Modi's energy revolution

India's economy and business climates continue to be hindered by the inability to provide sustainable and reliable electricy. But Modi has the opportunity to finally power India.

Michael Jacob
11 August 2014
blackout in Calcutta

Grid failure leads to blackout in Calcutta. Demotix/Dipyaman Sarkar. All rights reserved

In its first budget, presented last month to the Indian Parliament, Narendra Modi’s administration has earmarked $250 million for solar energy and grid infrastructure. To deliver on promises of economic growth, the Prime Minister is confronting the mammoth task of modernising the country’s creaking energy infrastructure. Such a task would prove daunting in any major economy, but India is the third largest electricity market in the world, and suffers from chronic issues of fragmentation and underinvestment. The political sensitivity of the matter has stalled reformers in the past, but the current administration enjoys a degree of popular support not seen in 30 years and Modi’s vision on matters of energy and business may finally break the impasse.

The case for change

Over the past decade, oil and electricity demand in India has nearly doubled. Last year, the country was one of only five in the world to consume over a petawatt-hour of electricity, and unlike many western economies, its appetite for energy is still growing. This is welcome news to the government as national energy consumption has generally led trends in GDP growth. The only bottleneck appears to lie in how fast India can build infrastructure to cater for this colossal consumption. Unfortunately, this has historically proven to lag behind demand.

The recent boom in the Indian IT and services industry has been powered predominantly by antiquated coal-fired thermal plants. In addition to turning India into the world’s third largest emitter of greenhouse gases, the inflexibility of this technology sometimes makes it difficult to match fluctuations in electricity demand. The national Central Electricity Authority estimates that 10 percent of peak-time needs in India routinely go unmet.

Modi’s administration is addressing the roots of this problem. The Minister of Energy, Piyush Goyal, explains that even when national power plants generate enough electricity, the patchy Indian grid is not always capable of carrying it to where it is needed. In 2012, India’s lights went out for a record breaking 600 million people and recently failed again across a state housing one-sixth of the country’s population. This is one reason why households in India consume on average three times less electricity than those in Europe or China.

Another major part of the problem is that nearly a quarter of India’s 1.25 billion citizens have no access to the grid at all. India has made progress towards expanding its infrastructure, establishing last year the final interconnections between its regional power grids. But it is one of the few major world economies not to have carried out a rural electrification programme on the scale that allowed North American farmers to plug into the grid in the 1930s. On the other side of the Himalayas, the Chinese government has succeeded in connecting more than 99% of households over the past decade.

If energy is the oxygen of modern business, the Modi administration has inherited an economy struggling to breathe, let alone flourish. Limited connections and the unreliability of supply deter foreign firms from setting up their operations in India, even in otherwise stable and business-friendly regions. But Modi also has the profile of a man capable of turning the situation around. In addition to the wave of popular support he is riding, he has a shrewd eye for business opportunities and an impressive track record in modernising energy infrastructure in the state of Gujarat, which he ran for 13 years. His actions suggest that he is prepared to face the challenges of reform. The question is whether he can convince his countrymen to follow.

High tensions

One major obstacle to modernising the vast energy sector of India is politics. Private investment, a common driver for infrastructure development in many countries, is close to non-existent in India, since electricity and fuel are both heavily subsidised, and tend to provide negative returns. The government’s rationale for controlling prices is to shield poor members of society, especially farmers, from basic living costs. But research by observers including the International Monetary Fund suggest that those benefitting most from cheap energy are urbanites who drive cars and own electricity-intensive home appliances. Because customers pay below-market rates for their energy, Indian utilities lack the revenues to finance the hundreds of new power plants needed to meet India’s growing energy-demand, or to connect the last 300 million citizens of rural India to the national grid. Modi's attempts to remedy the situation are ambitious but, like many of his predecessors, he will face friction along the way.

The first wave of resistance can be expected from state Chief Ministers. The Indian energy industry is currently divided into regional fiefs of state electricity boards that answer to local politicians. To date, each state has authority over how energy is produced, distributed and priced within its borders. The subsidies are a touchy matter in local politics. Whatever their macroeconomic impact, they are perceived as providing direct savings for cash-strapped households and a buffer between poverty and destitution. Few local politicians will risk angering their constituents for benefits that may be felt elsewhere in the country.

The importance of electricity prices among the Indian population can be inferred from the animosity that greets meter inspectors. According to the Central Electricity Authority, theft in India currently accounts for more than a quarter of losses over the national grid (losses in China and America tend to be four times lower). But government representatives charged to investigate intentional abuse of electricity infrastructure have reportedly been insulted, attacked and, on occasion, tied up and urinated on. Putting an end to the subsidies will be met with staunch opposition. However, there is one successful model that can be followed as a guideline, and no one is more familiar with it than India’s new leader.

An energetic reformer

In his time as Chief Minister for the state of Gujarat, Narendra Modi presided over amendments to laws regulating the local energy market, and drove upgrades of the electrical grid that led the region to become a net exporter of power. Electricity theft has come down thanks to raids on homes and factories, agricultural and residential power networks have been disentangled, and although many rural homes now pay higher bills, they also benefit from a more reliable supply of electricity. Gujarat has been commended by the national media for its commercially run electricity industry, an accolade that Mr Modi’s campaigners touted proudly throughout the recent national election campaign. Its electricity system could become a model for the rest of the country.

Modi benefits from other advantages over his predecessors. In the May election, his Bharatiya Janata Party not only dethroned a political dynasty, it also claimed an outright majority in the lower house of India’s parliament. Five of the 29 Chief Ministers that he will have to persuade to support his plans are from his own party. His arrival also coincides, by chance, with initiatives in several states to cut back on energy subsidies and to increase power tariffs. In Maharashtra, the home-state of Mumbai, prices are already comparable to much of the United States.

As the Modi administration sets out to modernise the national energy sector, it may find that its greatest asset comes from beyond India’s borders. The cost of renewable energy technologies has taken a nose dive over the past decade. Much as the mobile telephone network in Africa leapfrogged landline technology, remote areas in rural India could circumvent the infrastructure costs associated with conventional, centralised coal plants and benefit from potentially cheaper solar and wind power. Prime Minister Modi championed the installation of photovoltaics while acting as Chief Minister of Gujarat. Given the scale of energy demand in India, his vision could, at a national level, spell big business for the renewable energy sector, and good news for the world climate.

These are early stages in the new Indian government’s drive to transform one of the largest and most unwieldy energy markets in the world. The stakes are high, the challenges are daunting, but most importantly, the hopes and expectations of the Indian people are immense. Whereas Narendra Taneja, who heads the energy division at the ruling Bharatiya Janata Party, cautiously pledged in May that every home in India would be able to run at least one light bulb by 2019, the Prime Minister has since promised “round-the-clock power for all by 2022.” These bold words could herald the revolution that a fifth of the world’s population has been waiting for.

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