EPRG Seminar, 23rd February 2009, Cambridge

The Impact of Electricity Reforms on Regional Economic

Development in India

Anupama Sen, Department of Land Economy

Please Do Not Quote Without Permission

An outline of this presentation…

Background and Motivation

Research Questions

Indian Electricity Reforms

Methodology

Results/ Findings

Conclusions

ContentRelevance of research

Main questions and sub-questions

Setting the context

Overview of conceptual framework, empirical method and fieldwork

Some findings from empirical analysis

Summary and observations

Background and Motivation

Research Questions

Indian Electricity Reforms

Methodology

Results/ Findings

Conclusions

India’s economy has averaged a growth rate of 7% in recent years, driven by manufacturing & services

0

1

2

3

4

5

6

7

8

9

10

1990 1992 1994 1996 1998 2000 2002 2004

Electricity Consumption (%)

GDP (%)

Role of Electricity

Electricity can account for up to 30% of production costs in large industries

Multiplication factor between GDP and electricity estimated at 1.5

Electricity sector must grow at over 10% per annum to sustain future GDP growth rate

Generation has to be added in the right proportion to secure sustainable growth and associated development impacts

Distribution has to be freed up in the interim to manage short & medium-term growth

Source: Central Electricity Authority; Ministry of Finance

Constraints in generation and distribution have created a chronic power deficit, making electricity reforms crucial for future growth

MAHARASHTRA: Industry & financial services. 8% GDP growth (2004). 5000 Mega Watt peak deficit.

GUJARAT: Highly industrialised. 5.1% GDP growth (2004). Peak power deficit of 30%.

PUNJAB: 5.4% GDP growth (2004). Peak power deficit of 27%.

ANDHRA PRADESH: 7.5% GDP growth (2005). Peak power deficit of 15%.

Over 15% 10%-15% Less than 10%

Source: Central Electricity Authority, 2006

Power Deficit During Peak Hours of Demand

DELHI: 11% GDP growth (2004). Peak power deficit of 6%.

Observations

In addition to peak deficits, energy deficits exist across the country

Energy resources (coal mines) are concentrated in the northeastern and eastern parts of the country

Southern parts have hydro resources

Industry in the northern and western parts has been hit the hardest

In addition to being a highly topical area of research, an empirical study on India helps us get closer to the “real” issues in reform

Concurrent List Decentralised Policy Country-Specific

The Indian Constitution:Schedule VII

….. Forests

Economic & Social Planning

Factories

Electricity

Stamp Duties ……..

All 29 States have autonomy in the implementation of electricity reforms, subject to national legislation

States will differ in the manner and pace of implementation of deregulation & reforms

State-level data can be used in empirical analyses

Sufficient interstate variations in income & demographics

Circumvents common limitations of cross-country econometric studies such as currency conversions, differential political systems and non-quantifiable influences such as cultural factors

Background and Motivation

Research Questions

Indian Electricity Reforms

Methodology

Results/ Findings

Conclusions

The broad research question was analysed in components & reformulated to lend itself more readily to empirical analysis

BroadHow do different regional regulatory regimes in electricity provision lead to differing impacts on regional economic development, in developing countries in general, and India in particular?

Two-Stage Approach

Stage I

How does deregulation & reform affect key micro and macroeconomic variables?

What does the available evidence suggest conditions the nature of these impacts?

Stage II

How might these economic impacts produce regionally differentiated outcomes in circumstances where regional governments adopt different approaches to reform?

PathwayNeeded

Revised Empirical Question

What are the impacts of deregulation and reform of the electricity sector on regional economic development in Indian states, via their effects on the location and operational decisions of industry and business investment?

Background and Motivation

Research Questions

Indian Electricity Reforms

Methodology

Results/ Findings

Conclusions

Private

15%

Federal

33%State52%

8%

25%

Hydro3%

NuclearRenewables

Thermal

64%

Total Installed Gen Cap: 145, 600 MW

Break-up of Total Installed Gen Capacity

Excl. Estimated Captive Capacity of 33,000 MW

Ownership of Installed CapacityIssues

Negligible capacity addition in most states over the past five years

Industries forced to switch to captives where affordable

New thermal capacity addition planned for 2012

Recent push for nuclear energy; but time lag

Financial insolvency of State Electricity Boards

Statistics show that reforms need to address capacity constraints andincrease sector competitiveness; fairly conventional objectives…

Plant Load Factor: 77%

Source: Central Electricity Authority

…however, political economy has long influenced the process of electricity provision, and any analysis has to be interpreted with regard to this

Agricultural Tariffs

Agricultural consumers are promised free or very cheap electricity

Industries are charged very high rates to cross-subsidise agriculture

Tariffs have not been cost reflective in the past

Hidden Losses

Unmetered agricultural consumption

Wastage by agricultural segment

No funds for maintenance

State Electricity boards financially insolvent

T&D losses clubbed with agricultural consumption

Theft

Theft a common problem

Whole communities sometimes collude in obtaining electricity illegally.

