History of Indian Power Sector

Initially, most of the electrification was limited to large towns and cities. The emphasis was on supply to large urban concentrations. There was little or no coordination or cooperation between the different suppliers. primarily, the power sector was dominated by private plants.

Initial Power Plants in India

The first diesel power station was established in Delhi in 1905. This was a private plant set up by an Englishman in the name of M/s John Fleming. He was given a license under the provisions of the Indian Electricity Act 1903. This particular company, after getting a license set up a small 2 MW diesel set at Lahori Gate in Old Delhi. Later on, the same company was converted to the Delhi Electric Supply and Traction Company.

The first hydro electric station in India was erected at Sivasamudram in Mysore in 1902. This was followed by the hydro-electric station for the Bombay area.

Initial Legislation

The first legislation in the electricity sector insofar as India is concerned was brought about by way of the Indian Electricity Act of 1887. This Act provided for the protection of person and property from injury and risks, attendant to the supply and user of electricity for lighting and other purposes.

This Act was repealed and replaced by the Indian Electricity Act 1903. The Act of 1903 was the first attempt made to deal with the subject on broad and general lines applicable to the country as a whole. The need for such an Act was impressed upon by the commercial community.

The Act was already crippled due to some specific reasons since it did not recognize bulk sale of electricity and further, there was a problem of dual control where the local Government and the Government of India could both have a say in the matter. Things carried on in the same fashion and by 1907, it was realized that the difficulties being faced had to be resolved and the Government therefore, appointed a committee to look into the matter. This culminated in the drafting of the Indian Electricity Bill 1909 which finally led to the enactment of the Indian Electricity Act 1910.

In this legislation, the power of licensing was left to the local government, thus getting rid of the problem of dual control and further, the concept of issuing license for bulk supply was introduced. Bulk supply meant that a company could generate and sell to other distributors in large quantities who would, in turn, retail it under a different license to small consumers.

Electricity Supply Act (ESA), 1948

In 1948, the Government enacted the Electricity Supply Act (ESA) 1948 to pave the way for the formation of the SEBs. The Electricity Supply Act, 1948 was enacted by the Government since it was felt that the pace of electrification was much below the desired pace and that electricity was only available in major towns and cities.

The Electricity Supply Act, 1948 paved the way for setting up of State Electricity Boards (SEBs) and also envisaged constitution of the Central Electricity Authority (CEA). The following were the general duties of the State Electricity Boards:

• To arrange in coordination of the generating company or companies operating in the State for the supply of electricity that may be required within the State and for the transmission and distribution of the same.
• To supply electricity as soon as practicable to a licensee or other person requiring such supply.
• To collect data on the demand for and use of electricity and to formulate perspective balance in coordination with the generating company.

The Electricity Supply Act 1948 also laid down the principles for calculating the returns which the Electricity Boards were to earn. A three percent return on net capital at the beginning of each year was the overall guiding principle for tariffs charged by the SEBs. In the initial years, these provisions ensured that the SEBs were financially healthy. Thereafter however, the financial position of the SEBs deteriorated.

Though the Electric Supply Act 1948 mandated the setting up of the State Electricity Boards, it took a long time for all the states to set them up. One of the first SEBs to be constituted was that of Delhi which was set up in 1951. It was followed by the State of Bombay (1954), West Bengal (1955), Kerala (1957), Tamil Nadu (1957), Rajasthan (1957), Assam (1958), Bihar (1958), Punjab (1959), Gujarat (1960), and so on.

It is said that some of the states deliberately delayed the setting up of the SEBs since the State Government was unwilling to part with the power and privileges that go when administering a key infrastructure sector directly. The delay in the constitution of the SEBs has adversely affected the progress of the village electrification program.

From Private to Public Sector

During the period 1948 to 1956, the SEBs took over most private licensees upon expiry of their license agreements. While the growth of the Indian power sector primarily began in the private sector, the Industrial Policy Resolution of 1956 reserved generation and distribution of electricity exclusively for the public sector while allowing existing private utilities to continue. However, no new private licenses were granted.

The electricity sector is a concurrent subject under Article 246 of the Constitution where the Federal Government is responsible for policies and statutory and organizational field work and it is the States’ duty to provide for power generation and supply to consumers.

Other Institutional Developments

In 1964, the Regional Electricity Boards were established in different regions of the country for facilitating integrated operation and for encouraging exchange of power among the States. To encourage the States to build infrastructure for exchange of such power, inter-state lines were treated as centrally sponsored schemes and the States were provided interest free loans outside the State Plan. 

55 inter-state lines were constructed in the course of which 13 lines were connecting States located in different regions and this created the initial set of inter-regional links. The reason for development on the lines of regions was that the generation resources in the country were spread unevenly. The hydro resources were primarily located in the Himalayan foothills and the North Eastern region whereas coal was located in the Bihar-Jharkhand-West Bengal area with some reserves also in Andhra Pradesh and Madhya Pradesh. Lignite was available in Tamil Nadu and Rajasthan.

