Introduction The Power sector in India can be distinguished into three different activities viz.

Generation, transmission and distribution. However, the segregation and separate accountability in each of these segments was enforced only after 2003, once the Electricity Act, 2003 came into existence. Pre-2003 periodDire state Being a concurrent subject, the distribution side of Power sector was always the weakest link, which threatened the viability of entire sector with rampant theft, low level of metering and consistent under investment in transmission and distribution (T&D) systems, which made SEBs unviable and saddled it with huge losses. Consequently, in 2001-02, GoI asked Central Public Sector Undertakings (CPSUs) like NTPC and NHPC to bail out SEBs which defaulted on payments. At that time, the dues from SEBs had reached Rs415 bn (2% of GDP in 2001-02). A debt securitization package prepared by the central government prevented the power distribution sector from falling into a default crisis. 2003-2006Path breaking reforms The year 2003 came as a watershed year with enactment of Electricity Act, 2003, which helped disintegrating monolithic SEB structure into various independent activities viz. transmission, distribution and trading. Additionally, it marked entry of private sector to bring in more competition. The salient features of the Electricity Act are as follows: Disaggregating functions of generation, transmission and distribution with a view to create independent profit centers and accountability; Assigning responsibility on States of reorganizing SEBs, which ultimately paved the way for unbundling SEBs; Competition, economy and efficiency to be promoted in the best interests of the consumers and the national economy; Transmission to be separated as an independent function for creation of transmission highways that would enable viable public and private investments in the electricity industry; Open access in transmission with provision for surcharge for taking care of current level of cross subsidy, with the surcharge being gradually phased out For rural and remote areas stand alone system for generation and distribution permitted; Setting up state electricity regulatory commission (SERC) made mandatory; An appellate tribunal to hear appeals against the decision of (CERCs) and SERCs; Amendments made in 1998 to the Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948 for facilitating private investment in transmission to be broadly retained; Compulsory metering for enhancing accountability and viability;

Thus, the Electricity act changed the way the power sector was functioning and went a long way in ensuring improvement in the competitive landscape. Subsequently, in 2005, GoI framed National Electricity Policy (NEP), which aimed at laying guidelines for accelerated development of the power sector. NEP also provided supply of electricity to all areas while protecting interests of consumers and other stakeholders keeping in view availability of energy resources, technology available to exploit these resources, economics of generation using different resources and energy security issues. National Electricity Plan (prepared under NEP) laid a thrust on accurate assessment of demand to be an important pre-requisite for planning capacity addition. The Plan was prepared by CEA and approved by the Central Government can be used by prospective generating companies, transmission utilities and transmission/distribution licensees as reference document.

2007-2009- Initial Euphoria and merchant boom Post initial reforms, the Power sector went into a stage of rapid capacity expansion with an entry of private developers (IPPs) in a big way to encash perennial power deficit in the country. Various private players entered into power generation to benefit from attractive opportunity presented due to slower pace of capacity addition by Central PSUs and State SEBs. The merchant Power concept was also tabled and implemented by CEA and CERC to attract private sector investments. Consequently, the private sectors share in capacity addition increased substantially by 2009-10 (11th plan) to 30% from little over 4-5% in the 10th plan (2002-07). 2009-11-Self correction: Reality, however, dawned on the Sector with higher pace of generation capacity addition (~8-9% CAGR) vis-a-vis domestic coal supply growth (4-5% CAGR) leading to acute domestic coal supply crunch. Further, imported coal from Indonesia proved to be an expensive option for IPPs on account of 1) recent revision of coal prices by Indonesian government (price escalation of 150% last year) which left no option for IPPs but to seek government intervention and 2) ailing SEBs with huge losses unable to purchase expensive power to reduce peak deficit. Thus, merchant Power players went into self correction mode with lower PLFs than envisaged earlier and higher coal cost pressurizing their margins. 2011 onwards-Redefining period CERC has also came out with a new Point of Connection (PoC) mechanism, which removed pancaking of transmission charges between a interregional/interstate power generation station and intrastate one. This coupled with implementation of intrastate Open Access Policy is expected to go a long way in creating efficient short term and long term power markets by reducing overall power deficit in the country. Progress on the distribution reforms with emphasis on regular tariff revision by distribution companies, privatization of distribution areas to reduce AT&C losses and updating SEB accounts regularly would go a long way in improving the overall health of the power sector History Phase I-Pre-Independence Era (upto 1947) The first instance of commercial generation of electricity in India dates back to 1879 in Kolkata (then Calcutta). In 1897, the government of Bengal granted an exclusive 21-year license to the Calcutta Electricity Supply Corporation to supply electricity to Calcutta. Mumbai (then Bombay) was the second city to get electricity and as time progressed, private companies set up power supply systems in major urban areas under franchises, which allowed them a reasonable rate of return. The demand for electricity during this phase was driven by demand from industries, commercial enterprises (including tramways) and also domestic use. Most of the earlier private companies in the power sector cease to exist today as they were amalgamated into state-owned enterprises; however, a few of them continue to exist as private players. The Electricity Act 1910 was the first act in the power industry, which was introduced before independence. The Act provided the basic framework for supply of electricity in India. The sector was at a nascent stage during this time and there was a huge investment requirement for laying down basic infrastructure. The Act encouraged the growth of the industry by issuing licenses to private companies. Thus, during this phase, electricity generation was mainly in the private sector and power generation was largely based on coal and hydropower. Tata Power (formerly known as Tata Electric), which is the countrys largest

