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Karnataka’s confounding solar policy

BESCOM’s inability to purchase power has led to a bizarre solar policy which discourages and limits solar power generation.

The officials at the Karnataka Electricity Regulatory Commission (KERC) recently announced that it would reduce the amount paid to individual producers of electricity using solar panels, which will create disincentives for people from becoming self-sufficient for their energy needs. This has come at a time when Karnataka has been facing an acute power shortage, as was demonstrated by the interminable power cuts in Bangalore over the past few months.

The Union and State government has been trying to encourage citizens to install roof top solar panels and produce electricity for their household consumption. Further, any excess electricity generated can be sold back to the grid at a predetermined rate. This also ties in with Prime Minister Modi’s new thrust on solar energy.

Paying the right price is the only way to encourage households to install solar panels

Paying the right price is the only way to encourage households to install solar panels

The response initially has been lukewarm. Since 2014, when KERC released its Karnataka Solar Policy that envisaged achieving a minimum of 400 MW of grid-connected solar rooftop plants and 1,600 MW of grid-connected utility scale solar projects in the State by 2018. The target for 2014–15 and 2015–16 was 100 MW each. However, only 144 customers have come on board in Karnataka and together, they generate 2.4 MW of power, which is grossly inadequate.

It is in this context that the downward revision of tariff paid to solar power generators seems bizarre. Initially producers were paid Rs.10.5 per unit produced, which was reduced to around Rs.9.51 and is now slated to decrease to Rs.6.50 per unit. The stated reason is that capital costs for installing of the solar panels have reduced. Another absolutely confounding proposal by KERC is to set a cap on power generation per customer. The discussion paper actually states that consumers generating electricity “far in excess of the sanctioned load should not be encouraged”. Imagine a state starved for power and experiencing power cuts up to 8 hours a day in its capital city complaining about excess power generation.

The real reason however, is quite straight forward. BESCOM does not have the money to pay Rs.9.51 per unit generated. Consider the current cost of electricity: a normal urban consumer pays Rs.2.70 per unit up to 30 units, Rs 4 per unit for consumption between 31 and 100 units, Rs 5.25 per unit for consumption between 101 and 200 units and Rs 6.25 per unit beyond 200 units per month. Even for high tension commercial users, the maximum rate applicable is Rs. 7.65 per unit for consumption beyond 200,000 units. Given this scenario, how can BESCOM possibly buy power generated by individual users at Rs. 9.50? It is then no surprise that it wants to reduce the price paid per unit of electricity generated and that it actually fears a situation where there is excess production and distribution of electricity.

The solution is not to reduce the amount paid to people who incur considerable costs in installing solar power. The reduced amount will inevitable further reduce the incentives for consumers to use solar energy. Leaving aside an infinitesimal set of consumers who might want to opt for solar energy out of environmental consciousness, most people will react to financial incentives, even if it manages only to cover the cost of installation over a long period.

The answer lies in BESCOM employing marginal cost pricing for the electricity it produces. The price of electricity in Bangalore (and most of India) is below the market price and thus, electricity supply companies (ESCOMs) have heavy losses in their balance sheets. This hampers the ESCOMs ability to purchase power, whether from private generators of solar power or distribution companies, and supply it to the end user. Raising electricity prices will ensure the supply companies have enough income to purchase electricity and provide uninterrupted power supply. Given the high costs associated with power outages (as this article points out), it is imperative to ensure continuous power supply.

Finally, it is high time that KERC introduced contestability and competition in the power sector. Allow private players into the market who can provide uninterrupted power to all at the market determined prices. Mumbai, for example rarely experiences power outages. This is because there are three suppliers of power: TATA, Reliance and BEST. Competition among private electricity suppliers along with the state electricity board will ensure that prices are market based and there are no interruptions in power supply to domestic, commercial and industrial units.

Anupam Manur is a Policy Analyst at the Takshashila Institution. He tweets@anupammanur


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Outrageous Outages

The economic cost of power cuts to India is as high as 1% of GDP. It is time to reclaim that through proper pricing, privatisation and better management of supply.

Karnataka is experiencing dark days. Many parts of Karnataka are experiencing disruptions in power supply, or outages, for 8 to 10 hours in a day. Bangalore, the capital of Karnataka and IT capital ofIndia, has been experiencing three hours of scheduled power cuts and a few more hours of bonus unscheduled ones. Starting from today, Bangalore Electricity Supply Company (BESCOM) officially extended the scheduled power cuts from three hours to four.

Night time satellite image  of power cuts in Karnataka

A slightly modified night time satellite image showing Karnataka in darkness due to the power cuts.

