The low down on lindia's electricity sector

India is home to almost one sixth of the world's population. Over the past decade and a half the country has shrugged off its socialist stance and has veered right of centre, simultaneously opening up to the outside world.
The service sector was first off the block offering to the world hitherto little known Indian service skills at unbeatable costs.
Manufacturing and agriculture took a little more time to get going since that's a direct result of investments which takes its own time to implement.
Finally the financial sector started attracting international interest partly because of the attractive investment potentials and partly because sweeping policy and legislative reforms ushered in transparency and stability.

Living in the 90's
In the early ‘90s when India started to change there was much consternation in abandoning the protective, inward-looking mould while the rest of the world was rapidly making borders fuzzy and integrating into one big global community.
Fortunately a majority of the policy makers believed in what George Bernard Shaw had so eloquently articulated "The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man."
Fifteen years on, a country of a billion people is clocking a GDP growth of more than 8.5% and has finally broken into the league of top ten economies with USD 950 Billion recorded in the last fiscal year. A key pre-condition of that economic activity is adequate availability of electricity.

A flawed electricity sector
It is becoming increasingly clear that inadequacies in the electricity sector could become the major stumbling block of this fabulous growth story.
This four part article will attempt to explore what is wrong and what needs to be done to align the electricity sector with vibrant efficiency being seen elsewhere.
Lets have a quick look at electricity generation statistics. Installed capacity is 135 GW delivering 689,570 GWH of energy per year at an average load factor of 58%.
The estimated gap between peak demand and availability is 20 GW and the energy shortfall is 48,270 GWH.
Most of that gap is being met through highly inefficient and expensive liquid fired captive generation which falls under the unorganized sector. Correct data is not available about captive generation being used all over the country.
The only reasonably accurate estimate is derived by working backwards from the projected shortfall and the assumption that most of the demand is actually being met through captive generation.
It would be reasonable to assume that it costs US 25 Cents to generate a kWH of electricity by using diesel in small DG sets. Compare that with US 6 Cents per kWH for generating electricity from large coal-based or hydro plants.
India therefore has the potential to save an amazing USD 9 Billion per year if only efficient generating capacities keep pace with growing demand. That's the first area of inefficiency.
In India the T&D losses are reported at 35%. Meaning that out of the 689,570 GWH of energy being sent out by the generating plant, utilities manage to bill their customers for only 448,220 GWH.
Technical losses should be 10% at the most. Many countries regularly achieve less than that. This means 25% of the energy is being used without anybody paying for it.
That financial loss is being compensated by those who actually pay for the electricity through higher tariff or through Government subsidy. When it comes to subsidy, it can either take the form of direct payment to the loss-making utility or through less than optimum valuation of natural resource like coal and water used for generating the electricity.
At a conservative retail tariff of US 10 Cents per kWH, the 25% of avoidable T&D loss represents a staggering loss of USD 17 Billion every year to the country's economy. This is the second area of inefficiency.
Taken together, an estimated USD 26 Billion of expenditure can be curtailed for diversion into productive investment every year.
It is generally accepted that investments into the service sector yields annual outputs of at least ten times and in the manufacturing sector the annual output would at least be the same as that of the initial investment.
Assuming a very reasonable factor of two, the savings potential of USD 26 Billion per annum can yield a GDP of USD 52 Billion thereby setting the stage for an additional growth of 5%.
Mind you, we are not talking here of finding new money for new investments. Rather by making the domestic electricity sector as efficient as it is elsewhere in the world, we would be able to automatically convert avoided expenditure into investible resource. So, what is Indian doing about it?

India's power solution
The most obvious solution is massive expansion of generating capacity. That's a fairly simple and straight forward activity but it comes with three pre-conditions.
Sorting out infrastructural issues like land, road and rail linkages can prove to be daunting.
Nationally-owned resources like coal, oil, gas and water have to be made available at benchmarked costs. The investors must be assured of payments against the supplied electricity.
Of late considerable pragmatism has been demonstrated by the Government to sort out the first two problems. But the last issue is tricky.
The accepted solution is a Power Purchase Agreement (PPA) between supplier and a buyer with a P&L Account healthy enough for commercial banks to guarantee payments.
In India, most of the electricity distributors have negative bottom lines. Thus they are unable to offer a commercially bankable PPA.
For many of the large projects, this issue has been settled by extending sovereign guarantee for payments against the supplied electricity.
So far India has managed to plan for total installed capacity of 207 GW by 2012, hoping to add 72 GW of new capacities over the next four years.
Capacity is expected to be 800 GW by 2030. But it is obvious that sovereign guarantees can not be handed out indefinitely.
That's why the electricity distribution sector has to be quickly reformed to make it efficient.
Next month we will examine what is happening on distribution reforms in India.