private sector utility, commissioned its first hydro electric station with a capacity of 72 MW at Khopoli. The power industry suffered from huge costs and wide variation in power voltage during this period. As the technical knowledge in the domestic industry was not well-developed, most of the projects were based on imported technology and thus entailed huge costs. Also, there was a wide variation in electricity voltage that was supplied during this period, as both AC and DC forms were used.

Post-Independence Era (1947-1990) At the time of independence, electricity generation and supply was concentrated in the hands of private electricity suppliers, and largely in urban areas. Electricity supply was a must across the country to promote overall growth and development; hence, the Electricity (Supply) Act 1948, which was based on the UK Electricity Supply Act 1926, was introduced. Under this Act the Central Electricity Authority (CEA) was established at the central level and the State Electricity Boards (SEBs) at the state level. The objective of the CEA was to develop a sound, adequate, and uniform national power policy to coordinate development of the power sector in India. SEBs became integrated utilities with presence in generation, transmission, and distribution in their respective states. During this period, the development and planning was done by the SEBs at the state level, while the CEA was responsible for planning at the national level and it provided the SEBs with broad guidance, planning, and development. The Act also elaborated the financing norms and institutional framework for the electricity industry in India.

1. SEBs creation was mandatory for arranging electricity supply within states2. Electrification (limited to cities) was planned to extend across all parts of cities through SEBsTable 2.3 Salient features of Eletricity Act 1948
The SEBs took over the private companies in their respective states and the newly-created state electricity boards were interconnected to enhance system reliability and to ensure wider geographical coverage. The electricity sector moved into the public sector domain from the private hands, and over the years, the public sector gained prominence in the power sector. In the initial period, the SEBs performance was satisfactory and they played a vital role in the development of the sector. According to the Electricity (Supply) Act 1948, the SEBs were required to generate a minimum return of 3% on their net fixed assets in service after meeting the financial charges and depreciation. The SEBs were able to generate the minimum returns for many years, but, later on their performance faltered and they had to seek financial aid from the state in the form of grants, subsidies, soft loans, etc. The early seventies were marked by incidents of power blackouts and grid collapses. Hydropower generation suffered especially, as availability of water resources was heavily dependent on the monsoon season. Moreover, there were delays in civil works, delays in the supply of power plant equipment, and the infrastructure additions in terms of transmission and distribution were also not adequate. In its attempt to assist the states, the Central government established a few private companies that could cater to more than one state. The Central government amended the Electricity (Supply) Act 1948 and established the National Hydropower Corporation (NHPC) in 1975 to build hydropower plants and the