Power cuts of this nature in a major metropolitan area are nearly unheard of and Bangalore’s aspiration to become a global hub for business and innovation is under serious threat. Power disruptions are exactly that – they disrupt the everyday lives of citizens and businesses. There are plenty of news reports and stories of ordinary lives getting disrupted due to the power cuts. Inconvenience to citizens aside, power cuts have huge economic costs to businesses.

A study by Federation of Indian Chambers of Commerce conducted a survey on the cost of power cuts to businesses in India and the numbers are staggering. The study revealed that Indian companies are losing up to 40,000 rupees ($733) a day each because of power shortages, which are taking a toll on production. The survey, which covers 650 industries of various sizes across India, said that as many as 61% of the companies surveyed suffered more than 10% loss in production due to power cuts.

This 2009 report in India Today surveys the extent of economic costs to Indian companies. It quotes a study by Manufacturers’ Association for Information Technology (MAIT) and Emerson Network Power estimates that the cost of power disruptions to India Inc is to the tune of Rs. 43,205 crores (nearly 1% of GDP) per year. Manufacturing is, quite understandably, the worst hit sector, followed by financial services, Telecom, real estate and infrastructure. The estimate loss for firms in these sectors is a whopping Rs 54,434 per hour, as the report states.

Where is the light at the end of the Tunnel?

Every summer and sometimes during the post-monsoon period, the government has a pre prepared statement for the reasons for power cuts: shortage of rainfall, technical glitches in the power plants, thermal plants being shut for maintenance, etc.  However, the real reason for the constant power problems is the mispricing of electricity.

Comparison of average national cost of electricity. Source: http://www.theenergycollective.com/lindsay-wilson/279126/average-electricity-prices-around-world-kwh

Comparison of average national cost of electricity. Source: http://www.theenergycollective.com/lindsay-wilson/279126/average-electricity-prices-around-world-kwh

Electricity is cheap in India. A bit too cheap. The recently revised tariff for domestic consumers in urban areas in Karnataka will be Rs 2.70 per unit for 30 units, Rs 4 per unit for consumption between 31 and 100 units, Rs 5.25 per unit for consumption between 101 and 200 units and Rs 6.25 per unit beyond 200 units per month.

Further, there are two types of price discrimination that takes place in India. One is based on the type of consumers. Higher rates for industries and low rates/free electricity for farmers, etc. The second discrimination is based on the quantity consumed – per unit cost increases with higher number of units consumed.

The first type of price discrimination is done in order to enforce cross-subsidization of electricity. It ensures that industries pay for the farmer’s electricity. This has got to be stopped, just as diesel and cooking gas subsidies are being dismantled. All ESCOMs (Electricity Supply Companies) in India are under severe losses, which reduces their ability to ensure continuous supply of electricity by maintaining the plants, having a regulatory and enforcing structure to reduce theft of electricity and finally to reduce leakages in the distribution channels.

Price discrimination based on quantity consumed will ensure proper pricing of electricity. The higher number of units consumed, the more one pays. Big industries will naturally pay more than common households, but not as much as the present system. Small to medium enterprises may also end up paying more, but it would be significantly lesser than the opportunity cost of losing business due to power cuts plus the cost to arrange alternate modes of electricity production (diesel generators, etc).

Privatisation: It is time that the government realizes that more than half of India’s future power generation and supply should and will be done by the private sector. Incentivize the private sector to invest in power generation capacity.

Scientific management of power supply: ESCOMs in India should operate the way a private firm does: project production quantities, possibilities for production disruption, alternatives for mitigating the disruptions, predicting hike in demand, etc. It is surprising that the State Electricity Companies quote hike in demand as the reason for power shortages every summer. The meteorological department had announced well in advance that the monsoon this year will be below average and yet, it managed to catch the Power ministry and BESCOM by surprise.

Predicting increased demand and forecasting supply shortages will help the companies to prepare alternatives in advance. BESCOM can introduce special seasonal tariffs for summer or prepare for a weak monsoon by making arrangements to buy power in advance.

Reforms in the power sector have been in the public sphere for far too long without any concrete action. Smart cities, Make in India and any such ambitious projects will remain a dream until continuous supply of electricity is sorted out. It is time to reclaim the lost 1% of GDP due to power cuts.

Anupam Manur is a Policy Analyst at Takshashila Institution and tweets @anupammanur

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The global problem confronting India

Ankit Agrawal

The most important global problem confronting India is “Energy Security”. The dimensions of the problem are multi-axial. To put it succinctly, India needs access to hydrocarbon fuels like coal, oil and gas and it needs to be able to use these fuels (and others like uranium) to generate power and energy to meet the exploding demand of a fast-growing economy. These fuels may be domestically produced or imported.

