Indian power: Narendra Modi must centralise it

Indian power: Narendra Modi must centralise it

Nick Butler | Jun 01 13:27 | 10 | Share

Imagine being elected prime minister of a country with one and a quarter billion people, about 300m of whom live in absolute poverty. That is the challenge facingNarendra Modi in India. The hardest question must be to know where to start.

When it comes to energy Mr Modi’s first acts have been encouraging. He has set a high but achievable target for the installation of solar, on and off the grid, building on his experience in the state of Gujarat. He has also forced together three key ministries – covering power, coal and renewables – under a new minister, Piyush Goyal. He should probably have gone further and added petroleum and natural gas as well. Structural change in the complex bureaucracy of the Indian government matters a lot.

But the country also needs a change of policy. Given the example set by China it is simply no longer acceptable to say that poverty is inevitable and will always be with us. In two decades China has lifted 680m people out of poverty. There is no physical or intellectual reason why India cannot do the same. And the best first step would be to give people access to electricity. The Indian power sector as it stands is an embarrassment on several levels.

According to an excellent new study by the International Energy Agency the problems are clear:

68 per cent of India’s electricity comes from coal through power plants which are inefficient and which produce a third more emissions per kilowatt hour than the plants using the latest cleaner technologies;

the potential for renewables – including wind, solar and small hydroelectric schemes across the country is huge – but mostly untapped;

there is scope for extensive co-generation around industrial power use but it remains undeveloped;

the scale of need and neglect is shocking. More than 800m people lack clean cooking facilities and the latest objective long term forecasts say that number will still be more than 700m by 2030.

As the population grows further the risk is that the distribution of income and wealth will deteriorate and that because of a growing reliance on coal India will become the world’s largest and most intractable source of carbon emissions.

Beyond the new drive for solar, two big initial steps are necessary. First, India needs to complete and strengthen the grid across the country. The sources of supply – solar in the west, wind from Andhra Pradesh and Tamil Nadu in the southeast, and hydropower from the northeast – need to be linked to the power deficit regions in the north and the west.

Second, Mr Modi will have to designate a new series of liquefied natural gas terminals ready to receive gas from the global market. These terminals have to be linked to power stations and the grid. If he is smart Mr Modi will have spotted the opportunity to follow the Chinese in signing up a long-term gas supply deal with Russia. Russia needs new markets and India will need new supplies.

Pricing structures also need reform. Many tariffs are below the cost of generation, forcing cross subsidies which are paid for by industrial users. Not surprisingly this has led to industrial users generating their own so called “captive power” unconnected to the grid which is logical for them but suboptimal for the system as a whole. They have to be incentivised to sell surplus power into the grid.

The challenge is that to achieve these steps, and the many other things which are needed, Mr Modi will have to centralise decision making. As things stand each state is responsible for the generation, distribution and pricing of electricity for its residents and has authority over how energy is produced, moved and consumed within its borders. When taken together with the rules imposed by a host of other federal and state institutions this has proved a deterrent to many serious investments in the past. The current problems are the result not just of bureaucracy but of the fragmentation of decision making processes. India is one country and needs an overall strategy and an open market across all internal boundaries.

To centralise power, even partially, is a huge political challenge of course. Mr Modi won a landslide victory but as he must be well aware the window of opportunity during which he can use the authority he has will be short.

The provision of power to the whole of India, urban and rural, on and off the grid is critical for India’s transition to being a modern economy, and particularly for the elimination of absolute poverty. If that isn’t achieved India will remain backward and vulnerable as China continues to advance. The world needs Mr Modi to succeed.