Power sector reform: India's biggest problem

Though power reforms are the most important item on the government's agenda, it often leads to face-offs between the Centre and states.

Electricity is the common denominator for all technologically advanced societies. Correlation between per capita income and per capita power consumption is very strong. If the power industry is below-par, overall growth is hobbled.

Power sector reform is the biggest problem the Indian economy faces. India's public generation capacity (state+ central+ private utilities) is around 148,000 MW and captive capacities add up to another 55000 MW. The public system has a plant load factor of about 75 per cent (thermals). Transmission and distribution losses are 27 per cent. Collection losses are another 7 per cent.

At these performance levels, average power shortage is around 8-9 per cent and peaking shortages hit 12-15 per cent. The T&D and commercial losses taken together translate into the production of 1.5 units of power for every unit delivered and billed.

Financial losses for the sector itself amount to near 4 per cent of GDP - those are mostly incurred and absorbed by states and add to the consolidated fiscal deficit. Several state electricity boards have medieval accounting systems, which hampers estimation.

According to MAIT (Manufacturing Association of Information Technology) India Inc lost around Rs 44,000 crore (Rs 440 billion) in 2008-09, due to power outages. Hence, the overall loss may be around 5 per cent of GDP.  Roughly 20 per cent of villages remain off-grid.

Around 300-400 million Indians have no access to power. Per capita consumption is 700 units per annum (1 unit = 1 KWH or the power consumed by using a 40W tube for 250 hours). The average first world per capita consumption is around 1,000 units per month.

What is the government doing?  There's an independent regulator in the Central Electricity Regulatory Commission. There's also the carrot-and-stick Accelerated Power Development and Reform Programme, which encourages states to clean up their act.

Many states have responded and where unbundling has occurred, there's a clearer idea of exactly where problems lie. Recent revisions to APDRP could streamline the process and make it more effective.

Over the 11th Plan (ending 2011-12), India hopes to add 78,000 MW of capacity and the 12th Plan (2012-17) targets additions of another 100,000 -110,000 MW. So far, between 2007-08 and 2008-09, about 12,000MW has been added and another 66,000 MW is in various stages of the pipeline. Much of this will be private-funded and managed.

The availability of gas from the K-G Basin finds and the allotment of captive coal for projects should help. Private generators have also sourced coal from Australia, Indonesia and Mozambique, among other places.

Grid capacities are being enhanced and distribution spruced up. There are in effect, no private players in the grid business with Power Grid holding near-total monopoly.

In distribution, the new franchisee model being experimented with in Maharashtra and UP, may prove more politically acceptable than the direct privatisations of Orissa and Delhi. By 2012, it is rather optimistically hoped that T&D&C losses will drop to 15 per cent.

The new power exchanges are doing decent business. Right now, about 3 per cent of power generated is being traded and the market is growing at over 60 per cent per annum. The average price per unit was around Rs 7-8 in the past 12 months.

Open access, allowing consumers in state A to directly buy power from producers in state B to be carried on state A's grid, is still getting off the ground. Carriage fees have to be reasonable.

Some 70-odd open access applications are in various stages of implementation. Obviously if more states were amenable to, and technically geared for open access, power trading would get a boost. There is also litigation challenging current caps on trader-commissions and trading-volume limits.

If all this works, or enough of it, GDP growth could accelerate due to structural factors. The sheer scale of the effort dwarfs most others. Power reform is not the sexiest item on the political agenda.

One major issue is that it usually leads to direct face-offs between the Centre and states. It is a festering sore that needs to be tackled with the highest priority.

There could be fortunes to be made across the entire value-chain from utilities, to equipment-manufacturers, to turnkey engineering contractors, to IT-enablers, to traders to financiers. There would probably be an aggressive revaluation of players in this space as well.