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Mismatch between supply and demand

Publication Date : 19-12-2012

 

The Indian government's stated objective is to meet the demand for electricity. The idea is that any person should be able to buy as much electricity as he wants to as long as he has the capacity to pay.

The government is making an all-out effort to increase generation to meet this demand. Yet, the gap between supply and demand continues to increase; the increase in demand is outstripping the increase in supply. For many years, the shortage of electricity  has  been  in  the  range of 8-12 per cent.

There are two ways of addressing this mismatch between supply and demand--increase the supply or reduce the demand. The supply-side solution has been adopted by the government. It is doomed to failure because of the ever-increasing demand. It is almost as if the government is trying to catch the shadow. The demand increases as much as, or even more, than the increase in supply. A more circumspect approach of simultaneously limiting the demand is urgently required.

The demand-side approach is generally ignored on the ground that new technologies will help increase generation. It is true that nuclear, solar and shale gas inventions have led to a marked increase in generation than previously envisaged. However, there are limits set by nature, of a kind that mankind has not been able to transgress.

Ancient civilisations, pre-eminently that of the Indus Valley, have collapsed as a result of excessive exploitation of natural resources. 

Caution is, therefore, advisable. We should focus on the demand-side approach till the expected technological solutions fructify. Let demand follow the increase in supply; not the other way round. Thermal, nuclear and hydropower all have a negative environmental impact that cannot be wished away. Even wind and solar energy might have a negative impact and this will be apparent in due course of time.

Paul R Ehrlich, author of the 1968 trend-setting book, "The Population Bomb", wrote that the impact of the population can be expressed as a product of three characteristics--the size of the population, its affluence or per capita consumption, and the environmental damage inflicted by the technologies that are used to supply each unit of consumption.

The impact can be limited by reducing the size of the population, by curtailing the per capita consumption, or by using environment-friendly technologies of production. Such technologies are more expensive.

This  leads to a higher cost of production and lower level of consumption. The two solutions of reducing the per capita consumption and using environment-friendly technologies, therefore, coalesce into one--that of reduced consumption.

Population control is a long-term solution. The short-term solution must be a reduction in consumption. Since the bulk of the consumption is by the rich, it is this segment that will have to reduce consumption.

There is an increasing awareness of this problem in global fora. The preliminary draft of the 2009 report of the Unesco-sponsored Ethics of Climate Change in Asia Pacific project stated: “While making energy accessible and affordable to all to fulfill their basic needs, energy use for luxurious purposes can be reduced without infringing basic human rights. Thus, the ethical demands to meet concerns of equity can also mean restrictions for those who make excessive use of energy… those who are most vulnerable to the effects of climate change are often not those who have contributed to global warming the most. Poor and marginalised, as well as future generations have to endure the consequences of the actions of the wealthy in the present and the past.”

The Washington-based World Resources Institute says in a paper titled “Equity, Poverty, and the Environment”: “Too often, public policies favour affluent people and regions, enriching a few powerful political and economic elites while passing disproportionately large social and environmental costs on to the poor and disenfranchised populations. Poverty reduction--especially for the poorest--can be greatly enhanced through policies that promote fair distribution of natural resource benefits. In high-inequity, high-poverty countries, equitable access and fair distribution can be more effective than economic growth alone in reducing poverty.”

And yet, the government of India is trying to increase generation of electricity to meet the demand. This is happening because the government wants to establish equality in the right to consume electricity. This equality is like the equal right of a wrestler and a challenged person to reach the railway booking counter; or the equal right of an athlete and a five-year-old girl to receive food from a langar.

Obviously, the stronger person gets there first and captures the goodies. A similar phenomenon is noticeable in the power sector. The rich consume the electricity before it can reach the poor. It is profitable for the distribution companies to supply bulk power to the rich rather than manage thousands of small connections. The cost of distribution as well as collection of the dues is lesser in large connections. This leads to more power being supplied to elite areas like Palace Orchards in Bangalore and Green Park in Delhi, leaving the poor without electricity.

This increase in the consumption of electricity by the rich is unsustainable both from the ecological and social standpoint. Increased generation will harm the ecosystem, while inequality in consumption will lead to social stress. I have calculated that the diversion of a mere two per cent of the current generation of electricity is sufficient to meet the lifeline consumption of the 30 kWh per month per household of the 30 crore-odd electricity-less households in the country.

The reduction in the welfare of the rich by cutting their consumption by two, or even four, per cent would be minimal, while the enhancement of welfare of 30 crore households would be phenomenal.

This leads to the question of economic growth. We need to push the services sector which consumes about one-tenth of the electricity in comparison to the manufacturing units. This is often countered by arguing that services such as transport are predicated on manufacturing. This is not wholly correct. The services sector should be divided between the stand-alone services such as education, films and music; and supportive services such as transport. The focus on stand-alone services would enable us to increase our overall standard of living without a substantial increase in the consumption of electricity.

The Central Electricity Authority is currently engaged in formulating the National Electricity Plan as mandated under the Electricity Act, 2003.

The Authority feels constrained to take this aspect into account because it is required to draw up the plan in accord with the national electricity policy which follows the one-sided supply-side approach of increasing generation. However, Section 3(1) of the Act requires the government to formulate the electricity policy in consultation with the Central Electricity Authority. The Authority will do a great service to the nation by bringing the demand-side solution in focus while crafting the National Electricity Plan.

The writer is former Professor of Economics, Indian Institute of Management, Bangalore.

 

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