Power sector: Bigger challenges before developing economies

Dr B K Mukhopadhyay

Whither the power sector!

The electricity industry remains a strategic sector whose activities have significant implications on the performance of any economy – big, medium or small. The employment aspect is something to mention on this score. For example, the power sector  in India would need a huge workforce of over 6.5 lakh by the 12th five-year plan  [2012-2017] as the country embarks on an ambitious plan to add over 180,000 mw capacity by then, according to a report of the Institute of Energy and Research.

The Jawaharlal Nehru tiol Solar Mission aims at adding 20,000 MW solar power capacity in the country by 2022. Promotion of grid-connected solar power in a big way could bring the cost of solar power generation to grid parity levels. tural gas is also expected to play a key role in India’s energy mix by 2025, increasing to 20 per cent. What is more mentioble here is the fact that the petroleum and tural gas sector attracted cumulative FDI worth US$ 3,338.75 million [between April 2000 to March 2012] - an attractive destition for CDM projects owing to the vast market potential and well-developed industrial, fincing and business infrastructure. India has been ranked as the third best investment destition in renewable energy sector, next only to Chi and the US, according to Ernst & Young. Renewable energy contributes now to around 70 per cent of the total power business in India, as compared to 10 per cent in 2000 [in terms of project numbers and dollar value].

The experience of other developing economies may also be seen on this score. Bhutan’s experience is something to observe and shared on this score - the only country in South Asia with surplus power generation capacity and a hydropower sector that contributes as much as 40 percent of Government revenues, 45 percent of export earnings, and 25 percent of gross domestic product (GDP) in 2009.  As of now, Bhutan exports more than 75 percent of the hydroelectricity produced to India and the per capita income is also higher than that of the latter. The country also imports electricity from India during winter months to meet peak demand during winter.

The total installed capacity of hydro power at present is 1488.66 MW. The domestic consumption is approximately 250 MW, and the rest is exported to India through a bilateral contract. Now, it has 27 hydropower stations, comprising 4 major hydroelectric power plants, 12 mini-hydro plants, and 10 micro-hydro plants.  The total power generation increased from 2,060 GWh in 2002 to 6,925 GWh in 2009. Hydropower - the source for 99 percent of the country’s electricity generation today - is widely abundant in terms of potential, estimated at 30,000 MW. 

turally, accelerating hydropower development for export is of strategic significance for Bhutan’s economy. Given the government’s limited fiscal capacity for large infrastructure projects, the strategy is to leverage public and private investments to accelerate hydropower, and generate income for further socio-economic development.

What is most interesting to note is the fact that since 2007, hydropower generation has quadrupled to 1,489 MW and is further expected to increase to 1,602 MW by the end of the Tenth Plan and if the trend is maintained it would reach 10,000 MW by 2020. Endowed with vast hydropower potential from the perennially snow-fed north-south flowing rivers, the economy  is well aware of the facts and have undertaken far-reaching institutiol reforms to improve the investment climate for export-oriented hydropower projects, and to expand power distribution to largely rural domestic consumers in a fincially sustaible manner. 

Still, developing economies have to go a long way before a satisfactory level is reached. The case of Tanzania, East Africa’s second largest economy, may also be seen. It was experiencing power shortages that were restraining the country’s potential for economic growth - leading the IMF to even adjust Tanzania’s economic growth forecasts! In fact, in the last 7 years the Tanzanian electricity industry achieved limited success in diversifying its energy feedstock mix. The prevailing power crisis provides irrefutable evidence of planning, implementation and operatiol ineffectiveness.

Newer avenues/innovative practices must be sought after. A noticeable trend within resource-rich African countries has been that of allowing mining firms to develop power for their own use and sell the excess power to the tiol grid. Thus, mining sector development could be the key to averting future electricity crises.

Electricity pricing is the crucial area that is handled very cautiously by these economies because of obvious reasons. The intention of policy makers, not only in Tanzania but also in other economies, is definitely to minimize the effect of tariff rises on the industries’ operations and growth. In general, tariffs continue to go north in order to: cover losses, pay for emergency power generation and fund capacity expansion, either directly or indirectly. Attempts at cross-subsidization also had minimal effects on balance sheet.

The energy sector in Vietm remains domited by public ownership. However, market forces have been brought to bear in recent years and private sector participation is expanding. It is good to note that Vietm formulated a tiol Energy Policy for the period 2006 to 2015. The policy emphasizes the need to diversify the country’s energy mix whilst maximizing the use of local energy reserves: a) development of energy infrastructure and enhancement of long-term energy supply, b) development of energy in consideration of environment, c) improvement of energy efficiency, d) restructuring the energy sector’s structure and opening up the market for energy and e) enhancement of intertiol energy cooperation whilst ensuring tiol energy security.

For economies like India, Vietm and Bangladesh, why are the renewable sources not speeded up? Not only hydropower but biomass [includes wood, wood waste, pear, wood liquors, rail-road ties, pitch, wood sludge, municipal solid waste, agricultural waste, straw, landfill gases, fish oils, and other waste materials energy] is also the predomint fuel.  Solar power has to become an important part of rural electrification. Even where the grid extension is assessed economically unfeasible, off-grid electrification may be pursued, mainly through stand-alone solar home systems.

It is a fact that the use of solar energy for space heating and domestic hot water production has received little attention from the public and private sectors in such economies, mainly due to high cost of solar PV systems. Wind Energy / Geothermal Energy power has also remained unexplored so far. Fresh study can be conducted into the geothermal potential of the economies.

Renewable energy is very central to climate change mitigation efforts. Broad estimates have shown that mitigation from existing renewable energy portfolio is equivalent to around 4-5 per cent of total energy related emissions.

The Government-level strategy to meet the energy needs of these economies may focus on the vital areas: diversifying investment sources to meet the growth in energy demand, establishing a competitive energy market, developing renewable energies, promoting trading of energy with neighbouring countries, improving energy efficiency and conservation and promoting the environmental sustaibility of the sector.

It has been a fact that as the investment requirements of the energy sector happens to be a large one, many of these challenges are better addressed by public and private investors plus the multilateral and bilateral development banks that are already providing loans in this sector as already experienced in a number of economies.

In India, the tiol transmission system that shifts power around the country needs modernization and investment—some $110 billion according to a McKinsey study! The country’s power sector requires Rs 13.72 lakh crore in funding for the 12th Five-Year Plan (2012-17) as per the Working Group on Power for formulation of the 12th Five-Year Plan estimations.

The World Bank, for example, extends such supports to energy sector with loans for power generation, transmission, distribution, and rural electrification. In addition, it provides technical assistance in areas like: power sector policy and strategy; institutiol strengthening; private sector participation in infrastructure; gas master plan; petroleum product pricing; development of the Electricity Law and promotion of renewable and rural electrification.

Developing economies are sure to benefit out of these if the political strings are not attached!!

(The Writer, a noted Magement Economist, and an Intertiol Commentator on Business and Economic Affairs, attached to the West Bengal State University, can be reached at m.bibhas@gmail.com)