Interview with Suresh Prabhu: “Learn lessons from power sector reforms”

“Learn lessons from power sector reforms”

Suresh Prabhu, Former Union, Power Minister

Suresh Prabhu, Former Union Power Minister, has been one of the key change-makers in the power sector. He is responsible for having pushed th­rough critical reforms, most no­tably the Electricity Act, 2003. In a recent interview with Power Line, Prabhu spoke at length about the hits and misses in the sector over the past two and a half decades, and the changes expected in the next 25 years. Edited excerpts…

What have been the biggest achievements in the power sector over the past 25 years?

Firstly, I would like to put on record the contribution of Power Line in the journey of power sector reforms. Reform is a process that has a technical/technological component. To make reforms work, we need to introduce new technologies and new ideas. These deliberations are necessary for the success of reforms. Most importantly, any reform needs to succeed in creating an environment in which people can appreciate and welcome reforms. This is particularly important in the power sector, because it is a very complex industry and, therefore, has a complex process. Often the benefits accrue at a much later stage, thus making the beginning of the process very painful. So I used to say that pain is front-ended, gain is back-ended. In that context, Power Line magazine has played a pivotal role in shaping public opinion by explaining to people the complexities of the sector itself, and the necessity for reforms. So I must, on record, express my appreciation to Power Line for its role in this journey of power sector reforms.

We have always appreciated the significance of the power sector in the economic growth of the country. The impact of power on the social growth of the country is well known but still very important. In the past 25 years, we added almost 200,000 MW of capacity, which is a huge achievement for a country that had less than 100,000 MW in 2000. The fact that we can now boast of such a huge capacity addition is in itself testimony to the efficacy of power sector reforms and associated legislation such as the Electricity Act, 2003.

So, one achievement is the addition to capacity. The second tangible benefit, which is a result of this achievement, is that it helps people to set up businesses without depending on captive power generation. In my opinion, captive generation was a waste of capital because it is the responsibility of the grid owner to provide power to everybody – that is the most economical way of doing it. The third benefit is the quality of power, which, while not being ideal, has still improved conspicuously and consi­derably. I remember saying 25 years ago that while power quantity is extremely important, power quality is even more important, since substandard quality of power affects the grid system substantially, with households suffering immensely, disproportionate to their ability to deal with it. Again, I can say, with my gut feeling and without necessa­rily having the empirical evidence to back it up, that economic growth has accelerated because of policy reforms made at that particular time regarding the power sector.

Today, if you look at the banking system, you will see that it is in trouble, and one of the reasons for this is that we were un­able to reform the distribution segment to a desirable extent. The assets were stranded for several reasons. One is the lack of distribution reforms; another is gas supply, which was much lower than our expectation. The banking system also suffered because of problems in the power sector.

In general, the banking system and the economy on the whole suffer when the power sector does not perform well. So there is a direct relationship between the power sector and the economy, and the fact that India’s growth rate today is much higher than what it was 25 years ago can be considered a positive for the power sector. Another very important mile­stone of  power sector reforms was reached in 1991 when we started general economic reforms. These reforms essentially remo­v­ed the barriers for investment and re­mo­ved the conditions atta­ch­­ed to la­bour laws, etc. Moreover, these economic reforms encouraged private sector participation in building infrastr­ucture. But this objective was not achiev­ed in most of the sectors, with the exception of power, which is a positive for the sector. Of course, it can be ar­gued that such a development happened in the tele­com sector too but, as you can see, telecom was a completely different sector with limited capital intensity.

Power sector reforms were extremely successful in attracting private sector participation to add capacity, as can be evinced from the fact that most of the generation capacity added has been through the private sector. Now we are struggling to in­crease private sector participation in in­f­ra­structure. However, I can certainly pro­udly say that you must learn lessons from the power sector reforms.

“Power sector reforms were extremely successful in attracting private participation to add capacity. Most of the generation capacity added has been through the private sector.”

What are some of the areas where you feel we did not do as well as you would have liked?

One of the major disappointments is the lack of reforms in the distribution arena. I remember when we started implementing power sector reforms in generation, we realised that if we did not im­plement parallel reforms in distribution, it would come to a standstill at some point, which has happened.

We had many ideas for positive reforms, including the launch of the Accelerated Power Development Programme, and we had gotten Rs 400 billion from the Planning Commission at the time with great difficulty for the programme. The viability of distribution reforms in the states was argued, given that the central government does not own these disco­ms. Anyway, we launched the progra­m­me with the involvement of Nandan Ni­le­kani of Infosys, to prepare a plan to in­te­grate technology to reduce transmission and distribution (T&D) losses.

