India's Power Sector Liberalisation: An Overview

Author(s): Antonette D'Sa, K. V. Narasimha Murthy and Amulya K. N. Reddy

Source: Economic and Political Weekly , Jun. 5-11, 1999, Vol. 34, No. 23 (Jun. 5-11,
1999), pp. 1427-1434
Published by: Economic and Political Weekly

Stable URL: https://www.jstor.org/stable/4408049

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 SPECIAL ARTICLES

India's Power Sector Liberalisation: An Overview

Antonette D'Sa
K V Narasimha Murthy
Amulya K N Reddy

The Indian power sector was opened with much fanfare to private participation in 1991 to
increase in generating capacity and to improve the system efficiency as well.
However, althollghl several plants are under conistruction, till early 1999, generation had comn
private planlts totalliing less than 2,000 MW. In contrast, some state undertakings have complete
projects even earlier than scheduled.
Independent power producers (IPPs) claim that their progress has been hindered by proble
litigation, financial arrangements, and obtaining clearances and fuel supply agreements. On the
the state electricity hboards have been burdened by power purchase agreements (PPAs) that favoLu
with such clauses (as availability pavyment irrespective of plant ultilisation, tariffs reflecting h
costs and returns on equity, etc.
The process of inviting private participation in the power sector and the problems experienced
have spurred on the restructuring of the power sector, including the formation of Central and Stat
Regulatory Commlissions. However, some important problems have not been addressed. Addition
generation capacity witholut corresponding improveiment of the transmnission and distribultion
likely to frther undermine the system efficiency. What is more, issues like the reduction of 'co
losses' appear to have been ignored.
Most importantly, investment in infrastructure has been a state responsibility because the int
long gestation coupled with the relatively low returns from serving all categories of consumers hav
such projects comllmercially unprofitable. Whether or not private participation can take on such
to be seen.

A NEW policy of opening electricity it was suggested that the only possible1996, according to a statement of the
generation to private participation source
was of funds was the private sector and,minister of state for power:4 these reached
announced by the central government view of the fact that the Indian capitala total of 31 by March 1998.5
in in
October 1991. Then. in May-June 1992, market did not appear to be able to make In December 1998, the power ministry
a significant contribution, that the foreignasked all the IPPs to achieve financial
a high-level team consisting of the union
cabinet secretary, power secretary private
and sector should be welcomed. closure by March 1999.6 Table 1 lists the
finance secretary visited the US, Europe, It was also hoped that there would beavailable information on the status of
a side-benefit regarding the unacceptablyprivate power plants.7 8 9
and Japan, to invite foreign private sector
low system efficiency of the state electricity In fact, very few private projects have
participation in the power sector. Foreign
and This efficiency would be improved actually been commissioneda:a
companies returned the visit to Indiaboards.
through the oft-claimed better management (I) the 235 MW gas-turbine plant at
found the electricity establishment offering
concessions and incentives that were and higher technical performance of theJegurupadu (owned by GVK Industries,
hitherto unheard of in the powerprivate sectorsector. CMS Energy (USA), APSEB, ABB and
business. the Hongkong-based Asia Infrastructure
WHAT HAS HAPPENED
Fund, and constructed by ABB on a turnkey
REASONS FOR INVITIN(; PRIVATE SECTOR
By August 1995, about 189 offers were basis): I (
PARTICIPATION
received to set up private power generating (2) the 515 MW combined-cycle gas-
In 1990. the situation facing the energy projects of over 75,000 MW, at an invest- turbine (CCGT) plant at Hazira(ofESSAR
sector in India was roughly as follows. The ment of more than Rs 2,76,000 crore.2 Power):
central government - the conventional Tilese included 95 projects with an aggre- (3) the 172 MW naphtha-based plant at
source for funding power projects - wasgate capacity of 48,137 MW, awarded Vijjeswaram (of the joint sector Andhra
believed to have reached its limit as far through Memoranda of Understanding Pradesh Gas Power Corporation Ltd):
as funding was concerned. The Indian (MOUs) or Letters of Intent, and 32 projects (4) the 160 MW ccgt plant at Baroda
electricity sector had virtually no surpluses(costing more than Rs 1,000 crore each) (of GIPCL); and
to make available for investment. The with an aggregate capacity of 20,697 MW, (5) the 826 MW (740 MW) naphtha-
World Bank had stated in 1989 that requests awarded by international competitive bid- based plant at Dabholb (of the Dabhol
from the electricity sector of developing ding.3 Of these, eight were considered for
a This information is based on reports in national
countries added up to $100 billion counter-guarantees
per by the central govern-
newspapers till May 1999.
year. In response, only about $20 billion
ment. Seventeen private power projects b According to the managingdirector, this plantis
was available from multilateral sources, were accorded the Techno-Economic,
likely to commence commercial operation by
leaving a gap of about $80 billion. Hence,Clearance (TEC) by the CEA. till March
mid-May.

