Why the energy future looks bleak

In late July 2012, half of India was plunged into darkness as several regional power grids collapsed, leaving 600 million people without electricity. The crisis was an embarrassment for India's government, businesses and citizens: dysfunction in its energy infrastructure mocks the prospect of India one day achieving superpower status.

The Economist Intelligence Unit (EIU) sees India's appetite for energy growing by 54 per cent between 2011 and 2020. But a range of problems, particularly artificially low energy prices and state involvement in fuel production, will exacerbate the difficulty of meeting surging demand and supporting economic growth.

The fundamental problem in the power sector is that consumers buy electricity for less than it costs to generate. Efforts have been made to liberalise generation: the Electricity Act of 2003 encouraged private investment, spurring an estimated 65 per cent increase in capacity between 2003 and 2011, to around 200 gigawatts (GW). This nonetheless greatly undershot India's plans even as consumption jumped by 75 per cent.

On the transmission and distribution side the problem is political: local officials and politicians are loath to surrender control over dispensing electricity. Agricultural consumers (that is, rural voters) can often draw power for free, or receive steep discounts. Punishments for stealing electricity are rarely enforced.

Over time, not recouping the cost of providing electricity has left swathes of state electricity boards (SEBs) unable to invest properly in upgrading the inefficient grid. More than a quarter of India's electricity is thought to be lost in transmission and distribution. The SEBs can become financially healthy only if subsidies are overhauled and they are permitted to charge market rates for power. They can then invest on the scale necessary to upgrade the dilapidated grid.

Pricing and political problems feed through into the market for energy resources. Coal, which fuels around 60 per cent of India's electricity-generating capacity and accounted for an estimated 43 per cent of gross domestic energy consumption in 2011, is India's most important natural resource; the country has the world's fifth-largest reserves. Yet the coal sector fails to live up to its financial potential. State-owned Coal India Limited mines four-fifths of coal output but is obliged by the government to sell to power plants at below-market prices to safeguard electricity supplies, discouraging investment.

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