Context: The root cause of the present electricity crisis in India is said to be the demand surge due to heat waves. However, it is not the case with other products where the private sector is involved.
For example, the surge in the ice-cream demand is higher compared to electricity in summers. However, no one would see a shortage of ice cream in the market. It is because ice cream is produced in the market economy, and profit-seeking producers ensure the availability of ice cream through projections and a sufficient supply of raw materials.
Why there is a shortage of electricity?
Lack of market-based mechanisms and State control.
An increase in the global price of gas (Market based) has not resulted in the shut down of captive gas-based thermal generating plants or an increase in the price of electricity(State determined).
There are specialized “imported coal thermal plants” that only generate electricity with imported coal and sell electricity. These plants have 25-year lock-in prices for electricity. When the price of coal goes up, they stand to make a loss by operating the plant, and prefer to shut down the plant.
State-regulated systems lack self-correcting mechanisms, where High prices offer profit opportunities and less demand and vice versa.
What are the solutions?
The Indian electricity sector is at a breaking point through the forces of global warming, heatwaves, the carbon transition, financially unviable discoms, etc.
Thus, the price system of electricity should be market based so that profit-motivated firms start figuring out how to extract, store, import, and transport coal.
High prices encourage reduced consumption owing to changed behavior by self-interested customers.
Source: This post is created based on the article “Root cause analysis for the power crisis” published in Business Standard on 16th May 2022.