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No Power, No Boom in India

India has tried to build new power plants, like the one partly completed in the state of Andhra Pradesh. But there is often no fuel to run the plants.

Harald Sund | Photographer's Choice | Getty Images

But that campaign is now running into difficulties because the country cannot get enough fuel — principally coal — to run the plants. Clumsy policies, poor management and environmental concerns have hampered the country’s efforts to dig up fuel fast enough to keep up with its growing need for power.

A complex system of subsidies and price controls has limited investment, particularly in resources like coal and natural gas. It has also created anomalies, like retail electricity prices that are lower than the cost of producing power, which lead to big losses at state-owned utilities. An unsettled debate about how much of its forests India should turn over to mining has also limited coal production.

The power sector’s problems have substantially contributed to a second year of slowing economic growth in India, to an estimated 7 percent this year, from nearly 10 percent in 2010. Businesses report that more frequent blackouts have forced them to lower production and spend significantly more on diesel fuel to run backup generators.

The slowdown is palpable at Sowmya Industries, a small company that makes metal shutters that hold wet concrete in place while it solidifies into columns and beams, a crucial tool for the construction industry.

The company, located outside this city on the southeast coast of India, is struggling with several issues, including a 20 percent increase in the price of raw materials and falling orders.

But Sowmya’s manager, R. Narasimha Murthy, said the lack of reliable power was an even bigger problem. His company loses three hours of power every evening. And all day on Wednesdays and Saturdays — euphemistically called “power holidays” — it receives only enough electricity to turn on the lights but not enough to use its large metal-cutting machines.

“It’s very frustrating,” said Mr. Murthy. “Power is a basic need. Everything is dependent on power.”

It was not supposed to be this way. Two years ago, more than two dozen large power projects were planned near the company’s workshop, but most of them have been scrapped or put off because India cannot dig up enough coal to fuel them.

Mr. Murthy’s frustrations reflect a broader national malaise. Analysts say India’s economic woes could have been easily avoided if policy makers had better addressed problems like its electricity shortage, weak infrastructure and restrictive regulations. Instead, policy makers have been distracted by corruption scandals and turf battles.

“There is virtually no new investment by both the government and private sector,” said Ashok M. Advani, executive chairman of Blue Star, the biggest maker of commercial air-conditioners in India. “We have such an uncertain environment.”

In the last year, the nation’s power problem has grown acute, with the gap between demand and supply jumping to 10.2 percent last month, from 7.7 percent a year earlier. In some states like Andhra Pradesh, where Nellore is, and in neighboring Tamil Nadu, blackouts have become so common that many factories report getting more electricity from diesel generators than they do from the power grid, at a cost that is roughly three times higher.

A major problem is the anemic production of coal, which provides 55 percent of India’s electricity. Coal production increased just 1 percent last year while power plant capacity jumped 11 percent. Some electricity producers have been importing coal, but that option has become more untenable recently because India’s biggest supplier, Indonesia, has doubled coal prices.

India has one of the world’s largest reserves of coal but it has not been able to exploit it effectively, largely because a state-owned company, Coal India, controls 80 percent of production. The company has been hamstrung by political decisions like a policy that requires it to sell coal at a 70 percent discount to market prices. Critics also say it has not invested aggressively enough in new mines and technologies.

Policy disputes have also caused problems. In recent years, coal regulators tried to open new areas to mining, but they did not coordinate their decisions with environmental regulators, who have blocked much of that mining because it would destroy dense forests.

Companies like Sowmya Industries are hampered by power shortages.

India also appears to have a lot of cleaner-burning natural gas, but it has not fully exploited those reserves, either. Private firms have few incentives to do so because the government has capped the price of that fuel.

“There is a huge crisis looming,” said Chandan Roy, a retired executive at a state-run electricity producer, the National Thermal Power Corporation. He added that potential solutions were well known but political leaders were reluctant to carry them out because it would mean raising prices for electricity and fossil fuels.

For many businesses, the power shortage has become debilitating.

In the southern state of Tamil Nadu, Srihari Balakrishnan, a textile factory owner, said he goes through 6,300 gallons of diesel fuel on an average day to keep his operation running, spending $3,000 more than he would if power were available around the clock.

“We are not able to use 20 to 30 percent of our capacity,” he said. “We can’t use grid power for two full days of the week. When we have power, we have a six-hour cut,” he added, using an Indian term for blackouts.

Mr. Murthy of Sowmya, the shutter maker, said that his production could be 30 percent higher if he had access to reliable power. On a recent Friday afternoon, his workers were rushing to cut metal plates by the end of the day. They would not be able to use the machines the next day, when they would turn to welding the plates into shutters, which can be done with conventional power from the grid rather than industrial-grade power.

“When the power shuts down, no machine here will work,” Mr. Murthy, 35, said as he walked through his workshop. “We have to plan in advance.”

Mr. Murthy’s brother started the business nearly eight years ago, and together they built it to $390,000 in annual revenue. They primarily supply small contractors in the Nellore area, where the economy is dominated by rice farming and an expanding port.

Just 18 miles from their workshop is the site of several proposed power plants that should have eliminated the need for arranging their work around the power schedule.

V. Balashowry, the entrepreneur behind one of those power plant projects, Kineta Power, applied for a supply of fuel from Coal India four years ago. He had hoped to be producing nearly 2,000 megawatts of power by now, which would have increased the electric capacity in the state of Andhra Pradesh by about 15 percent.

Mr. Balashowry, a former member of Parliament for the governing Congress Party, has already bought 1,150 acres of wooded and pasture land, including 850 acres from the state of Andhra Pradesh, and has secured environmental approval for his plant. But no bank will give him money to build it until Coal India agrees to give him fuel.

“We have resources in India, but they aren’t able to do the proper thing,” he said, referring to government officials, during a recent interview in New Delhi.

Other companies are also stuck. Reliance Power, controlled by the investor Anil Ambani, says it has stopped construction on a large electricity plant nearby because it can no longer afford to buy coal from Indonesia as planned.

Mr. Murthy’s business suffers a double blow — he does not get enough electricity and there is less construction in the area, which means less demand for shutters.

He says a couple of years ago, the company was thriving because the power shortage was not as acute and government projects and private construction bolstered demand for its products. He now has 10 employees, down from 15 two years ago. “It was a very rapid drop-off,” he said. “Last year, we had a night shift as well.”

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