The Impact of Electricity Reforms on Regional Economic Development in India

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1 EPRG Seminar, 23 rd February 2009, Cambridge The Impact of Electricity Reforms on Regional Economic Development in India Anupama Sen, Department of Land Economy Please Do Not Quote Without Permission

2 An outline of this presentation Background and Motivation Research Questions Indian Electricity Reforms Methodology Results/ Findings Conclusions Content Relevance of research Main questions and sub-questions Setting the context Overview of conceptual framework, empirical method and fieldwork Some findings from empirical analysis Summary and observations

3 Background and Motivation Research Questions Indian Electricity Reforms Methodology Results/ Findings Conclusions

4 India s economy has averaged a growth rate of 7% in recent years, driven by manufacturing & services Role of Electricity 10 9 GDP (%) 8 7 Electricity Consumption (%) Electricity can account for up to 30% of production costs in large industries Multiplication factor between GDP and electricity estimated at 1.5 Electricity sector must grow at over 10% per annum to sustain future GDP growth rate Generation has to be added in the right proportion to secure sustainable growth and associated development impacts Distribution has to be freed up in the interim to manage short & mediumterm growth Source: Central Electricity Authority; Ministry of Finance

5 Constraints in generation and distribution have created a chronic power deficit, making electricity reforms crucial for future growth Power Deficit During Peak Hours of Demand PUNJAB: 5.4% GDP growth (2004). Peak power deficit of 27%. DELHI: 11% GDP growth (2004). Peak power deficit of 6%. Observations In addition to peak deficits, energy deficits exist across the country GUJARAT: Highly industrialised. 5.1% GDP growth (2004). Peak power deficit of 30%. Energy resources (coal mines) are concentrated in the northeastern and eastern parts of the country MAHARASHTRA: Industry & financial services. 8% GDP growth (2004) Mega Watt peak deficit. Over 15% 10%-15% Less than 10% ANDHRA PRADESH: 7.5% GDP growth (2005). Peak power deficit of 15%. Southern parts have hydro resources Industry in the northern and western parts has been hit the hardest Source: Central Electricity Authority, 2006

6 In addition to being a highly topical area of research, an empirical study on India helps us get closer to the real issues in reform Concurrent List Decentralised Policy Country-Specific The Indian Constitution: Schedule VII.. Forests Economic & Social Planning Factories Electricity Stamp Duties.. All 29 States have autonomy in the implementation of electricity reforms, subject to national legislation States will differ in the manner and pace of implementation of deregulation & reforms State-level data can be used in empirical analyses Sufficient interstate variations in income & demographics Circumvents common limitations of crosscountry econometric studies such as currency conversions, differential political systems and non-quantifiable influences such as cultural factors

7 Background and Motivation Research Questions Indian Electricity Reforms Methodology Results/ Findings Conclusions

8 The broad research question was analysed in components & reformulated to lend itself more readily to empirical analysis Broad How do different regional regulatory regimes in electricity provision lead to differing impacts on regional economic development, in developing countries in general, and India in particular? Two-Stage Approach Stage I How does deregulation & reform affect key micro and macroeconomic variables? What does the available evidence suggest conditions the nature of these impacts? Pathway Needed Stage II How might these economic impacts produce regionally differentiated outcomes in circumstances where regional governments adopt different approaches to reform? Revised Empirical Question What are the impacts of deregulation and reform of the electricity sector on regional economic development in Indian states, via their effects on the location and operational decisions of industry and business investment?

9 Background and Motivation Research Questions Indian Electricity Reforms Methodology Results/ Findings Conclusions

10 Statistics show that reforms need to address capacity constraints and increase sector competitiveness; fairly conventional objectives Break-up of Total Installed Gen Capacity Renewables Hydro Nuclear 8% 3% 25% 64% Thermal Total Installed Gen Cap: 145, 600 MW Plant Load Factor: 77% Issues Negligible capacity addition in most states over the past five years Industries forced to switch to captives where affordable New thermal capacity addition planned for 2012 Recent push for nuclear energy; but time lag Financial insolvency of State Electricity Boards Ownership of Installed Capacity Federal Private 33% 15% Excl. Estimated Captive Capacity of 33,000 MW 52% State Source: Central Electricity Authority

11 however, political economy has long influenced the process of electricity provision, and any analysis has to be interpreted with regard to this Vote-Bank Politics Electricity Used As a Carrot, Despite Reform Agricultural Tariffs Hidden Losses Theft Contractual Failure Agricultural consumers are promised free or very cheap electricity Industries are charged very high rates to cross-subsidise agriculture Tariffs have not been cost reflective in the past Unmetered agricultural consumption Wastage by agricultural segment No funds for maintenance State Electricity boards financially insolvent T&D losses clubbed with agricultural consumption Theft a common problem Whole communities sometimes collude in obtaining electricity illegally. Examples: Micro enterprises in Delhi, Maharashtra Relationship with Independent Power Producers (IPPs) historically an uneasy one Changes in governments have led to contractual failure Examples: Enron, Cogentrix

12 Political economy continued - pricing has often defied economic logic Example 1 Average Retail Tariffs By Consumer Segment Source: Tongia, 2003; Indian Planning Commission

13 Example 2 Cost of Supply & Average Tariff, Source: Tongia, 2003; Indian Planning Commission

14 A timeline of reforms shows they have been progressive Electricity generation begins in India Federally owned Generation Companies set up: NTPC, NHPC Generation reforms and IPPs, 1991 Electricity Act 2003 State Electricity Boards set up, 1948 Green Revolution Orissa privatisation, Private licensees, urban areas only New private licenses stopped, 1956 Earliest case of free electricity to farmers, 1977 Electricity Regulatory Commissions Act, 1998 Delhi Privatisation, 2002

