Power should not be subsidized

I would like to Thank the readers of the blog and specially people from my workplace. Your encouragement means a lot to me.

An artista always needs patrons of his art, a writer needs its readers, a performer its admirers, and an extortionate economic policy its subsidies.

A half page ad in Deccan Chronicle about the recent govt scheme jointly floated by ESSL (Energy Efficiency Services Ltd.) and local Discoms caught my eye in a train journey returning from home.

Since you do not have much to do in a train journey, I floated the idea for discussion to my co-travelers including a govt. employee, techie, businessman, and two MBA lads and a cynic (me).

The Issue: In order to fuel government's plan to boost energy efficiency, ESSL (Energy Efficiency Services Ltd.) and local Discoms are going to offer LED bulbs which cost Rs. 400 as an exchange for 2 incandescent bulbs costing Rs. 10 each to every household under the DELP scheme.

More than the policy what shocked me is the ill-informed and whimsical nature of opinions which we have as citizens to the state of affairs around us. Interestingly, these opinions differ so vastly when you change the strata of their economic and social exposure. That makes for another story some other time.

I am totally supportive of the intent of the policy but am in ardent opposition with the implementation vision of the policy. Let me explain why.

The govt decides to subsidize Rs. 400 per bulb in order to increase the efficiency of energy used per capita by promoting the usage of the LED bulbs, which is by far not a commodity which can be clubbed as a public utility good. So the government is spending the taxpayer’s money to allot a commodity which can be termed as a good of private choice.

This policy is similar to an instance where the government plans to spend money to subsidize the sale of 5 star rated air conditioners and offer it at 90% discount for the public.

I do not doubt the intent and but the benefit transfer to the people who would be the benefactors of this scheme. The policy flaw is in the implementation that should fail as the benefit of the subsidy would be transferred to the wrong class of people.

The question we should be asking is who would be the direct benefactors of the scheme and by subsidizing a public good, is the government not meddling with the market forces which are at play?

Through some statistics of the Discoms, it was estimated that 4 lakhs LED bulbs working at a 100% uptime could transfer a benefit of 191 million units in a year, i.e., roughly translated to a cost benefit of 275 million (as per current Andhra Pradesh rate of 1.45/ unit).

From economic and moralistic standpoint energy efficiency is one golden deer which we must pursue but importantly we should not lose the sight of implications and aftermaths the chase could lead to.

Better energy efficiency is a need of the hour for power undermined country like ours.

We must not forget that whole pandemonium of the show depends upon the uptime usage of the LED and the quantum of discount rate viz-a-viz the market price. The uptime of bulbs in India are hardly more than 6-8 hours which makes the time period for an 100% uptime extend by 3x.

India should be focusing on understanding the interplay of power pricing and the way it impacts its consumers. As long as the consumer feels that power is cheap and doesn’t take real chunk of consumer’s earning. It will be frittered away. This anomaly can be balanced by inducing carbon pricing in energy subsectors of consumption and energy usage, both in commercial as well as residential. Globally, we are slowly approaching the age of annulling all the externalities involved in the energy sector. Its time India should take this up seriously. The moment these factors start kicking in the prices of energy consumption will go up, leading up to the purchases of energy efficient equipment.

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Interestingly, we are only looking for a solution at the user end of the problem. Indian government should start addressing issues at the power generation, transportation and transfer level. We need to invest in upgrading our infrastructure by notches to match the international standards. India’s transmission facilities infrastructures are eons behind in terms of zero loss energy transmission capabilities and the new state of the art smart grid concepts. The 11^th 5 year plan intended to 62,000 MW capacity generation plan, but ended up 34,500 MW now put this in perspective of Duke Energy of US, which alone generates 58,000 MW or an EDF of France, ranked 4^th in utility companies of the world, whose 95.9 percent of the electricity output is CO2-free.

The economy and more importantly, the people should come forward and agree to take the issue head on. They should not be incentivized to use or replace bulbs and feel good about saving power. They should understand that the things in the world which are taken for granted are not meant to be.

The government should realize that the greatest cash cow of reforms is not always with the consumers but also at the generation and transmission level. And O’ boy, I haven’t started to talk about the dismal and appalling natural liquefied gas infrastructure. In the interest of reader’s attention, let’s make it another story. :)

The government should look at a level of parity to understand that the rates of return on its investment on the household sector of incentivizing the bulbs is so stark than the ROI it can experience in overhauling its dilapidated infrastructure. We have aging countries such as Japan who are ready to give out loans at throwaway rates, which can overhaul our infrastructure in 5-7 years. Given the interest which the world is showing in India, we should scoop the advantage of resorting to an FDI policy with a price control mechanisms in the power sector and cap the amount of revenues or investment a company could take out of the country for a period of 20 or 25 years.

A humble request to the government, Please do not give easy (cheap) power to people who do not understand the inherent value of it.

However, I would not like to end the piece without adding some positive facts about LED bulbs, to induce the corporates and the residential users to shift to LED.... So watch out for my next piece.