Saturday, November 14, 2015

The Curious Case of Surplus Electricity in India

Not Enough Takers

The last year has seen a somewhat strange series of news items. A country that has for years known only power shortages and load shedding is witnessing reports about many thermal power plants idling because there is no demand for the electricity they can generate. For example, a report in Indian Express dated 24 June 2015 talked about “57 thermal power units across the country that are shut down due to lack of demand despite the onset of peak summer”.

Apparently, the reason is that the electricity distribution companies – or DISCOMs – do not want to sign long term power purchase agreements (PPAs) with power generation companies, as their (DISCOMs’) financial position is under huge stress. As DISCOMs are forced to supply power at a price less than cost to agriculturists and domestic consumers, they face losses. These are only partly covered by subsidies from the government and cross-subsidy from customers who are charged higher than cost.  Since DISCOMs are not buying power, there is less off-take, and capacity running into several thousand megawatts is being forced to idle. 

A July 2015 report[1] by CRISIL Ratings, a credit rating agency, says that at least 3000 MW capacity is idle because of no demand or absence of PPA, and indicates that if PPAs are not signed by 2016, 15% of private capacity or 10,000 MW would be exposed to a similar risk. More recent news reports indicate even higher capacities may be idle because of lack of demand, in spite of improved supply of domestic coal and falling prices of imported coal. Some time back, coal shortages were also among the factors responsible for power plants not being  able to generate power, but power plants continue to generate less in spite of these factoring being tempered. Another indication of the demand being less is the sharp fall in price of electricity in the short-term market on the power exchanges.

Need Exists, But Not Demand

This trend raises an important question. Let us leave aside consumers like industries - who are charged power at higher-than-cost prices and the issue of why the DISCOMs are not buying all this idle power to supply to them. May be their demand is fully satisfied, or may be, as is being discussed, the industrial demand itself is not growing as expected. However, there certainly exists huge latent demand in the agriculture and domestic categories, given the fact that several hundred million people do not yet have any access to electricity, and millions more have poor quality, irregular supply. DISCOMs are reluctant to buy power at higher cost and supply it to these consumers at lower cost. On the other hand, these consumers appear to be unable or unwilling to pay higher costs for electricity, for otherwise the DISCOMs would have been happy to supply to them. Thus, there is ‘surplus’ electricity, but it’s too costly for those who need it. So, there is a huge need for electricity, but not a proportionate or equivalent market. Or, in other words, there is a need, but not demand – where ‘demand’ is ‘need’, backed by willingness and ability to purchase, expressed on the market.

Some Food For Thought

This reminds one of a very similar situation, in a sector equally, or possibly more critical: food. It may be recollected that about a decade back, newspapers were full of stories about how godowns were overflowing with foodgrains. There were stories of grains needing to be stacked in open grounds as there was little space anywhere. There was huge production of foodgrains – India is ‘self-sufficient’ since some time – but somehow, people were not able to buy these foodgrains as they could not afford the cost. It wasn’t anybody’s case that at that time, foodgrains were rotting in the godowns because people’s cupboards and stomachs were full. Far from it, millions were going hungry then (and even now).

Our analysis of the situation at that time[2] showed that the root causes of this situation included some fundamental systemic elements. Primary among them was the fact that the approach adopted to increase food grain production was inherently a high cost one. This was of course, the green revolution model, with high external inputs, which increasingly needed to be purchased. At the same time, the model was based on centralising, or at least concentrating, high production on a limited land area – with the result that fewer farmers and farm workers shared the profits, or benefitted from employment. This meant less purchasing power in the hands of large number of people. Costly production and less purchasing power was the deadly combination that led to overflowing godowns and a hungry population. Such a situation has persisted since then in various forms even if not manifesting so dramatically.

For example, in a paper published in 2010, the then Chief Economic Advisor to Government of India, Kaushik Basu commented on the  situation of high food prices combined with the huge food stocks with the Government. He said[3]:

“…in December, 2009, with food-price inflation above 20%, it was decided to release wheat. Ever careful not to cut deeper into the government’s coffers, it was decided to set the price of wheat above the Minimum Support Price (MSP) at which the Food Corporation of India (FCI) had acquired the wheat, with some add ons for storage and transportation. There are no surprises in the fact that there was no demand for the wheat thus put on sale; the sales in Delhi were actually zero. Evidently, the strategy used for releasing foodgrains has scope for improvement.”

