Explained: Why The Volatility In India's Electricity Demand Needs Introspection

Union power secretary Alok Kumar recently projected that the peak demand for electricity may touch 230 giga-watt (GW) in April 2023, an astronomical 14 per cent more than 202 GW on 26 April 2022. The ministry is gearing up to ensure the supply.

India surpassed the pre-Covid generation by 7.3 per cent, during the financial year 2021-22 (FY22).

According to Power Ministry, the growth rate touched 14-year high of 9.74 per cent year-on-year during April-November FY23. However, even peak deficit reached eight-year high of 4 per cent during the year. (Read here).

The volatility in demand needs introspection.

Auto sector, the biggest contributor of industrial GDP, has just surpassed pre-Covid sales. Fuel guzzler metals, cement etc., depend on captive generation. Energy transition of railways is growing but not yet complete and, rural electrification was over by FY20, leading to 72 per cent decadal growth in generation.

However, there is no official clarification on the demand spike. The Power Ministry is focusing on increased availability of both domestic and imported coal. Domestic fuel-based power stations are asked to blend 6 per cent imported fuel.

This one-sided (supply-side only) approach might create more problems for the power economy, than it solves.

Coal Production At Peak

Roughly 75 per cent of electricity generation in India comes from coal. Domestic coal supplies grew at world-beating pace for the last two years. It would be difficult for the sector to maintain the pace for long, due to technical and environmental considerations.

In FY22, India’s coal production grew by 8.68 per cent, as against 5.7 per cent (2021 calendar) in the world. Domestic supplies were up by 18.5 per cent, riding on high pit-head stocks of Coal India (CIL), accumulated during the Covid years.

In FY23, India aimed 17 per cent year-on-year production growth to 911 million tonne (mt). As of December, production was up by 16.39 per cent. CIL increased output by 15.82 per cent, higher than the asking rate of 12.4 per cent to reach 700 mt in the fiscal.

The Indian performance was miles above its global peers.

The scores of measures (like fast clearance to mining proposals, allowing captive miners to sell part-production in the open market, allowing private commercial mining in 2019) taken by the Narendra Modi government since 2014, had yielded fruit.

The upside potential will continue in FY24. The private commercial mines are still in gestation period. Together with captive generation, they increased production by over 30 per cent, for two consecutive years and, will grow further. But the growth rate has to come down.

Imported coal is costly. All projections indicate global prices will remain firm in 2023 due to higher demand from the developed world and the US sanction on Russia.

Can the financially weak state-run distribution companies (discoms) afford it?

In 2022, CIL offered to import fuel for state generation companies (GENCOs). Over two dozen of states submitted initial indent for millions of tonnes. In the end, most backed out.

India may end up importing more fuel in FY23, but that’s mostly for captive generation by industry.

The price concern will anyway dog discoms in FY24, as CIL looks to be all set to increase prices after 5 years. The company recently entered an MoU with its workers for minimum 19 per cent hike in wages. Rest assured, discoms will find that hard to swallow, leave alone imports.

Last but not least, even if coal is available, logistics are becoming a challenge. Ideally, India should produce domestic coal-based electricity at the pit-head and trade. This is resisted by states, who go beyond their means to promise electricity subsidies.

State-run distribution companies are compensated only a part of the revenue loss. They manage cash-flow by building outstanding dues to state GENCOs, controlling 33 per cent installed capacity. GENCOs in turn defer payment to coal companies etc. This is a vicious cycle.

The cash starvation of discoms is also the reason why 17 GW imported fuel-based coastal generation capacity remain idle. The net result is coal — both imported and domestic — travels long distances. Longer the distance, higher is the turnaround time of rakes and congestion.

Remember, congestion leads to higher energy demand.

India supplied more domestic coal to power stations in FY22 and FY23, at the sacrifice of rake shortage to industry. The power ministry also confirmed piling up of imported fuel at ports during the first half of FY23.

‘Free-Power’ Is Anti-Conservation

All put together, therefore, the demand side needs serious streamlining, even as supply side issues persist.

The need is getting more pronounced as the economy is getting bigger. Resistance of states to create an efficient power distribution system that recovers the cost to cater residential consumers, is the root cause of the problem.

In developed world, residential consumers pay more than industry. In India it's reverse.

Industrial and commercial segments are already charged very high rates. Any further increase in tariff will be detrimental to growth.

That being the case, the states should focus on conservation. But they don't. According to World Bank, the transmission and distribution loss in India was 19 per cent in 2014, as against 8 per cent globally and, 11 per cent in Bangladesh.

Power Finance Corporation’s (PFC) annual performance report said that Aggregate Technical and Commercial (AT&C) loss in the electricity sector increased from 20.73 per cent in FY20 to 22.32 per cent in FY21.

It’s a common knowledge that a part of such losses is nothing but electricity theft, and often, at local political patronage. Add to this the recent trend of offering free electricity, and the situation has become deadly.

In the past, political parties promised free power to specific groups (like farmers). Aam Aadmi Party (AAP) literally made it free-for-all by offering free 200 units in Delhi and 300 units in Punjab.

Approximately 70 per cent of the 57 lakh subscribers in Delhi enjoy this subsidy. Nearly 90 per cent of consumers in Punjab received zero bill this winter. Punjab is flooded with new applications, as subscribers are trying to maximise benefits by splitting electricity bills.

The trend has caught the attention of every political party. Congress has pitched for 200 units of free electricity in Karnataka. A total of nine states will go to polls in 2023 and, rest assured, we will hear more such promises.

This takes us to an important question. What is the end-use of this free electricity?

Ideally, 200 units of electricity is adequate to power a two-room apartment with TV, fridge etc. At 300 units, one can add an air-conditioner (AC).

It is okay if the nation subsidises the basic needs of the poor. But that shouldn’t include ACs. What if free electricity is encouraging the better-off to splurge on extra ACs, pumps, or heaters in the winter?

There is every reason to believe that free power is leading to inefficient consumption of energy. The link between the two is well established in auto-fuel. IEA confirms that high oil prices increased fuel efficiency in India beginning 2005.

That’s not all. The UPA government increased petrol prices but, offered huge subsidy in diesel to minimize impact on commercial vehicles to check inflation. The rich used the opportunity to buy diesel SUVs. Roughly 54 per cent of cars manufactured in India were diesel in 2012.

The then environment minister Jairam Ramesh admitted that the policy was misdirected.

“The diesel subsidy was introduced for a certain economic purpose, but it has ended up with a wholly different purpose. They (SUV owners) should pay full market price of diesel,” Ramesh said, at the 5th Sustainability Summit, Asia 2010.

As the Narendra Modi government removed the subsidy, sale of diesel cars plummeted to 18 per cent in 2021.

Learn The Lesson

The lessons are clear. Access to cheap resources, leads to misuse both at institutional and individual level. The subprime crisis in the US was created by extending loans at throwaway prices to the insolvent.

Lack of emphasis on conservation is creating a similar bubble in India’s electricity sector.

One possible outcome of it all could be that bankrupt discoms resort to scheduled load-shedding in summer rather than creating gaping holes in state finances or forcing GENCOs or coal companies to bear part of the cash-shortfall.