As of today, not only do we not have access to enough energy domestically, it costs a lot to meet the shortfall through imports. The domestic production of coal is not sufficient to meet the demand for electricity. More than 70 percent of oil and gas requirement is met through imports, nuclear plants don’t have access to enough uranium to run at full capacity and the hydropower potential remains under-exploited. The imported supply and its price tag are vulnerable to currency fluctuations, geopolitical events and equations and hostile military action from enemy countries.

To make sure that energy security is never a problem, we first need to devise and implement sensible domestic policies to resolve issues within the ambit of the state’s influence and authority. Focusing solely on the territory covered by the question, there are elements of the larger problem which can only be solved in co-operation with or influence over other countries:

One,  Assured long-term supplies of oil and gas (in which we are deficient) from friendly countries, which can reach us through sea-routes safe to navigate and pipelines not vulnerable to terrorist attacks.

Two, Assured supplies of uranium to feed and expand our nuclear power generation capacity.

Three, Access to latest technologies from advanced countries to make our nuclear plants more efficient and fail-safe, exploit domestic reserves of oil and gas found in challenging geologies and improve productivity and efficiency in the mining of coal. To give an example, hydraulic fracturing has been hailed as the technique heralding an oil and gas revolution in the U.S. due to which its output is expected to exceed Saudi Arabia’s by 2020, according to an IEA report. US oil and gas majors have gained substantial expertise with the technology which could benefit India. India is believed to have shale reserves in Cambay, KG on-land, Cauvery on-land, Assam-Arakan and Indo-Gangetic basins.

China is an upper riparian state controlling some major rivers flowing into India. It has built huge dams on many of those and diverted waters to other regions of the country, thus reducing the flow to India. This not only deprives India of water resources, it also reduces the hydropower potential of the country.

How Does It Affect The Foreign Policy?

Meeting these needs and solving these problems requires long-term strategic thinking from a foreign policy perspective. We need to develop and maintain good relations with countries exporting these products and technologies. This requires a fine balancing act when faced with competing demands from two countries, both of which may be crucial to us. For example, while we import large quantities of oil from Iran, the U.S. has been demanding that we stop doing so or face retaliatory sanctions in other arenas which could affect our global competence in trade, services and agriculture, and deprive us from gaining access to advanced technology. It also confronts us with moral dilemmas. India has opted to do business with the military government in Myanmar after decades of support to democratic forces led by Aung San Suu Kyi. This has been done keeping in mind India’s need to access Myanmar’s rich gas reserves, build a gas pipeline from it through Bangladesh and the need to prevent China from gaining a monopoly in the region. The decision erodes India’s global credentials as a champion of democracy and may reduce its heft on international forums, making the job of diplomats tougher.

How Does India’s Policy Affect World Efforts To Solve The Problem?

Being a major consumer, India’s bid to lock up energy supplies crowds out smaller countries from the market, thus putting their energy security in jeopardy. Insufficient supplies drive up prices, making energy unaffordable to poorer nations. India’s recent involvement in the South China Sea by way of carrying out exploration activities in disputed territory has muddied geopolitical waters. It has complicated resolution of the dispute over resource ownership by boosting the confidence of smaller countries in the region which are wary of confronting China on their own.

India is expected to enjoy a demographic dividend over the next 30-40 years with the relatively low average age of its population making the workforce more productive. A McKinsey report estimates that by 2030, 590 million people in India would be residing in cities, 91 million urban households will be middle class compared to 22 million today and GDP would have increased five-fold. It is logical to assume that energy demand will thus increase manifold in the next 20 years alone. To meet this demand, the basic elements of our energy security strategy need to be in place by the end of this decade.

What If India Can’t Solve The Problem In Time?

Economic growth rates will plunge, productivity will take a hit and unemployment will soar. As a consequence, a massive swell of unemployed and dissatisfied youth will rise in revolt, causing social and political unrest and chaos. The democratic fabric of the country will be threatened. Food security of the country will be threatened if the agriculture sector doesn’t get enough power, resulting in soaring inflation. Low growth, rampant unemployment and high inflation is a perfect recipe for a full-fledged civil war.

Failure to achieve diversification of energy supplies across countries and sources such as hydrocarbon, nuclear, solar and wind, will make India beholden to other nations. This will reduce our autonomy and manoeuvrability over other issues of national interest, force us to compromise against our will and principles and yield to nefarious interests. We will be taken for granted in a global power configuration driven by real politik, leaving us unable to defend our national interests. In absence of robust economic growth, our military will find it difficult to keep pace with rival powers. Regional rival China will lose no opportunity to compound our woes. It might engage in military adventure in Arunachal Pradesh and Sikkim and collude with Pakistan to facilitate its grabbing of Kashmir. Neighbours like Bangladesh and Sri Lanka may start ignoring us and join hands with Pakistan and China.

Ankit Agrawal is an Equity Research Analyst based in Delhi                                                                   

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