In other words, the need for food was there, but there were no buyers for it as the price was too high.

Common Threads

Can we draw parallels between what happened in the food sector with what is happening in the power sector today? A common question is – are these a transient phenomenon, an unusual occurrence as the economy moves from a low production, scarcity dominated state to a high production, high consumption state? Are these a result of a temporary imbalance between demand and supply? Or do these represent a more fundamental attribute? Is it that in attempting  to meet the scarcity (of food or electricity), we are pushing up production, but the very process adopted for increasing production is putting the commodity out of hands of people as it is inherently high cost? And is the process of production itself concentrating and cutting down employment opportunities, resulting in lesser purchasing power in the hands of the masses?

One very interesting example that vividly extends the analogy of overflowing godowns and rotting foodgrains to the power sector is from Gujarat. The Gujarat State Electricity Corporation (GSEC) had recently filed a petition with the Gujarat State Electricity Regulatory Commission, requesting that the Commission order the central procurement agency, Gujarat Urja Vikas Nigam to mandatorily buy power from its (GSEC’s) coal based generating stations. The Nigam was not buying  this power because it was more expensive than other, more modern, coal based plants. While the merits of the case are not relevant for us here, what is interesting is that the Gujarat State Electricity Corporation states that it is forced to partially shut down its plant as the power is not being purchased, and laments that[4]:

Due to the backing down/Reserved Shut Down of the generating stations, huge stocks of coal have accumulated without much use…

“The coal management is becoming extremely difficult and critical for the petitioner, as the coal looses (sic) its heating value with time due to oxidation and spontaneous coal burning which cannot be quantified or measurable”.

In other words, an accumulating pile of coal that is rotting!

In Conclusion

I am not an expert in food production and food security issues, nor in power generation and distribution. But as India continues to face challenges in providing food and energy to millions of people, a layperson’s instinct makes me feel that it may well be worth exploring these rather strange similarities in two very different sectors.

(I would like to thank Ashwini Chitnis and Ann Josey for some very interesting discussions on this topic, during the course of which they provided many insights and lot of useful information, particularly on the power sector related sections.)

A follow up blog post, titled “Coal Assets at Risk of BeingStranded?”, takes off from some points in this post.

[1] Crisil Insight: Current Worries; July 2015, by Crisil Ratings.
[2] This was a part of our (Manthan Adhyayan Kendra) study of agriculture in Punjab  and Haryana, which in turn was a component of our study of the impacts of the Bhakra Nangal dam and irrigation project. The study was published in 2005 under the title Unravelling Bhakra.
[3] Kaushik Basu (2010): The Economics of Foodgrain Management in India, Ministry of Finance, Government of India, new Delhi. Downloaded from
[4] Order of the Gujarat State Electricity Regulatory Commission, dated 4.1.2014, in Petition 1343 of 2013.


  1. People have been arguing for measures to make it easy for Discoms to supply power to the consumers who need it, but are not able to afford market determined prices. Till such measures are put in place, the aggressive capacity addition targets will remain highly questionable. In this context, it is important to highlight that 12th plan is first ever five year plan in which capacity addition target is likely to be fully met or even exceeded. In 11th plan we achieved 88% of the target capacity addition and we have already added 50% of the target capacity addition for 12th plan in the first two years itself. The results are evident. As you correctly point out, since demand for the high paying consumers is already met and is not growing at the rates assumed for justifying such aggressive targets, unless express measures are implemented for helping Discoms to supply power to the agriculture and poor, the issue of "surplus" generation and stranded assets is likely to coexist with load shedding and lack of access to electricity.

  2. I agree with your analysis. Discoms not buying electricity at the prices at which they are available from generators is simply a reflection of the fact that the bulk of discom consumers cannot afford higher prices (State governments are aware of this and that is why they resist tariff hikes to the extent demanded by economists speaking for the richer/ industrial/commercial consumers). I also think that discoms are underinvesting in the distribution network (there is no private interest in these networks) and that limits their ability to increase the electricity they distribute particularly to rural areas.