Deregulation of Electricity in India -1

2.1           Deregulation

It is widely recognized that electricity underpins economic growth, and hence is vitally important to the development and welfare of nations. Because of its versatility, convenience, and relative ease of transport, it makes possible many of the goods and services that we associate with modern life.

Unsurprisingly, developed nations typically have very high levels of electrification, and over the last hundred years electricity has gradually replaced other forms of energy to operate industrial and commercial processes, as well as becoming increasingly predominant in the household sector. From electric lights, electric motors, and microwave ovens, to television, telephones, and computers, electricity has become a critical input supporting a wide range of consumption, transportation and production activities. Over the next twenty years, barring major extended economic dislocations, energy demand worldwide is projected to grow by over 50 percent. The growth will be unevenly distributed however, with only about 25 percent growth in the industrialized world, and about 100 percent growth in the developing world, with India accounting for the bulk of the increase. This trend will be stimulated by the dynamics of current technological development (which includes semiconductors, telecommunications and information technologies). Going back as far as Thomas Edison, early industry leaders and politicians alike shared the view that electricity could be most efficiently supplied by vertically-integrated monopolies. In the United States, these were largely privately owned and operated, with the government playing a role as regulator. In many other nations around the globe, the state assumed the primary responsibility for the development and operation of the electricity infrastructure. There were a number of historical and practical reasons for this, chief among them being the ability of the state to raise the capital required, and the widespread view that such a strategic asset must be under the control of central government. Economies of scale could be achieved by building larger and larger generation plants, in tandem with transmission and distribution networks that gradually extended to even the most remote consumers. Further economies were achieved through additional vertical integration into the upstream energy resources sector especially oil, coal and gas.

2.2           Supply and Demand

Growth in demand for electricity is outstripping demand for other types of energy in India, as the region becomes increasingly electrified and per capita consumption rises. This trend is particularly marked in the developing economies. How this rapid growth in electricity demand will be satisfied is possibly one of the most critical issues facing the region over the medium term. The Indian Energy Research Center has projected that electricity consumption in India Energy economies will grow by 65 percent between 1995 and 2010 (an annual growth rate of 3.4 percent).

 

2.3           Generation Mix

The primary energy sources used to generate electricity differ significantly among the various APEC economies, although there are common themes. The current mix of energy sources includes thermal (almost totally fossil fuel powered), nuclear, hydroelectric and geothermal, with wind and solar gaining some ground at the margins. Total electricity generation fuel requirements by energy source are shown in Figure.

Fig 2.2 Total Energy Consumption in India

2.4           Electricity Pricing

Different pricing practices in the electricity sector have been developed in accordance with changing industry structure. While natural monopolies are compatible with a usual cost-of-service pricing practice, deregulated markets require more complex pricing mechanisms. Since the extent to which markets are deregulated and unbundled could be different in each economy, the pricing mechanism may also differ.

It is common practice in deregulated markets to allow generation prices to be set by supply and demand, while governments or regulators control transmission and distribution prices. So price regulation with respect to networks still retains some importance in the presence of fully deregulated markets. The price cap may well over- or under-shoot with respect to the optimal price level. This will create equity concerns between electricity suppliers and end-users.

State-based monopoly electricity markets, with regulated or mechanistically administered electricity prices, still remain, particularly in developing economies. Price controls are established in Japan, Korea, the Philippines, Russia and Chinese Taipei, although in some cases these are being phased out. Administered prices are prevalent in China, Indonesia and Vietnam, and are used to assist with wider energy policy objectives.

Transparency is an important issue in pricing practices especially in the case of a natural monopoly. As all costs incurred in the fuel chain from generation to distribution can be passed on to end-use consumers, it is important to maintain transparency in price determination processes to the extent possible. Otherwise consumers have to bear unnecessary costs, even from mistakes in economic decision-making, for example, with respect to investment in assets, their operation and maintenance.