India's "Power Holidays"

+ Brandon Fuller

Vikas Bajaj has an interesting piece on the inefficient system of rules that govern power generation in India:

A complex system of subsidies and price controls has limited investment, particularly in resources like coal and natural gas. It has also created anomalies, like retail electricity prices that are lower than the cost of producing power, which lead to big losses at state-owned utilities.

Bajaj argues that the dysfunctional policies have taken a toll on growth:

The power sector’s problems have substantially contributed to a second year of slowing economic growth in India, to an estimated 7 percent this year, from nearly 10 percent in 2010. Businesses report that more frequent blackouts have forced them to lower production and spend significantly more on diesel fuel to run backup generators.

One of the manufacturers interviewed in the story said that his company:

loses three hours of power every evening. And all day on Wednesdays and Saturdays — euphemistically called “power holidays” — it receives only enough electricity to turn on the lights but not enough to use its large metal-cutting machines.

Price controls limit the production of coal as well as cleaner-burning natural gas. Bajaj notes that the price controls leave private firms facing weak incentives to exploit India’s ample natural gas reserves. Meanwhile, firms and households make due with what’s available. Manufacturers rely on diesel-powered backup generators, an expensive and relatively dirty way to make up for the shortfalls. Households who lack access to electricity continue to rely on traditional fuels for cooking and heating—a practice with substantial health consequences.

Hat tip: Marginal Revolution

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Thank you!