What Do India’s Recent Electricity Sector Reforms Mean for Renewable Energy?

In the wake of massive blackouts this past summer that spanned 20 Indian states and left half of the country’s population without power, the national cabinet approved a debt restructuring program for State Electricity Boards (SEBs) in September aimed at improving the functioning and viability of India’s electricity sector. SEB debt across all states is currently over US$35 billion, or about 2 percent of the nation’s GDP.

Overburdened power distribution lines and illegal grid connections contribute to India’s electricity shortages and blackouts. (Source: Flickr.com, user Sistak)

SEBs are state-owned utility companies responsible for operating the electricity grid and delivering electricity to customers. SEBs buy electricity from power generators at a price negotiated through a Power Purchase Agreement (PPA), which they in turn sell to electricity consumers. Lack of necessary investment to improve grid infrastructure, widespread electricity theft, and low electricity prices that result in SEBs often selling power to customers at a loss are among the systemic problems in many states. Electricity losses during transmission and distribution to customers—due to grid inefficiencies, electricity theft, and illegal grid connections—account for more than 25 percent of power generated in India.

The cabinet-approved debt restructuring package aims at addressing some of these problems. Under the program, state governments will take on 50 percent of SEBs’ short-term liabilities over the next two to five years. The remaining 50 percent of short-term loans will be rescheduled by lenders, providing SEBs with favorable interest rates and a three-year moratorium on principal payments. SEBs have until the end of this year to sign on to the program, which will apply to debts accumulated through March 2013.

If the program has the desired impact, reduced debt pressure on the state utility companies will allow them to invest in much-needed infrastructure and operation improvements and revitalize the electricity sector by enabling new PPAs that are currently beyond SEBs’ financial capacities.

In order to qualify for the restructuring package, SEBs are required to implement several reforms aimed at improving their financial viability and provision of services. The conditions include that SEBs may not take on new short-term loans, must collect outstanding power dues from customers, and must reduce electricity losses by at least 25 percent. State governments must also regularly review electricity prices, which will likely result in price increases for consumers in order for SEBs to generate enough revenue to cover operating costs.

These reforms could be good news for advocates of sustainable energy in India. For one, reducing grid power losses and theft would inherently improve the efficiency of the electricity system. Furthermore, a well-functioning electricity grid is a prerequisite for integrating large amounts of variable renewable energy sources such as wind and solar. The improved ability of SEBs to finance power purchase agreements could also increase opportunities for renewable electricity generators to sell power to the grid in a more efficient and transparent process.

Given the severity of the crisis facing India’s electricity sector, SEBs should be monitored closely in the coming years to ensure that they implement the reforms necessary to ensure a secure, reliable, and affordable electricity supply throughout the country. Improvements in electric utility governance and infrastructure must be combined with robust renewable energy incentives and rural electrification programs in order to transition India to an energy system that is socially, economically, and environmentally sustainable.

Shakuntala Makhijani is a Climate and Energy Research Associate at the Worldwatch Institute.

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