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India's power sector needs urgent reforms

Publication Date : 01-08-2012


A huge blackout that plunged half of India into darkness highlights the need for reforms in a sector riddled with problems


A huge blackout that plunged half of India into darkness this week highlights the need for reforms in a sector riddled with fuel shortages, subsidies and tariff controls.

While India has always struggled with an energy deficiency, this has grown more acute over the past year.

An expanding middle class is demanding more refrigerators, TVs and gadgets from the power- hungry malls and stores that sell them so the need for electricity has never been greater. Thus, rolling blackouts in cities, including the capital New Delhi, are normal while towns and villages can go without electricity for eight to 10 hours a day.

The government power regulator says the gap between demand and supply has soared to more than 10 per cent as the output of coal - the backbone of power production in India - has stagnated.

"One of the major reasons for the collapse of the power grid is the major gap between demand and supply," said Rajiv Kumar, secretary-general of the Federation of Indian Chambers of Commerce and Industry.

"There is an urgent need to reform the power sector, and bring about infrastructural improvements to meet the new challenges of the growing economy."

But analysts say that clumsy policies allow politicians to give away almost a quarter of the total electricity produced free to farmers while preserving a complex subsidy system that makes the price of power cheaper than what it costs utilities to produce it.

The perennial power shortages produce a drag on the economy that the Planning Commission, which charts the country's growth plans, says slices almost two percentage points from the nation's GDP.

Two consecutive days of blackouts this week exposed the dangers of the government allowing such policies to persist. Over 600 million Indians in the north and east were affected as major farming states, faced with a possible drought, drew more than their share from the national grids.

States find it cheaper to pay the penalty for drawing more than their share of power than buying from the open market, which causes grids to crash.

India battles an average 10 per cent peak-hour shortfall and it has missed every annual target to add electricity production capacity since 1951. Delhi is seeking US$400 billion of investment in the power sector in the next five years as it targets an additional 120,000 megawatts in generation by 2017. Capacity is now about 200 gigawatts.

But coal accounts for nearly 60 per cent of power production and output has stalled, even though India sits on 10 per cent of the world's coal deposits. Efforts to exploit them effectively are slowed by state control of mining and environmental hurdles.

Earlier this year, top CEOs met Prime Minister Manmohan Singh to urge him to ensure a steady supply of coal so that power to their factories was not disrupted.

Domestic gas production has also plunged.

Other problems exist for the power sector in India, whose infrastructure deficiency is the biggest challenge in doing business.

The country fails to meter a substantial portion of the supply and thefts and transmission and distribution losses are high. There is overloading of transformers, poor maintenance, absence of conservation steps, whimsical load connections, among others.

A more pressing problem is the reluctance of politicians to raise power tariffs to sufficiently cover costs. This drains cash reserves from the largely state-run electricity-distribution companies, leaving them with rising debt.

This discourages investment in a sector that is otherwise seen as lucrative, given that about 400 million people still live without electricity.

"We need to focus urgently on reforming power sector," the Confederation of Indian Industry said in a statement.

"There is a tremendous demand supply gap in the country. It has stretched a lot, that is why such incidents are happening."


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