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It’s Not Quite as Dark as it Seems

September 19, 2012

Ashish Khanna, Jyoti Shukla Hindustan Times

The world’s largest blackout recently left 600 million people in India without power. While its immediate causes are still being analysed, the power sector’s underlying problems have been examined threadbare. At their heart, blackouts boil down to two issues: underutilised capacity and insufficient capacity. The former is a result of inadequate maintenance of old plants and the persistent shortage of domestic coal. This can be resolved by using imported coal. But that is very expensive and the additional cost does not get reflected in tariffs.  For their part, most distribution companies have resorted to load shedding, rather than buying surplus short-term power, on account of their dire financial position.

Insufficient capacity requires a long-term solution. The financial viability of State utilities is a pre-condition for attracting investments in this sector. This requires a coherent set of actions involving reductions of system losses, adequate tariffs that are revised at regular intervals and transparent competitive bidding for new investments.

Fortunately, we don’t have to look far for solutions. India has a number of examples of public (Gujarat, West Bengal) and private (Mumbai, Delhi) power sector companies that have good management practices, are well regulated, provide homes and industries with uninterrupted power supply and earn reasonable profits.

So what have these states done differently? First, they have significantly reduced their transmission and distribution losses, which devour a third of the power in other states. These companies upgraded their networks and cracked down on power theft, which enabled them to generate additional revenues that further improved operations.  Note that peak power deficits in May 2012 were just 1% in West Bengal and 1.2% in Gujarat, as compared to 9.2% in the rest of India.

Second, these states have increased tariffs at regular intervals and consumers pay higher tariffs in return for regular, high-quality power supply. In Gujarat, for instance, consumers pay Rs. 5.3 per unit of power; in Mumbai, Rs. 5.86; and in West Bengal, Rs. 5.78. While these tariffs are only 10% higher than average tariffs in other states, lower losses and better efficiency imply that these companies are profitable.

So where can other states begin from? Power utilities in other states must reduce their financial losses through sound management practices and tariff rationalisation. But consumers will rightly demand regular power supply with better voltage before they are willing to pay a higher tariff. West Bengal demonstrated the importance of earning credibility with consumers before raising tariffs. Just three years after improvements in power supply and energy access, improved customer service and negligible dependence on state subsidies, the utility got approval for the required tariff increase under the new government. Similarly, in Delhi, private distribution companies were incentivised to reduce losses in a time-bound manner during the reform period, before receiving a tariff hike.

West Bengal’s experience is relevant for states with large rural populations, where agricultural consumption is not metered and farmers receive erratic power supply at odd hours. These states can implement universal feeder, transformer or consumer metering to account for agricultural consumption and losses. This would allow them to provide consistent power to rural households and charge for it, while also experimenting with innovative mechanisms to make the most of subsidies. India is not unique in trying different models to improve the power sector’s efficiency and expansion. Latin America also shows that both private and public models can be successful. The public sector model adopted in Brazil, notably of its power company CEMIG, shows that State-owned enterprises with strengthened corporate governance can overcome challenges similar to those faced in India.

A private sector model has also been adopted in Latin America, notably in Brazil and Chile, with significant success. Long-term regulatory clarity was provided through multi-year tariff agreements applied for periods of four to six years at a time, based on the utility’s performance in accordance with established service standards and close monitoring of its compliance.

A ‘one size fits all’ approach for India’s various states is unlikely to work. But every state can tailor these basic lessons to match its needs in order to provide consumers the power they deserve at prices they can afford.  There is no excuse to not begin the process.

Ashish Khanna is senior energy specialist, World Bank, India and Jyoti Shukla is manager, Energy, World Bank, South Asia. The views expressed by the authors are personal.

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