LACKING SPARK - Politics has aggravated the energy crisis in India

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By Commentarao - S.L. Rao The author is former director-general, National Council for Applied Economic Research
  • Published 24.10.07

In the years that I have been actively engaged with energy, more particularly electricity, I have been surprised by the inability — even of experienced journalists, let alone the ordinary public — to understand the simple facts that lead to the severe shortage of energy. There is also the nexus between project developers, contractors, bureaucrats and politicians that misinforms the public through conferences, commissioned papers and press notes, which are used without questioning.

All oil and gas fields belong to the nation. They are leased out to private and public developers. These developers undertake the risk of exploration and of bringing the discovery to the stage of production. Pipelines and other infrastructure have to be built to bring the oil or gas to the locations where they will be consumed. The investment is high and, in the stage of exploration, also risky. It is only right that there is adequate reward to make the risks worth taking. However, the government has decided that tariffs will be market-determined, not regulated. This could enable developers to make windfall profits at the cost of the consumer, as international prices respond to political and military events.

Gas is used in India mainly for generating electricity and making fertilizers. It is also used as household fuel, fuel for transportation and for making petrochemicals. These other uses are in their early stages. Electricity is almost a necessity for most people, apart from its use in agriculture and industry. In a country with as many poor as in India, a lot of the energy used in the household is not priced, like cow dung, tree branches, dried leaves and so on. With economic development, these people will graduate to using electricity. Many of the poor can pay a price for electricity that is below its cost, while many others cannot afford to pay at all. The poor are also there in urban areas. They can afford to pay very little, if at all. Electricity has become a necessity, almost like water, and in a democracy universal access is needed.

Indian agriculture used to be a “gamble on the monsoon”. Since the Green Revolution, this gamble has been mitigated by the use of groundwater. But groundwater has to be pumped up by electricity or diesel. Poor farmers cannot afford the full cost of the required electricity. Since the number of all these poor households and farmers is large, and many of these people are voters, their requirements for electricity supplies, whether free of cost or well below cost, have to be met by the government.

Politicians ensure that electricity tariffs to the poor and to farmers are subsidized with costs met by the government. Given the inefficiency of governments, many undeserving “rich” households and farmers also get subsidized electricity. There is also large-scale theft by households, industries and commercial establishments, which go scotfree because of their nexus with politicians and bureaucrats.

State governments are responsible for distributing electricity. They cannot afford to meet the full cost of subsidies and the burden is passed on to the distributing companies (as cross-subsidies) with some support from governments, or it is met with the help of higher tariffs from those who can afford to pay, principally consumers who form the richer households and industries. Fertilizers are also subsidized for similar reasons, but paid for by the Central and not the state governments.

Gas has to be priced at levels that will not make electricity and fertilizer costs so high that the subsidy costs to the government rise even higher. Obviously the long-term attempt must be to persuade consumers to pay higher prices. This will happen as they prosper with the economy. The subsidies must also be properly targeted so that the undeserving do not take advantage of them. Politicians must be taught not to interfere in the identification of the deserving.

Over the last decade, to improve availability of electricity, the government has taken numerous decisions. Generation, transmission and distribution have been opened to private investment. There has been some private investment in generation and it is rising because of the new ultra mega power projects that get various tax incentives.

The government has been unable to implement entry of private investment in transmission. It has been blocked by the Power Grid Corporation, the incumbent and efficient state monopoly in interstate transmission. It claims national security interests, but of course protects its incumbent monopoly. State governments have spent little energy on the issue of intra-state transmission. Transmission constraints have limited electricity trading. Even in a shortage situation, as with electricity, there are times of the day, season and year when there are surpluses in some places. Adequate transmission capacity will allow the surplus to move to the areas of deficit, at a price. Trading is limited and thus much of this surplus is wasted.

Distribution was to be privatized. However, the infighting in the Congress between the Central and the state leadership in Delhi that had privatized electricity, plus the ideological opposition to any privatization, appear to have led to the abandonment of the initiative for privatization of distribution. State ownership of distribution is inefficient, wasteful, expensive and imposes an avoidable burden on state government finances. State ownership has resulted in all electricity consumers suffering from sudden blackouts, voltage fluctuations and poor response to complaints. If privatization is not happening, at least there should be a separation between government ownership and the professional management of electricity distribution. However, state-owned electricity distribution offers perquisites to bureaucrats that are not available in normal government service, Bureaucrats will not give up their ‘right’ to these cushy jobs which rotate between them every few years.

State regulators, also mostly retired bureaucrats, have an ideological problem with allowing captive plants to use state-owned transmission lines and have imposed high surcharges for this use. This has halted this good reform. Independent regulation of electricity was expected to make regulation transparent, consultative, and thereby enable quick decisions for which full reasons would be given. It would take account of all interests. This has not happened largely because governments have preferred to give ‘independence’ to regulators, not to the substance. Appointments have been from among government servants, as is the case with most of the staff. Funds are inadequate, governments give ‘private’ (not public) instructions to regulators, and are not keen to implement some of the laws and policies. State regulators have achieved little that was expected of them.

Despite India having discovered an ocean of gas in recent years, vested interests have ensured that fuel prices, especially of domestic gas, are pegged at levels that will make it expensive for electricity-generation. Chances are that it will be used only for intermittent generation to meet ‘peak’ demands, for transportation and for household fuel. The royalty that the government gets from the developers might also be used to moderate the cost of gas for fertilizers and perhaps power as well. Meanwhile the imported gas coming in by ship is much more expensive, as will the gas entering India on land-based pipelines if and when we agree with Iran, Myanmar and Bangladesh, to buy their gas.

Our electricity problems are due to the many large voter groups who have to be subsidized, state governments that are short of funds, politicians whose will for the national interest is weak, bureaucrats whose personal needs overshadow the national purpose, regulators who do not function effectively, and laws, policies and reforms that are not enforced.