Vol. 6 | Issue 5 | Aug 2012
reforms m g devasahayam
The ‘Dark Age’ is looming
The Government’s dealing with power sector is more like five blind men
trying to figure out different parts of an elephant
INDIA needs a second wave of reforms, says President Barack Obama. It will, of course, be driven by the US Agency for International Development (USAID) and MNCs like Wal-Mart. Like it was in the mid/late nineties when these entities, led by Enron, the energy MNC, anchored the ‘first wave of reforms’!
We are still paying the price of the ‘first wave’ at the core of which was the power sector. And today India is ‘powerless’, with the media predicting the ‘the coming of the dark ages’. The Indian power sector is in deep distress and angry citizens are taking to the streets in protest against the abysmal situation.
Power shortages through June and July averaged over 36,000 MW, roughly 18 per cent of India’s installed generating capacity of 2,02,980 MW. Outages routinely cause 12-16-hour blackouts in cities. Losses in distribution average over 30 per cent across the country. Power utilities are running an overall annual loss of about Rs 70,000 crore. Over 25 per cent of India’s population still has no access to electricity.
To find out why this has happened, we need to go back two decades. In the early nineties, when India’s power sector reforms were being deliberated at the World Bank, there were two schools of thought. The issue was whether the reforms should be ‘structural’ or ‘end-use efficiency’ oriented. Those who knew the Indian realities suggested that end-use efficiency, supported by structural reforms, should lead the process. But the consultants and ‘reform specialists’ pitched in for the structural approach, with end-use efficiency as an embellishment.
The report submitted by US consultants in mid-96 to USAID suggested a ‘structural’ approach of creating ‘independent organisations’ with ‘unbundled functions’-generation, transmission and distribution-replacing the State Electricity Boards (SEBs). These organisations would then be turned into ‘privately owned firms’, which would provide much of the growth of the power sector since ‘the quest for profit would motivate their activities, and they would have a greater commercial orientation than most government-owned organisations’. End-use efficiency was sought to be achieved by a ‘trickle down’ process passing through the layers of restructuring, unbundling, privatisation and tariff rationalisation on a cost-plus basis.
This report spawned the ‘management model’ approach, which the Union Ministry of Power got endorsed from the Chief Minister’s conference in late 1996. These structural modules became the mantra and the yardstick for appraising SEB reforms. The extent of financial and technical assistance by World Bank, ADB and other agencies also depended upon the rigidity with which these reform modules were adopted.
The sum and substance of the process was that the inefficiencies of SEBs would be removed through physical restructuring and these entities made viable and profitable by a freewheeling market mechanism. The objective was to facilitate the takeover of India’s power sector by US and other MNCs. For this purpose, an embargo was placed on NTPC and the SEBs not to create additional generation capacity while sovereign guarantees as well as a special escrow mechanism were provided to pay for high-cost power from multi-national generating plants. Hoping to pluck low-hanging fruit, independent power producers (IPPs), mostly Americans, came in their droves.
Due to the near-bankruptcy of the SEBs, which were to buy the high-cost power produced by such entities, this model did not work. Instead, scandals like Enron happened. The World Bank panicked and withdrew from India’s power sector in 2002 after spending billions on consulting services and project formulations. IPPs also rushed out!
Despite the passage of the Electricity Act in 2003, largely to facilitate private investment and promote public-private participation, the power sector continued its descent into chaos. In 2005, after a reality check, the Planning Commission, headed by Montek Singh Ahluwalia admitted that though there had been a number of experiments in electricity reforms, including the one fashioned by himself in mid-nineties, none of them had established ‘a viable model’.
‘Open access’ has been Ahluwalia’s favourite panacea for all these evils and he himself describes it as “allowing generating companies to sell directly to distribution companies and bulk consumers, thus creating a competitive market where producers could take investment decisions based on demand, and without relying on power utilities or State Governments. This would bring electricity at par with other goods and services where competition and market forces determine efficiency levels, investments and pricing”. He suggested that ensuring ‘open access’ and copious supply to miniscule bulk consumers of 1 MW and above would empower the people and transform India’s power sector!
Treating electricity at par with other market goods and services reflects a lack of understanding of basic economics, of the market, of electricity as a commodity and the profile of its consumers. Unlike telecommunication or civil aviation, where consumers are well heeled, electricity is a product, which even the poor use for basic comforts as well as for earning their livelihoods. Besides, given the chaotic distribution infrastructure and poor system reliability, it is highly doubtful whether the open access would remain open at all.
Just by augmenting generation, enhancing tariff and accelerating open access, it would be well-nigh impossible to make power utilities function as professional entities, performing the essential tasks of delivering adequate, reliable, affordable and good quality power to their consumers. Any increase in generation capacity is more than offset by inefficiencies and wastage at every stage - production, transmission, distribution and delivery. Without fixing these inefficiencies and wastages, increasing generation capacity and production is like filling a bucket full of holes! The first and foremost task should be to fill these holes.
For this, the basic philosophy of power utility management should undergo a paradigm change and move away from the generation-led augmentation mindset to the distribution/delivery-led optimisation alternative. Wire (distribution) and non-wire (delivery) services should be blended and managed in such a way as to remove the severe constraints that plague the system: ill-trained workforce, poor reliability, high line losses, low voltage profiles, overloading of transformers, poor maintenance, absence of conservation measures, power theft, haphazard layouts, whimsical load connection, inadequate clearance, etc., and bring about optimum revenue integrity in metering, billing and collection. While substantially improving power availability and reliability, this would also restore the financial health of utilities.
The basic philosophy of power utility management should undergo a
paradigm change and move away from the generation-led augmentation
mindset to distribution/delivery-led optimisation.
This can be achieved by creating a comprehensive consumption profile in each utility, designing a state-of-the-art distribution system and streamlining the delivery mechanism and feeder system to meet the specific need of each consumer category. Legal and regulatory compliance with regard to cost-to-serve and T&D losses is another imperative. Dovetailing this with effective demand-side management and aggressive promotion of distributed-decentralised generation utilising our vast renewable energy sources could transform India from a ‘powerless’ to a ‘powerful’ nation!
This is not even being attempted. Now, in 2012, as the ‘Dark Age’ is looming, the Prime Minister has appointed another committee of secretaries to sort out five key problems -domestic coal supply agreements; gas allocations; imported coal issues; final forest clearances for coal blocks and coal production from captive coal blocks. The Planning Commission, under Ahluwalia, has chipped in with a diktat to States to continuously hike electricity charges to eliminate subsidy to fund essential services like drinking water, education and health! These initiatives are meant to benefit IPPs and not to revive the ailing power sector!
The Government’s dealing with power sector is more like five blind men trying to figure out different parts of an elephant. The diagnosis is dependent on the individual sector’s interests and not fulsome. A solution depends on who is most effective in lobbying! This prevents evolution of a holistic approach to tackle the power sector’s ailments from a multi-pronged angle. Perhaps, the powers-that-be are eagerly awaiting a ‘third wave’ from the likes of Enron!g