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Implications of India’s Power Outage

By Ian Bhullar

Aug. 3 – India’s recent power outage, which affected 20 of India’s 24 states this week, has raised questions both within and beyond India’s borders about capacity to deal with growing energy demands.

As power returns to the 700 million affected, India’s population asks how such a huge blackout could happen. In other parts of the world, including China, commentators ask what lessons can be learned from a blackout affecting one tenth of humanity.

Reports of the blackout, which ran from Tuesday into Wednesday morning, have stressed just how dramatic its costs were. Alongside miners trapped underground, surgery procedures cancelled, and hundreds of trains stuck on the tracks, the economic costs are likely to be very large.

On Tuesday the central bank cut its economic growth outlook for the fiscal year ending in March from 7.3 percent to 6.5 percent.

“This is going to have a substantial adverse impact on the overall economic activity. Power failure for two consecutive days hits sentiment very badly,” said N. Bhanumurthy, senior economist at the National Institute of Public Finance and Policy.

The reasons are difficult to determine. Sushilkumar Shinde, the Power Minister at India’s central government, has blamed states for drawing more than their fair share of power from an overburdened grid. Uttar Pradesh’s top civil servant has pointed to outdated transmissions lines.

But the reasons may be much more systemic, including over-dependence on oil, gas and coal imports, corruption that has led to the degradation of the power network, and widespread theft of power from the national grid.

This year’s poor monsoon has meant that water otherwise used for power generation has also been siphoned off.

Outside India, concerns are being raised about what the nation’s power failings mean for growing energy consumption in a richer world.

Matthew Hulbert, writing for Forbes, notes that rising energy prices as a result of increased demand are likely to make blackouts all the more common across the world. This will hit emerging economies badly during important periods of development: whereas developing countries face prices over US$100 per barrel, OECD predecessors at the same level of development paid around US$22 per barrel (set at 2010 US$).

These problems are compounded by fuel subsidies in many emerging economies. Fearing the effects of rising prices on social stability, governments are reluctant to repeal subsidies. But these subsidies stunt the growth of efficient energy systems, inhibiting market dynamics that would stimulate investment in the broader energy sector.

Even China’s Global Times, one of the country’s more “jingoistic” papers , argued in a Thursday editorial that it has lessons to learn from India’s failings.

“China needs to generate more power to support higher living standards,” it said. “It probably needs to double the current power generation to sustain the country’s modernization drive. But the difficulty involved in further expanding electricity production has been clearly felt.”

“Thermal power is limited by the accessibility of more coal and oil. Building more hydro-power stations is facing stronger resistance from public opinion.”

Positive stories have also arisen, however. First Post has suggested that many Chinese energy firms already present in India are eying the clear demand for more and better organized energy.

Chinese energy equipment producer Shanghai Electric Corp signed an US$8.3 billion contract with Reliance Power in 2007 for the supply of 36 coal-fired thermal power generators. This year it has drawn up plans to set up a manufacturing plant in India.

India accepts foreign direct investment in a wide array of areas within the energy sector. This may be important for prevention of energy crisis.

“I think over the next decade the investments of the government and particularly the investments of the private sector will be a big part of the solution here,” says Professor Arun Sundararajan at NYU’s Stern School of Business.

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