National Thermal Power Corporation (NTPC) to set up coal-based power plants to supplement the generation capacities of the SEBs and private companies. NTPC built its own transmission network to transmit electricity to different SEBs. In 1981, the government decided to integrate operations of the central and state transmission systems to form a national power grid to facilitate transmission of power generated by non-SEB generators; these efforts led to the incorporation of the National Power Transmission Corporation in 1981. Initially the company was engaged in managing the transmission assets of the central generating companies, NTPC, NHPC and NEEPCO; but in 1992, this entity was renamed as Power Grid Corporation of India Ltd and all the transmission assets of the three above mentioned generating companies were transferred to it under an ordinance. Furthermore the government set up the PFC in 1986 as a financial institution dedicated to power sector financing to supplement planned expenditure on power plants, specifically new power plants. During this phase, lot of emphasis was laid on setting up hydropower plants, as the government planned to develop the irrigation and power sectors simultaneously. The installed capacity in the hydropower sector did witness significant growth up to 1970; however, the lesser-than-expected growth rate and longer gestation period decreased its share in total power generation capacity. In the meanwhile coal-based power plants continued to grow and the share of thermal power capacity increased in the total capacity. While the SEBs aided the growth in the Indian electricity sector, by the end of the phase under review, they suffered huge financial and technical losses (poor revenue collection, billing, metering and energy accounting, electricity theft, cross subsidies and SEB staffs inefficiencies were the main reasons for their losses); as a result of these losses, they provided poor electricity service to end consumers because the state-owned corporation power plants were running at low plant load factor (PLF) and the SEBs did not have enough funds for renovation and modernization of their plants. The demand-supply gap was increasing and many states were facing electricity crisis. These circumstances forced the government to restructure the sector in a phased manner, and this paved way for meting out electricity reforms in 1991. PostReform Phase (after 1991) The deteriorating health of the SEBs made it impossible for them to infuse fresh investments into the sector. Moreover, the country was facing a macroeconomic financial crisis that made it difficult for the governments, both the Central and state governments, to fund power projects through budgetary support. Due to these events, the government decided to restructure the power sector in a phased manner in 1991; consequently, it opened up the power sector (liberalize) and invited foreign private companies to get funds and technology into the Indian power sector. First Phase (1991-95): Investments were a must in the power sector to enable it to produce electricity in line with the expected economic growth. The government liberalized the sector and opened it for foreign and private investments to increase the availability of funds for the power sector. For allowing independent power producers to operate in the sector, the government made an amendment to the Electricity Act 1910 and the Electricity (Supply) Act 1948 through the Electricity Laws (Amendment) Act of 1991. The amendment allowed private participation in thermal, hydro, wind, and solar power projects, and also allowed them to operate as IPPs. Foreign ownership up to 100% was allowed. IPPs were to operate on a costs-plus model wherein the tariff was determined by the Central government and the IPPs were guaranteed a 16% post-tax return on equity, full repatriation of profits, among

others. The operators and the SEBs entered into power purchase agreements (PPAs) as the SEBs were responsible for transmission and distribution of power generated by private players. Around 189 projects, with an expected capacity of 75 GW, were proposed; however, only a few of these projects cleared the approval process, and had Memoranda of Understanding (MoUs) and Letters of Intent. The rest were either stalled in the approval process or did not reach financial closure. The government also put on fast track 8 projects with offers of counter guarantees. Mega Power Policy 1995: In 1995, the government introduced the Mega Power Policy to increase private investments in over 1000MW generation projects that would supply electricity to more than one state; hence, the name mega power projects. The projects were to be awarded on the basis of competitive bidding and the CEA, Power Grid, and NTPC were to provide support to these projects. CEA was to provide assistance in identifying potential sites for setting up the plants, while Power Grid and NTPC were to provide assistance for transmission of power and preparation of feasibility report, respectively. The experiences of the first phase were not great and the Enron debacle is a reflection of this statement. In the Enron Dabhol Power Project priority was given to FDI rather than the cost of generation electricity. The main objective of reforms was to ensure reliable and quality power supply at an economic cost. It was essential to ensure that the sector was financially viable and attractive enough for private investors to put in their money. The SEBs were integrated utilities with presence in generation, transmission, and distribution in their respective states. The SEBs were under huge losses and it was perceived that unbundling the SEBs and segregating generation, transmission and distribution into different corporations could make it possible to monitor efficiency levels in each of the areas. Many states initiated the restructuring process. Orissa was the first state to undertake restructuring of the power sector in 1996; the results were, however, not significant as the losses (theft, technological and financial) did not come down. The first phase of the reform failed as the objective of attracting private players did not achieve the desired results. Private players did not enter the sector, as the SEBs, who were to transmit and distribute the power generated by the private players, were still running in losses. Private players were uncertain about their returns due to poor financial health of the SEBs. The annual commercial losses of the SEBs increased consistently from Rs 45.6 bn in 1992-93 to Rs106.8 bn in 1997-98. The power plants continued to work at low PLF. Second Phase (1996-2002): The 1995 Mega Power Policy did not propose any fiscal concession, hence in 1998, the revised Mega Power Policy 1998 included these concessions. The Power Trading Corporation (PTC) was also set up after this revision to purchase power from identified projects and to sell to identified-SEBs. Establishing regulatory commissions and privatizing electricity distribution in cities (with population of more than 1 mn) were the pre-conditions included in the revised policy. In December 1996 the Common Minimum National Action Programme (CMNAP) was structured in consultation with the state governments, and guidelines were established to hasten the sectors progress. In addition to envisaging setting up of regulatory commissions, the CMNAP reiterated the need for rationalization of tariff and that no sector was to pay less than 50% of the average cost of supply. Tariff for agriculture sector was to be not less than 50 paise per unit and the tariff was brought to 50% of the average cost of supply within 3 years.

