FDI: Little Less Than Panacea For Power Sector

FDI stands for foreign direct investment, based on international or foreign investments. It plays an important role in demonstrating the relevance of having residence in the economy of any country. It maintains ‘lasting interest’ by controlling the enterprise. According to the IMF, FDI consists of twelve different parts. These are reinvestment income through foreign companies, equity capital, power exchanges, internal transactions, borrowing for commercial purposes, less cash under equities, investments income through the invested money of foreign investors belonging to vantage capital, the internal income of FDI, control premium, fee for no competition and so forth.

FDI: Little Less Than Panacea For Power Sector

Growth in the energy sector is necessary for overall economic development. However, India’s power sector is in desperate need of change. Even though 100% FDI through the automatic route is allowed in the power sector (except atomic energy), its expansion is not keeping pace with its energy needs. The government has taken a new step to develop the electricity industry.

According to the regulations passed by SEBI in 2010, the government has allowed foreign participation in power trading exchanges of up to 49 per cent. This includes foreign direct investment (FDI) of up to 26 per cent and foreign institutional investment (FII) of up to 23 per cent, with FII investments allowed through the automatic route, and FDI permitted only with government permission.

Through the adequate supply of electricity, the government wants to facilitate growth in energy. All this happened just because of running power exchanges. Power firms are authorised to receive up to 100% FDI, but India is yet to declare a policy on FDI in power exchanges, leaving investors in the dark.

Power Exchanges 

Power exchanges are online marketplaces that assist generators and consumers in determining pricing based on demand and supply. The two power exchanges operating in India are the Financial Technologies-backed India Energy Exchange, which has a 93 per cent market share, and Power Exchange India Ltd, which the NSE and NCDEX jointly sponsor. Both trade around 2% of the country’s total output of 800 billion units. National Power Exchange – a joint venture of National Thermal Power Corporation (NTPC), National Hydroelectricity Power Corporation (NHPC), Power Finance Corporation (PFC), and Tata Consultancy Services (TCS) – and Marquis Energy Exchange, situated in Ahmedabad, have both proposed new power exchanges.

State-owned energy distribution firms mostly supply retail customers; however, big customers with needs exceeding 1 megawatt can purchase electricity via power exchanges. The market controls exchange prices. More buyers and sellers elect to trade energy through exchanges as private sector participation in the power industry grows and the market shifts from a regulated to a market-driven regime.

Foreign investors are drawn to India’s electricity sector because of the large imbalance between demand and supply. In fact, foreign investors will be able to enter the market more easily with FDI permission, and power exchanges will be able to generate capital and introduce innovative technologies.

More about FDI

Furthermore, the world’s cumulative expertise in power exchanges is quite limited, and the industry in India is just four years old. With FDI permission, Indian power exchanges would be able to form partnerships with global bourses and share their knowledge and skills. In India, power exchanges are currently outside the system. They are only permitted to trade in the day-ahead market and must wait for the requisite government and regulatory licences to add longer-term goods. 

Furthermore, since loss-making power distributors have been opting for power cuts rather than buying pricey electricity from the short-term market, volume growth in this market has been restrained.

Struggling Electricity Industry

It is unclear if the government of India’s recent action would be able to breathe new life into the country’s struggling electricity industry. About a quarter of all electricity generated in India is stolen or lost in transmission, five times more than in China. 

More is given away to farmers, while the remaining is sold at a loss to consumers, driving state power providers into bankruptcy and causing the rolling blackouts that plague practically the whole country every day and jeopardise the country’s economic prospects. In India, successive national and state administrations have viewed populism, or the offer of cheap or subsidised power, as a viable and successful approach.

Conclusion

India is struggling to supply stable power to its 1.3 billion inhabitants due to electricity generation, transmission, and distribution issues. The recent decision will not operate as a magic wand that will alter the country’s power scenario in the blink of an eye. Still, there is no doubt that it is a step in the right way to help alleviate the sector’s investment bottleneck. Instead of populist tactics such as offering unstable and interrupting electricity, load-shedding, etc., a policy should be established to ensure dependable round-the-clock power to its residents.