Economic and Political Weekly June 5, 1999 1427

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 TABLE: PROJECT STATUS
(According to Information Available in Newspapers till March 1999)

Project Location Developers/ Capacity Status

State) Major Shareholders (MW)

Thermnal Power Projects:

* Dabhol (LNG) Maharashtra Dabhol Power Co (740+1,440) Power Purchase Agreements (PPAs) signed, with re-negotiation
(Enron Dev Corp. (earlier 695+ 1320 MW); counter-guarantees for tariff and termination
Bechtel. GE) payments obtained; Phase I complete; fuel linkage and financial closure
for Phase II obtained;

C Bhadravati (coal) M aharashtra Ispat (Mittals) 1.072 Working for financial closure (FC); obtained counter-guarantee

* Jegurupadu (ccgt) AP GVK Reddy, etc 235 Commissioned and working (counter-guarantee only for termination
payment obtained after commissioning), no escrow account as yet
opened by APSEB;

Vijjeswaram(liquid fuel) AP AP Gas Power Corp 172 Commissioned; working

Godavari (ccgt) AP Spectrum Power 208 Construction in final stages, opted forno counter-guarantee;

* Vishakapatnam (coal) AP Hinduja National Power 1.040 Discussions on for fuel supply agreement; counter-guarantee
( 1998); fuel-supply agreement finalised

* Mangalore (coal) Karnataka Mangalore Thermal Power 1,000 Re-negotiation in November 1997, and TEC obtained, bu
(Cogentrix. China Light and litigation (Supreme Court); a separate project fora 300km tran
Power) line (= Rs 700 crord) is required;

l b Valley Orissa AES Transpower 420 Re-negotiated PPA: engineering procurement construction (EPC)
contract under finalisation;

* Neyveli (coal) TN CMS Energy 250 Counter-guarantee signed: nearing financial closure;
Shalivahana (fuel oil) AP Shalivahana Power Corpn 34.56 APSEB's permission;

Kondapalli AP Lanco Group (Hyderabad) 330 Financial closure (December 1998)

an(t Eastern Generation (UK)

Hazira (liquid fuel) Gujarat ESSAR Power 515 Commissioned and working, but GSEB yet to open letters of credit:

Baroda (liquid fuel) Gujarat GIPCL 160 Commissioned and working;

Dholpur(naphtha) RPG Group

Toranagal (coal) Karnataka Jindal Tractabel Power 260 130 MW unit

commissioned:

Pillaiperumalnallur(ccgt) TN Dyna Makowski 330.5

N Madras (coal)St 1I TN Videocon Power 1,050 Working forfinancial closure

N Madras St ll TN Tri-Sakti 500 Working forfinancial closure

Basin Bridge (diesel) TN GMR Vasavi Power 220 Underimplementation

Balagarh (coal) WB BPCL(RPG group) 500 Techno-economic clearance(TEC) expected

Korba MP Daewoo 1,070 Nearing financial closure, but escrow cover to be given

Bina (coal) MP Aditya Birla Group 578 Nearing financial closure, but escrow cover to be given;

Bhilai MP L & T 574 Nearing financial closure, but escrow cover to be given

Srimushnam (lignite) TN BSES Ltd (TICAPCO) 250

Paguthan (ccgt) Gujarat GTEC 655 To be completed shortly

H)vdro-electric projects:
Almatti Karnataka Chamundi PowerCorp 1,107 Clearance awaited;
Baspa State II HP Jai Prakash 300
MaheshwarHEP MP S Kumar's 400 Working forfinancial closure;

Note: * Indicate the projects termed 'fast-track'.

