More Power to India to Power More Public Disclosure Authorized Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT Energy and Mining More Power to India Public Disclosure Authorized The Challenge of Electricity Distribution Pargal and Banerjee Pargal Sheoli Pargal and Sudeshna Ghosh Banerjee Public Disclosure Authorized More Power to India DIRECTIONS IN DEVELOPMENT Energy and Mining More Power to India The Challenge of Electricity Distribution Sheoli Pargal and Sudeshna Ghosh Banerjee © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 17 16 15 14 This work is a product of the staff of The World Bank with external contributions. The findings, interpreta- tions, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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More Power to India • http://dx.doi.org/10.1596/978-1-4648-0233-1 Contents Foreword xiii Acknowledgments xv About the Authors xvii Abbreviations xix Overview 1 Evolution of Policies and Institutions 1 Impressive Achievements in Many Dimensions 2 The Agenda for Addressing Distribution Performance Must Now Be a Priority 3 Analyzing Operational and Financial Performance of Distribution 5 The Sector Operating Environment Has Contributed to Discom Financial Difficulties 6 Institutional Factors and Governance Shortcomings Are Other Contributors 8 Way Forward: Priority Areas for Action 11 Notes 14 References 17 Introduction 19 Note 20 References 20 Chapter 1 Evolution of Policies and Institutions 23 Policy Space Uneventful through 1991 25 Sector Restructuring and Independent Regulation in the 1990s 26 The Lead-Up to the Electricity Act of 2003 27 Notes 31 References 32 More Power to India • http://dx.doi.org/10.1596/978-1-4648-0233-1 v vi Contents Chapter 2 Impressive Achievements in Many Dimensions 33 A Tripling of Generation Capacity 33 Progress toward a Clean Energy Future 35 Creating a National Grid 37 Developing Competitive Power Markets 40 Competitive Power Procurement 42 Massive Expansion of Access 45 Promising Examples in Distribution 48 Notes 51 References 52 Chapter 3 Deterioration of Distribution Finances 55 State Subsidies to the Sector Impose a Heavy Opportunity Cost 55 Rising Power Sector Debt Has Escalated the Risk of Financial Contagion 61 The Central Government’s Response to the Risk of Contagion 65 Projected Sector Finances at the End of the 12th Five-Year Plan 66 Notes 69 References 69 Chapter 4 Drivers of Losses 71 Rising Gap between Cost and Revenue 71 Inefficiencies in Distribution and Generation 74 Decomposition of Utility Losses 76 Tariff Performance on Equity 82 Benchmarking Utilities on Financial and Operational Indicators 88 Notes 95 References 96 Chapter 5 Implementing Sector Reforms 97 Implementation of Reforms Index 97 Sector Outcomes Index 101 Relationship between Implementation of Reforms and Sector Outcomes 103 Note 104 Reference 104 Chapter 6 The Role of Governance and Institutional Factors 105 Vertical Restructuring: Unbundling State Electricity Boards 106 Corporate Governance 107 More Power to India • http://dx.doi.org/10.1596/978-1-4648-0233-1 Contents vii Regulatory Governance 115 Central Mandates 123 Notes 130 Bibliography 131 Chapter 7 Moving Toward Efficient and Effective Service Delivery 133 Align Stakeholder Incentives 134 Strengthen Regulatory Governance and Processes 134 Implement Key Regulatory Mandates 136 Improve Corporate Governance of State Utilities 137 Promote Responsible Lending to the Sector 138 Ensure Availability of High-Quality, Updated Data 138 Reinvigorate Planning and Coordination Mechanisms 139 Explore Different Models to Improve Distribution 140 Promote Electrification in a Financially Responsible Manner through Different Delivery Models 141 Notes 142 References 144 Appendix A Advantages of the Point of Connection Method in Assessing Transmission Charges 145 References 147 Appendix B Measures to Overcome Barriers in Integrating Renewable Energy into the Electricity Grid 149 References 151 Appendix C Considerations for Attracting Private Investment in Hydropower 153 Note 155 References 155 Appendix D Experience with Multiple Transmission Owners 157 References 161 Appendix E Maharashtra State Electricity Transmission Company’s Strategic Alliance Model 163 Reference 165 Appendix F International Experience in Private Sector Participation in Transmission and Distribution 167 Selected Country Experiences 168 Key Findings 170 Notes 172 References 172 More Power to India • http://dx.doi.org/10.1596/978-1-4648-0233-1 viii Contents Appendix G International Experience in Open Access 173 Country Experiences 173 Key Considerations in Designing OA 175 Implementation Issues 176 References 177 Appendix H Coal Sector Challenges and the Power Sector 179 International Experience with Coal for Power Generation 184 References 188 Appendix I Best Practices in Electricity Theft Reduction 191 Notes 194 Reference 194 Appendix J Regulatory Assets: The Delhi Case 195 Notes 197 References 197 Appendix K A Strategic Model to Improve Distribution Performance—Enersis in Chile 199 Note 201 Reference 201 Appendix L Separation of Carriage and Content in Distribution—Potential Benefits and International Experience 203 India 203 New Zealand 205 The United States 208 European Union 208 Concluding Observations 210 Notes 211 References 212 Appendix M Productive Use of Electricity—Experience from Indonesia and Peru 213 Reference 214 Appendix N Regression Results—Governance and Performance 215 Appendix O Overview of the India Power Sector Review Databases 219 Bibliography 227 Appendix P Background Papers 229 More Power to India • http://dx.doi.org/10.1596/978-1-4648-0233-1 Contents ix Boxes 1.1 Reform Areas of the Electricity Act of 2003 (and Subsequent Policies): Objectives and Mandates 28 2.1 The Bhiwandi and Agra Distribution Franchises: A Success Story 49 4.1 Improving Rural Supply: Rural Feeder Segregation in Indian States 83 4.2 Kerala—A Successful State Electricity Board 91 4.3 Design of a State Performance Index Using the Analytic Hierarchy Process 93 6.1 Good Practices in Corporate Governance for State Utilities 108 6.2 Corporate Governance in West Bengal 112 6.3 Organizational Transformation and a Turnaround in Performance in Gujarat 113 6.4 Involving Consumers as Stakeholders: Selected State Electricity Regulatory Commission Experiences 119 6.5 Impact of Metering on Operational and Financial Efficiency in Rural Haryana 129 Figures 1.1 Impact of Inadequate and Unreliable Electricity on Firms 24 1.2 Electricity Sector Policies and Schemes over Time 25 1.3 Timeline of Sector Unbundling and Establishment of