The promise of cheaper power for all

The Financial Express, September 09, 2008

By Pradeep S Mehta

The ministry of power has once again failed to fulfil the target for new generation capacity for the financial year 2007-08. The current power famine in India can create a hurdle not only for the attainment of universal access to power by 2012, but also the continuation of the general surge in affluence seen over the last two decades.

If GDP growth is to be sustained, the growth of power generation should at least equal it. However, this has definitely not been the case in India. Estimated shortfalls in average and peak availability in 2007-08 were 9% and 13%, respectively, indicating the continuing tendency of the power sector to lag behind the rest of the economy.

Circularity in economic phenomena implies that the worsening of India’s power famine due to the rapid pace of economic growth might threaten the very sustainability of such growth. The economy might slide to a lower equilibrium more in sync with sluggish power expansion.

In light of this fact, the Planning Commission has proposed an investment of $200 billion in the power sector during the 11th Plan period. With the public sector unable to mobilise such funds, it has to form a partnership with the private sector to achieve the required investment. The latter can make varied contributions—from boosting generation through ultra mega power projects (UMPPs) to investing in the transmission & distribution network.

Of the planned expansion of 78,577 mw, around 45%, or 36,000 mw, is to be delivered through private UMPPs. Each of these projects has a capacity exceeding 4,000 mw, a size that generates economies of scale. The success story of entrepreneurship in India might yet come to the rescue of the power sector through such large lumpy investments. Much of the remaining capacity addition will continue to be made publicly through central power undertakings and state generation companies.

Adding generating capacity by inviting UMPPs through a competitive bidding process will not only help meet increasing energy requirements, but also reduce the cost of power supply. Tariffs resulting from the bidding process conducted for the initial UMPPs have been reported as being lower than the present average cost of power generation in the country. The rates fixed for buying power from UMPPs are in the range of Rs 1.70-2.30 per unit, against Rs 3.00 and above from other sources.

With power a vital requirement for manufacturing and services, as much for agriculture, cost and profitability of production should be favourably impacted, thus giving a boost to economic growth. Similarly, cheaper power would give rise to a sharper increase in consumption by households over time. This, in turn, will imply higher growth of aggregate power demand. To sum up, cheaper power through UMPPs should imply a faster rate of growth of power demand if lower costs translate uniformly into lower prices.

This has immense implications for policy. While lower power costs for the production sector are welcome from the perspective of economic growth, the same argument cannot be made for all consumption. In fact, the lower costs of production for UMPPs should not translate into wasteful consumption by high-income consumers, given the involved sacrifice of energy.

At the same time, the nation must continue to make steady progress towards universal access to power. This is still is a distant dream, with 55% of the country’s population without access to electricity. Therefore, the unfinished task is considerable. In the National Electricity Policy, 2005, the government has fixed a target of providing electricity to all households and to increase per capita consumption to 1,000 kw a year by 2012, from the current level of less than 600 kw.

To facilitate universal access and prevent wasteful consumption, the lowering of costs should be accompanied by a more progressive power schedule for households, ie, initial units of power consumption by a household should cost less than before, but the per unit cost for consumption above a stated threshold should not decrease.

In this way, the cheap power forthcoming from UMPPs, if managed properly, can improve access, accelerate economic growth and maintain demand for power within tolerable bounds. Such a tariff plan would also facilitate access by hitherto uncovered rural consumers. In other words, aggregate power consumption would rise through extensive rather than intensive means.

Above all, the success of the PPP model in the power sector would also depend upon the sincerity of efforts made by the government to provide the required support to private players. The Delhi Model, wherein the government provided subsidy to private distribution companies at the initial stage of reforms, is a good example. As a result, the companies have been able to reduce their losses significantly.

To conclude, public-private partnership in the power sector is in effect a partnership for India’s development. Its success will determine whether an India pregnant with unfulfilled promises will deliver.

The writer is assistant policy analyst at Cuts Centre for Competition, Investment & Economic Regulation and can be reached at

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