This July, Prime Minister Narendra Modi asked scientists from the Department of Atomic Energy (DAE) to make sure that India’s nuclear power capacity by 2024 is tripled from the present capacity of 5,780 MW.

This was bolstered by a press statement issued by the Government saying the Prime Minister believed in clean and reliable sources of energy that could drive India’s energy strategy; given the scale of demand for power in India, nuclear energy could play a significant role. Such moves may well mark the beginning of a new era for India’s ailing power sector, known for its poor supply and quality of power.

With an annual per capita power sector consumption of just around 800 kWh, the Government has no choice but to lay equal emphasis on both renewable and non-renewable sources of energy.

According to a June report by the World Bank, about a quarter of India’s population remains without power. Those who have access to electricity have to make do with the uncertainty of power supply, thus resulting in massive “unsatisfied demand” and “restricted consumer welfare”.

There were accumulated sectoral losses of ₹1.14 trillion sector-wide in 2011, according to the World Bank Report, and over ₹2 trillion by March 2012, according to the rating and analytics firm Crisil.

These were led largely by distribution and bundled (state electricity boards and power department) utilities across the country and further paint a dismal picture of the sector, especially when one thinks of the financial burden on the lending institutions.

Spillover effect The same report rightly cautions that the recent increase in private sector investments in the sector could have a negative spillover effect on lenders, thereby affecting the financial sector in general. Power sector debt in states such as Uttar Pradesh, Meghalaya, Rajasthan and Haryana exceeded 10 per cent of the state gross domestic product (SGDP) in 2011.

The report stresses that the Electricity Act, 2003 was transformational and paved the way for sustainable reforms in the sector, provided state governments were committed to its implementation. The private sector made a quantum jump in generation capacity as a result of the removal of entry barrier and confidence created from the new enactment.

However, the same cannot be said about government-owned power utilities, which are mostly in dire financial straits.

Unlike previous studies of the sector, the World Bank study makes a comprehensive report and gives a timely call for implementing the mandate of the Act. For instance, it calls for regulatory effectiveness, accountability and improvement in the benchmarking performance of utilities by reducing the state government’s interference in their functioning.

The Act has all the elements necessary to bring about a structural change in the sector such as open access, corporatisation, unbundling and competition — but political expediency has not allowed significant changes to happen. In other words, the tenets of the Act have not been followed in letter and spirit.

Experiment with models According to the World Bank report, it may be worthwhile to consider experimenting with different models in power distribution. It could be along the lines that exist in Delhi (Tata Power Delhi Distribution is a joint venture company between Tata Power and the Delhi government); or the franchising model such as the Maharashtra utility’s attempt to franchise distribution to Torrent Power Ltd in the industrial town of Bhiwandi. It could also use different distribution models in States with the co-existence of public and private sectors.

Further, the report’s suggestion of having a public-private partnership model in urban areas and state discoms serving the rural areas of the same state may work well in improving the health of distribution utilities.

Another solution is to set up an urban franchisee model for urban areas and expanding its services to the rural areas in stages.

While the Electricity Act, 2003 has worked well in strengthening India’s power sector to some extent, it has also underlined the weakness of the new institutional mechanism.

While it has done commendable work on model tariff regulations, power purchase management and standards of performance of licensees, the State Electricity Regulatory Commissions’ (SERC) response has been lukewarm and self-defeating.

The steep increase in power purchase cost in recent years has had a cascading effect on consumer tariff. It’s about time power purchase costs are reviewed. Further, tariffs set by the central and state regulatory commissions vary substantially across regions and generating companies, thus creating an impression that the regulatory environment has failed to protect consumers’ interest; rather they have worked more in favour of developers and/or generators.

Contradictory signals This dichotomy arises because although power regulators are legally independent, in practice they end up following the line of ministries both in the Centre and the States.

Two critical areas highlighted by the study include the need for minimising government interference by fixing governance and accountability of State-owned power utilities and ensuring regulatory effectiveness and accountability.

How this can be brought about should not pose a challenge for Modi, who successfully achieved transformational changes in governance and the financial viability of Gujarat’s power utilities. Bringing state governments on board for refurbishing distribution, however, holds the key to transforming India’s power sector into a robust one.

The 2014 Budget has made significant announcements to address issues in the power sector, including extending the 10-year tax holiday in the sector until March 31, 2017, rather than provisioning for yearly extensions in subsequent budgets.

This, along with the provision of feeder separation in rural areas, and strengthening of sub-transmission and distribution will help. But it is the implementation of the provisions of the Electricity Act, 2003 with least political interference that will help revive the sector in the long run. The directions given by Modi may set the power sector on the right path.

Ailawadi is a retired bureaucrat and former chairman of the Haryana SERC, and Singh is the director of project operations, Nathan Economic Consulting India. The views are personal

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