Karnataka’s power sector: History, politics of development have consequences

When Chief Minister HD Kumaraswamy announced crop loan waivers in his first budget after he came to power in May this year, there was widespread concern about how the state would finance these. Many who thought the loan waiver was a valid response to agrarian distress argued for managing costs by cutting the other biggest subsidy component in the budget – government subvention to the Electricity Supply Companies (ESCOMs).

This is estimated to be ~ 11,048 crores for FY2018-19 according to the most recent tariff order issued by Karnataka Electricity Regulatory Commission (KERC) and is owed by the government to the ESCOMs in the state so that they can provide free electricity to irrigation pump sets below 10 HP, a key plank in the government’s welfare policy.

Electricity subsidies are often attributed to the incompetence of ESCOMs and are rarely interpreted as welfare policy. This has led to a near-complete silence about the continuous cycle of evasion of responsibility in the sector: the government subvention owed to the ESCOMs is only partially-paid; the ESCOMs delay payment for power bought from state-owned generating stations hoping this would be set off against the subsidy owed to them; and in turn, municipal bodies do not pay the ESCOMs for the electricity they consume. In this way, the power sector has become the flexible and convenient current account for the government whenever it needs a bit more fiscal wiggleroom. What seems to make this cycle of evasion acceptable is the widespread belief that subsidy payments to utilities are somehow ill-justified.

This belief stands on a now-familiar storyline which turns the utilities into villains of fiscal problems of the state – inefficient public utilities that have no incentive to improve performance, compromise fiscal prudence and prevent much needed public expenditure on sectors such as health and education, all due to political pressures from rural constituencies. In this story, the solution is straight forward: there must be strong political will at the top of the hierarchy to implement tough measures to reform the sector.

Unfortunately, this kind of thinking that seeks to separate “petty” politics from what are considered technical matters of utility operations has contributed to the obfuscation of the very real political negotiations that have been happening in the sector. This thinking has also stifled what would be a useful debate in the sector on whether and how public-owned companies can be incentivised to become commercially viable and less prone to corruption.

This thinking has restricted the debates in the sector to ways and means to improve technical and commercial efficiency parameters in public utilities without acknowledging the central role that electricity departments and utilities played in agricultural development until the recent past and how to transition out of this regime and at what cost.

Political settlements therefore, have occurred under the guise of techno-economic adjustments. For example higher agricultural tariffs in the northern region are justified on the basis of deeper ground water levels in that region.

The real effect of this adjustment, however, is not on ground water consumption as that is completely free for users. Instead, ESCOMs in the regions with low paying consumers receive a higher allocation of the budgeted power sector subsidy in the State relative to their share of sales to consumers that do not pay for electricity (IP sets account for 97% of this sales revenue).

Historical factors such as structural differences across regions in Karnataka also affect seemingly technical issues such as tariff determination subsidy.

For example, Karnataka’s strategy of relying on a services-led growth around Bengaluru also left most paying consumers concentrated in one region.

The creation of regional ESCOMs as part of the reform in 2002 was meant to create autonomous companies that could operate on commercial principles according to cost of supply in each region.

In practice, however, tariff setting norms and subsidies in the state have evolved an equilibrium that can accommodate the vastly different consumer profiles in various regions of the state so that most of the budgeted power subsidy is allocated to the ESCOMs in the northern region.

The state’s historical context and its politics of development, including the debate on the inequalities between the northern and southern regions, has consequences for the balancing act that is required in the sector- often brokered by the energy department and the regulator. It is useful to be mindful of this political dynamic in the sector rather than relying on measurement and monitoring based on technical parameters alone.

This research is based on work presented in full in the book Mapping Power: The Political Economy of Electricity in India’s States, edited by Navroz K. Dubash, Sunila Kale, and Ranjit Bharvirkar.

A version of this blog post first appeared in the Hindustan Times.

A Tale of Two Reforms: The Power Sector in Andhra Pradesh

Andhra Pradesh’s power sector is going through a second phase of reforms. The first (1999-2004) was widely seen as focused on privatization of electricity distribution; this time the goal is to ensure affordable and reliable power supply for all. To do so, Chief Minister Chandrababu Naidu has pledged to keep retail tariffs unchanged in the coming years for all consumer categories, while improving the quality of supply and service.

At present, the central government is pushing strongly to raise retail tariffs to reflect the rising costs of supply, a target set for states under the UDAY scheme for discoms’ financial turnaround. This makes Andhra Pradesh’s plan—to improve electricity without any additional cost burden on the consumers—particularly intriguing. Can Naidu pull off this trick while avoiding negative consequences for the state’s electricity sector? What are the consequences of failure?