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Power Company - Enron International). I I yield relatively low returns and have longsigned a large number of PPAs with an
payback periods. Consequently, poweraggregate capacity higher than could be
Several other projects are under way. At
the end of March 1998. projects underplants have been perceived to be com-supported by way of escrows. For example.
implementation accounted for a total mercially less profitable. Such projectsin Madhya Pradesh (MP), the SEB has
capacity of about 3.000 MW. Another were. therefore, undertaken by the public signed PPAs aggregating to about 6,500
sector. Private promoters face difficultiesMW and of these. nine projects totalling
eight projects with atotal capacity of 3,654
MW had been sanctioned financial when trying to obtain funding, as bankersabout4,600 MW have already received the
assistance by institutions, but financial are unlikely to agree to loans with a maturityCEA' s techno-economic clearance. In con-
closure has not yet heen achieved.12 longer than three years, to match the tenortrast. leading financial institutions have
In contrast, several central and state of their deposit liabilities. Even financialassessed the total 'escrowable capacity' of
government undertaki gs have completed institutions (FIs) find it difficult to extendMadhya Pradesh at only around 2,561
or are completing their projects on time loans commensurate with the long paybackMW. 18 Similar problems also exist in some
(or even earlier than scheduled). For periods of power projects. other States.
example, Units V and VI (210 MW each)Moreover, the State Electricity Board In addition to the overestimation of
of the Raiclhur Thermal Power Station are (SEB) is invariably the sole purchaser ofescrow capacity. there are two problens:
being commissioned ahead of schedule bythe power that a private sector generator (a) distribution regions that guarantee
the Karnataka Power Corporation (KPCL).generates. That being the case, the private payment through escrow accounts could
The completion of tInit V in a record sector "will not take the risk of not being be 'cherry picked' by the independent
period of only 28 monlths13 has resulted paid"16 by SEBs in poor financial health. power producer leaving the SEB with the
in a saving ofl Rs 200 crore; with a capitalThe SEBs are also unlikely to get backing unremunerative distribution regions to
cost of Rs 3.22 crore per MW. it is the from financial agencies for their service its other commitments; and
lowest cost thermal unit to be constructed commitments to purchase electricity from (b) the existing stakeholders in the cash
in recent years. 4 the private producers. Hence. counter-flows of SEBs object to such agreements.
Further. in the case o'f private promoters,guarantees from the central government For instance, the State Bank of India(which
projects without foreign lparticipation arehave been sought. provides overdraft facilities to the SEBs)
being completed as scheduled. For ex- Some counter-guarantees from the is refusing to lift its lien on the receivables
central government were eventually
ample. the chief promoter of the 235 MW of the SEBs. Further, at a top-level meeting
Jegurupadu project in Andhra Pradeshobtained in the case of six of the eight 'fast- in January 1998, banks pointed out that
avoided delays by persuading Indian track' projects. Even with these counter-state governments were not paying their
financial institutions to invest even before guarantees. promoters tend to wait dues
foron bonds issued, but were issuing
any counter-guarantee was obtained.-5 other arrangements such as fuel supply more and more guarantees!
agreements to be finalised. Other sources of funds are limited. While
PROBLIEMS ENCOUINTERED
There are other options that could be
private power projects in industrialised
The stakeholders in the power scenario considered for dealing with the financial countries raise funds through institutional
are the generators - independent power problem, such as:a investors (insurance companies, pension
producers (IPPs) and/or state undertaki ngs, (a) an escrow account - into which the funds, etc), in India these usually invest
the distributors (at present the State cash inflows of the SEB are deposited and i n some waya in government undertakings,
Electricity Boards), the government (central to which an independent power producer limiting the sources for private power
and state) and the consumers (commercial, (IPP) would have first access in case of projects. Hence, as compared with the
industrial, and others). as well as house- defaults by the SEB, investment requirements of the private
holds (with and without electricity). (b) an agreement by which the IPP couldpower sector estimated at Rs 2,92,500
Attention will now be focused on the crore for the next decade, the maximum
supply electricity directly to buyers, through
problems noted by the private producers the existing lines, and borrowing from Indian Fs/banks is pegged
and the electricity establishment in the (c) an irrevocable letter of credit, at 40 per cent of the outlay or Rs 1. 17,000
course of constructing new power plants. favouring the IPP on certain conditionscrore. 9
being met and issued by a highly rated Risk sharing: The many risks perceived
Problems Mentionel bhy Private
Producers
by private producers20 are usually
bank/financial institution - guaranteeing
payment on behalf of the SEBs. addressed in the PPAs.
Construction risk: This is the risk of the
Litigation/rene gotiation leading to delays. With regard to escrow accounts, financial
For several reasons, for example, high
institutions are said to be limiting their
project not being completed on time and
costs, environmental impacts, and loans to IPPs at the SEB's 'escrowable' within the budget. To counter this risk,
perception of financial irregularities, therecapacity. It is recommended that the amount
provisions for liquidation damages to.cover
in the escrow account should be 9.25 times
have been protests against some power the costs of delays are included in the
plants. Litigation as also renegotiation ofthe monthly tariff payable by the SEBs, engineering procurement construction
Power Purchase Agreements (PPAs) have that the escrow account should be charged(EPC) contract.
caused long delays in project completion,exclusively in fax our o' an IPP with a pro- Market risk: The market risk includes
so that construction has not been completedvision to assign the same to lenders of the demand risk and price risk. A demand risk
as scheduled. For instance, the MangaloreIPPs, and that the escrow account should is avoided by the 'take or pay' stipulation
Power Company's PPA for a 1,000 MWbe established before financial closure.17 of the PPAs, according to which the SEB
coal-based plant was originally signed in However, problems exist even with the agrees to pay the IPP the 'availability' rate
1993. re-negotiated in November 1997, escrow mechanism. Several states have regardless of the number of Kwh actually
and has yet to be resolved.
a The IDBI has been financing purchase of
Financingt pr)oblelms Compared to typical a These have been described in detail by Credit
indigenous equipmentby various SEBs through
commercial projects, in frastructure projects Analysis and Research Limited. its bills rediscounting scheme.