Examples: Micro enterprises in Delhi, Maharashtra

Contractual Failure

Relationship with Independent Power Producers (IPPs) historically an uneasy one

Changes in governments have led to contractual failure

Examples: Enron, Cogentrix

Vote-Bank PoliticsElectricity Used As a Carrot, Despite Reform

Average Retail Tariffs By Consumer Segment

Source: Tongia, 2003; Indian Planning Commission

Political economy continued - pricing has often defied economic logicExample 1

Source: Tongia, 2003; Indian Planning Commission

Cost of Supply & Average Tariff, 1974-2002

Example 2

1879 1950 1960 1970 1980 1990 2000

Electricity generation

begins in India

Electricity Act 2003

Electricity Regulatory

Commissions Act, 1998

State Electricity Boards set up,

1948

Private licensees, urban areas only

Generation reforms and IPPs, 1991

Orissa privatisation,

1996

Earliest case of free electricity to

farmers, 1977

Federally – owned Generation Companies

set up: NTPC, NHPC

Delhi Privatisation,

2002

New private licenses

stopped, 1956

A timeline of reforms shows they have been progressive

Green Revolution

The reform process culminated in the consolidation of all policy onpower, in a set of core measures, contained in Electricity Act 2003

Description

REGULATORThe establishment of an independent regulator for each state

UNBUNDLINGSplitting up the state-owned monolith and corporatising each segment

TARIFF RATIONALISATION Setting tariffs according to cost of supply; correcting distortions

OPEN / THIRD PARTY ACCESS

Allowing open access to the transmission grid, in phases

COMPETITION IN DISTRIBUTION

No explicit mention of ‘privatisation’

CAPTIVE GENERATION The complete de-licensing of captive generation

STATE IPPS REG UNB TARIFF OPREG DPVT TOTALA B C D E F G

Andhra Pradesh 1 1 1 1 1 0 5Arunachal Pradesh 0 0 0 0 0 0 0Assam 1 1 1 1 1 0 5Bihar 1 1 0 0 0 0 2Chattisgarh 1 1 0 1 1 0 4Delhi 0 1 1 1 1 1 5Goa 1 1 0 0 0 0 2Gujarat 1 1 1 1 1 0 5Haryana 1 1 1 1 1 0 5Himachal Pradesh 1 1 0 1 1 0 4Jammu&Kashmir 0 1 0 0 0 0 1Jharkhand 1 1 0 1 1 0 4Karnataka 1 1 1 1 1 0 5Kerala 1 1 0 1 1 0 4Madhya Pradesh 1 1 1 1 1 0 5Maharashtra 1 1 1 1 1 0 5Manipur 0 1 0 0 0 0 1Meghalaya 0 1 0 0 0 0 1Mizoram 0 1 0 0 0 0 1Nagaland 0 0 0 0 0 0 0Orissa 1 1 1 1 1 1 6Punjab 0 1 0 1 1 0 3Rajasthan 1 1 1 1 1 0 5Sikkim 0 1 0 0 0 0 1Tamil Nadu 1 1 0 1 1 0 4Tripura 0 1 0 1 0 0 2Uttar Pradesh 0 1 1 1 1 0 4Uttaranchal 1 1 1 1 1 0 5West Bengal 0 1 0 1 1 0 3TOTAL 17 27 12 20 19 2

Source: Government of India

Though most states have initialised the reform process, there is debate over the adoption of the complete set of core measures

Background and Motivation

Research Questions

Indian Electricity Reforms

Methodology

Results/ Findings

Conclusions

Continued…

OBJ: Investigate the impact of electricity sector deregulation & reform on regional economic development.

(2) Dynamics of electricity sector reform and regional economic development in India.

(3) Literature Review

Theoretical Issues

Infrastructure deregulation

Electricity sector & output growth

Spatial studies on electricity sector

Impact of electricity deregulation on economic systems

To understand the dynamics of deregulation & range of theorised outcomes which could translate into real impacts.