The context for this latest gambit is the reform effort of 1999-2004. Despite backing by the chief minister, supportive and skilled regulators and utilities, and the central government, the plan to improve discoms’ health through tariff and management reforms did not receive public support. Although discoms registered efficiency gains, the public focused on the accompanying tariff hikes, which caused mass agitation. Some have suggested this was central to Naidu’s defeat in the 2004 state assembly election.

In his return to power in 2014 in a smaller Andhra Pradesh, Naidu has devised a reframed reform strategy. First, consumers are at the centre of reforms and are promised high-quality service at affordable prices. Notably, however, this does not include promises of a 24/7 supply of free power to farmers, as in Telangana.

Second, the reform relies on disruptive technologies to bring down discoms’ power bills through a five-point strategy:

• Improve supply through enhanced renewable energy (RE) generation, energy storage technologies, and full capacity utilisation of conventional power plants;
• Implement energy efficiency measures;
• Strengthen the transmission and distribution (T&D) network to bring down losses to below 6 percent;
• Adopt information technology for better consumer services; and
• Improve financial management of power projects, including loan swaps.

There are early signs of progress. The state has achieved 7 GWs of RE installed capacity, which is 10 percent of national RE capacity and 30 percent of the state’s total generation capacity. To complement RE capacity, Andhra Pradesh has inaugurated the first thermal battery plant of India and allocated more than 100 acres for energy storage projects. The state has set a target of 10 lakh (1 million) electric vehicles on the road by 2023, backed by a dedicated electric mobility policy and planned investment of Rs 30,000 crore (300 billion rupees). Andhra Pradesh has emerged as a national front-runner in the State Energy Efficiency Preparedness Index. To improve efficiency and reliability of the T&D network, the state initiated a $570 million project last year, with donor assistance.

What works in the state’s favour is that it has some breathing room to manoeuvre because of several reasons. After the bifurcation of the state, Andhra Pradesh gained from a slight reduction in subsidised load (domestic and agriculture) and aggregate technical and commercial (AT&C) losses. Since it is a relatively wealthy state, it has managed a persistent revenue gap by increased state subvention, from 12 percent of discoms’ revenue requirement in 2014-15 and 2015-16 to 19 percent in 2018-19, as illustrated below. This has prevented a decline in quality of service.

In September 2018, the per-unit revenue gap was 0.06 rupees, one-fifth the national average, and AT&C losses were 11 percent, half the national average, as reported by the UDAY portal. These developments make Andhra Pradesh a leader in UDAY target achievements while providing the fiscal space to manage the political demands for explicit subsidies.

However, for long-term gains, the state will need to use this breathing room to bring down the costs of supply and create enough demand for the additional power capacity it is adding through RE and augmented capacity utilisation. Naidu hopes his plans for industrialisation will absorb the surplus power. Whether this works will depend on growth in industrialisation as well as proper resource planning for the additional generation capacity.

Notably, Andhra Pradesh has sought to capture the gains of falling RE generation costs as technology improves. The counter, and more problematic, story is that industrial consumers would leave the grid to capture these gains through direct installation of RE, which would cut into the cross-subsidy available for poorer customers. Andhra Pradesh is seeking to manage this transition by proactively adopting these disruptive technologies in an effort to reduce the power bills for all, but also retaining industry through improved quality and a stable tariff.

In this tale of two reforms, Andhra Pradesh has moved from a price- and privatisation-focused effort to one that aims to put consumers up front. If it fails, the results would be dismal and all too familiar: low tariffs combined with growing stranded capacity as new generation finds no takers, and declines in cross-subsidies as industrial customers flee. But the reforms are designed specifically and deliberately to avoid these traps, which is what makes them interesting. If Andhra Pradesh succeeds, it will signal an alternative, consumer welfare-focused model of power reforms. While it is too early to predict success, this is an effort worth watching.

Ashwini K. Swain is executive director of the Centre for Energy, Environment & Resources and a visiting fellow at the Centre for Policy Research. This research is based on work presented in full in the book Mapping Power: The Political Economy of Electricity in India’s States, edited by Navroz K. Dubash, Sunila Kale, and Ranjit Bharvirkar.

A version of this blog post first appeared in the Hindustan Times.

A Window for Power Sector Transformation in Uttar Pradesh

A rare window is open for power sector reform in Uttar Pradesh. The Bharatiya Janata Party (BJP), in office in both Lucknow and New Delhi, has a sweeping mandate to transform Uttar Pradesh’s troubled electricity situation. The party has made two important commitments on this front. First, to ensure every household in the state has an electricity connection and access to 24-hour reliable supply. Second, to turn around the state’s five loss-making public distribution companies, or discoms.

