The path to a blackout free India

The massive electricity blackouts seen across large parts of India at the end of July have triggered passionate debate about the woeful state of the country’s power sector. The outcry is justified since outages hurt the economy. India’s manufacturing, for example, slowed to its worst performance in nine months partly due to power disruptions, as recent data from the HSBC Purchasing Managers’ Index shows.

Even as the national grid failed, many factories, offices and shops hummed with activity, powered by back-up diesel generators. Is that a testimony to Indians' grit in surviving the country’s creaking infrastructure? The answer is a yes, but at what cost? We risk the band-aid of diesel-generators becoming an improvised “cure” for our power ills.

At nearly 800 units per capita, India consumes less than one-third the 2,500 unit worldwide average. For the economy to expand 7% annually, electric supply must grow at around 6%, from 200 gigawatt (GW) today to 700 GW by 2032. Given the energy deficit is already in double digits and consumption will rise, the picture may become bleaker before it starts getting brighter.

As India debates long-term challenges such as fuel shortages, bankrupt State Electricity Boards (SEBs) and issues around land acquisition, we believe the country can take rapid action on five fronts to improve the situation in the short term.

One measure is to import coal at lower costs. In 2011-12, coal-fired capacity of 117 GW produced only 86 GW power, mainly because of lack of fuel. For its part, Coal India Ltd (CIL) cannot fulfill rising demand, and consortia such as the Minerals and Metals Trading Corporation and State Trading Corporation face challenges around tariffs, blending, rate cards and logistics. We believe India should consider a model such as that of the Japan Coal Development Organization (JCDO) where 10 integrated power utilities came together in the 1980s. JCDO negotiated on behalf of its members with mining companies from other countries, focusing more on long-term fuel security than on costs alone. It reduced landed costs through bulk imports and locked in strategic investments in mines abroad. India could implement a similar model where utilities negotiate for India as one bloc, either through a public-private partnership or the private sector itself. While India looks at a longer-term solution for domestic coal blocks, coal-based generators need to work with regulators and SEBs to ensure they have a price blending mechanism in place to partially offset the inevitable increase in costs due to imported coal.

Second, gas-powered plants face similar challenges, operating below 60% capacity for lack of supply. Industry considers gas imports too expensive, while India imports record diesel quantities to produce power at Rs.13-14 per unit, over 50% the price of liquefied natural gas (LNG)-based power. Diesel’s true cost is even higher, since it is subsidized up to 25%, contributing to fiscal and trade deficits. With the government aiming to cut this subsidy, diesel will only cost more in the long-term as this month’s price increase shows. We estimate 10% diesel consumption goes into generators, costing the economy around $9 billion annually. Producing the same power with LNG will cut this by at least one-third. The government can ensure higher utilization of gas plants by inking contracts, even at higher prices. Companies such as GAIL and ONGC are looking to capitalize on North America’s gas surplus by eyeing long-term contracts and investment opportunities in liquefaction terminals. New Delhi should help Indian companies finalize such contracts soon.

Simultaneously, in renewables, the government can move swiftly to help businesses lock-in low-cost global capital, and utilize excess solar panel capacity before other countries aggressively enter the fray. Besides adding solar capacity, states must also provide holistic infrastructure for transmission and distribution. Proper planning can help avoid hiccups, seen at the Charanka solar park. Looking at wind power, financial incentives such as accelerated depreciation have resulted in a great deal of capacity, much of it underutilized for the want of suitable incentives for generation and a lack of distribution infrastructure. Regulators must encourage demand through preferential pricing, efficient Renewable Energy Certificates and by rigorously enforcing renewable power purchase obligations.

To further bolster the power sector, open access should be encouraged as it allows low-cost producers to match needs of customers who would otherwise burn diesel at two to three times the cost. However, open access’s potential is hindered by surcharges which can add around Rs.1 per unit, making the cost uncompetitive. These charges make power costlier for customers. The Union and state governments should reduce or eliminate surcharges—something that can be done quickly. A three-year moratorium on surcharges could prod SEBs to address distribution problems and boost power trading, currently below 10%, compared with 30-40% in developed economies.

Finally, promoting distributed power generation closer to demand hubs ensures reliable power to end customers and eases pressure on the unstable grid. The government can provide financial incentives and improve the ease of doing business for plants using highly efficient techniques, such as combined heat and power, and organic rankine cycle. These systems ensure reliable electricity for industrial clusters, freeing them from dependency on diesel generators.

If India has to grow at a fast pace, industry and government must act together on measures yielding quick results, while working out long-term power issues. No longer can Indians and their businesses be left in the dark.

Amit Sinha and Sumit Nadgir are partner and senior manager, respectively, with Bain and Company. Sinha leads the firm’s Power and Energy practice in India.