Lydia Powell and Akhilesh Sati, Observer Research Foundation
One of the perverse energy messages coming out in May 2015 is that there are no takers for electricity in what is generally believed to be an electricity starved country. The trend has been in the making for some time now but when the Minister for Power and Renewable Energy Shri Piyush Goyal remarked in the lower house of the Parliament that there was surplus power at the national grid monitoring station indicating that power was available at ‘zero rupee per unit’ (Rs 0 a KWh) it must have shocked even the uninitiated. This meant that there are no takers for power even when it is free. The Minister urged utilities to buy power from exchanges and then went on to advise states to invest in more power supply through solar and gas based power plants. He probably did not realise that he was actually contradicting himself. If utilities which are the largest buyers of power do not want to buy power then who will want to invest in what is seen as expensive power?
Data from the Indian Energy Exchange which is the largest among many power traders shows that the sell bids outnumbered buy bids by a significant margin on most days. In April there were buy bids for 2.9 billion units against sell bids for 4.9 billion units. The average market clearing price was Rs 2.68/KWh which is low compared to average price of electricity available through long term contracts. The most puzzling story came out during the last week of May which said that 57 base-load thermal power plants with total capacity of over 8000 MW in the northern and western regions were facing ‘reserve shut-down’. In other words these plants were being asked to back off capacity on account of lack of demand. We also saw stories on key investors are walking away from thermal power projects and many observers attributed it to lack of demand growth. What is happening? Who killed demand for power in a power starved country?
Source: India Energy Exchange
The short answer can be given in two parts: the first part is the short term effects (1) Industrial slump partly explains lack of demand growth for power (2) The fact that cash strapped utilities are trapped in long term contracts that require at least the capacity charge to be paid even if power is not lifted is another reason why utilities cannot take advantage of lower prices in the spot market (3) The fact that there is no universal service obligation pushes utilities to opt for outages rather than supply. This is something any rational economic actor would do. The longer term questions for which there are no answers are more troubling. Who killed electricity demand in a country with one of the lowest per person electricity consumption in the developing world as well as the largest number of people without access to electricity?
In theory the huge unmet demand for energy in India can absorb primary energy from any source – be it gas from Iran and Turkmenistan, uranium from Kazakhstan, coal from anywhere and solar energy from everywhere that call all be turned into electricity. Apart from millions of un-electrified households that are longing for electricity, there are also urban household and business consumers that are eager to do away with expensive power back up systems. If there is surplus supply at one end and huge unmet demand at the other and we still have a problem then it must be the system in-between that is killing demand.
Both government failure and market failure can be blamed for this demand destruction. The market is not designed to provide electricity to poor un-electrified households with latent demand (which means that demand is not backed by purchasing power) but governments have an obligation to step in to this segment which the market has failed. But the government (and the utilities owned by the government) have failed to convert this huge latent demand for energy and electricity into a source of productive power and eventually market demand. In the urban and industrialised segment where demand is backed by purchasing power, the market has responded but perversely through diesel based generators (and countless number of small generators of less than 100 KvA along with millions of invertors) which is a perverse outcome in a country that can ill afford expensive power. Once again the market has failed to lead to the efficient fuel choice because the government has failed to provide an efficient market for fuels. Demand destruction in a country that is energy poor is a tragedy and it cannot be addressed if we limit our solutions to the unforgiving and predatory economic environment that we are forced to operate in. The situation in the electricity segment is not very different from that of the food grain segment which has grain surplus at one end and widespread malnutrition and starvation at the other. It is also not very different from the housing segment where large areas of unused land (and buildings) exist at one end and crowded and tiny homes in wretched slums at the other end. Simplistic answers to this complex problem must be resisted at all costs. We are all to blame – not just the utilities!
On the coal front the news coming out in May has been distressing as many outcomes of the supposedly successful coal auctions are moving into the courts. Guide posts are being changed mid course and auction participants are left with no choice but to seek judicial intervention. The bench hearing the case on Gare Palma coal mines has rightly remarked that ‘this is not the way a government should function’.
On the gas front the most important news in May was the revival of stranded gas based power projects through reverse bidding (bidder of lowest subsidy gets the gas) but this was accompanied by the news that there were few takers for gas based power even after the subsidy. This month the government also declared that it may allow market price for gas from complex fields but we don’t know yet which market the government is talking about. There is no market for gas or for that matter any fuel in India. We also saw news on GAIL’s talks with Shell to sell US LNG which once again raises questions over the prospects for LNG as a source for power generation. On LNG there was also news on preliminary agreements with France and South Korea on manufacturing LNG carriers in India. One cannot blame the government for its optimism over the demand for LNG carriers and LNG at a time when demand for everything is falling. The government has to be optimistic if it wants to stay in business.
On the oil front we saw an increase in the price of Indian crude basket (by Rs 2.29/Litre) which resulted in increase in prices of both petrol (by Rs 3.13/Litre) and diesel (Rs 2.71/Litre). The fall in the value of the rupee is one reason why there was a somewhat disproportionate increase in the case of petrol.
Source: PPAC & IOC
There was some conflicting news on the Jaitapur nuclear plant with gram sabha of Jaitapur passing a resolution against the nuclear power plant and a member of the Maharashtra ministry declaring that the Jaitapur plant will be completed. If we go by the precedent set in Kudankulam, we can be assured that protests against Jaitapur will be crushed using disproportionate force (physical and judicial) and the project will progress, provided the government wants it to succeed.
On the solar front many projects were announced by private players. Even coal companies such as Adani are throwing their hat in. This could indicate a gravy train on the move. Though it is too early to judge the success of these projects, concerned ministers were enthusiastically making announcements on cumulative solar GWs that have been committed. Government push will probably stop only after the count touches 100 GW.
May also had some interesting sound bites on climate negotiations. As negotiations on carbon mitigation in Paris draw near, concerned ministers were once again saying that India will have the cake and eat it too. The cake is a seat on the rich country table. The ticket for this table has already been purchased with stratospheric targets for renewable energy. The eating is in the joy of blaming rich countries for global warming. All concerned ministers are doing this with a committed sense of duty.
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Courtesy: Energy News Monitor | Volume XI; Issue 50