The economic cost of power cuts to India is as high as 1% of GDP. It is time to reclaim that through proper pricing, privatization 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.
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.
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).
Privatization: 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