Fixing the power sector

Reform: Floating in the air. Photo: Walter Drood/ gettyimages

THE power sector reform program in South Asia missed the point that electricity is a secondary energy. It ignored the need for ensuring supply of primary fuel to generate electricity. In Bangladesh, since domestic gas reserve was considered plentiful, gas-based generation capacities were added without any thought that gas is an exhaustible resource. There are signs of gas shortage, which is going to become more acute by 2013.
India's coal reserves of 267 billion tonnes are the fourth-largest in the world. However, its production falls short of the demand by 10% annually. While the power sector is growing at the rate of 10%, coal production is growing at the rate of 5%-6%.
Reliance on domestically available fuel resources for power generation is evident all across South Asia. In Bangladesh, 83% of power generation is based on gas, while 52% of Indian power generation is coal-based. Power generation in Sri-Lanka used to be hydro-based. In Nepal, hydro-based power generation remains significant.
Given the unreliability of a single source of fuel for power generation, countries in South Asia have opted for more diversified fuel mix that is not limited to exhaustible resources but also applies to renewable sources such as hydro. For example, the share of hydropower in Pakistan has been reduced from 60% to about 30%.
In Sri Lanka, the switch from hydro-generation to thermal power led to increase in price of electricity from Sri Lankan Rs.2 per kWh to Sri Lankan Rs.18 per kWh. Moreover, projected increase in carbon dioxide emission in Sri Lanka due to implementation of its thermal electricity generation plan would be 230% higher in 2010 compared to levels in 1990, and would further rise to 850% in 2022.
Therefore, affordability of power and the need for deployment of low carbon energy have become the key challenges in finding a more diversified fuel mix. Meeting these challenges would call for adoption of the least-cost generation expansion plan. The least-cost expansion plan would involve choices relating to appropriate fuel mix and technology. In all events, competitive procurement based on solicited bid is a must.
To provide uninterrupted electricity excess capacity has to be installed. To obtain overall least-cost generation, the least expensive fuel option should be chosen to meet base load demand; the next more expensive fuel should be used to meet additional demand during the peak period; the most expensive fuel should be limited for use in case of emergency arising due to shutdown of base load or peak load plants.
Electricity is both an input and an output. As an output, electricity should be produced by using the cheapest primary energy. Electricity as an input should be used in the least quantity necessary to produce maximum output or services. The standard model of power sector reform takes the population and economic growth rates to forecast electricity demand, ignoring the issue of energy efficiency, and assumes that electricity generation has to grow at a rate that is the higher of the two growth rates.
The concept of fifth fuel or negawatt is especially relevant in the context of emerging economies. Efficiency in both electricity generation and consumption can indeed be thought of as a fifth fuel, other than coal, petroleum, nuclear and alternative energy. Increasing the thermal efficiency of power plants not only decreases power generation costs but also suppresses CO2 emissions.
By using the same amount of electricity to get more service or output we could save investments in megawatts (negawatt) that could be used in meeting the huge needs of social sectors in emerging countries.
The standard reform model also focused on electricity generation based on fossil fuels and relegated renewable energy, other than hydro, to a footnote. Recent experiences have shown that renewable energy, particularly solar energy, can contribute by improving access to minimum electricity in remote rural areas where grid expansion is not economically viable.
Given the high transportation and infrastructure costs of primary energy, trade of electricity through regional grids has become a significant prospect. Such grids could also even-out the increased demand for electricity during peak periods by synchronisation of electricity generation, transmission and distribution over different time zones.
The main reason for the lackluster performance of the power sector reform agenda is the supply demand mismatch in electricity, resulting in a power crisis. Crisis perhaps does not always provide the best environment for reform measures to succeed. Take the case of electricity tariff reform. Clearly, it is hard to convince consumers to pay a higher price when power cuts are frequent or low voltage damages their equipment.
Power sector reform agenda correctly emphasised the need for narrowing the existing gap between cost of supply and electricity tariffs. However, the understanding was that electricity was a homogenous commodity and the price should be the same for all users in all locations for all kind of electricity supplies.
It is time to ask whether uninterrupted electricity and intermittent electricity should have the same price. Whether a premium centrally air-conditioned office space should pay the same price for electricity as a small grocer does.
Although some differentiations were made among categories of consumers and peak-load pricing, the price innovations were not carried to the full extent. Notably, in the telecom sector, innovations in pricing and bill collection methods have made telecom services affordable even to the poorest consumer categories and, at the same time, yield significant returns for the investors.
The reform program also emphasised more on unbundling through creation of new institutions rather than focusing on competitive outcome. Many institutions, each with monopoly in its own jurisdiction, can hardly deliver competitive outcomes. The issue of transmission and distribution losses can best be addressed in a competitive environment. Open access and moving away from single to multiple buyer models need to be pursued with greater zeal.
Clearly, the power sector reform agenda needs an overhaul. The ignored backward linkage of the power sector with primary energy sources needs to be established and strengthened. This would require significant investments in infrastructure, including development of port facilities. Given somewhat lower appetite of the private sector in power projects in recent years, innovation is called for to attract private entrepreneurs.
The recent allocation of captive coal blocks to private companies for ultra mega power plants in India is a good example. These projects resulted in highly competitive electricity tariffs. For example, Reliance Power has bagged the Tilaiya 4,000 MW ultra mega power project (UMPP) by offering to supply power at Rs.1.77 per unit.
It is now clear that the power sector has to walk on both public and private sector legs. While return to pre-reform status would neither be feasible nor desirable, public sector institutions involved in generation, transmission, and distribution need to be strengthened through further investments and efficiency improvements.
Implementation of power generation projects in South Asia experienced as high as 50% variance with the target. Equipment shortage, delay in land acquisition and environmental clearance, manpower shortage, lack of finance are some of the major causes for delays in implementation of power projects.
The future power sector reform agenda should balance the growth and access issues. The former aims at increasing per capita consumption of electricity and the latter relates to increasing the electrification rate, i.e. percentage of population having access to electricity.
Both energy efficiency and renewable energy need to be mainstreamed. Both would require considerable investments, particularly in research and development. Care has to be taken to promote energy efficiency and renewable energy on economic and technical efficiency rather than on emotional or value-driven preferences.
Electricity should be considered as a tradable good. This would require substantial investments in regional grids. It would also require significant planning and coordination to synchronise electricity generation, transmission and distribution over different time zones. More innovations in pricing and bill collection methods using modern technology are required.
Future power sector reform agenda would require considerable study and research of various inter-linked issues. It is our sincere hope that our incomplete analysis above will initiate the process.

M. Fouzul Kabir Khan is former Power Secretary and co-author of Financing Large Projects. Email: [email protected].