IEA Commends Indian Electricity Reforms, Calls for Action to Improve Market Efficiency

(New Delhi) — 23 April 2002

"India's electricity market is moving in the right direction, but the implementation of planned reforms must be accelerated, especially in the states", says William C. Ramsay, Deputy Executive Director of the International Energy Agency. In the presence of the Indian Minister of Power, Shri Suresh P. Prabhu, Ambassador Ramsay made these remarks at the launching ceremony for the book "Electricity in India - Providing Power for the Millions". The IEA book chronicles and analyses India's progress toward liberalisation since the early 1990s. It offers examples of how others have addressed some of the same challenges facing the Indian electricity sector today. He added, "Ahead lie some difficult political decisions, but reform is critical if the country's electricity sector is not to hamper robust economic growth."

Ambassador Ramsay commended the central government efforts begun in 1991 to attract private investment and in 1998 to establish the legal framework for a new regulatory system enabling independent tariff-setting with power to correct long-standing price distortions. He added, "In this transition period, it would be indispensable that the central government set clear reform goals, with mechanisms to monitor progress towards an electricity market. The central issue now is ensuring that power utilities can earn a fair return on investment. In the Indian states, utilities are clearly not able to collect sufficient revenue". Large and inefficient subsidies remain in place and power theft is increasing, further eroding the financial position of the state electricity utilities. These are not new trends, but the situation has reached a critical stage, where the federal government in New Delhi can no longer afford to cover the losses of the state power utilities.

The states have a key role to play in effecting institutional changes. But the IEA believes the role of the central government is vital in providing the necessary legal and financial incentives for the states to implement reforms. Past reform efforts have underestimated the political and technical obstacles to overhauling the existing system and to introduce competition, and were too optimistic about the time needed to do so. Private investment alone cannot be expected to resolve management issues, remove market distortions and counter the interference of vested interests. The public electricity supply industry needs to be put in order rapidly before the private sector can begin to operate efficiently, allocating capital and using energy resources in such a way to provide cheaper and better quality electricity.

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