M-RCBG Associate Working Paper No. 12
Lighting the Way:
Unlocking Performance Gains in Electricity Distribution and Retailing in India
The financial problems of electricity distributors in India have undermined the soundness of the entire power sector, resulting in chronic shortages. Unreliable power imposes costs on the entire economy that translate into lower economic growth. Recurring annual losses by the distribution sector can be traced to distorted tariffs and high levels of technical and commercial losses. However, rather than trying to correct these problems directly through mandated tariff hikes or infrastructure investments, the Ministry of Power should create an enabling environment for market incentives and competition to lead to efficient outcomes. First, the retailing function, which is not a natural monopoly, should be unbundled from the distribution function, which is a natural monopoly, and opened to competition. The problems in retailing are “complex.” Patronage-based relationships between end users and politicians have fostered environments in which electricity is demanded at subsidized rates or simply stolen with little fear of penalties. By depriving distributors of revenues, these norms ensure low-quality service. Liberalized retailers can create value by offering differentiated service plans allowing customers to match the reliability of their service with their willingness to pay and by lowering the transaction costs associated with maintaining paid connections. Both advances should increase revenues flowing into the power sector. Second, the distribution function should be further commercialized. The problems in distribution are “complicated.” Despite efforts by the national government to fund new investments in distribution infrastructure, effective execution of such projects has proven elusive and technical losses remain high. Based on international experience, expanding the scope of private sector participation should increase operational efficiency and reduce technical losses, provided that incentives are well designed. Reforms on the retailing side can be expected to ameliorate the political opposition often associated with privatizations of electricity distribution.