Troubles With India’s Power Grid

The Economist: An Area of Darkness
The Economist: The Future is Black
The Economist: Powerless
Ernst & Young: Ready for the Transition
FT: Fantasies of Power in Muddle-Along India
NatGeo: Indian Power Outage Spotlights Energy Planning Failure
NYT: An Electrical Grid is Pressed to Its Limit
RBI: RBI Releases Annual Report for 2011–12
WSJ: India’s Power Network Breaks Down
WSJ: Investment in Infrastructure is Plunging

On July 30 and 31 of this year, two blackouts in northern and eastern India caused more than half of the country’s population to lose power for multiple hours. Power outages of shorter duration and effect have become a daily part of Indians’ lives, and they are indicative of serious problems with India’s power supply system. India’s power grid will become a hindrance to future economic growth if India does not address the grid’s weaknesses. Underinvestment in energy infrastructure, a poor system of energy allocation, and environmental and resource constraints on India’s power supply are some of the problems with India’s power supply chain.

The Indian government must invest in energy infrastructure to accommodate a modern industrialized economy that is heavily reliant upon electricity and connectivity for daily business operations. Many industries in India are struggling in part because India’s power supply chain is unreliable, outdated and non-existent in many parts of the country. Currently, 300 million people are permanently without power, and, in the areas that do have power, supply is consistently below the levels needed to keep the electricity running without interruption. For example, some villages only have electricity for four to six hours a day. The distribution of the electricity from the grid to users is also problematic because the government sets artificially low electricity prices that bankrupt state-owned firms responsible for distribution, and thus, these firms cannot afford to purchase all of the needed electricity from the power companies. Moreover, the delivery system itself needs updating to address reliability concerns, which could cost about $110 billion to accomplish, according to one study. Despite these issues, the government plans to invest only 2.1 trillion rupees (about $38 billion) this year in infrastructure, down from 3.9 trillion rupees (about $70 billion) last year.

The way that India allocates energy is also flawed. States give a daily estimate to the government of how much power they expect to need the following day. The government imposes fines if states exceed the quotas calculated based on these daily forecasts, but these fines are not enough to maintain energy discipline. When demand upon the grid exceeds the available capacity, generators automatically shut down in the areas of excess demand to prevent damage to the system. Many government officials and analysts blame the power outages on the fact that some Indian states exceeded their electricity quota and triggered large numbers of generator shut downs. However, India’s power grid does not have enough capacity to tolerate much demand volatility.

India’s electricity capacity has been strained by environmental and resource issues. This year’s drought negatively affected hydroelectric power generation and increased demand for electricity at the same time. Farmers have had to increase their normal electricity usage in order to hydrate their crops, and they have no incentive to conserve energy because they receive free electricity. Coal production, which state-owned Coal India controls, has also been inadequate. Thus, for power companies to keep up with demand, they have to purchase coal from foreign sources, which is more expensive than domestic coal. Low coal production has a significant effect upon the country’s power supply because about 70% of India’s power is coal generated.

In its current state, India’s power grid will be unable to cope with the demand for electricity, which is likely to double by 2020. Currently, India’s plans for developing energy infrastructure depend on nuclear energy and coal. Nuclear energy is unpopular, especially in light of the nuclear disaster in Japan last year. Moreover, the most modern coal-based power plants require a higher grade of coal than that found in India. This hurts demand for domestic coal sources and creates financial difficulties for the companies investing in such modernizing projects. India must address the investment, allocation and capacity problems that are hurting the power supply chain to guarantee its ascendency to developed nation status.