During this phase the sectors performance improved as compared with the first phase as the PLF reached around 70%; however, commercial losses continued to pose a major hurdle in the sectors development. During this period private sector investments were already being made for capacity addition in generation but the need was felt for private participation in transmission as well; consequently, the Electricity Laws (Amendment) Act was passed in 1998 to enable private participation in the power transmission sector. The central transmission utility (CTU) and the state transmission utility (STU) were set up under this Act. The maintenance and construction activity of transmission network was supervised by CTU at the inter-state level and by the state transmission utility (STU) at the intra-state level. These utilities also recommended regulatory commissions on allotment of licences to different players. The CERC issued the first Indian Electricity Grid Code (IEGC) in January 2000 to ensure grid discipline and to set operation and governance parameters for players in the transmission and distribution (T&D) sectors. Third Phase (2003 onwards): The Electricity Act 2003, which came into effect from June 10, 2003, replaced the earlier laws, acts governing the Indian power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948 and the Electricity Regulatory Commissions Act 1998. The bill sought to provide a legal framework for enabling reforms and restructuring the power sector. The Electricity Bill was passed by the Parliament in 2003; this Bill sought to provide a legal framework for enabling reforms and restructuring of the power sector. The Bill became an Act with effect from June 10, 2003 and replaced the earlier laws governing the power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948, and the Electricity Regulatory Commission Act 1998. National Tariff Policy (2006): GoI had announced National Tariff Policy on January 6, 2006 in continuation of NEP. It basically deals with various parameters with respect to fixation of tariff like providing adequate return on investment to power generator and supplier and ensuring reasonable user charges to consumer. This policy stated that Multiyear tariff (MYT) must be adopted for determination any tariffs from April, 2006. The two major issues dealt in this policy 1) competitive bidding for all private projects and 2) method for determination of cross subsidy charge.

Demand Characteristics India remained chronically power deficit due to capacity addition delays which kept the peak deficit just over 10% at the end of 9th plan. The deficit remained high in the 10th plan (2002-07) primarily due to 1) lack of power equipment capacities (BHEL was on the only BTG manufacturer) with ~6GW capacity at that time 2) Shortage of Balance of Plant (BoP) players delaying commissioning of plants on time 3) land acquisition problems. Thus, though, India remained power starved, the demand remained extremely price sensitive due to 1) Single buyer-multi seller model which kept expensive fuel options out of use as ailing SEBs are the only buyers of electricity and 2) huge AT&C losses coupled with free or grossly subsidized rates of electricity to agriculture and residential consumers kept these options out of reach from most of the IPPs despite very low per capita electricity consumption. Consequently, India lags behind most of the developing countries in case of per capita electricity consumption as shown in the following graph Indian per capita electricity consumption grew only at 4.7% CAGR over the last six years mirroring the capacity addition in the country. However, compared to most of developed or even other developing countries, Indias per capita consumption is very less. Indias electricity demand is grossly under reported owing to 1) inadequate connectivity (39% villages connected as of FY11, with just 10% households connected) 2) 2-18 hours of power cuts especially in summer by SEBs deflating the actual demand and 3) latent demand suppressed due to poor quality and reliability of power.

