More Power to India: The Challenge of Electricity Distribution

DIRECTIONS IN DEVELOPMENT

Energy and Mining

More Power to India

The Challenge of Electricity Distribution

Sheoli Pargal and Sudeshna Ghosh Banerjee

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Attribution—Please cite the work as follows: Pargal, Sheoli, and Sudeshna Ghosh Banerjee. 2014. More Power to India: The Challenge of Electricity Distribution. Directions in Development. Washington, DC: World Bank. doi: 10.1596/978-1-4648-0233-1. License: Creative Commons Attribution CC BY 3.0 IGO.

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ISBN (paper): 978-1-4648-0233-1

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DOI: 10.1596/ 978-1-4648-0233-1

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Contents

Boxes

Figures

Tables

Foreword

Two decades after the liberalization of India’s economy and a decade after the passage of the forward-looking Electricity Act of 2003, how has India’s power sector done? This World Bank review of India’s power sector assesses progress in implementing the government’s reform agenda and examines the sector along different dimensions—achievements in access, financial and operational performance of utilities, governance, private participation, and coverage and targeting of domestic user subsidies.

The sector has come a long way, as shown in this report, with significant achievements on many fronts: a tripling of conventional generation capacity with active private participation, renewables increasing from zero to 12 percent of the energy mix, the development of a state-of-the-art grid linking the entire country, the transformation of market structure, and the extension of service to more than 250 million users. Several states, programs, and utilities could indeed be beacons for others and are worthy of emulation, including homegrown models of distribution.

Overall, however, the potential of the sector remains unrealized. The lack of reliable power is a leading concern for industry and a potential constraint to growth. Annual per capita consumption is low by global standards and 300 million people lack electricity while the peak deficit is more than 10 percent. Sector finances are weak, with distribution utilities being the main contributors to sector financial losses. Utilities in several states have taken on significant commercial debt to finance their operation, which has led to concerns about poor power sector performance spilling over into the financial sector and broader economy. State electricity boards and distribution utilities also continue to require government support to stay in business, including transfers. This imposes a high opportunity cost on the economy by preempting other development spending. A key message of the report is thus that the distribution segment, still largely government owned and run, will require the sustained attention of the authorities if sector performance is to improve.

Unlike 10 years ago, today stakeholders outside of government, specifically the regulator and commercial financial institutions, critically affect the operating environment and thus power utility performance. The incentives of these players and the government (both as policy maker and as owner) need to be aligned to support utility performance. At the same time many factors that constrain performance are under the control of the utilities themselves—underpricing, physical losses, and inefficiencies in bill collection—underlining the importance of limiting the government’s role, strengthening regulatory governance, and bolstering competition so that utilities are both pushed to be efficient and permitted to run on commercial lines. This agenda has to be carried forward by the states, facilitated by the central government through technical assistance, knowledge transfer, public information campaigns, and financing. Support from the center for pilots and experimentation with different models of service improvement, leveraging India’s diversity and size, can be an important contribution. The Electricity Act of 2003 and associated policies constitute an enabling policy and regulatory framework for the sector’s development—the focus now must be on implementation.

The World Bank stands ready to partner with India on this journey.

Philippe H. Le Houérou

Vice President, South Asia Region

The World Bank

Acknowledgments

The India Power Sector Review was carried out at the request of the Department of Economic Affairs in the Ministry of Finance and the Planning Commission of India. Led by Sheoli Pargal and Sudeshna Ghosh Banerjee, the team comprised Mohua Mukherjee, Kristy Mayer, Mani Khurana, Amrita Kundu, Pranav Vaidya, and Bartley Higgins. Arsh Sharma and Joeri de Wit provided research, econometric analysis, and presentational assistance. Shaukat Javed, Harriette Peters, and Vinod Ghosh provided able administrative support. The work was supervised by Jyoti Shukla and Salman Zaheer.