15 The reform process culminated in the consolidation of all policy on power, in a set of core measures, contained in Electricity Act 2003 Description REGULATOR UNBUNDLING The establishment of an independent regulator for each state Splitting up the state-owned monolith and corporatising each segment TARIFF RATIONALISATION Setting tariffs according to cost of supply; correcting distortions OPEN / THIRD PARTY ACCESS Allowing open access to the transmission grid, in phases COMPETITION IN DISTRIBUTION No explicit mention of privatisation CAPTIVE GENERATION The complete de-licensing of captive generation

16 Though most states have initialised the reform process, there is debate over the adoption of the complete set of core measures Source: Government of India STATE IPPS REG UNB TARIFF OPREG DPVT TOTAL A B C D E F G Andhra Pradesh Arunachal Pradesh Assam Bihar Chattisgarh Delhi Goa Gujarat Haryana Himachal Pradesh Jammu&Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttaranchal West Bengal TOTAL

17 Background and Motivation Research Questions Indian Electricity Reforms Methodology Results/ Findings Conclusions

18 This research consists of several core elements. A framework of potential impacts has been drawn OBJ: Investigate the impact of electricity sector deregulation & reform on regional economic development. (2) Dynamics of electricity sector reform and regional economic development in India. Overview and understanding of the structure and functioning of the electricity sector in India. (3) Literature Review Explores all literature related to the research questions. Theoretical Issues Infrastructure deregulation Electricity sector & output growth Spatial studies on electricity sector Impact of electricity deregulation on economic systems Interface between national and regional levels Spatial Impacts of Infrastructure on Economic Development To understand the dynamics of deregulation & range of theorised outcomes which could translate into real impacts. Places electricity deregulation in the context of broader infrastructure deregulation in developing countries. Establishes the contribution of electricity to aggregate production and output growth in developing countries. Establishes that there have been no previous comprehensive analyses on impact of electricity reform on regional economic development following a defined conceptual framework & existing evidence is sparse. Starting point for conceptualising an empirical analysis. Review of all empirical work on electricity deregulation on key economic variables. Identifies most commonly observed impacts to be on prices and investment flows. Suggests the effect, at the national level, of these variables - prices and investment flows- and probes possible pathways to the regional level. Investment flows induced by regulatory reform in electricity is investment in physical infrastructure, where there is evidence of direct links to regional economic development - explored here, to draw a pathway to the regional level. Continued

19 and operationalised using data from India to arrive at an answer to the main research question Examines the role of how the main impacts of electricity deregulation identified at the national level could feed through into regional impacts through regional economic theory. Sets up basis for empirical investigation. (4) Conceptual Framework Uses Indian data to establish and explore whether commonly observed impacts of electricity sector deregulation hold for Indian states. (5) Impact of Electricity Sector Deregulation on the Economic System: An Empirical Analysis of Indian States (6) Spatial Impact of Electricity Sector Deregulation on Regional Economic Development: A Comparative Empirical Analysis of Indian States Probes the relevance of key economic variables identified in the empirical analysis to the regional level through a comparative study of representative Indian state, using regional economic theory, particularly through investment flows. (7) Synthesis (8) Conclusions Note: Line arrows indicate elements of the dissertation; block arrows indicate how each element helps towards achieving the research objectives. Numbers in parentheses indicate chapters.

20 Background and Motivation Research Questions Indian Electricity Reforms Methodology Results/ Findings Conclusions

21 Findings in the core macro work shows some of the hypothesised impacts have been manifested Description Findings H1 Electricity within infrastructure Electricity contributes significantly to industrial economic output H2 Efficiency Impacts System efficiency and output increase H3 Electricity Prices Average prices unchanged, industrial prices of electricity decrease; unclear whether attributable to improved efficiency H4 Electricity Pricing Cross subsidies from industry to agriculture and industry to domestic consumers decrease H5 Impacts on Supply & Availability (Reinvestment) System availability improves, but currently chronic power deficit across India H6 Investment Impacts Industrial consumption increases, quickly at first

22 The second core empirical work involved fieldwork in three representative Indian states, to probe economic impacts of reform DELHI: 11% GDP growth (2004). Privatised distribution. Empirical Work II Location questionnaires and interviews administered to around forty organisations in total Stakeholders interviewed included industry organisations, chambers of commerce, regional development agencies, electricity regulators and power distribution companies MAHARASHTRA: Industry & financial services. 8% GDP growth (2004). Public, unbundled, early stage. ANDHRA PRADESH: 7.5% GDP growth (2005). Public, unbundled, advanced stage. Impacts differ in manner and magnitude, by state and by industry size/sector (large energy intensive & small and medium energy non-intensive) Thus macro effects might produce differential outcomes on the ground, for industry in the three states

23 Background and Motivation Research Questions Indian Electricity Reforms Methodology Results/ Findings Conclusions

24 Conclusions & Next Steps OBSERVATIONS MACRO WORK Impacts hypothesised in the conceptual framework are manifested in the empirical analysis to a great extent, but through unconventional pathways, conditioned by the political economy of electricity reforms in India. States that implement an incomplete reform might end up worse off, and states might have to go beyond at least 4/6 reform measures to see changes. FIELDWORK The most crucial issues in electricity provision vary in relevance for industry, between states. E.g. Price in Maharashtra, quality in Andhra Pradesh. Thus the changes in macro variables will produce differential spatial impacts on industrial growth and associated development in different states. Large industries affected differently from small & medium enterprises (SME), yet the latter have deeper associated employment and wage impacts. Linkages between the two. SYNTHESIS Findings from both pieces of empirical work need to be related back to the conceptual framework and interpreted within the context of regional economic theory.