Any technologically advanced society needs energy and in turn, that means adequate fuel supply. Unfortunately, India is deficient in oil, gas and coal. This is not a barrier to growth. Many of the richest countries in Europe, along with Japan, Korea, the US and China are energy importers.
But being a fuel importer does mean rational, sensible policy is required. Sadly, Indian policy has been anything but rational. Problems have been allowed to develop over decades and little corrective action has been taken.
India has endemic power shortages and very high transmission and Distribution (T&D) losses. Thermal coal or gas based power contributes the largest share of generation and will continue to do so. Hydel has environmental problems and invariably triggers protests. Wind and solar aren't competitive yet, and may not be so for years.
In theory, shortages should mean investments into the power sector in the hopes of high returns. But the private sector is wary of touching power. Private generation projects have stalled and lost huge sums. There are massive delays with project clearances; there are problems with land acquisition. There are coal shortages and imported coal is expensive. The franchisee model and/ or privatisation, where private franchisees operate, or buyout state power assets hasn't worked either.
Power tariffs are unrealistic with weird cross subsidies. Cash-strapped state utilities also delay payments to generators and equipment suppliers. The provisions of the Electricity Act of 2003 should have helped, but implementation has been piecemeal and uneven. States have unbundled utilities, and set up regulatory commissions to make tariff-setting a little more rational. However, although unbundling helps to pinpoint problem areas, these problems have not been addressed. Nor has open access been introduced.
The Centre has run schemes to improve the performances of state utilities. The APDRP (Accelerated Power Development and Reform Programme) and its successor, the Revised APDRP (RAPDRP) tried to improve financials and above all, reduce T&D losses. One out of every three units of power generated is "lost" in T&D. Unfortunately, reduction targets have not been met.
The Centre also ran a big bailout of state utilities in late 2012. This won't be much use on its own since losses will mount again unless efficiency improves. Banks have hit sector lending limits and power is by far, the largest contributor to non-performing assets held by PSU banks.
Coal supply is a key bottleneck. Coal India
Limited (CIL) controls 90 per cent of domestic production and CIL has problems meeting supply commitments. It would perhaps, make sense to break CIL up into several entities, maybe by region. That would at least, help pinpoint areas of under-performance. However, this is far too radical a solution for the political establishment to consider.
The offering of captive coal blocks to private power producers has run into major problems. Apart from well-founded accusations of favouritism and corruption, many blocks are in no-go zones. They cannot be exploited without major environmental damage. Coal shortages are responsible for low plant load factors. Imported coal is much more expensive. The concept of a price pooling mechanism to even out coal costs has now been junked. This is not necessarily a bad outcome because the concept itself was flawed. But the impasse on pooling at Cabinet level is another sign that the problems aren't taken seriously.
There are problems, too, with gas supplies. The under-performance of Reliance's KGD6 has meant that gas powered plants have been starved of fuel. LNG imports are much more expensive and gas-based plants are unviable at the current tariffs.
At a guess, if power sector reforms took hold, India could accelerate GDP growth by at least 1 per cent, maybe even 1.5 per cent. What needs to be done? Faster processes of project clearances are needed across every infrastructure sector, of course - this is not unique to power.
Specific to power, tariff rigidities and cross-subsidies are one concern. Fuel costs are variable and if they cannot be passed on, no investment will enter the sector. Coal supply efficiencies must improve, if necessary by removing CIL's monopoly status, or drastically altering CIL's corporate structure. T&D improvements are also vital. If T&D losses were halved, India would have power surplus to current needs without any new capacity being developed.
Even the financial stresses of the last fiscal haven't triggered urgency about reforms. If GDP growth picks up, the problems will become more acute as power demand grows and fuel costs rise. But it seems things will have to get really desperate before concrete corrective action is taken. In the circumstances, any business with high exposure to conventional power is best avoided.