Progress in both areas is sorely needed. In 2017, more than 17 million rural households did not have a formal electricity connection. Supply remains unreliable in urban and rural areas, hampering economic growth.

Since the 1980s, the state’s public discoms have been accruing annual losses, the result of a large gap between the cost of supplying electricity and the revenue they recover from customers, coupled with underfunded subsidised tariffs for domestic and agricultural users.

The former Samajwadi Party government signed Uttar Pradesh up to the central government’s UDAY power sector reform scheme in 2016. This allowed 75 percent of discom debts to be cleared, and various initiatives to improve the companies’ financial performance were started. But discoms are continuing to report sizable losses.

Source: Government of India and Government of Uttar Pradesh. (2017). 24×7 Power for All Uttar Pradesh

Universal electricity access and discom performance are closely intertwined challenges in Uttar Pradesh. Increasing access and reliability of supply ultimately will depend on success in transforming the performance of discoms—in particular reducing the large losses they accrue in supplying domestic and agricultural consumers. Put simply, it will not be possible to provide reliable electricity to millions of additional rural households as long as discoms face high losses supplying rural and agricultural users.

Successive governments since the 1990s have in practice focused on access, without coupling this with serious action on improving discoms’ performance. Politics explains this. Decisive programs for household electrification and increasing the hours of supply are politically popular in the short term. Tackling the state’s loss-making discoms, in contrast, requires political parties in office to allow electricity tariffs for domestic and agricultural consumers to rise regularly, and to take stringent action on revenue collection and theft. In a politically competitive multiparty state, no party has been willing to make the bargain of jointly tackling both areas, for fear of electoral repercussions.

Challenges exist besides highly subsidised tariffs, high theft levels, and poor revenue recovery for Uttar Pradesh’s discoms. While many states can rely on industry consumers to pay high tariffs that cross-subsidise low tariffs for other users, Uttar Pradesh has only a small base of industrial consumers. Additionally, the cost at which discoms receive power from generators is high.

On household electrification and reliability of supply, the BJP has moved fast. Progress is already evident. By way of the central government’s Saubhagya scheme, millions of households have been provided with a regularised electricity connection, and millions more will be connected in the coming two years.

Although the BJP’s target of full household electrification by 2019 looks difficult, the goal may be reached soon thereafter. The BJP has drawn up a 24X7 Power For All plan for Uttar Pradesh, which promises 24-hour electricity supply to all rural and urban domestic and industrial consumers from late 2018. Currently, rural areas receive around 18 hours’ supply. This in itself represents a notable improvement above the supply situation of recent years.

Toward reforming the financial performance of the state’s discom, the BJP is also acting on various fronts. It has built upon programmes the previous Samajwadi Party government started to extend metering, improve billing and revenue collection, and cut down on theft. The BJP has expended significant political capital by pushing through substantial increases in electricity tariffs for domestic and agricultural users, helping to bring down the gap between cost of supply and revenue collected. However, losses at the state’s discoms remain high. With elections due in 2019, the BJP may find it politically unpalatable to take further steps to raise tariffs and cut down on losses in the coming year.

Electoral support has for decades been mobilised on the basis of promises of cheap or free electricity in Uttar Pradesh. In the 1970s and 1980s, farmers were promised cheap electricity. In the 2000s, it was weavers who were wooed with subsidised power. Losses are typically significantly higher in VIP districts.

A window of opportunity to change the status quo is open in Uttar Pradesh. If the BJP can deliver on reliable access for all, and link success on this front to public acceptance of regular tariff increases and timely bill payment, then the seeds of transformation in the power sector may be sown.

When the BJP last ruled in both Lucknow and New Delhi, between 1997 and 2002, the party pushed through extensive structural reforms of the power sector, against significant opposition. However, shortly after doing so, it backtracked on tariff increases required by the state’s discoms to support a financial turnaround, fearing electoral defeat. It remains to be seen whether a story of bold ambitions from the BJP giving way to electoral pressures is repeated.

Jonathan Balls is a New Generation Network postdoctoral scholar at the Australia India Institute, The University of Melbourne. This research is based on work presented in full in the book Mapping Power: The Political Economy of Electricity in India’s States, edited by Navroz K. Dubash, Sunila Kale, and Ranjit Bharvirkar.

A version of this blog post first appeared in the Hindustan Times.

Electricity Reforms in India Depend on Getting the Politics Right

The Indian economy is among the fastest-growing in the world. Sustaining this growth requires a healthy electricity sector that is able to meet increased demands, ideally alongside an eye to environmental sustainability.

Yet electricity consumers continue to face unreliable supply, distribution utilities are in poor financial health, and, most problematic, power plants remain underutilised even as universal 24/7 supply remains an unfulfilled promise. Far from buttressing growth, the sector risks acting as a drag on the economy as its poor finances reverberate through the Indian banking sector in the form of stubbornly intractable non-performing assets.

