Rational expansion of electricity consumption

India´s low per capita electricity consumption, which currently stands at less than 1,000 kWh per annum, has been a subject of debate and consternation. The situation is likely to undergo a change, but it is imperative to set rational goals in this regard.

India´s low level of electricity consumption is likely to increase over time. However, caution would be appropriate while making comparisons among countries. The most common comparison is with China, whose electricity consumption is 3,000 kWh per annum per person. China´s export-led base is much larger as compared to India´s, with its manufacturing known to be energy-intensive. The three times per capita consumption thus cited for comparison is not a relevant comparator. Normalising for the differences in export bases, the consumption would drop sharply. That would still be much larger than India´s present consumption, but it could represent a better comparator.

The US, which uses approximately 16 times the electricity on a per capita basis as compared to India, too is not a relevant comparator since the economy is excessively energy-intensive to the point of being energy inefficient. For this reason, considerable efforts are being made by federal and state administrations in the US to propagate energy efficiency, which could involve changes in lifestyles that are not relevant to India. Closer home, India needs to look at its own states to analyse the data and arrive at rational goals for energy (including electricity) consumption. Gujarat provides a useful case study in this reference as the state has a large manufacturing base, with an internal consumption that is significantly lower than the production. Consumers have access to 24X7 reliable electricity supply, except for the agricultural consumers who have adequate supply at pre-designated hours. The income levels in the state are also amid the upper quartile amongst several states. The per capita electricity use in Gujarat is 1,800 kWh per annum, and is growing relatively slowly.

Clearly, the data and experiences from the state hold out important lessons for the country. In the international arena, Turkey is a good comparator as it has a large manufacturing and export-driven, modern and well-developed economy, and a per capita consumption less than 2,800 kWh per annum.

It is essential to deconstruct the drivers of electricity consumption. The first set of factors that impact the consumption in a country like India include the levels of access, reliability of supply, price of electricity, efficiency in supply and consumption, and other largely internal influencers within the electricity industry which is ridden with inefficiencies. Even as network access has improved in recent years due to sustained investments in rural networks by successive governments, the reliability of supply remains an issue in many parts of the country.

Service delivery is also inefficient and is characterised by stubbornly high network losses. Similarly, there are very significant pricing inefficiencies leading to inadequate use and under-recovery of costs for electricity distribution companies. These bankrupt utilities have racked up more than INR 300,000 crore of losses in aggregate, with an annual loss of over INR 80,000 crore. There is little wonder that in the face of financial adversities, the utilities supply to consumers is cut-off, even as power is available in competitive markets without takers at very attractive prices.

That said, the impact of load shedding in the long run tends to be overstated. While improved access and reliable supply may inevitably increase consumption, removal of inefficiencies can have a counteracting impact.

Beyond the factors intrinsic to the energy sector, the second set of factors that drive consumption relates to economic and social aspects such as income levels (and hence affordability), lifestyle and culture, transport and mobility, and the manufacturing base that drives consumption. If the manufacturing industry picks up, the impact may be inevitable since close to 50 per cent of the current consumption base is from the sector. Even other sectors could benefit from trickle down effects of manufacturing-led consumption increase. However, new manufacturing is much more energy efficient than before.

Despite a large manufacturing driven economic growth, empirical analysis indicates that the per capita energy requirement is unlikely to exceed 1,400-1,500 kWh by 2020, hence the trickle down impact into other consuming sectors could also be much slower. While economic growth and lifestyle changes could cause consumption increase, there could be a counteracting impact of energy efficiency. Modal shifts in consumer behaviour- as exemplified by the rapid move from physical shopping in malls to e-commerce- could also affect consumption since commercial real estate was otherwise set to be a very high growth sector for electricity consumption.

The practicality of manufacturing driven growth also needs to be revisited. While manufacturing in India has advantages rising from labour availability and a large domestic market, structural infirmities could hold back its expansion; the cost and reliability of electricity is also an important structural disability. Traditionally, industrial and commercial sectors have cross-subsidised domestic and agricultural consumption. Over time, cross-subsidies have reached levels that have been distorting consumption patterns severely. The Electricity Act, 2003 attempted to limit these distortions by mandating that cross subsidies should be reduced, and eventually, eliminated; this however has not happened.

After the initial few years when the cross-subsidy held steady or even fell in some cases, the levels have generally started to rise, as has the trend of supplying free power to agriculturists, which has resurfaced again in several states. To limit the impact of rising electricity costs, large consumers have attempted to change their supplier to alternate sources, including captive or third party suppliers, through ´open access´, which is permitted under the Electricity Act, 2003. However, this too has faced tremendous hurdles and has been frustrated by utility and regulatory actions.

While seemingly protecting utilities and certain categories of consumers, the tariff distortions and the roadblocks to open access have finally raised input costs enormously for the industrial and commercial consumers, whose tariffs are higher than their Chinese or even western counterparts. Coupled with the unreliability of supplies, the high cost of electricity may significantly limit industrial growth.

Ownership of utilities is one of the principal factors that limits answers to the problem. In large parts of the country, barring some urban pockets, state-owned utilities are licensed to supply electricity; however, they are inefficient, lack business orientation, and also do not respond to regulation.

In addition, regulators too are more aligned to the short-term tariff containment objectives for subsidised consumers, rather than the long-term sustainable growth of the sector. Frequently, they fail to hold accountable the state-owned utilities under their regulation. The combination of such factors perpetuates inefficiencies and distortions in the electricity sector and ultimately limits consumption expansion. Recent attempts to delink state-owned utilities from power supply through the separation of ´carriage and content´ is aimed to attract competition and reduce their negative influences in this critical sector. A bill has been prepared by the Government of India, which was proposed for introduction in the monsoon session this year before unrelated matters disrupted the functioning of the parliament.

The separation of carriage and content is one more effort to bring some commercial orientation and competition in the sector, with the aim that the process will help the country remove deep-seated distortions and make electricity available and affordable. Even if this bill passes through in subsequent sessions of the parliament, the ability to contain misrepresentations and expand electricity supplies in the country remains to be seen.

In a nutshell, India´s electricity sector is fraught with distortions and unreliability, holding back the expansion of supply and limiting consumption. Much of the catching-up India has to do on overall supply levels could come from the industrial and commercial sectors. However, the country appears to be stuck in a vicious cycle, where the artificially high cost of electricity results in high input costs for manufacturing. Addressing existing issues under the state-ownership of the distribution sector is indeed difficult since such utilities have different priorities from commercial enterprises and do not respond to regulation in the expected manner.

To increase consumption and encourage economic growth, the government needs to commence thorough and sustained electricity along with wider energy sector reforms. Failing to do so could not only stunt the electricity supply expansion, but also seriously jeopardise the health of the economy and the aspirations of the country to emerge as an economic superpower.

The article has been authored by Anish De, Partner, Infrastructure and Government Services, KPMG in India. The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.