Managing electricity crises in Karnataka

Abstract

This report consists of two parts. In the first part, we evaluate the Power situation in the state in the forthcoming years till 2012, and identify a severe crisis facing Karnataka. We recommend commissioning of power plants at a faster rate to avoid such crises in the future. In the second part, we try to address the problem in the intervening years by controlling demand, through a least distorting tariff. For this, we follow the standard literature in independently evaluating marginal costs reflecting tariffs based on marginal analysis for economic resource optimization, and then adjust the least sensitive parts of the tariffs to address the concerns for equity, fairness and revenue generation. Through comparison with existing tariffs, we identify that the resource optimization tariffs would far exceed present prices, indicating heavy subsidization of electricity across the board at current price levels. We suggest a two-step mechanism of rationing electricity at current prices, and then allowing secondary trade between consumers at the higher marginal cost reflecting tariffs. Rationing would be in quotas at current price levels, in quantities based on recent consumption levels to existing consumers. The secondary trade would be allowed at market determined prices for individual savings. We show that this mechanism can be very easily implemented using the existing single kilowatt-hour meters, just by modifying billing. We also show that this method of pricing is not susceptible to inconsistencies, and achieves the task of aligning consumers incentives to societal costs, while maintaining both equity and revenue requirements.