NOTE NUMBER 244 P U B L I C P O L I C Y F O R T H E privatesector APRIL 2002 Power Subsidies Lucio Monari Lucio Monari is with the A Reality Check on Subsidizing Power for Irrigation in India South Asia Energy and Infrastructure Group of A f t e r a l m o s t a d e c a d e o f h i g h - l eve l e f f o r t s t o b r i n g e l e c t r i c i t y t a r i f f s the World Bank. He has c l o s e r t o t h e c o s t o f s u p p l y, I n d i a h a s b a re l y m a d e a d e n t i n t h e worked on energy projects in Asia for the World l o n g - s t a n d i n g a n d i n c re a s i n g l y u n e c o n o m i c a l p r a c t i c e o f s u b s i d i z i n g T H E W O R L D B A N K G R O U P PRIVATE SECTOR AND INFRASTRUCTURE NETWORK Bank and in the private p owe r f o r i r r i g at i o n . P rog re s s h a s b e e n s l owe d by c o n c e r n t h at h i g h e r sector for the past 15 years. t a r i f f s wo u l d h a r m f a r m e r s a n d t h u s u n d e r m i n e t h e a c h i eve m e n t s o f t h e g re e n revo l u t i o n p a c k a g e — c h e a p p owe r a n d wat e r, n ew s e e d s a n d f e r t i l i ze r — a i m e d at e n a bl i n g t h e c o u n t r y t o f e e d i t s e l f . B u t a n ew s t u d y s h ow s t h at a p a c k a g e o f r a p i d e l e c t r i c i t y s e c t o r re f o r m s , i n c l u d i n g a m ove t owa rd c o s t - c ove r i n g t a r i f f s a n d i nve s t m e n t s t o i m p rove t h e q u a l i t y o f p owe r s u p p l y, wo u l d i n c re a s e f a r m e r s ’ i n c o m e s by 4 0 – 1 0 0 p e rc e n t ove r a s i x - ye a r p e r i o d . Electricity tariffs for farmers in India amount to dissatisfaction has grown, and so has their unwill- less than 10 percent of the cost of supply. That ingness to pay even highly subsidized charges. As means a power subsidy for the agricultural sector users delay paying electricity bills and resist tariff of an estimated US$6 billion a year—equivalent increases, cost recovery diminishes for the utili- to about 25 percent of India’s fiscal deficit, twice ties, perpetuating the problem. the annual public spending on health or rural A study covering two states—Andhra development, and two and a half times the yearly Pradesh and Haryana—assessed the impact of expenditure on irrigation. At the same time, the cutting subsidies as part of broad reforms of gov- quality of supply to farmers has worsened over ernance and regulation aimed at reducing the years. Operational inefficiencies and high losses, controlling theft, strengthening meter- distribution losses due to pilferage have con- ing and collection, and moving to independent tributed to the financial insolvency of power util- tariff setting, competition, and privatization ities across India. With little or no investment (box 1).1 As a first step the study assessed the funding available to rehabilitate the electricity current approach to delivering services—in par- system, power outages and voltage fluctuations ticular, the costs arising from poor-quality ser- have become increasingly frequent. Consumers’ vice and poor subsidy design. P O W E R S U B S I D I E S A REALITY CHECK ON SUBSIDIZING POWER FOR IRRIGATION IN INDIA Box Data collection and surveys Repairing a burned-out motor costs about half the yearly electricity tariff that farmers pay 1 Several studies were undertaken in collaboration with state utilities in Andhra Pradesh and Haryana to esti- mate the electricity consumption of irrigation pumps, for each pump. The costs of repairing motor burnout are regressive, amounting to 10 per- cent of gross income for marginal farmers but to assess the quality of power supply, and to collect less than 2 percent for large farmers. Moreover, data on farmers’ production costs and incomes. The marginal farmers face other disadvantages. studies involved monitoring consumption and quality Some farmers cope with the poor quality of using meters, surveying farm households, and conducting power supply by purchasing backup diesel 2 an econometric analysis of the primary data to gauge the impact of current power supplies on farmers’ irriga- pumps, or overinvesting in larger pumps in the tion technology choices, farm incomes, and electricity hope of pumping more water when electricity is demand. available. But small and marginal farmers can least afford these coping strategies—and about 40 percent of farmers who own electric pumps in Haryana, and 48 percent in Andhra Pradesh, The costs of unreliable quality and supply are small and marginal. Although farmers pay a small fraction of the cost Beyond the costs of the repairs and the lower of power, they endure the frustration and eco- crop yields caused by lack of water while motors nomic costs of supply that is both unreliable (not are being repaired, the poor quality of power available at predictable times) and of poor qual- supply has several other important effects on ity (with fluctuating voltage). Both