Power demand is seasonal with sharp variations across the year Though, generally, power demand traces GDP growth (0.9-1.1x), in case of India, it has always lagged due to substantial delays in putting up capacity. As a result, the gap between base and peak deficit has widened in last few years. Further, Indias power demand is seasonal, varying substantially over the year e.g. it peaks in summer season with 12-14% deficit and trending down to 6-8% during monsoon (June-September) due to lower usage of heating and cooling requirements on domestic as well as Industrial customers. Industrialized West and North regions remained power deficit Historically, the Western and Northern states have remained as load centres with increased deficit; however as most of the private capacity addition by private players is coming up in the Western region, the deficit is expected to go down in FY12 to 10.9% from 14.7% last year as per Load Generation Balance Report (LBGR) 2010-11. At the same time, Northern and Southern States region deficit is expected to widen on account of increased requirement from UP, Punjab and AP respectively.

.Ailing SEBs stifled demand growthjust 39% of villages are electrified The RGGVY scheme was implemented from 2006, but had limited success due to last-mile implementation problems. There is also dearth of good transmission EPC players in far flung areas. The unwillingness of states and SEBs are also the key factors limiting the success of RGGVY scheme. Since, most of the State distribution companies cross-subsidize heavily to their residential and agricultural consumers, their revenue model operates on Average Cost of Sale (ACS) > Average Revenue Realization (ARR) (cost > revenue) basis. Hence, it is easier to cut demand by load shedding, which in turn curbs subsidized power usage. State distribution companies resort to extensive load shedding which under--reports the actual demand scenario,

especially for the rural and semi urban areas. Moreover, only 39% of villages are electrified in India implying inability to cater to the large un-met demand.

But, State elections-fair un-met demand indicator (adj. for free power) Power demand pre-state election season could be the fair estimation of un-met electricity demand during which distribution companies offer uninterrupted power supply to even rural and semi-urban areas. However, states that offer free power to agriculture ended up in excessive usage of power by farmers.

Consumers are ready to pay more for quality and un-interrupted power Contrary to common perception, the consumers are ready to pay higher for quality and uninterrupted power supply, as private distributors like Torrent, Tata and Reliance are charging almost 2x vis-a-vis their state owned counterparts. Thus, the private distributors are charging higher and consumers are paying them the increased price. Additionally, large scale market for DG sets with an average cost of Rs10-15/Kwh also indicates that consumers have potential and are ready to pay for quality and reliable power.
Thus, the private distributors are charging higher and consumers are paying them the increased price. Additionally, large scale market for DG sets with an average cost of Rs10-15/Kwh also indicates that consumers have potential and are ready to pay for quality and reliable power Thus, the private distributors are charging higher and consumers are paying them the increased price. Additionally, large scale market for DG sets with an average cost of Rs10-15/Kwh also indicates that consumers have potential and are ready to pay for quality and reliable power. Though, hydel plants posted growth in output in the range of 20-23% YoY for the fifth month in a row due to good rainfall coupled with capacity addition, the thermal power generation continued to suffer due to coal shortages and availability of poor/wet coal. The thermal PLF fell below 62% for the first time since August 1998. This is despite the fact that nuclear capacities are running at higher PLFs since that time due to higher uranium availability and rise in installed capacity. Thus, dwindling domestic sources may severely hamper the prospects for the capacity addition target for the 12th plan keeping power deficit at elevated level for long period of time.

...Indias capacity remains coal dominated; Renewable push expected With 56% of the total installed capacity is coal based, Indias installed capacity like China and US, remain coal dominated. Domestic coal is still the cheapest fuel available in India. Indian coal pricing is far cheaper even when adjusted for calorific value and ash contents. As a result, CPSUs, SPSUs and private sector planned power capacities based on domestic coal. In the last 2-3 years, tough stance taken by MoEF to allot clearances stalled CILs production from new mines. Consequently, CIL became non-committal and started offering coal on MoU basis after March, 2009 implying coal supply for fresh capacities of only ~50-60% of requirement (without legally binding enforcements). Moreover, going forward, the gas scarcity and lack of institutional framework keep options like gas and nuclear out of mind of developers. Hydro capacity addition is also coming up but at a very slow pace due to state level issues (such as R&R problem, land acquisition, basic infrastructure near sites).

Consequently, renewable is the only option that can be explored for faster capacity addition in the near future.

