03-Dec-2009

Electricity reforms - an alternative approach

[This was mailed to Hasiru Usiru mailing list]
This Prayas report discusses reform of the electricity sector (i.e., "standard model" which is: unbundling utilities, preparation of unbundled entities for competition by management/ownership changes possibly full privatization, lowering entry barriers by liberalization, stronger regulation) with respect to India. All italics/emphasis mine.

Of Rocks and Hard Places: A Critical Overview pf Recent Global Experience with Electricity Restructuring:Navroz K. Dubash and Daljit Singh: December-2005)

On competition
Competition, albeit poorly understood and poorly defined, is well on its way to becoming the contemporary magic formula to a healthy power sector. The tone is set by the Electricity Act, 2003, the preamble of which states that "promoting competition" is an end in itself, or at least as a taken-for-granted means to a better electricity sector. The Act is written to enable, if not mandate, competition in electricity although it does also encompass several other types of reform measures in its ambit.
...
Editorials in the business newspapers are unanimous in urging adoption of competition; a recent sample from the Business Standard declares "… critical if India is to remain competitive … is that competition be introduced in the [electricity] sector" [Business Standard 2005]. Commenting tariff hikes and their subsequent roll-back in Delhi during the summer of 2005, one of only two states to have privatized distribution, news commentators confidently assert "…competition is the only alternative" [Karnik 2005] and "competition … must be allowed in residential areas" [Times of India 2005].
...

empirical evidence suggests that "aggressive but plausible" estimates of price savings from wholesale electricity competition are 10%, translating to retail price savings of about 5% [Wolak 2004]. By contrast, subsidy reform, loss reduction, and a host of other more prosaic improvements are likely to result in savings many times greater, with far fewer downside risks. From this perspective the preoccupation with electricity competition in India is somewhat perplexing.

...
An alternative approach for India
The Indian electricity sector is between a rock and a hard place. The recent past of state- led dysfunction offers few reasons for hope, and the future, at least in the form of the international model of restructuring and competition, promises more confusion and only uncertain success. Electricity market optimists declare the problems with the model can be fixed. Pessimists suggest that once all the fixes are in place, the costs may well outweigh the benefits, and price signals will have been considerably muddied. Both agree that electricity markets have been far more challenging to implement than anyone had earlier thought. In this context, organizing the sector around improved regulation becomes a viable alternative option. In reality the long-term choice for India is not the easy one between a discredited state-led past and a shining market future, but the far more difficult one between flawed regulation and imperfect competition.

For countries like India, there is a strong case for stepping back to look at specific national priorities, rather than examining every option only through the lens of a market- based structure, which in the case of India is anyway a distant and uncertain dream.

First, it would be wise to adopt a "no-regrets" strategy on reforms that goes beyond the wish list approach of the National Electricity Policy to more concrete and time bound steps. Debate over competition should not be a delaying tactic or hindrance toward progress on more prosaic and necessary reforms. Leading the list of "no-regrets" measures is certainly management improvements in the distribution sector, whether under public or private ownership. Closely related is the need to strengthen the ability of regulatory institutions, which have already improved transparency in the sector and are undoubtedly critical to ensuring distribution improvements. Again, even if competition is introduced in the future, investment in strong regulatory institutions will certainly not have been wasted. Similarly, investment in transmission upgrades will be beneficial irrespective of industry structure.

Second, the sector is currently trapped between the ephemeral promise of the invisible coordinating hand of the market, and the reality of weakened and uncertain planning institutions. In the short to medium term, more deliberate planning is inevitable, particularly for generation capacity. Indeed, one of the weaknesses of fully restructured markets has been inadequate incentives for generation. Open access for a small proportion of demand in India is unlikely, by itself, to result in the desired investment. Instead, there is a strong case for use of Integrated Resource Planning (IRP) techniques to ensure that low cost generation (or demand side) options are fully explored. Additionally, there is no reason why IRP cannot be mated to competitive bidding mechanisms to enhance efficiency. However, planning needs to go beyond the short term needs of the sector, to develop and embrace a cohesive long-term vision.

Third, a preoccupation with organized electricity markets and in particular the full standard model obscures a more productive discussion to be had on emergent new directions in electricity reform that stress hybrid approaches. For example, experience in major developing countries such as South Africa, China, and Brazil suggest that both the state and the private sector will continue to play a major role in electricity through mixed or hybrid structures.

...India would be better served by focusing on fundamental, if unexciting and challenging, basic management reforms in the sector, particularly at the distribution end. Under the right conditions, competition can be a tool to an end. It is unlikely to be a shortcut.

Regards,
Dinesh.

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