problems farmers. Using Haryana survey data, the study mean that water often cannot be pumped during developed a regression analysis to isolate the critical periods in the plant growth cycle, leading effect of different power supply indicators on to lower crop yields and incomes for farmers. the net incomes of electric pump users. It found Electricity is available to agriculture mostly that three factors have a large and statistically during off-peak hours—sometimes for as little as significant impact on farmers’ income: the days three and a half hours a day as a result of supply lost due to transformer burnout, power unavail- regulation and poor management of the net- ability, and unscheduled power cuts. work by the utilities. At other times unscheduled power cuts occur when transformers fail because The costs of theft of overloading, unbalanced loading, or poor The electricity subsidies take the form of a flat maintenance and protection of equipment. In rate paid by farmers per unit of horsepower per Haryana 26 percent of transformers failed dur- pump; farmers’ actual power use is not metered ing 2000, most often during July and August, or recorded. These flat-rate subsidies help to when irrigation requirements and thus electric- camouflage theft. ity demand are highest. It took more than 10 To estimate farmers’ actual power use in days on average to repair a transformer and Haryana, meters were installed on a sample of restore power supply to consumers in Haryana. 584 pumpsets and their readings recorded every In Andhra Pradesh the incidence of transformer other week for a year. The results show that burnout is even higher, at about 29 percent, farmers consume 27 percent less than the utili- though repairs take only about four days. ties estimate—and that transmission and distri- In some parts of Haryana farmers receive bution losses are therefore correspondingly power supply at normal voltages plus or minus higher than the utilities claim (47 percent, com- 6 percent (as required by Indian electricity sup- pared with the official 33 percent). ply rules) only 20–40 percent of the time. The These incremental losses cost the utilities voltage fluctuations significantly reduce the about US$160 million a year, undermining operating efficiency of electric pumps and lead their ability to provide reliable service to farm- to pump burnouts. Frequent imbalances in the ers. A large part of the losses is due to pilferage three-phase supply also strain pump motors and by residential, commercial, and low-voltage accelerate burnouts. industrial customers. Table Percentage change in power supply indicators from base year to year six 1 Indicator Tariffs Share of costs recovered at Business as usual 210 Gradual reform 470 Accelerated reform 470 end of year six (percent) 30 60 60 Availability of power supply No change 9 hours a day 9 hours a day Duration of power cuts 100 –40 –70 Days lost to transformer burnout 100 –40 –70 Frequency of motor burnout 100 –40 –40 3 zx Source: World Bank 2001. The costs of poor targeting The accelerated reform scenario envisions Large farmers are more vocal in arguing for more aggressive institutional, regulatory, and retaining the subsidized flat rate because it rep- technical reforms than the gradual reform sce- resents a manageable share of their gross nario. These accelerated reforms would reduce income. Moreover, paying a flat tariff for every theft, improve billing collection, shorten the pump enables them to irrigate a large area at a wait for service, and improve the utilities’ capac- low per unit cost. But for small farmers who can ity to manage loads. And they would lead to afford electricity for irrigation, the cost per greater reductions in the duration of power cuts hectare is significantly higher. These small (70 percent, compared with 40 percent for farmers need pumps of a minimum size, and gradual reforms) and in days lost because of they must pay the same tariff per pump as large transformer burnout (70 percent, compared farmers to irrigate a much smaller area. As a with 40 percent; table 1). result, while electricity tariffs represent 6 per- The study carried out the simulations for a cent of the gross farm income of large farmers, six-year period to allow for the introduction of they amount to 13 percent of income for mar- tariff reforms and for investments to rehabili- ginal farmers. tate the transmission and distribution network. But electricity subsidies do not even reach The results show that tariff increases for agri- most small and marginal farmers. Many lack culture, matched by improvements in quality, access to electricity and rely mostly on rainfall to would benefit farmers, particularly small and irrigate their fields. In Haryana, for example, marginal farmers (figure 1). Under the business farmers owning electric pumps have net as usual scenario the incomes of small farmers incomes a third higher than the