India's power challenge

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A future of big spending awaits India if it is to provide power to a billion people.

Rapid economic expansion is driving up India's overall energy needs, but in particular demand for power generation. High growth in consumption rates has put pressure on the government to ensure there is sufficient capacity to avoid driving up fuel costs and raise import bills from oil, gas and coal. At the same time, the pre-dominance of coal-fired power generation is impacting India's nascent attempts to reduce its greenhouse gas emissions.

The International Energy Agency (IEA) has estimated that Indian power generation capacity will need to triple by 2030 to meet anticipated economic growth. But many issues will need to be addressed first. The sector has substantial structural inefficiency with weak State Electricity Boards (SEBs) and frequent, prolonged transmission failures. There is also a very high level of distribution losses estimated at 20% for technical reasons and 30% for non-technical causes.

A lack of reliable supplies is having another unexpected effect on India's energy import bill. A large part of electricity demand is now being met by private diesel generators, as a growing middle class has become able to afford them to keep their homes air-conditioned and domestic firms have become profitable enough to buy units for fall-back electricity supplies.

India's policy of subsidising diesel and petrol prices to control inflation has made this an economically viable means of bypassing the weaknesses of the electricity system, but with demand for diesel growing, import bills are rising and the government has indicated it may revise the subsidy policy.

India's oil ministry has estimated that demand for diesel grew by an unforeseen 24% last year because of its use in power generation.

India's recent economic growth has placed further strain on this already weak system. Government policies subsidising tariffs for the agricultural sector and some households have undermined producers' margins meaning there has been little spare cash to invest in new generation capacity.

The government has also announced a major rural electrification plan for the next 20 years, which will see more people connected to the grid, thus adding to already high demand levels. But even if the plan does manage to connect 96% of the population by 2030, this will still leave 60 million people in rural areas without access.

India's installed power generating capacity at the start of 2007 was 115 545 MW. Private generation accounts for only about 10% of total capacity, with the remainder owned by the public sector, of which about two-thirds is in central government hands and one-third by the Indian states.

The need for more generation has been anticipated since the mid-1990s when the then government launched various projects. This resulted in installed capacity rising 48% but still short of its target by 50%.

The state has dominated the sector since India's independence. The Electric Supply Act of 1948 integrated the then smaller fragmented utilities into 19 SEBs who remain the dominant institutions within the industry, controlling well over half of the electricity supply and the vast majority of distribution. The SEBs fall under the jurisdiction of individual state governments.

Financial losses at the SEBs are estimated at around US $6 billion a year - equivalent to 1.3% of India's GDP. In an attempt to address this, the government in the 1990s allowed individual states to pursue their own SEB reform plans.

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