Reviewing The Electricity Act 2003: Real Initiatives Needed – I

THE Common Minimum Programme of the new UPA government has finally accepted what the people concerned with the crisis of the power sector have been demanding all along: a re-look at the power policies followed for the last one and half decades. The CMP’s acceptance of reviewing the Electricity Act should not be restricted to just an examination of the provisions of the Act but also of the philosophy underlying it. This is doubly important as the Congress, as a party had supported the Act in Parliament and had vigorously pursued the same policies in many of their states that Chandra Babu had followed in Andhra. The private entry in generation earlier, trifurcation of the SEBs and then distribution, have all been followed in Orissa, Delhi and Madhya Pradesh. While Delhi is now feeling the after effects of privatisation — with tariffs for electricity slated to take a very steep rise and the supply being still very poor — states such as Madhya Pradesh have paid a very high price with prolonged power cuts and rates for electricity shooting up for the farmers S N Roy, former chairman Central Electricity Authority, had predicted that these power policies would bankrupt the farmers and impose very high costs on the consumers leading to political instability. It is for the Congress to realise this and look at the sector afresh without its ideological blinkers of a neo-liberal economic order.

The elements of the current so-called reform policy in the power sector has consisted of the following:

Separation of generation, transmission and distribution

Allowing private entry as Independent Power Producers or as Transmission Companies

Privatising distribution

Changing fuel policy to allow hydro-carbons instead of coal

Allowing power trading companies to trade in electricity

Encouraging captive power plants and giving them additional incentives to supply to the grid

Withdraw the state from rural electrification

Remove all cross-subsidies

If we look at individual components of the policies, it can be shown that each of them has failed. Enron, GVK Industries, Essar Power all have sold power at high costs to the SEBs driving them further into the red. The privatisation of generation, whether in Orissa earlier or in Delhi now has not brought in any benefits to the consumer and have actually increased the outflow from the state exchequer. The hydrocarbon policy, which encouraged naphtha as fuel, has been a disaster, imposing a cost of fuel per unit of Rs 4-5, way beyond the current tariffs can sustain. But the more important issue is to address the underlying assumptions of these policies and examine their validity.

In this article we will examine the issues related to the costs of generating power and will leave power trading, privatisation of distribution and rural electrification for later.

The underlying assumption of the power policy has been the neo-liberal belief that markets are the only way to improve efficiencies and lower costs. Recognising that power sector is a monopoly — both transmission and distribution networks are costly and difficult to duplicate — the policy was to separate generation from the monopoly elements of transmission and distribution. With this, it was argued that competition in generation would lower the cost of electricity as generators vie with each other to supply cheaper and cheaper electricity. We will leave out the question whether in a scarcity situation, there can be any meaningful competition. The question to ask here is has such competition lowered the price of electricity anywhere in the country or for that matters anywhere in the world?

The record of private power generators in India have been that they have asked for and reached Power Purchase Agreements (PPAs) that have grossly inflated plant costs and secured rates for electricity well over what it is costing the SEBs to generate. The Enron is only the most infamous of the PPAs; the other ones starting from the various PPAs in Andhra to the ones proposed for Maheswhar were hardly better. It was just their smaller size did not cause as much damage. The net result has been a very severe pressure on the costs of supplying electricity. About 10 years back, it used to cost Rs 1.20 to produce one unit of electricity; it costs around Rs 2.60-2.80 to produce the same today. A large measure of pushing up the cost of generating electricity was providing various incentives to the private IPPs, which were then also availed off by NTPC. The net result has been a huge outflow from the SEBs to NTPC and IPPs. At a conservative estimate, this outflow has not been less than Rs 100,000 crore in the last 10 years. No wonder the SEBs have become more and more sick as the reforms have gathered strength.

The situation in the rest of the world in no different. Whether it is the Californian case, where market “competition” drove up the cost of power to five times its earlier cost to UK, where the power companies after “competition” made windfall profits, the picture has been exactly the same as in India. The power markets are easy to rig and such competition leads to cartels and profiteering.


The fuel policy has seen a switch to Natural Gas, Liquefied Natural Gas (LNG) and Naphtha. Mercifully, the naphtha route is dead, though the damage it has inflicted, particularly on the Maharashtra (Dabhol) and Kerala (Kayamkulam) SEBs, have been very high. The LNG route continues to be encouraged as more and more combined cycle plants come up with Natural Gas as the fuel.

The problem with the Natural Gas route is that it depends on the price of gas. If we allow Indian Natural Gas prices to be indexed to international fuel prices as is being pushed by the petroleum ministry, this will mean that cost of electricity in India would hinge on the price of crude, an extremely volatile commodity. This also does not take into account that the indigenous Natural Gas supply may not be enough and we will have to supplement this with imported LNG. Here again, imported LNG would be, in all likelihood, tied to international oil prices.  Any shift to Natural Gas would have to take into account how gas will be priced in the country and not based on piecemeal policy making.

It is not that basing our power programme to coal is without problems. We have seen that coal prices in India have gone up steeply as the governments of the day have not been able to address the problems posed by the coal mafia and improve the performance of the coalmines. The price of coal has doubled in the last 10 years and so has its freight. The net result has been accentuating the push on the cost of generating power.

Are there no solutions to lowering or containing the price of generating electricity? There are obviously two components to the cost of generation, capital cost and fuel cost. If we look at these two issues separately, we will see that alternate solutions exist. However, this demands a change in mindset that the current economic establishment is not prepared to do


The most important way to reduce the cost of capital equipment is to purchase same number of units in bulk: take advantage of economies of scale that such manufacture of equipment would entail. If we can place an order on BHEL for say 30 coal fired units of 250 MW units for the next five years, this will allow BHEL to procure material in bulk and therefore allow them to quote much lower prices. This would also give a big boost to Indian industry as they would then be supplying various equipment to BHEL and would have an assured order book. There could be various ways of financing this programme using imaginative methods, some of which have been detailed by professor Prabhat Patnaik elsewhere. But the central point here is that even without such methods of financing, the costs of equipment would come down drastically if we can decide on a stable procurement policy.

Currently, each SEB procures plants independently with various financial aid and loan packages. Quite often, they are tied by their financing to take either the global bidding route or tied import of equipment from the country giving the loan. All this leads to very high cost of equipment, which ultimately gets passed on to the consumer as high power tariffs.

The fuel issue needs to address is what should be the fuel policy for the power sector. Here again if Natural Gas is to be used, it must be based on fixed long term price regime and not linked to international prices. Further, we should avoid, as far as possible the import of fuel for the power sector. The second component of fuel policy is to take a hard look at the coalmines and various central levies that are being imposed on the power sector including high freight charges by the Railways.

All this demands hard work and detailed plans. Unfortunately, reforms in India has come to mean mouthing a few slogans and washing ones hands off to let markets take care of everything, from a lack of understanding of the power sector to solving the problems of the sector. That markets have failed from California to UK has not dampened the enthusiasm of the proponents of neo-liberalism. It is time that the government addressed the real problems of the sector with some real initiatives: and not fictitious reforms as of the earlier government.