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Knowledge Redefined

Metis Editorial Series

Meeting Power Sector Needs:
Are we moving in the Right Direction?
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Metis Editorial Series; Meeting Power Sector Needs: Are we moving in the right direction? 1
Knowledge Redefined

Meeting Power Sector Needs: Are we taking the right direction?

India with its dense population and growing economy has become one of the major
drivers of the global energy demand. With an average growth rate of 7-8 per cent
per annum, the Indian economy is emerging as one of the strongest players in the
global framework. To fuel this growth momentum it is essential that the country’s
power sector also rises up the graph.
To survive in the ever changing and dynamic world, reforms form a key part in the
functioning of every sector and economy as a whole. However unlike other
sectors, the Indian power sector is one, in which implementation of reforms have
lagged behind those in other major sectors. The sector is plagued by many issues
on various fronts like regulatory, financing, social, etc. We at Metis believe that
the successful eradication of these will result in the full fledged growth of
this sector.
Evolution of the Indian Power Sector
All the major sectors of the Indian economy have undergone reforms in the last
two decades beginning with the fillip given by liberalisation in the early 1990s.

1948 1970's 1990 1998 2003 2004/5 2006 2006 2007 2009 2010
•Electricity •NHPC & •FDI Policy •Electricity •Electricity •Competitive •National •Rural •Electricity •Revised •Competitive
Supply Act NTPC Regulatory Act, 2003 Bidding Tariff Policy Electrificatio Ammendme Mega Bidding
Formation Commission Guidelines n Policy nt Act Power
Act Policy
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Metis Editorial Series; Meeting Power Sector Needs: Are we moving in the right direction? 2
Knowledge Redefined

Continuing the trend reforms in the Indian power sector were initiated in the early Inherent legal and red tape issues were now preventing the sector to become an
years of the last decade. attractive business opportunity. Electricity Regulatory Commission Act, 1998 was
enacted to sort out the regulatory and legal concerns and to fix a percentage return
India's power sector has recently experienced developments tending it to create
for private players. However, only a meager capacity came up from private players
dominancy in the Infrastructure sector. These developments have given rise to
new opportunities for the private sector especially in the power generation till the year 2000 and the result was not as expected.
segment. Electricity Act (EA) 2003, superseding all the before-laid acts, de-licensed the
generation business and paved a new way for private participation. Private sector’s
Electricity generation, as we know, is one of the most capital intensive and
attractive segments of the power sector and has gone some of the most dramatic 20 per cent share in the present installed capacity has all its due credits to the
changes with respect to time and needs. plans, policies and regulations, which followed the EA 2003. In fact, the enactment
of EA 2003 is the first broadest step towards developing electricity value chain on
Mapping the evolution, pre-independence, electricity generation in the country was wholesome basis.
initiated by private entities focusing on supplying to urban areas. After the
enactment of Electricity Supply Act, 1948, State Electricity Boards (SEBs) came to Further to this, the tariff policy in 2006 implemented international competitive
existence and took over all the responsibilities, from generation to retail supply. bidding in generation projects for private developers, besides giving a five year
The Act indirectly disfavoured private indulgence in electricity sector, and gave full window for central and other government players to align themselves to this
powers and authorities to state electricity departments. Networks were extended to structure. January 6, 2011 saw the implementation of competitive bidding for all
rural areas; however the quality and quantity was poor. generation projects in the country.
With the growing inefficiencies and financial pains, central sector participation Now the country’s economic growth is significantly reliant on the electricity sector’s
became an important initiative to enhance the sector’s growth. The latter part of performance. Generation capacity addition has become one of the deciding factors
the 70s saw the formation of two major central sector companies NTPC Ltd. for sustaining 8-10 per cent GDP growth.
(formerly National Thermal Power Corporation) and NHPC Ltd. (formerly National
Hydroelectric Power Corporation) focusing on building upon thermal and hydro 15 GDP vs Power Sector Growth (in %)
capacities.
9.6 9.3
10 8 8
However, the increasingly poor financial performance of the state utilities, rising 6.7
power deficits, slow capacity addition amongst others ensured that the Indian
power sector also formed part of the liberalisation regime in the 1990s. 5 7.3 6.8
6.3
2.5 4.6
The reforms in the country’s power sector followed worldwide reforms that began 0
in the United Kingdom, Norway, Canada, and the USA and were later adopted in
2006-07 2007-08 2008-09 2009-10 2010-11
Latin America as well. In developed countries, sweeping reforms focused on GDP % Power sector Growth %
restructuring vertically integrated cost-of-service monopolies and introducing
wholesale competition, while developing countries focused on their need to
Source: Economic Survey, 2010
accelerate power generation investment.
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Metis Editorial Series; Meeting Power Sector Needs: Are we moving in the right direction? 3
Knowledge Redefined

Both generation and GDP growth thus form an integral part of the growth of percentage of gas and diesel based plants indicates insufficient peak load capacity
the Indian economy. The past shows that for an average growth of 5.5 per close to the load centres.
cent in the power sector, led to an average growth of 8.3 per cent of GDP in
the last five years. 200.00 Trend in Capacity Addition (in GW) 173.63
180.00 159.40
147.97
160.00 143.06
132.33
140.00 118.43
124.29
112.68
Present and future rising needs- what does the sector need 120.00 105.05 107.88

