Long-term issues in the power sector : analysis of demand, investment, and efficiency effects of distortions in retail electricity tariffs

This sector is facing an ambitious capital investment program at a time when the shortage of public financing is clearly a major constraint to accelerating development. Electricity tariff policies, if carefully designed and properly implemented, have the potential for making significant contributions to the national welfare by simultaneously achieving multiple desirable objectives: (1) contributing to the fiscal and budgetary objectives of the Government of India (GOI) and the States, and thereby facilitating the massive amounts of capital mobilization required to meet the growing power needs of the country, (2) providing the correct price signals for stimulating energy conservation and demand management, and (3) increasing the efficiency of public and private resource allocation in the power sector. With the preceding as a brief background, the objective of this study is to assess, from an economic perspective, the effects of distortions in retail electricity tariffs upon consumer demand for electricity, the resultant implications for sector investment requirements, and their effects on overall sector efficiency. In this study, "investment" is interpreted in the broadest context of capital investment and fuel-related expenditures not only of public sector power supplying entities -- at the central and state levels -- but also of private investment and fuel-related expenses incurred by consumers to meet their requirements for electricity. The approach used in this study was to first undertake a quantitative analysis of the issues involved in the specific context of four State Electricity Boards (SEB"s). Based on these analyses, implications for all-India are developed. The four SEB"s selected for this purpose were Harayana State Electricity Board and U.P. State Electricity Board in the Northern Region, and Maharastra and Gujarat State Electricity Boards in the Western Region. Together, these four Boards account for about 30% of all of India"s electricity sales. These four SEB"s are also sufficiently diverse; they provide the opportunity to analyze the range of tariff distortions that are representative of the situation in most other SEB"s. (Author abstract)