.What is in store for the 12th plan? CEA has already downgraded capacity addition target to 76GW (62 GW thermal capacity) for the 12th plan. However, the Planning Commission and Power Ministry has to validate and formalize it. It can only be done once the imported coal based projects gets clarity over the fuel pass through scenario, clarity on domestic coal pricing and increased support from Power ministry on other fuel options (like gas). Further, the private sector would be interested in seeking the clarity before putting more money into the sector. Implementation of Distribution reforms and signs of improvement in State distribution companies health are the key parameters to be keenly observed in the near term in order to judge the sustainability of the whole sector. ..Private sector participation is expected to rise.. Over the last 15 years, private capacity addition share has increased to 38% in the 11 th plan due to 1) domestic linkage offered to the private sector 2) attractive policy initiatives such as policy on Merchant power development and Ultra and Mega Power projects and 3) Competitive bidding based policies (Case I and Case II biddings). Additionally, in the 12th plan, the private sector participation is expected to increase with capacity under construction of ~59 GW with ~59-60% capacity addition from private sector (see more details in Annexure I & II). .Case II bids would assume increasing preference over Case I Historically, Indian projects had been developed on cost plus basis and mostly by government owned entities. However, as per National Tariff Policy 2006, GoI issued guidelines for competitive bidding of power projects. These guidelines were implemented by States in two forms:

1) Case I bidding: An open bidding process where project developer bid is based on any fuel, any location and any technology. The project developer bids for the total or partial power generated. The bidder is responsible for the necessary
approvals and clearances. This kind of bidding is more relevant for states with scarce fuel resources. 2) Case II bidding: An open bidding process where developer bids on the basis of specific fuel and specific location. These specifics are provided by State/Central governments inviting the bids. The government assists the developer in securing land, water and mandatory clearances. Such kind of bidding is preferred by state where there are coastal areas (imported fuel) or areas with rich resources. The mandatory provision was made under National Electricity Policy to procure electricity from competitive based projects from January, 2011 by all distribution companies. This has resulted into increasing preference towards electricity procurement towards competitive based projects. Further, levellised tariffs of projects bid under competitive bidding are lower (in the range of Rs2-3/unit) compared to that bid under cost plus tariff regime. Since 2005, the capacity contracted under Case I/II bidding aggregates to ~42.6 GW with increasing

preference towards Case II bids. Following table illustrates increasing preference towards Case II over Case I bids.

..Only silver lining is 49% of capacity addition to be supercritical... The only silver lining in the 12th plan remains higher share of supercritical capacity addition as this type of plants are 3-4% more efficient vis--vis subcritical power plants. Thus, the coal demand for a MW of coal used can be reduced in the plan. This would also ensure the appropriate and better use of coal for the thermal projects. The supercritical technology is also expected to bring in additional benefits in terms of carbon credits. Thus, a developer can sell these carbon credits in the market to get an additional benefit once the project gets registered under Clean Development Mechanism (CDM) proposed by UNFCCC.

Coal supply biggest impediment

Indian coal reserves are unevenly spread which are present mainly in the Eastern States (~87% of total in five eastern states-refer to Annexure VI). Further, Indian coal is low grade with higher ash and moisture content, which degrades it calorific value. Though, India is the third largest producer of coal in the world, just behind USA and China, the domestic coal sector is unable to keep pace with the growing needs of the power sector due to Environmental clearance delays faced by coal miners in the last few years. The railway infrastructure too has been inadequate for the requisite amount of coal transfer leading to acute coal shortages faced by most of the power plants today. Thus, the demand supply mismatch, if not timely addressed, could cripple the power capacity addition growth. The demand CAGR over FY09-12 stood at 6.6%, vis-a-vis coal production CAGR of 4.6% over the same period led to an acute shortage of coal. In FY12, the coal import demand is expected to reach 142MT due to faster capacity addition. Thus, import requirements to surge substantially going forward. In recent months, various power stations in the country recorded coal stocks below critical stock level. As a result, almost all the thermal power plants are running at lower PLF leading to much lower power generation than targeted.

