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Reforming the Indian Electricity Supply Industry

Urbanization and Infrastructure

This paper assesses the costs and benefits of further re-structuring of the Indian electricity supply industry. The poor financial condition of the State Electricity Boards (SEBs) has led to a significant decline in private sector participation in new generation investment projects. Agricultural tariffs set far below average cost and massive rates of technical and commercial transmission and distribution losses have necessitated subsidies to electricity consumption that are close to 1 percent the Gross Domestic Product (GDP) of India. Under these conditions, further electricity industry re-structuring seems unlikely to benefit the Indian economy and may even make matters worse. Improving the financial health of the SEBs should therefore be a top priority. Introducing wholesale electricity competition without financially solvent SEBs is unlikely to benefit and very likely harm the Indian economy. This paper argues that an effective and credible industrywide regulatory process is necessary for financial solvency of the SEBs. The paper outlines the key components of this regulatory process and describes how it might be implemented. It closes with recommendations for further re-structuring of the Indian electricity market once the SEBs are financially solvent. These recommendations emphasize that the re-structuring process should be tailored to initial conditions in India in order to capture the greatest possible benefits from wholesale competition with the least risk to the health of the Indian economy.

301wp.pdf (258.59 KB)
Frank Wolak
Publication Date
November, 2006