How to solve the power crisis

Managing T&D losses is the key to reform in the power sector. Some tentative progress has been made in this area. Independent regulatory authorities have been set up at both the central and state levels.

States reforming under the Accelerated Power Development and Reform Programme are progressively increasing tariffs for residential and agriculture segments, while reducing tariffs for subsidy-providing industry.

Nine states have also unbundled their SEBs into separate generating, transmission, and distribution companies. NTPC is now getting paid in time by all SEBs.

The progressive Electricity Bill was passed in 2003. And Brutus is an honourable man!

The Electricity Bill, 2003, consolidates previous laws and offers a bold new vision for the future. The central feature of this progressive legislation is the concept of "open access".

Part I: India's infrastructure impasse

Open access allows buyers and sellers to trade in power, after paying a charge to use the common state-owned transmission system, and a surcharge to compensate the Transco for T&D losses.

This system creates a national market for power, and encourages IPP investments by permitting generators (freed of licensing) to sell excess power outside the state in case the contracted SEB defaults.

Despite the legislation, downstream open access still remains an academic idea. Since power is a concurrent subject, the Act didn't lay down rules for states.

The Act asked state-level regulators to permit open access for users of more than 1 MW within five years. Although 18 states laid down time-frames, most are behind schedule.

Further, states have imposed non-competitive conditions for open access, limiting open access for higher capacities (15 MW) and longer time periods (greater than a year), providing lower priority in using the transmission system, and not specifying the surcharge, and so it can be manipulated.

Unsurprisingly, two years after the legislation, there are two instances of downstream open access being used! Which is why captive generators are not going to bail us out of this impasse.

The reason the SEBs and their trifurcated successors are pressuring state regulators to stymie competition is that they have to bear subsidies and theft and dacoity losses.

The SEBs will not allow generators to bypass them till this core issue is dealt with. Back to the impasse!

Gas, the perils of dirigisme: As if the problems of the power sector caused by the bankruptcy of the SEBs weren't enough, we now see another set of related crises on the horizon.

There simply isn't enough low-cost fuel to support rapid growth in power generation, even if the theft and dacoity problem of SEBs was fixed.

We have seen the four brave IPPs in Andhra failing even before construction for lack of gas supply. But there is no shortage of LNG, which could flow to India, even in the short term.

The problem is that the subsidised power and fertiliser regimes cannot bear market prices for LNG, even if some final consumers can. Gas pricing has acquired tremendous political overtones.

It has taken six years for the Centre to raise gas prices by 12 per cent from Rs 2,850 per million cubic metres to Rs 3,200 per MCM last week. Even this revised ceiling price is less than half the current market price for private domestic gas in Gujarat (PMT, Gauri, Lakshmi), what to speak of the higher prices still of LNG, naphtha and fuel oil.

With gas available at subsidised prices, gas demand naturally far exceeds supply. As a result, the government has had to resort to a system of "gas allocations".

As against supplies of 65 million standard cubic metres per day of domestic gas (out of a total of 81 MMSCMD of all gas supplied), current allocations aggregate about 120 MMSCMD.

Power and fertiliser plants play musical chairs with their ministries for allocations; most fertiliser plants have given up and are burning higher-priced naphtha.

The country would save Rs 1,000 crore (Rs 10 billion) annually if naphtha were replaced by LNG in the fertiliser sector alone. This would require a major change in policy: to recognise that administered prices are not market prices, and that higher fuel costs are economically far less costly than output foregone!

As much as 4,000 MW of power could be brought on line immediately only if there was enough gas (16 MMSCMD). NTPC's Kayamkulam plant has shut down for want of gas.

Other gas-based plants are running at a PLF of 60 per cent. This shortage of gas is causing a loss of generation of 15.1 billion units of electricity. With such shortages, no doubt encouraged by administered pricing, it is hard to see how the share of natural gas in power generation can rise from 10 per cent today to 25 per cent by 2012 (i.e. 55,000 MW).

Looking ahead, all gas solutions (LNG, increase in domestic supply from the K-G basin, importing by pipeline from Iran and/or Bangladesh) are going to be priced at greater than $3 per million British thermal unit, making it very hard to generate power at Rs 2.3/kWh (the current ceiling price realised by most SEBs).

Coal, the perils of nationalisation: The shortage of coal is the latest debacle in the energy sector. Coal is critical to power generation in India, with almost 61 per cent of the installed generating capacity (110,000 MW) being coal-based.

However, less than a third of the capacity addition planned in the Ninth Plan was sanctioned; only 40 per cent of the production increase was achieved.

Nearly 20 plants nationwide are in a critical situation, with a shortage of coal supplies leading to a shortfall in generation -- 3.6 billion units. The shortage is of 11 million metric tonnes per annum (15-20 per cent of coal consumption), which is forecast to grow to 50 mmtpa by the end of the Tenth Plan.

With 80 billion tonnes of proven reserves, there is no shortage of coal in India. Unfortunately, the bottleneck is how production is managed. The nationalisation of coal mines (coking in 1971 and non-coking in 1973) was justified by the need to manage coal resources for the long term.

Only 30 years on, shortages, rampant pilferage, transport delays, permitting nightmares (after years of trying, even NTPC can't get permits for its pit head mines), and now the travesty of MMTC issuing tenders to import coal for a coal-surplus nation … and we still do not wish to re-examine nationalisation.

The amendment to the Coal Nationalisation Act, which was to facilitate the entry of private players and competition, has been allowed to lapse!

Conclusion: The problem of securing adequate fuel supplies for increasing generation re-emphasises the need to improve the financial position of the SEBs.

In the short run, importing gas and coal till domestic bottlenecks are cleared will raise power generation costs and stress the SEBs. In the long run, gas prices will rise to market levels, and coal prices will reflect true environmental costs and the higher costs of assuring supply.

The era of administered gas and coal supply is coming to an end. In every way, there is no alternative to SEB reform.

The elasticity of power consumption with respect to GDP is 1.2; rapid growth necessitates greater power consumption. To maintain political largesse in power distribution (a.k.a. theft and dacoity losses), India is foregoing $12.5 billion in economic output annually.

Isn't this loss painful enough to build a national consensus on this issue? If not, the power problem will get worse before we are forced to turn to the straightforward solution, the only solution to rid us of our energy impasse -- the elimination of power theft and dacoity!