In addition, we incentivised the whole process by proposing that the discoms be paid in proportion to the reduction in T&D losses. We also proposed that if one did not want to privatise a utility, one could actually make each and every distribution circle commercially viable. It is important to note that commercial viability has nothing to do with ownership, as you can achieve it through the franchise model or other measures. Unfortu­nately, this idea was not followed up on, unlike the other legislations related to the generation sector. Today, we are seeing the effect of that regulatory inertia in that the distribution companies are currently struggling and affecting the generation companies, which, in turn, is affecting the banking system.

The second area where we have underachieved, despite improvements, is en­ergy efficiency. If you recall, when we im­­­plemented the Electricity Act, 2003, we also implemented the energy effici­ency law and created the Bureau of En­ergy Efficiency (BEE). Mr Shashi She­khar, then director in the Ministry of Po­wer, was appointed by me as the first director of BEE through an administrative order. Then we really worked on it in order to improve energy efficiency and built a good momentum. Nevertheless, I still think we should do a lot more on the efficiency front. The global movement is towards both augmenting supply and improving efficiency on the supply side, as well as demand-side management and energy efficiency.

“When I was power minister, I used to say that the power sector runs on technology and not on ideology. Today, I can say that the next 25 years shall be defined by a new wave of technology.”

What is your view on the proposed amendme­n­ts to the Electricity Act, 2003?

Making the power sector commercially viable should be the first overall objective of all sector reforms. The second ob­jective has to be affordability of po­wer, as constant price increases do not work. Thirdly, we should make amendments so that more investment constantly co­m­es into the sector and competition im­proves to a great degree, as this ultimately benefits consu­mers. Four­th, the am­end­ments need to em­ph­asise the sanctity of contracts be­cause whatever we do, contracts need to be ex­ecuted above all. The Indian Con­tract Act, 1872 was made nearly 150 years ago. It is time that we realise the importance of honouring the sanctity of the terms we mutually agree to. So, if you look at all these points to­gether, it is evident that some amendments are necessary. For ex­ample, some of the discoms and other companies in the sector were plunged into uncertainty due to a change in po­litical leadership at the state level.

I fully understand that there would be some cases where parties may disagree with a contract by invoking certain cla­uses in the contract. These clauses may be invoked in case of a default, a misrepresentation, or a distortion of the pro­ce­ss. So, the parties can always take re­co­urse to these clauses in case of non-fulfilment of due process. However, to subvert the sanctity of a contract is not good for anybody, which, in turn, necessitates the development of an institutional mechanism to deal with such a situation. That is what the proposed amendment intends to achieve, and it is a very good thing.

Secondly, I think it is time that the government stops being too involved in this whole process. We created regulators with the sole purpose of regulating the sector and ensuring that their decisions are respected by all participants in the sector, who would in turn follow the process. I think it has been a long time since we created the regulatory framework, and we should revisit it to find out whether it is working and endeavour to create a stable regulatory regime that will be in everybody’s interest. This is something that the proposed amendments are aiming to achieve, and I welcome them.

Now there are some concerns about affordability, something that is a part of power sector policy. In particular, the farmers feel that they will be cheated in this process. I think there is logic in this because, unfortunately, when input pri­ces go up, the agriculture cost and pricing committee neglects to take into account certain aspects of cost.

In order to amend this, you must consider how this uncertainty can be address­ed through legal means.The Electricity Act, 2003 included a provision relating to subsidy, which mandated the government to pay subsidy upfront. Unfortu­na­tely, this provision was subsequently removed from the actual act, and we are predictably seeing the adverse impact. I personally feel that each and every amendment made to the act should ne­ver forget the overall objective of the act itself and the context in which it was drafted. For instance, in 1948, we natio­nalised the entire electricity business, although there was private participation prior to that in the electricity sector. For 50 years thereafter, we witnessed the ill-effects of that move.

The Electricity Act, 2003 had some ob­jec­tives that were derived from the lear-nings acquired from this process of failure. Now, when you are making amendments, never ever ignore the objective of the act, and also account for the history. The history of the Indian power sector can be briefly segregated into three eras: pre-1948, 1948 to 2003, and post-2003. It is important to remember this history because those who forget it are condemned to repeat it.

