Making competition work in Indian electricity sector

Abstract

The economic growth of the nation calls for a matching rate of growth in the infrastructure, power being one of the most important sectors in infrastructure. To support a GDP growth of 9-10% per annum, the required growth rate of power is estimated to be more than 14- 15% annually. The Electricity Act, 2003 shows some commitment and the willingness on the part of the Government to take big strides in developing the power sector. However, the electricity sector reforms are still at a very nascent stage. World over competition in the electricity generation sector has not been possible on a long run basis. This is because of lumpiness in electricity investments, its non-inventoriable nature, the long lead times taken for construction along with environmental constraints imposed on it, and the fact that in electricity we are facing a twin commodity, energy in the short run and capacity in the long run. Under guaranteed return based cost plus return based regulation, excess capacity has been the result, while under competition, of the pool based variety, capacity deficit has been the result. Thus study of competition is a challenge, and more so in India, where electricity deficit is endemic, and there is a fear that competition would lead to California type disaster. But over a period of time the traditional electricity system started facing challenges from various corners. The first chink in the monopoly armor of electricity sector was provided by the PURPA Legislation in USA. However, the next but much bigger blow came from the privatization of the British Electric Supply system which helped in accelerating the process world over. The liberal path was then followed in Netherlands, Norway, Sweden, Finland, and other European countries. Some of these experiments proved to be successful and others not so successful. India also had its taste of bringing reform and competition in the electricity sector through Orissa and Delhi experiments, albeit to a much lesser successful extent. The electricity industry function can be divided into physical functions such as generation, transmission, system operations, distribution; and merchant functions such as retailing to final customers and wholesale power procurement. The first step in introducing competition in each of these functions depends upon the scope of competition in each of these functions. In this study various issues have been identified in each of these functions of the Indian electricity sector and possible steps suggested to overcome these issues for bringing competition in this sector. The approach of this study has been descriptive rather than prescriptive in nature.