Power equations from the power grid

But it takes two to tango and governments have also to state their position. A controversial area in India is the electricity sector. Governments are made and unmade on performance and policies. Inve-ctive flows freely and sometimes even bl-ood. On September 15, somewhat quietly, the Central Electricity Regulatory Comm-ission released a terriblyimportant document a “consultation paper” on bulk electricity tariffs. We have the largest rural electricity network in the world with almost 90 percent villages electrified and this paper was saying things which would affect every Indian, so it was ignored.

The interesting thing about the electricity tariff paper is the soft and firm style in which it presents choices to the country. It never leaves the domain of fact, but it also does not at this stage force the choice. It is gently persuasive. It shows with great clarity and detail that you have the choice of not having power if you don’t pay the existing cost.

In a detailed evaluation two of my colle-agues had done with me of a State Electricity Board, one of the best in India, we had shown that their existing cost could not be covered by a reasonable system of pricing, but if their repair and maintenance norms could achieve efficiencies achi-eved elsewhere in India and heat rates improved, it was possible to reduce costs and break even.

Theso-called “fair price” methods co-mpensate the producer for existing costs even if he is inefficient, but do not force him to reduce costs. Costs fall with better operation and improved technology. Pr-icing must not be a fetish in medieval concepts of fairness, but must reward those who reduce costs and innovate. In fact, it uses the same concept of long range marginal cost pricing and the fact that efficiency pricing has to compensate for the capital costs of modernisation, but it leads to the advantages of reduced costs of materials, energy and labour.

The bottomline however is that unless we compensate the producer for investme-nts required for techn-ology upgradation and let him keep some of the benefits of better operation, we are condemned to shortages and high prices. The monopolist is not a villain of Hindi movies. He takes advantage of bad policy rules and inelastic demand. The power tariff paper gives us an option to get out of this trap.

The next step is then possible. If we get out of ourfixation of penalising efficiency and let the new rule-based systems work for some time, it will be possible to really get into markets which work in the power sector through real time. This is really exciting. In 1997, as Power minister, we discovered that if a sector grows in India, deficits soon run into surpluses. By end-’97, a 7 per cent growth of power generation meant that there was excess capacity in all regions, but the south. We then agreed to ship more power to the Southern grid, particularly from the east.

But the generators in the east, working at low capacities because of lack of demand, wanted to load their fixed overhead costs on their low sales and sell power to the south and west at around six rupees a unit. We become prisoners of the monsters we create. This was sorted out and power from around 100 MW of capacity started flowing in January ’98 and doubling the next month.

Simultaneously, we worked on an availability tariff which uses an efficiency principle to select the supplier formeeting grid demands. This, of course, is not liked by the existing producers who want full cost compensation rather than a efficiency price. The Power ministry has done remarkably well in increasing inter-grid supplies since we are again in a situation of excess capacity, thanks to a high growth in recent mon-ths. Meanwhile, a Power Trading Corp-oration planned in ’97 has also been set up and will eventually trade power.

The power tariff paper shows that as generation capacities expand there will be no alternative to efficiency criteria working on determining generators walking in or out of the grid. We will have to force the pu-blic sector parastatals to accept this and nudge the IPPs into accepting that they really do not have the options of ignoring efficiency as a criteria. At that stage, which I see about five years away, the regulator can sit aside and provide a ground for fair trade in real time. In particular, they will then protect the interest of the small man.

In the Draft Bill I hadintroduced in Parliament in August ’97, we had taken special care to see that regulators were selected by an autonomous, high-level selection process. This has obviously work-ed and Dr Surendra L. Rao and his co- lleagues have given us a vision of obtaining cheap and quality power supply in the future. We must all decide to rise to the challenge it entails.