.Coal stock pile up at pitheadWho is to be blamed?... Apart from coal production, timely implementation of constrained evacuation infrastructure (railways) is also affecting coal supply at power plant-end. Lower availability of railway rakes is often cited as one of the key reasons for inventory pile up at pitheads. According to the Railway ministry officials, the pit stock needs to be brought to the rail head by the coal companies before the actual supply begins. Hence, if CIL is not able to transport coal from the pithead to rail head, there is no way only pit stock can be viewed in isolation for gauging the performance of rail dispatch. The railway ministry has claimed that 68 rakes per day were idle in August, 2011, while in September, October and November, there were 228, 117 and 11 idle rakes, respectively, and were not put to any use because of the production cut. However, our interactions with CEA and CERC officials confirm that there is the last mile connectivity problem with many of CILs remote pit-heads, which are either underutilized

or not utilized e.g. North Karanpura of CCL, which can contribute ~40MTPA, is yet to contribute towards CILs production. The implementation of Tori-Shivpur-Hazaribag line (93) km was delayed for a decade primarily due to delayed environmental clearances. Thus, there are two problems 1) CILs lack of creation of evacuation infrastructure and 2) Sluggish pace of Indian railway in laying new rail tracks. The domestic coal shortage is getting accentuated due to delays in acquiring land (due to MoEF clearances) by coal miners coupled with inadequate railway infrastructure by Indian railways.

.How No Go areas led to acute coal supply shortage? In 2010, the MoEF changed the way of assessing the clearances for thermal power projects and coal mining proposals. This led to significant time delay in procedures, which resulted into delays in commissioning of thermal projects. There was clear segregation in areas as Go and No Go, where mining activity was banned. Subsequently, CILs many projects were stuck, which were proposed to set up near deep forests. In the past two years, no new mine has started coal production severely constraining CILs ability to ramp up production to supply to fresh capacity being added in the power sector. Thus, CIL stopped entering into legally binding FSAs with power developers. Finally, Union government has to step in to control the damage as per following news article. A new GVC coal pricing mechanism is introduced CIL has changed pricing mechanism for domestic coal from Useful Heat Value (UHV) to internationally accepted Gross Calorific Value (GCV) from January. The GCV based pricing of non-cocking (thermal) coal has caused new set of problems for private developers as most of these players went ahead and signed PPA contracts to supply power at fixed price for 25 years. The new GCV mechanism involves 17 grades in tight bands based on calorific values of coal vis--vis the earlier distinction of seven grades by CIL. While, CIL argues that the new GCV mechanism allows it to shift to internationally accepted pricing principles, transparent sampling methods and consistency in calorific values of coal from different subsidiaries and lack of infrastructure are the major hurdles before CIL. Our recent interaction with Power developers and regulators suggests an increase of 40% for thermal coal (F and G grade coal) due to GCV mechanism, which implies a 20% tariff hike on an average. However, Coal ministry is not in favour of coal price revision as it will mean higher tariffs for State distribution companies, which are already under financial distress. Imported coal..can India afford it? In wake of domestic coal shortage, India is heavily dependent on Indonesia for coal imports. Indias 60% of the thermal coal imports happen from Indonesia due to 1) proximity 2) cheap inland transport facility by barging and 3) available open sea loading facility resulting into lowest maritime freight. As a result, most of the private power IPPs like Adani, Tata and Reliance Power bought stake in Indonesian mines or entered into a long term pricing arrangements with mines located there. The Indonesian coal is priced at a floor price (based on average of international coal index prices New Castle/Richard bay), which is averaged monthly. These prices were at a steep discount to international spot coal prices. However, with advent of new Indonesian coal policy, the Indonesian coal prices are revised upwards and linked to market rates. This has raised alarms for Indian Power sector as most of the private IPPs have entered into PPAs spanning over 20-25 years with State distribution

companies based on competitive bidding. Such projects dont offer passing of fuel prices to the end-consumer. As per the new formula notified by Indonesias directorate general of minerals, coal and geothermal (DGMCG), Indonesian coal producers will have to sell at prices notified by their government. The benchmark price is to be based on a formula that refers to the average coal index price in accordance with international market mechanism. All existing coal supply agreements with Indonesian coal mining companies will have to be modified to comply with new coal pricing regulations before September 23, 2011. Indian power companies import ~40 MMT of coal yearly from Indonesia under long-term contracts. Consequently, long term contracts based on discounts and flat pricing are no longer honoured, rendering the import based coal projects unviable. Project developers have stopped