These long-standing problems have not persisted for want of attempted solutions: opening the sector to private generation; regulatory reforms; an omnibus federal Electricity Act in 2003 to introduce competition; and successive efforts to restructure distribution company finances. The persistence of utility failures speaks to an underlying flaw in the approach taken. All past reform efforts have had, at their core, a common effort to insulate the sector from politics.

In a developing country like India, where citizens’ life chances are strongly influenced by electricity access, costs, and performance, electricity is invariably political. This is how it should be.

In our recently released book Mapping Power: The Political Economy of Electricity in India’s States, we argue that this approach is misplaced. Electricity reform will succeed only by providing greater political payoffs than the flawed status quo. In a developing country like India, where citizens’ life chances are strongly influenced by electricity access, costs, and performance, electricity is invariably political. This is how it should be in a democratic polity. Far from de-politicising the sector, successful reform will require deeper, but more careful, engagement with politics.

Is productive political engagement possible in the power sector, leading to simultaneous electoral and electricity gains? To explore this question, we worked with a set of talented researchers to examine the politics of electricity in 15 states from the mid-1990s to the present. In this introductory article we explain what our work suggests about not only why politics is important for India’s power sector but how it is best examined and addressed. In subsequent blog posts, our colleagues will share their state-level case study findings.

Our framework for Mapping Power can be summarised in three principles.

First, start with understanding state-specific factors driving politics and power. Electricity politics may be driven by subsidy and quality of service in Delhi, procurement politics in Jharkhand, farmer subsidies in Punjab, the balance of farmer and industrial interests in Maharashtra, and high loss levels and theft in Uttar Pradesh. As this suggests, mapping power requires exploring politics beyond the power sector, including party politics, the politics of regionalism within states, and patterns of economic development. Although national-level politics and technology drivers are also important, the starting point must be dynamics that are state-specific.

Second, four categories are crucial to understanding the political economy of power: demand for access and service quality, demand for subsidies, cost of supply, and available financial space. The first two categories represent political demands placed on the system. The last two represent the extent of breathing room that enables states to manage those political demands. While the importance of each of these factors may vary across states, collectively these four categories, combined with the reform process and the interaction between them as shown in the figure below, constitute a way to map the political economy of power in states.

Third, applying this understanding to a forward-looking analysis, how can state governments pursue a virtuous circle involving electoral and electricity politics? In a state such as Bihar, the answer lay in promising and delivering on energy access, taking advantage of low-cost power in surrounding states. In Gujarat, creatively managing farmer pressure through a mix of technical solutions and political promises was key. Other states are trapped in a vicious cycle, and the starting point is to tackle the driving factors, whether the expanding scope of subsidies in Tamil Nadu or high-cost supply and high losses in Rajasthan.

Applying this framework, which leads to diverse state-specific explanations, also allows us to comment on the national-level electricity challenges described earlier. With regard to electricity for the poor, electoral gains and electricity outcomes point in opposite directions. In an effort to limit their losses, discoms have strong disincentives to connect new citizens to the grid, and they provide only minimal quantity and quality of supply to the connected poor, because most pay below-cost tariffs. Simply calling for tariff increases to match costs is unlikely to win voter consent, given the low credibility of discoms to deliver improvements. Resolving this situation requires developing a state-specific pathway that appropriately sequences politically credible quality improvements and tariff increases alongside expanding the financial space to actually implement such a pathway.

Absent any changes, a continued central government push to expand access and provide reliable supply to all citizens, when combined with slow industrial demand growth—which limits the amounts of cross-subsidies available—could lead to a further financial squeeze on distribution companies and in turn state governments. Periodic bailouts, the most recent of which is UDAY, are intended to ameliorate this squeeze.

But unless the breathing room thus generated is explicitly and intentionally used to fundamentally alter some mix of the four key factors described above—political demands for access and subsidies, or supply costs and fiscal space—the result is only to kick the financial can down the road.

Solving India’s electricity problems by continually devising ways to shut out politics and pretend the sector can be run apolitically simply will not work. This is not to be naïve and suggest the power sector must be swayed by every political gust. Rather, we need more creative politics, based on a careful analysis of state-specific links between politics and electricity, which can credibly promise and deliver on long-term electricity gains and reap long-term political rewards.

Navroz K. Dubash is a professor at the Centre for Policy Research; Sunila Kale is a faculty member at the University of Washington; and Ranjit Bharvirkar is a principal and director of the India program at the Regulatory Assistance Project.

A version of this blog post first appeared in the Hindustan Times.