The Rural Electrification Corporation (REC) was set up in 1969 after the famines of the 1960s with a mission to facilitate availability of electricity for accelerated growth and for enrichment of quality of life of rural and semi-urban population.

In order to give a boost to power generation, the Government of India created the National Hydroelectric Power Corporation (NHPC) and the National Thermal Power Corporation (NTPC) in 1975. These Corporations established large regional generating stations, the benefits of which were shared by the States of the region. The World Bank played a crucial role in the growth of NTPC’s installed capacity as more than half of the US$7 billion loan that it awarded went to NTPC.

The Power Finance Corporation (PFC) was set up in 1986 to assist building of new capacities and in 1989, the Government of India set up the Power Grid Corporation of India Ltd. (PGCIL) by carving out transmission lines from the various central generating stations. Till that time, the generation and transmission systems in the country were planned and developed on the basis of regional self-sufficiency and the initial set of inter regional links was developed under the centrally sponsored programme.

Installed Generation Capacity

In India, the installed capacity was only about 1,362 MW in 1947. It is primarily thermal (about 65 percent) with maximum capacity from coal.

Performance of SEBs

Though the SEBs were expected to give a rate of return of 3% on their net assets in accordance with the provisions of the VI Schedule of the Electric Supply Act 1948, there was trouble right from the very beginning.

The SEBs virtually functioned as extension of the Government department in charge of power. The finances of the SEB had started causing concern by the mid-fifties itself. The Venkataraman Committee which reported in 1964 found that the return on their investments was poor. The Committee, however, did concede that a part of the poor returns was on account of the fact that the SEBs had the responsibility of electrifying the rural areas as well where both, expenditure and losses were high.

The onset of green revolution in India around the mid-sixties which had a direct bearing on the financial performance of the SEBs. The Green revolution required high doses of inputs of fertilizers and water. In some states, green revolution allowed for two to three crops in a year and profits in the agriculture sector jumped manifold. This translated into vote banks and this started the process of a close correlation between the power sector and politics. The political decision to provide free or subsidized electricity in many states completely destroyed the financial position of the SEBs.

Subsidies which were announced by the State Governments were not necessarily paid. Announcement of subsidies was done purely to garner votes during elections. Farmers were offered electricity at flat rates based on pump capacity rather than by extent of use measured through a meter. This according to many had several negative effects, for example, the World Bank estimated that the SEBs paid an annual subsidy of about $4.6 billion (1.5 percent of GDP) to agricultural and residential users.

Over time, the performance of the SEBs went from bad to worse. The return on assets has become negative for most of the SEBs. The poor financial performance stems from many factors. To begin with, there is a very high degree of commercial losses, meaning theft. Theft can be of various types. It can be of the form of direct tapping from distribution lines and it can also mean tampering with the meter. The net result is that the consumer does not pay for the electricity he consumes.

To make things worse, the tariff that is set is not determined on the basis of any economic rationale but on political expediency. No political party would like to increase tariffs for fear of loss of vote banks and as a result, power subsidies kept on rising to astronomical levels.

The regime of cross subsidy became more and more stringent whereby the commercial and the industrial sector along with railway traction made up for a part of the revenue lost through sale of electricity to the agricultural and domestic sectors. Over time, the revenue earned through cross subsidy could finance smaller and smaller portions of the total subsidy requirements.  This led to a steep rise in electricity price for the industrial sector which harmed them since they slowly became uncompetitive. It also encouraged the industrial sector to set up their own captive plants and free themselves from the stranglehold of the SEBs. 

The losses of the SEBs deteriorated further since quite often the Government did not pay their dues.

There were no investments made for improving the infrastructure, especially distribution, which was slowly getting outdated and out of sync with the growing demand. The depreciation fund which was set up in accordance with the VIth Schedule of the Electricity Supply Act 1948 proved to be inadequate as prices of plant have raised manifold.

There were very little investments made in generation sector since the internal resource position was very poor. This led to a poor capacity addition program. 

Though there was inadequate capacity, there were periods of underutilization of the existing capacity primarily because of poor technical efficiency.

The SEBs were treated as centres of patronage and jobs were doled out to people close to the power centre. The employment levels were thus way above norms. Not only were the SEBs overstaffed, it was an undisciplined force. The number of employees per million units of energy sold in India in 1990-91 was about 5 while it was 0.2 in Chile, Norway and the US.

Theft and pilferage of equipment and wires lying in the stores was rampant. Service to consumers was downright unacceptable with long waiting lists for new connections coupled with high corruption. Service to consumers in case of outages was pathetic, especially in rural areas.  

By the early 1990s, the position of the SEBs was so critical that it became absolutely unsustainable. It was clear that some form of financial discipline had to be enforced immediately but the SEBs had no financial might left in them to rectify the situation.