“The beauty of nature is that change occurs irrespective of our assent and the only choice we have is to adapt to these changes or become obsolete. So those who refuse to accept changes will in reality pay a big price.”

What are the big changes that you see in the power sector in the next 25 years?

When I was power minister, I used to of­ten say that the power sector runs on technology and not on ideology. The tur­bines and generators work on technology and ideology cannot change their fu­nctioning. Today, I can say that the next 25 years shall be defined by a new wave of technology.

The first part of the technological ch­ange, which you are already seeing on the ground, is renewables becoming mo­re important in the energy portfolio. But it still has not reached its true potential because of the absence of storage. So, the way in which I see technology moving, I clearly see a big change in the next 15-20 years.

Secondly, technology is going to imp­rove and enable the use of wireless electricity. So, this whole system of transmission lines, sub-transmission lines, swit­ch­ing yards, etc. will likely be less important in the next five to 20 years.

Thirdly, renewables will, of course, be­come more effective. The efficiency levels of photovoltaic cells, for example, may rise by 25-30 per cent. But, more im­portantly, new renewable sources will be developed. For instance, there is al­rea­dy significant research going on in the seabed field. Until the last generation, we used fossil fuel, hydro and nu­cl­ear for generating power; then we mo­v­ed to entirely new sources of power such as renewable power. In the future, we might move into completely unknown areas of power generating sources. We may call them renewables, or they may be derivatives of both renewable and con­ventional sources, but it is indispu­table that there will be new sources over the next 15-20 years.

Another aspect of the change will pertain to improvements in the efficiency of technology over the next 15-20 years. Climate change will be a massive trigger for further technological changes, going forward. Climate change concerns will lead to radical changes at the regulatory level as well, and at the social level as a result of social uproar.

In addition, some changes will be necessitated due to international obligations. We will have social uproar as a result of the frequent occurrences of typhoons, which will damage crops and by extension, the economic well-being of farmers. These ty­phoo­ns will also affect the livelihood of fishermen. So, there is a commercial co­n­cern regarding the introduction of renewables, which have unique technological and commercial characteristics such as intermittencies and low ramping capacity. But, more importantly, climate change and the resultant social up­roar will engineer a change in the de­mand side – something that will be alleviated by technology.

There will also be another driver of ch­ange as we will move from the centra­lised form of electricity generation characterised by mega/ultramega projects to small-sized projects. Small-sized de­centralised projects would not require a lot of land unlike big-ticket projects, which face land acquisition problems both in India and in other countries.

Some older concerns of the 1980s, the 1990s and beyond were not related to the transmission and distribution segments, but to governance issues. What also happened was because the power sector was everybody’s property, no­body was responsible for it. However, when you bring in smaller, distributed generation plants, which will become widespread in the next two decades, there will be a sense of ownership within the community. For example, our traditional wisdom created something called “Devrai”, or “forest owned by God”, whi­ch nobody could enter. They were all around temples and had water tanks that prevented anybody from entering them. This ensured the de­velopment of the first community audit, as they wanted to ensure that the sanctity of the forest was preserved. In my opinion, similar concepts will develop in the next 20-25 years. We will see community ownership and community participation, which will obviate the older concerns of governance. Furthermore, technology by itself will make it impossible to steal electricity, especially with prepaid me­ters, etc.

“Power Line has played a pivotal role in shaping public opinion by explaining to people the complexities of the sector and the necessity for reforms.”

How will the Indian power sector have to ch­an­ge to adapt to the changes taking place?

The beauty of nature is that change oc­curs irrespective of our assent and, therefore, the only choice we have is to adapt to these changes or become obsolete. So those who refuse to accept ch­an­ges in reality will pay a big price. I think, going forward, a magazine like yours will play a key role in shaping public opinion and in letting people know about the impending changes. I think we must have some mechanism to distinguish opinion-makers and policymakers, as they are different and have different approaches. In addition, I think we must have some sort of an institutionalised training program­me, as it is vitally important. These progra­m­mes must ap­p­rise people of the chan­ges; otherwise, we will oppose each other on ideas. So this kind of essential mechanism for training the mind is very important.

It would be helpful for the power sector to emulate the example of the railway sector, which set up a mission to change transportation technologies. I am of the opinion that in the power sector, we must similarly set up a technological mi­ssion encompassing the transmission, distribution and generation segments – that is, the entire ecosystem of the pow­er sector – so that we can prepare for the changes steadily.