On July 30th, the northern grid of the Indian electricity network collapsed, causing electricity outages affecting 8 different states. As power was being restored on the 31st, the grid collapsed again. This time along with the northern grid, the eastern and north-eastern grids also collapsed affecting an area populated by an estimated 670 million people. The successive grid failures have brought domestic and international scrutiny to the Indian electricity sector. Some of the explanations being given are lack of grid discipline on the part of states and increased network stress due to poor monsoon rains, which lead to both a reduction in power from hydropower stations and increased demand for extraction of groundwater for irrigation.
Neither of these explanations seems convincing as they do not explain why the failures occurred after recent rainfall, or why the first happened during off-peak hours (2:30 am). Further, withdrawal of electricity above allocated amounts by states is not uncommon. We will have to wait for the findings from the official inquiry into the collapse to know some of the proximate causes. But, ultimately, long term systemic issues need attention to prevent such outages.
The Indian electricity sector has two major problems. The first is the technology and management of the transmission and distribution network and the second is inadequate supply of electricity.
The Indian transmission network is divided into 5 regional grids. Over the past decade, all but the Southern grid have been synchronized to establish a National Grid that allows electricity to flow from regions with a surplus to those with deficits. The grid is managed by a network of load dispatch centers, which coordinate with each other to balance supply and demand of electricity on the grid at all times. To protect grid stability, they have the right to cut off a state drawing in excess of its allocation. This, for some reason, did not happen on the days of the failure.
Human error might have been the cause, but automated circuit breakers also should have protected the grid from large scale collapse. Tampered-with or damaged equipment could be to blame. This has focused attention on the need to hasten upgrades to the ever-expanding and increasingly congested electricity network. There are calls for investing in smart grid technology, already in use in other BRIC economies, which by generating real time information on grid operations would drastically reduce response time to demand-supply imbalances and help prevent the sort of cascading failures that occurred last week. Upgrades difficult because of the financial state of the sector. State-owned power generation and distribution entities that provide electricity below cost to agricultural and residential customers are operating with unsustainable losses—reports suggest that projected losses for 2012 will be greater than the entire income tax paid by Indians in 2011.
Though better network management will help reduce the risk of large scale outages, the large gap between the demand and supply of electricity is a more serious issue. Inadequate production capacity, inefficient operations at power plants, coal and gas shortages and transmission and distribution losses of up to of 30% all combine to create an estimated power deficit of about 8%. Inefficient power use is a further problem. A quarter of the annual average capacity utilization for all plants in India lies unused. Of course, maintenance-related shut downs and lower off-peak demand means that full utilization may not be feasible or desirable, but there is still a large margin for improvement. Generating units lose an average of 10% of generation time due to equipment failure, partly because of inadequate maintenance. The average figures mask the wide variation across plants in performance, with some plants operating at very high levels of efficiency, with others perpetually far below average.
Reforms enacted in various states seek to address these inefficiencies through the unbundling of vertically integrated state electricity boards and by encouraging private investment in generating capacity. The “corporatization” of the state government-owned generation companies, it is hoped, will increase the production efficiency of power plants through improved management and maintenance. In a recent working paper examining state-owned coal-fired power plants in India, we and our coauthors find no evidence for the impact of unbundling reforms on the average utilization of state-owned coal-fired plants, though we do find that the availability of units increases in some states.
The modest impacts of unbundling that we find may in part be due to the slow pace of tariff rationalization, which should create incentives to improve efficiency. Further, efficiency improvements from competition among generators have also not materialized due to slow growth in participation by private generation companies. Currently, 72% of installed capacity is government-owned. Coal is the largest fuel source for electricity generation, at 57% of installed capacity (the next largest is hydropower at 19%). The inability to guarantee the supply of coal is thus a major constraint not only on new entrants to the generation market but also to the expansion of capacity by existing companies. Although India has one of the world’s largest coal reserves, Coal India Limited (the government-owned monopoly) has been unable to increase production to keep up with demand. This has led to reduced operation at existing coal-fired power plants and long delays in the commissioning of new plants.
Network upgrades, tariff reform, addressing coal shortages through coal sector reform and bolstering the autonomy of regulatory agencies are needed to encourage efficient operation of and investment in the sector. But these reforms must be carried out while ensuring affordable electricity to the rural poor, a large number of whom are still not connected to the electricity grid. The political economy of balancing such efficiency and development objectives has slowed progress on reform.