Places electricity deregulation in the context of broader infrastructure deregulation in developing countries.

Establishes the contribution of electricity to aggregate production and output growth in developing countries.

Establishes that there have been no previous comprehensive analyses on impact of electricity reform on regional economic development following a defined conceptual framework & existing evidence is sparse.

Starting point for conceptualising an empirical analysis. Review of all empirical work on electricity deregulation on key economic variables. Identifies most commonly observed impacts to be on prices and investment flows.

Interface between national and regional levels

Spatial Impacts of Infrastructure on Economic Development

Suggests the effect, at the national level, of these variables - prices and investment flows- and probes possible pathways to the regional level.

Investment flows induced by regulatory reform in electricity is investment in physical infrastructure, where there is evidence of direct links to regional economic development - explored here, to draw a pathway to the regional level.

Overview and understanding of the structure and functioning of the electricity sector in India.

Explores all literature related to the research questions.

This research consists of several core elements. A framework of potential impacts has been drawn……

Note: Line arrows indicate elements of the dissertation; block arrows indicate how each element helps towards achieving the research objectives. Numbers in parentheses indicate chapters.

(4) Conceptual Framework

(5) Impact of Electricity Sector Deregulation on the Economic System: An Empirical Analysis of Indian States

(6) Spatial Impact of Electricity Sector Deregulationon Regional Economic Development: A Comparative Empirical Analysis of Indian States

(7) Synthesis

(8) Conclusions

Examines the role of how the main impacts of electricity deregulation identified at the national level could feed through into regional impacts through regional economic theory. Sets up basis for empirical investigation.

Uses Indian data to establish and explore whether commonly observed impacts of electricity sector deregulation hold for Indian states.

Probes the relevance of key economic variables identified in the empirical analysis to the regional level through a comparative study of representative Indian state, using regional economic theory, particularly through investment flows.

…and operationalised using data from India to arrive at an answer to the main research question

Background and Motivation

Research Questions

Indian Electricity Reforms

Methodology

Results/ Findings

Conclusions

Findings in the core macro work shows some of the hypothesisedimpacts have been manifested

Description Findings

H1 Electricity within infrastructure Electricity contributes significantly to industrial economic output

H2 Efficiency Impacts System efficiency and output increase

H3 Electricity Prices Average prices unchanged, industrial prices of electricity decrease; unclear whether attributable to improved efficiency

H4 Electricity Pricing Cross subsidies from industry to agriculture and industry to domestic consumers decrease

H5 Impacts on Supply & Availability (Reinvestment)

System availability improves, but currently chronic power deficit across India

H6 Investment Impacts Industrial consumption increases, quickly at first

The second core empirical work involved fieldwork in three representative Indian states, to probe economic impacts of reform

MAHARASHTRA: Industry & financial services. 8% GDP growth (2004). Public, unbundled, early stage.

ANDHRA PRADESH: 7.5% GDP growth (2005). Public, unbundled, advanced stage.

DELHI: 11% GDP growth (2004). Privatised distribution.

Empirical Work II

Location questionnaires and interviews administered to around forty organisations in total

Stakeholders interviewed included industry organisations, chambers of commerce, regional development agencies, electricity regulators and power distribution companies

Impacts differ in manner and magnitude, by state and by industry size/sector (large energy intensive & small and medium energy non-intensive)

Thus macro effects might produce differential outcomes on the ground, for industry in the three states

Background and Motivation

Research Questions

Indian Electricity Reforms

Methodology

Results/ Findings

Conclusions

Conclusions & Next Steps…OBSERVATIONS

MACRO WORK

Impacts hypothesised in the conceptual framework are manifested in the empirical analysis to a great extent, but through unconventional pathways, conditioned by the political economy of electricity reforms in India.

States that implement an incomplete reform might end up worse off, and states might have to go beyond at least 4/6 reform measures to see changes.

FIELDWORK

The most crucial issues in electricity provision vary in relevance for industry, between states. E.g. Price in Maharashtra, quality in Andhra Pradesh. Thus the changes in macro variables will produce differential spatial impacts on industrial growth and associated development in different states.

Large industries affected differently from small & medium enterprises (SME), yet the latter have deeper associated employment and wage impacts. Linkages between the two.

SYNTHESIS Findings from both pieces of empirical work need to be related back to the conceptual framework and interpreted within the context of regional economic theory.