average for the would drop by 100 percent and those of large state’s farmers and four times those of farmers farmers by 50 percent. With accelerated reform, relying exclusively on rainfed cultivation. the incomes of small farmers would rise by 100 percent and those of large farmers by 40 Reality check on reform percent. To gain a better understanding of the potential impact on farmers of different reform packages, Implications the study simulated several policy reform Small and marginal farmers in Haryana have scenarios: shown a high willingness to pay for improved ▪ Business as usual—with tariff increases but reliability of power supply because the poor deteriorating quality. quality of supply has affected them so severely. ▪ Gradual reform—with steeper tariff increases By contrast, medium-size and large farmers and some improvement in quality. (about 60 percent of those owning electric ▪ Accelerated reform—with the same tariff pumps) are less willing to pay in the short run increases but more aggressive improvements because of their expensive backup arrange- in quality. ments, which reduce their vulnerability to P O W E R S U B S I D I E S A REALITY CHECK ON SUBSIDIZING POWER FOR IRRIGATION IN INDIA Power sector reform and agriculture— chase the more efficient pumpsets as the quality Figure who gains? of power supply improves. 1 Many farmers understand that improved Small farmers electricity service depends on higher tariffs and Large farmers metering. Fewer understand the need to invest Percentage change in net income in more efficient pumpsets. To ensure contin- viewpoint from base year to year six ued and increasing support as power sector –120 –80 –40 0 40 80 120 reforms are put into action, policymakers must Accelerated is an open forum to reform clearly define, communicate, and build consen- encourage dissemination of sus for a strategy that balances higher costs of public policy innovations for Gradual power with improved service performance over private sector–led and reform a time frame that small and marginal farmers market-based solutions for find acceptable. The key will be to offer incen- development. The views Business as usual tives and support that make the transition as published are those of the painless as possible. authors and should not be Source: World Bank 2001. attributed to the World Bank or any other affiliated organizations. Nor do any of supply fluctuations. So it is the smaller and Note the conclusions represent poorer farmers who end up bearing the cost of 1. The Note draws on a World Bank study carried out official policy of the World wasted resources and unreliable supply. To in collaboration with the states of Andhra Pradesh and Bank or of its Executive improve equity as well as efficiency in the use of Haryana (World Bank 2001). The World Bank team for Directors or the countries water resources, it is therefore imperative to the study included Lucio Monari, senior economist in the they represent. shift to electricity metering and per unit tariffs. South Asia Energy and Infrastructure Group and task Both the gradual and the accelerated reform leader, Djamal Mostefai, Dina Umali-Deininger, Sunil To order additional copies would involve a transition period during which Khosla, Bhavna Bhatia, and Chandra Govindarajalu. The contact Suzanne Smith, tariffs would rise but the quality of supply would contribution of several consultants and government offi- managing editor, Room I9-017, remain uneven. Small and marginal farmers, cials is also acknowledged. The study is available at http:// The World Bank, who would be most affected by the variations in lnweb18.worldbank.org/sar/sa.nsf/India. 1818 H Street, NW, quality, could reduce their costs during this Washington, DC 20433. period by investing in smaller pumpsets with Reference more efficient motors. Farmers’ willingness to World Bank. 2001. “India: Power Supply to Telephone: invest in new pumpsets would depend, of Agriculture.” South Asia Region, Washington, D.C. 001 202 458 7281 course, on efforts to improve the quality of sup- Fax: ply as quickly as possible, to minimize the risk of 001 202 522 3181 pump burnouts. Email: Given this risk, an incentive package may be ssmith7@worldbank.org needed to encourage farmers to invest in new pumpsets—as well as some kind of insurance against the cost of burnouts—until the quality of Printed on recycled paper supply is more consistent. Over the six-year reform period, during which the quality of power supply is expected to improve, the cost to farm- ers of a new pumpset—as well as of the (more realistic) per unit tariff—would be completely offset by higher productivity and farm income. In the shorter term states that encourage energy conservation as part of their reform package could offer incentives to rural cooperatives or vil- lage electricity committees to help farmers pur- This Note is available online: www.worldbank.org/viewpoint/