The Electricity Act of 2003 was indeed a watershed event in the history of the Indian power sector. Cutting across political lines, Parliament passed this legislation, which has changed the face of the sector.
The Act called for the immediate delicensing of generation, a gradual path for opening up distribution, setting up regulatory commissions, trifurcation of state electricity boards into generation, transmission and distribution, a gradual reduction of cross-subsidies etc. In short, the Act was a complete overhaul of the way things were done for almost a century.
The basic objective of the Act was to improve efficiencies, bring about competition and, thereby, provide reliable and affordable power to all.
Within a relatively short span of seven years a lot has been achieved. We are now talking of adequate base load supply in the foreseeable future, ten years or so. We are adding around 9 GW to 10 GW of generation capacity every year, which is twice the capacity we were adding until 2005. The efficiencies of many newer plants being built are among the highest in the world. The few areas where distribution has been privatised have been hugely successful. Around 3% of generation comes from renewable sources.
India has one of the most audacious solar energy programmes in the world. India will soon have a platform for trading renewable energy credits and energy efficiency credits. Many regulators have imposed a renewable power off-take obligation on distribution companies.
Besides, the quality of regulation is getting better and transparent. The system of addressing disputes through appellate tribunals is improving. The process of public hearings for tariff setting is getting more consumer-oriented.
There are also some significant social changes taking place. The first is that the quality of power supply is now a major election issue. Politicians are forced to ensure that basic amenities such as power are available to all. Secondly, people are now willing to pay more to secure reliable power supply. This willingness to pay, to improve the quality of life, is also amply demonstrated in rural areas.
The share of private sector participation is increasing and foreign investors are returning to the Indian power sector.
The social change is so significant that we can actually use it to launch the next wave of power sector reforms. While we have achieved a lot, much of it was done by simply squeezing out some appalling inefficiencies in the system. The low hanging fruits have now, by and large, been devoured. We can no longer escape two basic truths, which will only become harder as our economy and the global economy grow.
The first truth is that fossil fuel-based energy prices will increase and these will have to be passed on to the consumer.
We will need to rely on fossil fuel energy at least in the near future and these energy sources are limited. Global as well as the Indian population is still increasing. While the world population is likely to stabilise by 2050 at about 9 billion from the current 6 billion, the Indian population is likely to stabilise at about 1.6 billion from the current 1.15 billion. We not only have to cater to existing energy needs but also that of the future.
India needs a lot more energy to alleviate basic poverty of even the existing population. The country will need to rely on all available energy options such as renewables, nuclear power and also imports. Given the huge surge in energy demand from China and India, global energy prices are bound to increase, at least over the next 20-30 years. There is nothing to suggest that a new, abundant energy source that is cost-effective will be found in the near future.
There is no option before us other than passing on the increase in energy price to the consumer. The political leadership at the Centre has managed to free oil prices and has passed on all variations to the consumer . The same political will, however, is weak at the state level for increasing electricity prices. This has resulted in ever increasing losses for the state electricity boards. The combined loss of electricity boards has increased from Rs 21,000 crore in 2005-06 to Rs 53,000 crore in 2008-09.
The situation is only getting worse. In 2006 the average cost of supply was Rs 2.6 per unit and the average revenue was Rs 2.21 per unit. This meant that the loss per unit was Re 0.39. In 2009 the loss per unit doubled to Re. 0.78 because the average cost of supply had increased to Rs 3.4 per unit but the average revenue had increased to only Rs 2.62 per unit. We have now reached a point where no more generation capacity can be added, as generation companies cannot continue selling to bankrupt electricity boards.
?The second part of this article will appear on January 12
The writer is executive director, business and strategy, Tata Power