Political Economy of Electric Power in India

• Published in: Economic and political weekly 1996-05, Vol.31 (20), p.1201-1210
• Main Author: Sebastian Morris
• Format: Article
• Language: English
• Subjects: Average fixed cost; Capacity costs; Capital costs; Cost efficiency; Cost of equity; Cost savings; Dollar averaging; Foreign exchange; Implicit costs; Special Articles; Utilities costs
• ISSN: 0012-9976; 2349-8846

Since the cancellation of the Dabhol Power Project (DPP), the debate about electric power in India has come into the public view, raising hopes that corrective measures can be taken to have a viable, cost effective and growing power industry. A critical examination of the recent policy changes especially as regards the Independent Power Projects (IPPs) reveals that there are many dysfunctionalities in this policy particularly in the enormous and quite unnecessary burden it places on the balance of payments, and in the additional constraints against improvement and change in the state sector. It would be damaging to indigenous power equipment manufacturers, particularly the BHEL, just when it is showing the potential to be an important international player in the industry. Moreover the policy is fundamentally flawed in not recognising that bulk purchase of power (for base load) by a utility necessarily acts against the interest of the utility (except in the case where the utility's cost of power generation from its new base unit is higher than for an IPP). If the policy is truly amended to avoid a bias in favour of the IPPs, little of the planned investments, especially from the foreign sector, would materialise. That there are significant social gains in having power generation (and not just distribution) in large integrated firms has been little appreciated. Several constraints to the healthy growth of the sector that had been building up are uncovered in this paper: the inability of the state sector to discipline its management and workforce, large-scale corruption and leakages, load and system imbalances brought about by inadequate investments in distribution systems, and in hydel capacities. The bulk industrial consumers being increasingly left to fend for themselves through captive power generation, as also the political inability to raise the price of power for the household and the agricultural sectors have further contributed to the structural weakness of the SEB system. In the 1990s these have acted to result in a dangerously slow growth in addition to capacities. The problem was compounded by the severe resources 'constraint' of the state. The vicious circle that exists today can be broken only if the government gives up its monetarist blinkers and realises that investments can in part 'create' savings, especially in a sector like power where the marginal product of power is far more than the cost of generation. Large under-utilised capacities in