The team is grateful to Ashish Khanna, Rohit Mittal, Kavita Saraswat, and Kwawu Gaba for discussions and constructive ideas. Crucial analysis, inputs, and insights were provided by consulting teams at Deloitte Touche Tohmatsu India Pvt. Ltd. (Shubhranshu Patnaik and Anujesh Dwivedi), Mercados Energy Markets India Pvt. Ltd. (Anish De, Puneet Chitkara, Anvesha Paresh, Kumar Sanchit, and Debadrita Dhara), and, PricewaterhouseCoopers Pvt. Ltd. (Ashok Varma, Debasis Mohapatra, and S. Johnny Edward). The team thanks the peer reviewers Vivien Foster, Lucio Monari, Sameer Shukla, and Luis Andres, as well as Ashok Lavasa (former Additional Secretary, Ministry of Power) and Sushanta Chatterjee (Deputy Chief [Regulatory Affairs], Central Electricity Regulatory Commission) for substantive comments.

Finally, the team appreciates the advice and suggestions of the Technical Advisory Panel constituted for this task:

The team gratefully acknowledges the financial support of the Energy Sector Management Assistance Program (ESMAP), the South Asia Poverty and Social Impact Analysis (PSIA) Trust Fund, the Australian Agency for International Development, and the Asia Sustainable and Alternative Energy Program (ASTAE).

Bruce Ross-Larson, Jonathan Aspin, and Jack Harlow at Communications Development Incorporated edited this report.

About the Authors

Sheoli Pargal is an Economic Adviser in the World Bank’s South Asia Sustainable Development unit. She has worked across infrastructure sectors on a range of topics including regulation and governance, private sector participation, public-private partnerships, and industrial pollution, with a focus on analytical and technical advisory work. In twenty years at the World Bank she has had assignments in the research department; the Latin America, Eastern Europe, and South Asia regions; and corporate policy and operations units. She has also worked in the Planning Commission in India. Ms. Pargal has a Ph.D in economics from Northwestern University and B.A. and M.A. degrees in economics from St. Stephen’s College and the Delhi School of Economics at Delhi University.

Sudeshna Ghosh Banerjee is a Senior Economist in the World Bank’s Sustainable Energy department. She has worked on energy and infrastructure issues in the South Asia and Africa regions in both operations and analytic assignments. She focuses on project economics, monitoring and evaluation, and on a broad range of energy sector issues including energy access, energy subsidies, renewable energy, and sector assessments. Ms. Banerjee holds a Ph.D in public policy from the University of North Carolina at Chapel Hill and M.A. and B.A. degrees in economics from Delhi University.

Abbreviations

All amounts are in Indian rupees unless otherwise indicated. All dollar amounts are in U.S. dollars.

Indian rupees are converted to dollar amounts using the year-specific exchange rates taken from the World Development Indicators.

Year ranges with a slash (such as 2003/04) indicate fiscal years.

Overview

The government of India has emphasized that an efficient, resilient, and financially robust power sector is essential for growth and poverty reduction (Ministry of Power 2005). Almost all investment-climate surveys point to poor availability and quality of power as critical constraints to commercial and manufacturing activity and national competitiveness. Further, more than 300 million Indians live without electricity, and those with power must cope with unreliable supply, pointing to huge unsatisfied demand and restricted consumer welfare.

This report reviews the evolution of the Indian power sector since the landmark Electricity Act of 2003 (EA 2003, or EA), with a focus on distribution as key to the performance and viability of the sector. While all three segments of the power sector—generation, transmission, and distribution—are important, revenues originate with the customer at distribution, so subpar performance there hurts the entire value chain. Persistent operational and financial shortcomings in distribution have repeatedly led to central bailouts for the whole sector, even though power is a concurrent¹ subject under the Indian constitution and distribution is almost entirely under state control. Ominously, the recent sharp increase in private investment and market borrowing means power sector difficulties are more likely to spill over to lenders and affect the broader financial sector. Government-initiated reform efforts first focused on the generation and transmission segments, reflecting