100.00
India is one of the most populous countries in the world with a population density 80.00
of 382 people per square kilometre (sq km). Despite being the world’s sixth largest 60.00
1
energy market, it has one of the lowest per unit energy consumption in the world . 40.00
This disparity further continues with the per capita electricity consumption as well. 20.00
India is just 24 per cent of the world average. 0.00

Per capita electricity consumption in FY

2009 (units per person)
RES (MNRE) Hydro (Renewable) Nuclear Diesel Gas Coal Total

15000 13000
10000 Source: CEA
5000 2400 3200
767 However despite the growth and progress made, the sector has shown dismal
0 performance in terms of the planned target achievement. As we know from the
India China US World previous plans as well, the targets set by the government have been too ambitious
Average and lack clarity. Same is the case with the current plan as well. The initial target of
2
Source: World Bank 78700 MW has seen many revisions till now, with the latest being at 51,000 MW
India being a mineral rich country has under its focus, generation capacity addition in April 2011.
based on coal as the primary fuel. The total installed generation capacity in India is
more than 174 GW. Of this coal thermal forms the main component with 65 per
cent of the total.

Fuel cost optimisation requires an optimal mix of fuels to efficiently cater to base,
intermediate and peak requirements of the power system. However in the case of
India, the fuel mix has not changed materially over the years. A constant

1
Primary Energy Consumption ~387 MMTOE (per capita 2.4 / btoe), world
2
average- 11.3/btoe http://www.metisbs.com/permalink.php?type=1&id=4084
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Metis Editorial Series; Meeting Power Sector Needs: Are we moving in the right direction? 4
Knowledge Redefined

100000 Target vs Planned Capacity Addition for 11th Plan (in MW)
Slippage in 2010-11 Capacity Addtion target (in MW)
80000
2007-12 8000 2834, 37% 3609, 57%, 1755.5, 26%
7114
60000 2010-11 6877
7000 6368
40000 78700 2009-10
6000
12160 5121.5
20000 2008-09
9585 5000 4280
3454 2007-08
0 9263 4000
Actual Planned 2759
3000
Source: MoP, Metis
2000
If we see the capacity achievement for the year 2010-11, all the three sectors have 1000
not achieved the targeted capacity as planned. However, the private sector has
shown better efficiencies vis-à-vis the centre and the state. It experienced a 0
shortfall of only 1755.5 MW or 26 per cent. The worst performer has been the state Central State Private
sector with a shortfall of atleast 57 per cent of the target.

The same dismal performance can be seen in the previous financial year with only
60 per cent of the targeted 20000 MW planned for the year. The only consolation
was that the figure of 12160 MW achieved last year has been the highest has
added in a single year.
Some documents of the Ministry of Power give an interesting break-up of the
slippages among the power companies in various “sectors” — the central PSUs,
the state PSUs and the private sector. Predictably, the state PSUs have fared the
worst with a slippage of 56.7 per cent. They could only add 2,759 MW capacity, in
comparison to targeted 6,368 MW. The private sector, too, did not meet the target,
but managed to add 5,151 MW against a target of 6,877 MW, a slippage of 25 per
cent, lowest amongst the three.
Target Achievement
Source: MoP, Metis
The numbers of slippages are constantly increasing and it is estimated that
3
more than 50000 MW will be slipping into the next five year plan period. This
leaves a big question the capability of the sector to perform as per the
requirements and growing needs of the economy.
Further India faces huge deficit in terms of peak and energy requirements. Even
though the deficit is falling in the last three years, the figure is still high as
compared to the global average of 3-4 per cent. The wide disparity in the power
demand-supply across various regions in the country also aggravates the situation.

3
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Metis Editorial Series; Meeting Power Sector Needs: Are we moving in the right direction? 5
Knowledge Redefined

Unreliable services are hampering agriculture and industry and penalising

Peak, Energy Deficit Trend (in %) households with large welfare losses. Further the level of cross subsidisation and
18 increasing discom burden has caused a worry for the power sector.
16.6
16 13.8
12.7 To sustain the growth momentum of atleast 8 -9 per cent the past few years, the
14 11.9 4
power sector has to in any case grow at a CAGR of atleast six per cent . Taking
12 10.3 this consideration, the future demand for power is expected to reach 303-310 GW
10 Energy by 2020.
11.1 Deficit
8 9.6 9.9 10.1
6 8.6
Challenges Ahead
4 Peak
2 Deficit According to the Power Ministry with the increase in the population and the
installed generation capacity, the per capita electricity consumption will reach
0
approximately 990 units per person by 2015, still below the target of 1000 units per
2006-07 2007-08 2008-09 2009-10 2010-11 person by 2012.
5
India is expected to become an energy surplus country by 2016-17 ; however, the
Source: CEA deficit situation is not expected to change. The reduction in deficit will be marred
by artificial scarcity of power supply by discoms in light of their failing financial
health.
It is estimated that India will surpass China in terms of population by 2030 and
become the most populist country in the world. To provide for such a large
population will put a strain on the power infrastructure in the country. The country Power Shortage Causes
is already facing a deficit situation with the World Bank predicting that nearly 40
per cent of the Indian population still does not have access to electricity. • Low plant load factor (PLF) due to non availability of fuel

