Patna, February 27, 2015: With more than two-thirds of its population lacking access to electricity, Bihar needs to add significantly toits generation capacity and ramp upinvestment in transmission and distributionif it isto provide affordable and reliable power to its people, says a World Bank study.

More Power to India: The Challenge of Distribution, presented in Patna today is a review of the Indian power sector across key areas of access, utility performance, and financial sustainability. The study, conducted at the request of the Government of India, has identified electricity distribution to the end consumer as the weak link in the sector for almost all Indian states.

The power sector in Bihar faces several operational inefficiencies. Accumulated losses of the sector were around Rs 85billion in 2012. Aggregate technical and commercial (AT&C) losses in distribution are among the highest in the country at around 50 percent in 2013 as against an all India average of 27 percent. Transmission losses were around 4percent in FY12-13 against the all-India average of around 2.4 percent.

Today, Bihar has the lowest per capita consumption of electricity in the country at 144 kWh against a national average of 917 kWh. Its peak deficit at 30 percentis highest among all states. Not much new capacity has been added since 2003 and there is great reliance on central sector allocations.

The report notes that several structural issues such as low demand in rural areas, revenues being lower than the cost of providing electricity and lack of incentives for utilities to supply power have been instrumental in electricity not reaching consumers, particularly in rural areas. The commercial viability of rural service delivery needs to be increased to attract investment to the sector. Detailed state-wise electrification plans which delineatethe areas which are expected to be connected to the grid and areas that will require off-grid access will assure investors in off-grid generation that their investment will not be rendered obsolete by the unexpected arrival of the grid. Increasingopportunities for productive use of electricity by small and medium enterprises in rural areas can also increase rural consumption, the study suggests.

Encouraging developments in the power sector of Bihar include the fact that the state has invested in institutional reforms and efficiency improvements. The Bihar State Electricity Board was unbundled into 5 companies in FY 2013; the Bihar Electricity Regulatory Commission was set up in 2005; Distribution Franchisee for Muzaffarpur, Gaya & Bhagalpur were awarded in 2013; the state joined hands with the central transmission utility, Power Grid, to invest in transmission infrastructure; and collection efficiency has improved over time. The distribution companies in Bihar are also planning to use the public-private partnership (PPP) route to provide electricity for domestic and productive uses, including through mini grids in un-electrified districts.

In order to improve the quality and adequacy of supply to its consumers, Bihar needs to set up robust energy audit and accounting mechanisms and buildorganizational capacity to execute and maintain new capital investments, the study suggests. The state could improve operational and financial efficiency in distribution through a multi-pronged approach- using IT for transparent energy audits across the value chain; adopting some of the innovations in reducing AT&C loss pioneered by private sector entities; ring fencing supply to the agricultural sector with a transparently determined and administered subsidy so that rural areas receive reliable power, while revenue maximizing models are implemented in urban areas; and improving institutional accountability, following examples from states like Gujarat and West Bengal.

"Lack of access to power for a large segment of the people and industry in Bihar, coupled with an inefficient, loss-making distribution segment are major constraints to Bihar's growth. Revitalizing the power sector, by improving the performance of distribution utilities, and ensuring that players in the sector are subjected to financial discipline is the need of the hour,"said Sheoli Pargal, Economic Advisor, World Bank and author of the report.

While making an urgent call for change, More Power to India recognizes the many impressive strides that the Indian power sector has made over the years. Generation capacity tripled between 1991 and 2012, boosted by the substantial role played by the private sector. A state-of-the-art integrated transmission grid now serves the entire country. Private distribution utilities in Kolkata, Mumbai, Surat and Ahmedabad, which have been owned and operated by the private sector since before Independence, point to potential gains from private participation. Grid-connected renewable capacity in the country has risen from 18MW in 1990 to 25,856 MW in March 2013. And more than 28 million Indians have annually gained access to electricity between 2000 and 2010.

However, according to the study, the financial health of the sector is fragile, limiting its ability to invest in delivering better servicesTotal accumulated losses in the sector stood at Rs 2.88 trillion or 3 percent of GDPin 2013.

