What should our ambitious energy goals for the new decade be? What policy instruments are needed? The big achievement of the last 15 years has been the completion of village and household electrification. As many as 1,25,000 villages and about 600 million people have got access to electricity. Funding from the Central government made this possible. There is also sufficient generating capacity for the first time due to large private investments.

The immediate challenge is to get the State governments to turn around the finances of their electricity sector. This can be done by a combination of improved governance, higher tariffs and timely provision of subsidies for free/highly subsidised electricity for agriculture.

If improving governance appears difficult, getting the private sector to manage distribution is a proven solution. The success of the private sector in distribution in Delhi has enabled the Delhi government to give subsidy from the budget for free supply of 200 units of electricity per month.

Major bailouts

Two massive bailouts by the Central government for the power sector have been given since 2001. These became unavoidable as public sector banks and the Power Finance Corporation kept providing loans liberally to distribution companies without what should have been the normal precondition — that the revenue realised per unit of electricity supplied should be higher than the average cost of supply. Such lending needs to stop.

Further, if generators, including NTPC, supplied electricity only on Letters of Credit as the Power Ministry has stipulated, this hard budget constraint would force the States to act. The Central government and its financial institutions need to be firm.

The comfortable position of generating capacity being in excess of demand at present is the result of substantial private investment in generation. But further new investment, which would certainly be needed, would take place only if markets see a financial turnaround in the sector.

Subsidise the poor

The UJWALA programme has acquired momentum and every household should be having a cylinder and a gas cooking stove in the next few years. But the poor households cannot afford the price of the cylinders and are, therefore, not able to do all their cooking on gas.

The big decision that needs to be taken is to give gas cylinders to poor households at a subsidised rate of, say, ₹300 per cylinder. This would lead to the full transition to clean cooking with enormous benefits to the health of poor women. Indoor air pollution would end. Overall air pollution would be reduced by about 25 per cent.

Clean energy for cooking should have a very high claim for subsidy in the Budget. It could be plausibly argued that this claim should be higher than for, say, piped water supply. If funds cannot be found in the Budget, then the oil companies should be made to cross subsidise, by raising the price of petrol and diesel to recover the cost of subsidised supply of gas cylinders to poor households. Though cross-subsidy has been out of favour for good reasons, this a case where the benefits would be enormous and the distortions marginal.

When the sun shines, solar power is the cheapest source of electricity. Wind energy is cheaper than electricity from coal. India should, therefore, target raising the share of renewables in electricity generation from the present level of less than 10 per cent to 50 per cent within this decade. Germany, with modest sunshine, has already achieved 46 per cent. This would need a clear policy direction.

Feed-in tariff

Distribution companies would need to invite bids for larger and larger quantities of supply of solar power. They also need to go in for a feed-in tariff of, say, ₹4.50 per unit for decentralised solar power. This means that they should offer to buy solar power on a first-come basis, up to 1MW, from any supplier in rural areas and from rooftops of their customers.

The distribution companies would gain financially as their average cost of supply of power is usually ₹7-8 per unit, which is much higher than the suggested feed-in tariff. With just 1MW of generation in a village, over 600,000 MW of solar power could come up with private investment. This would not need any subsidy from the Budget. Farmers’ incomes would rise. Electricity would be provided for agriculture in the day and that too at a lower cost.

For all new investment in generation, be it below 1 MW for a feed-in tariff, or, for a bid for supply for large capacities, a credible power purchase agreement with the distribution company for at least the duration of the loan for the generation project is an essential prerequisite.

This could be put in complete jeopardy if the separation of carriage (the wires business) and content ( the supply business) is attempted through an amendment in the Electricity Act.

There would then be no distribution company to assess demand growth, ensure reliability of supply and the transition to renewables. The anchor of the distribution company is essential.

The major cost of electricity consumed is in generation. India has benefited considerably from competition in generation through the Electricity Act. The benefits of retail competition, where it has been introduced in the developed world, have been at best marginal. What is usually not appreciated is that retail competition was first introduced only in the 1990s in the UK when demand had stopped growing. India, on the other hand, needs to quadruple its per capita consumption.

To summarise, India needs to first restore the financial health of the power sector. It must also avoid the counter-productive shock of attempting separation of carriage and content in electricity. It should be getting all its households to use clean cooking energy in the next few years by subsidising the poor directly or through cross-subsidy. And, it should have the ambition of being a global leader in the transition to renewables by taking their share in generation to 50 per cent. All this is feasible.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP