Distortions in the power sector annually costs India around $86.1 billion or 4.1 per cent of GDP with excessive coal fired power generation as the biggest source of waste, a new World Bank report has said.
The report "In the Dark: How much do power sector distortions cost South Asia?" goes beyond just the fiscal cost of inefficiencies in the sector, to assess the loss of consumer welfare and producer surpluses as well as the environmental and social costs. It also looks at the entire supply chain of power supply, from upstream fuel supply to downstream access and reliability and not just generation, transmission and distribution that most analysts generally focus on.
India generates nearly three fourth of its power from coal and the report says lack of competition in coal mining that is monopolised by state run Coal India Ltd offers the most scope for reforms.
"The greatest source of waste is excessive coal-fired power generation, which leads to substantial health and environmental damages. The excessive health cost borne by the population is estimated at $35.9 billion a year. Excessive emissions of global warming gases add another $14.1 billion in annual external costs. Together, the net social and environmental costs of excessive coal consumption reach roughly 1.7 per cent of GDP a year," the report says.
Though the country has made giant strides in the area of reducing power outages--peak demand shortage has declined from 11 per cent in 2011-12 to 0.9 per cent in 2017-18 with average demand shortage falling from 8.5 per cent to 0.4 per cent during the same period, it still suffers from high transmission and distribution losses at 22 per cent in 2015-16 was still among the highest in the world. Further, while India claims to have electrified 100 per cent of its villages, an estimated 178 million people still live off the grid with no access to electricity. Much like CIL in mining, the dominance of state owned power plants in generation--63 per cent of generation and 56 per cent of capacity including 61 per cent from thermal power plants, and distribution companies--private or otherwise acting as regional monopolies, has contributed to inefficiencies in the sector.
"India needs to put in place an incentive mechanism on technical parameters where power plants and distribution companies are benchmarked and rewarded or punished," says Fan Zheng, senior economist at World Bank and the author of the report. "If implemented correctly, it will bring down inefficiencies significantly and quickly. Turkey has done it well and is a good example of that."
"There is also a big issue with subsidised power available to households and the agriculture sector that impacts the financial viability of distribution companies and power plants. Like the government has done with its Direct Benefit Transfer in LPG, a similar model can be implemented in electricity as well," she says. "Technology by way of smart grids and meters is available so it can be done without punishing anybody who actually needs cheap electricity."
The impact of power shortages on downstream rural households and firms is the second-largest source of economic cost, estimated at 1.42 per cent of GDP a year. It includes the potential income losses of un-electrified households and the income losses of households and firms that are already connected to the grid but affected by power outages. According to the report, the third-largest cost is downstream social distortions from the use of kerosene lamps, which are estimated to cost the economy 0.31 per cent of GDP.