With new initiatives taken in the sector in terms of introduction of competition, • Shortage of peaking power in the grid
trading, reforms in distribution, the sector was expected to develop at a faster
• Growth in demand for power outstripping the growth in generation and
pace. However, the performance and growth of the power sector has not been up capacity addition
to the mark, making the reform process incomplete.
• High T&D losses of about 28-30%
Future Directions
• Inadequate sub-transmission and distribution network in some states
With demand accelerating fast, it is high time the supply catches up with it, given
the economic, social and financial impact the critical role the power sector plays in • Inadequate inter-regional transmission capacity
sustaining growth and energy security, it is an imperative that the sector moves on
• Poor financial position of the state utilities hampering resource
the right growth track.
mobilisation
As the economic growth of the country progresses in the coming years, the higher
incomes will fuel the demand for power. However, it is the responsibility of the
government to ensure that at the same time the lower income groups (rural areas
especially) are brought under the umbrella of power connections. 4
Metis Research
5
Mercados Research
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Metis Editorial Series; Meeting Power Sector Needs: Are we moving in the right direction?
Knowledge Redefined
To reduce shortages and fuel the growth of the power sector, there is a need in
addressing issues and conflicts from various segments, along with focus on easing
movements of funding. The fund requirement is expected to increase to Rs 11.2
6 Finally the most important challenge lies ahead in the ever increasing financial burden
lakh crores in the next five year plan with generation requiring the bulk of it at Rs
5.1 lakh crores.
However along with this increase in funding there is an increased need to focus on
the failing state of discom finances and the high losses in electricity transmission.
With old and weak infrastructure a part of the present system, the reduction of
losses are taking place at a slower than expected level. Also the slow pace of the
implementation of the policies like RGGVY, RAPDRP has further delayed.
There is huge gap in the cost of supply and the tariff. Blended tariff has increased
to the tune of 6.5 per cent versus and average increase of 16.5 per cent in the cost
of supply, thereby highlighting the disparity in the country’s tariff structure. The
blended tariffs will have to increase by about 25 per cent if SEBs were to break-
even. If Coal India increases prices for utilities by about 20 per cent, a further five
per cent increase in overall tariffs would be required to break-even.
A bigger focus is to be made on removing the challenges lying ahead for power
generation. Some of these are enumerated below:
Concerns
Transfer of land during land acquisition along with the R&R issues
Loopholes in MoEF clearances for all- power generation, transmission, fuel availability
Non availability and increasing shortage of major fuels like coal, gas
Rising cost of power generation
Delay in and Lack of support infrastructure like railway lines for fuel transportation,
pipeline for gas transfer, limited power evacuation infrastructure
Limited domestic capability to implement new technological changes in equipment
manufacturing
Project delays due to non availability of equipments
Financial and economic impact in terms of interest movement impacting future cash
flow
Cyclic and unreliable criteria set by banks and financers for funding a project- like
signing of PPA before availability of finance and 25 year cash flow prediction in an
6
MoP
6
unstable environment.
Limited domestic financial sources- increasing shift to foreign markets for fund raising
on SEBs and discoms and lack of open access. According to Shunglu committee it
has been estimated that this financial burden for FY11 is Rs 68000 crores.
Competition in many critical segments of the industry, especially distribution, is
inadequate or incomplete and remains under threat (including peak price
escalation), while existing monopolies of State-owned distribution continue to
underperform (unmetered sales, leakages, outages, lack of transparency in
financial accounts and performance management), thereby increasing power
shortages in the country.
Power shortage ultimately results as power outages at retail level, which affects
the productiveness of the country’s economic activities. Electricity, one of the key
inputs for industrial production, decides the final price of many products.
The main reason for the country’s products’ ineffectiveness globally is due to
higher tariffs paid by the industrial segment. Beyond higher tariffs, unreliable and
poor quality supply greatly affects the national income from industrial houses.
As per the recent study conducted by MAIT (Manufacturers Association of
Information Technology) and the US based Emerson Network Power, India Inc has
lost INR 43,205 crore in 2008-09 due to power outages. Also the revenue loss due
to power failure grew at an average of 11.9 per cent in the past five years (2003 -
09). As electricity downtime costs the industry especially metals, cement, paper,
textile and IT sector on a greater extent, any shortage in the future will surely
hamper the economic growth rate.
In addition to these problems, a new issue of misusing market competition has
arisen with NTPC going on a signing spree of 38000 MW in a span of 3 months.
This has caused serious concerns to be addressed in terms of eating up a major
chunk of the future market for the other remaining players.
Going forward with our series, Metis will be covering the major challenges as
highlighted here in the coming editorial issues, to enable the beginning of a
collective thought process from all our readers and subscribers.