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The country's challenges to a well-functioning energy sector

27 September 2012

The blackout in July 2012 that cut power to hundreds of millions of Indian households and businesses offered a stark reminder of the deep challenges facing India’s energy sector.

A new report published today by the International Energy Agency (IEA) details these challenges and examines the means to overcome them. The report, Understanding Energy Challenges in India, notes that achieving a well-functioning energy sector based on market principles would allow India to operate successfully within the global market and meet its citizens’ growing demand for energy.

Liberalisation of India’s energy sector remains unfinished. Energy policy reforms that began 20 years ago have helped to move the country away from a predominantly government-owned energy sector. Yet political complexity and a tradition of socialist economic practices have left the sector unable to complete the transition, nor provide reliable access to its entire population.

The six main challenges addressed in Understanding Energy Challenges in India underscore the need for a reformed energy sector built on policies and institutions that are aligned to global best practices.

• Pricing set by the government prevents India’s energy sector from operating in line with global market fluctuations. Reform should reflect realistic opportunity costs in order to overcome persistent fiscal and supply-side problems.
• Government intervention, limited access to the latest energy technologies and weak managerial expertise undermine India’s transition towards a well-functioning energy sector. To increase their commercial viability, reform must provide energy players with managerial autonomy based on economic principles.  
• Growing energy demand and providing universal access require the widespread deployment of clean, state-of-the-art energy technology. Reform should focus on the framework conditions needed (including moving away from import substitution) to compete internationally for investment.
• Inefficient bureaucratic and administrative processes hinder the transition to an open, well-functioning energy sector. Reform should include improved co-ordination among ministries, and between central and state governments.
• Providing universal access is an important policy goal, but must not impede sound investment and managerial practices within the energy sector. The Indian government should provide affordable energy to the poor through social policies and supportive government programmes.
• Inconsistent policy messages create confusion about whether energy is considered a commodity or an entitlement. Strong political will and effective public communication are needed to obtain support for an energy sector based on market principles.

Through a holistic overview of each energy sub-sector, Understanding Energy Challenges in India reiterates the need for a commercially-viable, globally integrated framework.

This report is part of the International Energy Agency’s new Partner Country Series of publications and was produced with support from the Korean Energy Economics Institute (KEEI).

Partner Country Series - Understanding Energy Challenges in India - Policies, Players and Issues