Into the Fourth Decade: Reforms and short-circuits in India’s electric power structure

“The viability of [electricity] Distribution Companies is a serious concern,” asserted the Finance Minister, Nirmala Sitharaman, while presenting the budget for FY 2021-22. She announced a “revamped reform-based result-linked” distribution reforms scheme with an allocation of ₹3,05,984 crores over 5 years – the highest ever Central allocation for the purpose. Economic viability of electricity distribution as a Central budgetary concern can be traced back to 1991. The then-Finance Minister, Manmohan Singh, presenting the budget for FY 1991-92, had raised concern over high transmission & distribution losses and outstanding dues of erstwhile State Electricity Boards to the NTPC, Coal India and the Indian Railways. Singh had asserted that “we cannot allow State level enterprises to become an instrument of unplanned and unauthorised transfer of resources from the Centre to the States.”

The year 2021 marks beginning of the fourth decade of ongoing electricity reforms in India. This blog post reflects on what we learnt by studying three decades of attention and interventions to fix electricity problems and suggests priorities for the fourth decade.

Three Decades of Electrifying Reforms but Dim Outcomes

The Centre’s attention to the plight of the power sector led to the opening of electricity generation for private sector participation in 1991, a subsequent decade of state level experiments with standard model of electricity reforms and finally, overarching legislation in 2003 mandating institutional restructuring and broad governance shifts. Since 2000, the Centre has had sustained support for techno-economic interventions, through successive centrally-sponsored schemes, to fix efficiency losses and financial leakages in electricity distribution. Centrally designed bailout schemes have emerged as a regular feature in the sector. Yet, the sector continues to grapple with past problems like operational inefficiencies, theft & non-payment, access challenge, unreliable supply, and distressed finances.

Despite the potential political rewards of improving electricity access and quality, given its importance to livelihoods and quality of life, these outcomes have not been taken up seriously and successfully in India. Seeking to explain this paradox, our book project – Mapping Power: The Political Economy of Electricity in India’s States – undertook a comparative analysis of state-level political economy and experiences of electricity reform in 15 states. Five insights from our analysis in the book and other studies:

1. In developing countries like India, electricity provision is invariably political, given its importance to citizens’ livelihoods and quality of life. The reforms effort to insulate electricity from politics, therefore, may not be feasible or indeed desirable. Far from depoliticising electricity, pragmatic reform interventions must require deeper, but more careful, engagement with politics.

2. Electricity sector dynamics cannot be understood independent of broader political economy trends. To examine electricity politics, it is important to understand the extent to which reforms are informed by and address the political context. In a federal system, with competitive electoral politics, political context varies across states. Therefore, state-specific political economy considerations are key to explaining the political economy of electricity.

3. The electricity sector has experienced a see-saw relation of power-sharing between the Centre and the states. No doubt states have failed in electricity reforms, on several fronts. There are two ways forward: fixing the reform process and better managing the political economy at the state-level, or redirecting responsibilities to the Centre. Increasingly, there are growing efforts in favour of the latter, as evident in recent legislative reform proposals (see our analysis of these proposals issued in 2015, 2018 & 2020). However, past experiences provide little confidence on the Centre’s ability to address electricity problems embedded in state-level political economies.

4. Centrally designed, standard reform packages do not work in varying political economy contexts, even within one nation. This was also observed by the World Bank (a key advocate of the 1990s electricity reform package in India) in its review of global reform experiences: “power sector reforms were more likely to gain traction if they were consistent with the country’s political system and ideology and led by champions enjoying broad stakeholder support”. This statement applies equally to India’s states.

5. India has to address its 20th century electricity challenges while making the transition to 21st century electric power structure. The transition is likely to lead to disruptive politics. While it provides an opportunity to address the existing electricity challenges, it has the potential to aggravate them in absence of careful and proactive State engagement. Managing the transition will require substantially re-making long entrenched institutional and political patterns in the sector.

Into the Fourth Decade of Electricity Reforms

As the sector enters the fourth decade of reforms, the Central government has geared up to rethink its approach to electricity reforms and transition. The Finance Minister has announced an upcoming framework “to give consumers alternatives to choose from among more than one Distribution Company.” Echoing this emphasis, in an interview, the Power Minister has expressed his commitment to delicense electricity distribution business to end monopolies of discoms. The Finance Minister has also allocated long-term budgetary support to fix discoms’ financial leakages, to be used for prepaid smart metering, feeder separation and system upgradation. There is simultaneous emphasis on expanding India’s ambitious plan for transition to cleaner energy sources: the budget made an announcement for a Hydrogen Energy Mission to be set up in the current year.

Will this technology and market-enabled interventions make this decade ‘the prime of life’ for India’s electricity? The answer lies in how we envision the institutional and political  patterns around these techno-economic solutions. Drawing on our analysis and understanding of the sector political economy dynamics, we suggest, as necessary complements to the interventions being planned, the following five priorities:

1. Re-engage with the debate on electricity as a private commodity vs electricity as a public good (essential for human development). In the past three decades, governments have opportunistically shifted their position on the nature of electricity provision. A broad consensus is a necessary prerequisite to plan for a better electricity future.

2. Prioritise pre-distribution of clean energy solutions for the poorest citizens to minimise redistributive pressures. The redistributive pressures of democratic politics in a developing country have made electricity provision a means of welfare that has fostered a low-level equilibrium trap encompassing poor quality, poor payment and populist politics. Energy transition and low-cost renewables offer an opportunity to free the citizens, businesses and the sector from this redistributive pressures.

3. Drive a shift away from ‘redistributive welfarism’ (that prioritizes subsidised tariffs for the poor while compromising on the quality of service) to ‘productive power’ that empowers and enables the poor to pay for better quality service through productive use of electricity. This will require a comprehensive strategy that seeks to complement reliable electricity supply to rural areas with targeted interventions to mobilise its productive use.

4. Support political entrepreneurship to bring convergence between electricity and electoral outcomes. This will require a careful analysis of state-specific links between politics and electricity and appropriate sequencing of politically credible quality improvements and price rationalisation, by looking into demand for access and service quality, demand for subsidies, costs of supply, and available financial space.

5. Economic viability of the electricity system is critical to our electricity future and must be pursued. In designing a reform strategy, the Centre must consider the costs of specific policy options, assess alternative approaches and allow space to the states to chart their institutional pathways. Simultaneously, the current pandemic experience has highlighted the weak resiliency of our electricity systems. Therefore, the long-term vision and reform strategy for the electricity sector must treat building system resiliency as a critical complement to the goal of economic viability.

(Our current research aims to stimulate engagement with political opportunities and constraints as part of national electricity policy discussion and promote development of state-specific approaches to electricity transition that internalises the effects of political changes as an important complement to techno-economic analysis. We will use this blog to share our observations and insights and look forward to a productive engagement.)

Environmentality is a collection of ideas, perspectives, and commentary by researchers at the Initiative on Climate, Energy and Environment, Centre for Policy Research, New Delhi. Views and opinions expressed in this blog are solely those of the authors. They do not represent institutional views.

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