construction activity or asked government to intervene so as to revise tariff for competitive bidding based projects. Further, ~10MMT of imported coal is lying idle at ports. The lack of demand for imported coal is on account of variety of reasons 1) sharp depreciation of the Indian rupee leading to prohibitive cost 2) the recent drop in international coal prices leading developers to cancel earlier contracts 3) utilities not paying on time 4) increase in logistical costs 5) each state invoking section 11 of electricity act preventing the private developers to sell electricity to other deficient states, and 6) lack of evacuation facilities.
.Captive coal allocation policywhy it has not worked? Coal Industry was nationalized in 1973 under the Coal Mines Nationalization Act and coal mining was exclusively reserved for the public sector. However, subsequent amendments in the act allowed captive mining by industries such as Steel (1976), Power (1993) and Cement (1996). The primary objective of awarding captive coal block to specific user segment is to provide fuel security, cost competitiveness and a measure of control over production of coal. The GoI allocated coal blocks in two ways: -1. Government dispensation: The Central/State owned company is awarded a coal block without the sale being restricted to captive consumption only. The company is free to sell surplus coal in the market. Typically, state mining companies like GMDC, JSMDC and NMDC operate under this scheme. 2. Captive Dispensation: Under this scheme, the private developer develops and uses the coal for own consumption, but the consumer is not allowed to sell surplus coal in the market. Since, 1993, 289 coal blocks are allocated though these two routes, which have an estimated reserves ~41 bn tonnes. However, out of these blocks only 28 blocks under operation.

There are different reasons for captive policy to be a non starter. They are as follows: 1. Allotment of remote/unexplored blocks: Though selection guidelines stipulate that the allocated coal blocks are at a reasonable distance from existing mines and exiting projects of CIL, the allocated coal blocks are relatively remote or unexplored. Such mines are geographically much challenging. Mines with infrastructure are rarely handed over for allotment as development of initial infrastructure (roads, bridges etc.) or the prospective exploration takes lot of time and resources.

2. Joint allocation of mines: Further, 45 mines are jointly allocated till date. However, the timely development of these mines becomes challenging because of difference in schedule of end-user projects. The varied economic interests of allot tees make the optimum utilization of mine very difficult. Additionally, the technical requirements (coal grade, blend quality) end users might be very different. Consequently, the joint ownership model attracts very few investors/lenders in the market. 3. Forest closure/the prospective license for unexplored blocks: For unexplored coal blocks, developers require Prospecting license (PL) to be able to prospective exploration. The grant of PL is a long drawn process with involvement of both central and State ministries. Further, Forest and Environment clearances also take 3-4 years, which also includes State and Central ministries approval in each process. 4. Acquisition of coal mine land: There are few proposals, which are facing delays due to opposition from local population. The land acquisition process is also tedious with absence of relief and rehabilitation packages from the Central and State governments and large scale employment package to the land owners being dispensed under the mine land acquisition. Thus, captive coal production remained subdued because of government apathy and lack of incentives provided to the captive coal miners. However, GoI will have to take policy initiatives and improve support structure to kick start development in captive coal mines.

Can coal blending be a feasible option? In India, coal blending is envisaged for optimization of plant parameters and cost for endusers. Indian power stations can take up to 10-15% coal blending under the present working norms for the BHEL designed boilers. However, coal blending is opposed on the ground that 1) it will increase the tariffs all across the power stations 2) additional transportation cost of imported coal has to borne by endconsumer 3) limitation for competitive based projects and 4) It will put additional burden on already ailing SEBs. In general, 10% blending at source would increase power tariff by 30-35 paisa. However, the dynamics may favour only port based power plants due to high transportation cost involved for in-land power projects. CERC has already issued guidelines for 30% blending of coal, however, this will apply to only new projects as currently BHEL and domestically designed boiler can take only 15-20% of blending of imported coal. Thus, the boiler designs have to be changed to accommodate blended coal. Secondly, the blended coal power plant tariffs will create its own set of problems of monitoring blending level at plant levels and policy initiatives for blended tariff based power plants. As a result, only large companies like NTPC with large domestic coal usage may only be able to blend imported coal effectively to minimize its impact of tariffs. Further, most of the PPAs signed by NTPC are pass-through. Thus, an increased fuel cost will be allowed to pass through to SEBs without any loss to the generator. Thus, coal blending is feasible only for cost-plus contacts and port based projects and has got limited application in India in the present scenario.