Gas based power generation in India: Lessons from a transaction cost analysis

• Investigation of low private investment in gas based Indian power generation.
• Transaction Cost Economics (TCE) framework.
• Contractual design leads to weak demand response in Andhra Pradesh.
• Strong demand response in Gujarat – minimizes transaction costs.
• Transaction cost minimization essential for strategic power sector development.

We use a transaction cost framework to analyze the performance of gas-based private investments in two coastal Indian states – Andhra Pradesh and Gujarat. These states have a similar regulatory set-up and have seen bulk of the initial gas-based private investment being made. Yet they differ greatly in terms of actual generation. Andhra Pradesh's lack of success can be attributed to upstream regulation and arm's length contractual design. This created a weak demand response giving rise to high transaction costs. Whereas in Gujarat, upstream contractual design has ensured that demand response is strong enough to minimize transaction costs for utilities downstream. Our cases reiterate that alternative governance structures (competitive markets and hierarchical systems) need to be subjected to a comparative analysis of transaction cost minimization. Hence, the general policy of promoting competition may not be a strategic solution for India where adequate investment for annual supply of electricity is the real problem.