More than 250 million people in South Asia live without access to electricity, which is a quarter of the global population living off the grid, reveals a new report In the Dark: How Much Do Power Sector Distortions Cost South Asia published by the World Bank.
The report highlights that South Asia’s 707 kWh a year (in 2014) per capita electricity consumption is the second-lowest in the world, above only Sub-Saharan Africa, and less than a quarter of the world average. As South Asia continues to grow, demand for electricity will rise over the coming decades. India alone is expected to account for 30 percent of the growth in global energy demand between now and 2040.
In the last decade, total installed generation capacity in India increased from 154.7 GW in 2007 to 345.5 GW in 2018, making it the world’s third-largest producer of electricity, falling behind only China and the United States. More than 115 million people have gained access to electricity since 2013, increasing the share of population with access to electricity from less than 80 percent in 2013 to 86 percent in 2017.
India has also become one of the world’s leading countries in renewable energy development. According to a Mercom’s India Solar Project Tracker, at the end of September 2018, the country’s total installed capacity was 348,737.97 MW with renewables accounting for 74,667.96 MW, making up 21.41 percent.
Despite this remarkable progress, India still faces an enormous need to meet the growing demand for electricity. The International Energy Agency projects that electricity demand in India will almost triple between 2018 and 2040. As of October 2017, about 178 million people were still living off-grid. The reliability of electricity is still low compared with the international standard. The 2018 Global Competitiveness Report ranks India 80th among 137 economies in the reliability of its electricity supply.
There has been a dramatic increase in private sector investment after the introduction of the Electricity Act of 2003. The private sector contributed to 54 percent of the incremental generating capacity during 2012–17. However, electricity generation in India remains dominated by projects owned by the central and state governments. In 2017, publicly owned projects represented 63 percent of total generation and 56 percent of capacity, including 61 percent from thermal power plants.
After the introduction of 2003 Electricity act, a competitive wholesale market has developed in which power producers can sell electricity to the highest bidder, and large customers (end-users with requirements above 1 megawatt, MW) can purchase power from the lowest-cost source. But the scope of competition remains limited. In 2017, more than 90 percent of electricity was sold through long-term power purchase agreements. The rest was sold through bilateral transactions, including only 4 percent through the competitive wholesale market, the Indian Energy Exchange, and Power Exchange India.
The lack of competition in electricity supply is because of the several barriers to entry to the market. First, state governments impose a heavy open access charge on consumers who choose to buy electricity from a third party rather than from state distribution utilities. In several states, this additional open access charge almost doubles the cost of electricity for consumers who buy from a power exchange.
Low tariffs and the distorted allocation of coal have also prevented private generators from entering the market.
Apart from this, transmission congestion has prevented power trading across states, particularly in the northern and southern regions of the country. Although power curtailment caused by transmission constraints has gradually declined since fiscal 2013, a significant amount of electricity continues to be lost to congestion in the electric network. For example, if there had been no transmission congestion in 2017, almost 4 percent more electricity could have been transmitted in the power exchange.
India loses about a quarter of electricity in the network due to both technical and commercial reasons – well above the 10 percent international norm.
The report finds that the economic cost of power distortions is equivalent to 4-7 percent of the GDP a year in Bangladesh, India and Pakistan, a range much higher than the previous estimates. The report identifies three main types of distortion that are most responsible for inefficiencies that contribute to fuel shortages, inefficient electricity generation and delivery, and wasteful consumption.
- Institutional distortions that arise from weak governance and the inefficient allocation of inputs and outputs of the electricity sector.
- Regulatory distortions stemming from price regulation, subsidies, and cross-subsidies.
- Social distortions that cause environmental and health damages.
The report suggests that the government should prioritize the quality of electricity and not just access to electricity. It states, “Electrical wires alone provide no benefit if there is no power.”
The report offers some useful recommendations for power sector reforms in South Asia:
- Rationalize the price of energy to incentivize investment and conservation.
- A narrow focus on liberalising energy prices may not be adequate given the current inefficiencies in the sector.
- Prioritize increasing efficiency, coupled with a gradually increasing in energy prices.
- Address institutional distortions and allocate resources based on transparent market rules rather than administrative order
- Create adequate incentives to improve the operating performance of utilities.
The World Bank is also helping South Asian countries to meet their energy needs through direct investments, technical assistance and budget support. For energy projects, its total lending commitment accounted $8.6 billion at the end of fiscal 2018. The main focus of the World Bank has been to provide low-carbon options for energy access, such as increasing the use of renewable energy and encouraging more efficient use of energy.
Recently, the World Bank approved a $310 million loan assistance package for Jharkhand to reform its power transmission system. It has also approved a $250 million development policy loan (DPL) to Rajasthan for the improvement of the state’s electricity distribution sector under the Power for All program.
In June 2018, the World Bank promised over $500 million for two renewable energy projects in Sindh, Pakistan.
In April 2018, the World Bank has approved $55 million in financing to expand the use of renewable energy in rural areas of Bangladesh that grid electricity cannot easily reach.