These losses are overwhelmingly concentrated among distribution companies (discoms) and bundled utilities - State Electricity Boards (SEBs) and the State Power Departments, says the study. Sector losses have led to heavy borrowing - power sector debt reached Rs 5.07 trillion in 2013. More than 40 percent of the loans were made to discoms.

Over the last two decades the sector has needed periodic rescues from the central government -- a bailout of Rs 350 billion in 2001 and a ‘restructuring package' of Rs 1.9 trillionthat was announced in 2012.

Poor Performance of Distribution

Several factors have contributed to the losses in the distribution segment, according to More Power to India. The cost to discoms of purchasing power has risen faster than their revenues have, primarily due to fuel shortages and the need for expensive fuel imports by generators and also due to generation inefficiencies and low capacity utilization of power stations that have pushed up the price of power. Also, tariffs have not kept pace with costs over the years. This has in turn led to an increase in borrowings resulting in increases in interest costs. Finally, there are factors that are well within the control of utilities - such as under-collection of bills and delayed collection of payments, along with the fact that more than one-fifth of electricity purchased is collectively ‘lost' by the utilities, so does not generate revenues for them.

Projections show that even if tariffs rise 6 percent per year to keep up with the cost of supply, annual losses in 2017 will likely amount to Rs 1,253 billion (US$ 27 billion).

Mounting Subsidies: High Opportunity Cost, Weak Targeting

Utilities face pressure to provide below-cost power to agricultural and rural residential consumers for which they are reimbursed through subsidy payments by state governments. Since 2003, in fact, subsidies booked have grown by 17 percent per year, and subsidies received by 12 percent per year; the cumulative gap between them was Rs 450 billion for 2003-13. This has had a crippling effect on the already struggling financials of the utilities, the study says.

"State financial support, which has become essential to keep many utilities afloat, has a high opportunity cost. Our study estimates that 15,000 hospitals and 123,000 schools could have been developed in 2011 if the power sector had not pre-empted these funds. Our recommendation is that states should compensate their utilities transparently and upfront if they are required to provide free or below cost power to specific consumer categories," said Sudeshna Ghosh Banerjee, Senior Economist and co-author of the report.

As noted above, More Power to India recommends that the sector develop a commercial orientation -- once there are clear signals of political will to run the sector in a commercial manner, with transparent subsidies going to only those who are eligible for such support, then day-to-day operations should be turned over to professional managers whose pay is linked to the performance of the utility, the study suggests.

The study also highlights the need for better targeting of domestic subsidies. Lack of effective targeting of such subsidies has led to anomalies such as economically weaker sections of the population ending up paying more for consuming less power. In fact, in 2010 some 87 percent of the domestic electricity supplied India-wide was subsidized. Over half of subsidy payments (52 percent) India-wide went to the richest 40 percent of households in the country in 2010, the study adds.

Other facets of sector performance highlighted by the study include:

• Around 70 percent of the sector's accumulated losses in 2013 came from the states of Uttar Pradesh, Rajasthan, Tamil Nadu, and Haryana. Uttar Pradesh alone accounted for 27 percent of the sector's accumulated losses.
• While grid connectivity has increased, over 200 million people without power live in "electrified" villages.

Today, it takes seven procedures and 67 days to get a power connection for a commercial establishment in India. In China it takes 28 days, in Thailand 35, and in Singapore 36 days.

Key recommendations:

• Support an increase in energy access through geo-spatial electrification planning thatspecifiesgrid and off-grid areas; create an attractive investment climate for standalone home system operators; and invest in harnessing large anchor loads and increase electricity use by small enterprises.
• Increase capacity by investing in institutional capacity building.
• Set up robust energy accounting and audit processes using management information systems, implementation of consumer indexing, and metering feeders.
• Provide incentives to employees through Manpower Planning and Performance Management systems --give performance linked incentive schemes to employees and prepare skill development plans.

Link to the report: http://documents.worldbank.org/curated/en/2014/06/19703395/

Funding for the preparation of "More Power to India" was provided by the World Bank's Energy Sector Management Assistance Program, Asia Sustainable and Alternative Energy Program, Trust Fund for Poverty and Social Impact Analysis and Australian Aid.