From The Economist, January 14:
Soon it will need as much electricity as Europe
KEEPING THE power on in India is a tricky business. All across the country, grids are creaking as demand soars. Distribution companies are struggling to invest—in part because they have been saddled with the cost of providing cheap power to farmers and in part because of plain old theft. “People in urban areas are smart, they’ll tamper with the meter,” says Arvind Singh, a power executive in the eastern state of Odisha. “In rural areas they’ll just hook into the network, and if you catch them you’ll have to have a big fight.”Solving such problems is essential if India’s economy is to keep growing at pace. Since 2021, demand for electricity in India has increased by around 9% each year. It is set to more than double in the next decade. By 2035, India will need almost as much power as the European Union. Meeting that demand will require Indian states to pull off a grand transformation, at a speed no other country has managed. If they fail, India’s progress could stall.
In recent years India has done a good job of building impressive motorways and airports; it has also invested heavily in power generation. But the business of distribution—making sure electricity actually gets to where it is needed—is in an awful mess. All around the world, electricity distributors keep track of their so-called “technical and commercial” losses: in short, the difference between how much power is produced and how much is actually sold, resulting from problems such as shoddy cables, theft and unpaid bills. Globally, distributors aim to lose no more than 7.5% of the power that enters their networks; in China they lose 3-5%. Losses in India, though lower than they were, come in at 16%. That makes Indian distributors some of the world’s least efficient.
The “original sin”, says Richard Rossow of the Centre for Strategic and International Studies, an American think-tank, came when politicians promised to fix low prices for farmers without stumping up the cash to pay for them. That trend gathered pace in the 1990s; electricity distribution companies (known as discoms) began running up huge debts. Today they owe some $80bn, or 2% of India’s GDP. This has left them unable to borrow for investment; as a result, pylons and substations have decayed. In several Indian states incumbent parties have lost votes by trying to rescind old promises of free power.
For the most part, discoms are state-run and lack expertise in management and engineering. They make easy targets for corruption. “Businesses just bribe an official to switch them to an agriculture coding, then pay a few rupees a month for hundreds of units of power,” says Mr Rossow. Inefficiency has driven up power costs for Indian households. But rather than fixing the root causes, politicians have simply offered to fix prices for them, too.
Subsidies have distorting effects. Giving farmers free power for pumping groundwater has made growing water-hungry crops artificially attractive. It is why so much rice is grown in semi-arid states such as Punjab, depleting water tables. Even worse, handouts are often funded through higher tariffs for commercial users. This means manufacturers pay around 50% more for electricity than they should, calculates Arvind Subramanian, an economist. He calls this policy “killing the goose”: in the name of helping the poor, investment that would create jobs is stifled.
India’s central government sees the problem. Power prices for industrial users are far higher in India than in places such as China, Vietnam or Indonesia, it notes. Adjusted according to purchasing power, they are among the highest in the world (see chart). Many big users simply exit the system altogether by setting up their own power plants. That can be cheaper, but it is still much more expensive than plugging into a big, well-run grid would be. All this is holding back the government’s efforts to boost manufacturing....
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