Economic and Political Weekly June 5, 1999 1429

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obtained. Similarly, the price risk is avoided be paid by the IPPs have been regarded crore/MWa
by or $1,366/KW (- Rs 2.942.6
by the tariff structure in which all costs them as being too high, as they include
crore27 for 695 MW). In comparison, in
of producing power - fixed (interest, charges forcommitment, import-handling, the US. a basic 300 MW coal-based steam-
depreciation, O and NM, insurance, taxes)service, and so on (as shown in Annexureelectric
1). plant (about 30 per cent more
expensive than an LNG-basedt plant)
and variable (fuel), plus a return on equity Environmental problems: Some require-
(ROE) are assured. ments of the ministry of environment have required about $1,100/KW in 1990 prices,
Fuel-supply risk: This is the risk of notbeen unacceptable to the IPPs. For instance, which works out to about Rs 3.4 crore/
obtaining a timely supply of the appropriateafter nine years of generation, a 100 per MW @ Rs 31/$,28 and NTPC's 645 MW
fuel. To counter this risk, IPPs either signcent ash utilisation for coal plants was gas-based Kawas projectc (commissioned
long-term contracts with the public sectorrequired. Power companies were alsoin September 1993) at Rs 2.4 crore per
supplier (for example. gas from GAIL) orexpected to develop ash products and MW.2930 In addition, there were payments
acquire a captive source (for example, amarket them.23 in the deal for equipment/consultancy/
captive coal mine). For, liquid fuel trans- recurring expenses to affiliates of the
Problems Faced by the SEBs owner-firms. All this led to critical com-
portation sometimes presents a problem,
because oil suppliers do not guarantee Unacceptable PPA term.s - not viable for ments and some re-negotiation. The Enron
transportation between the port/refinerythe SEBs: According to the terms specified project (Phase I) cost was reduced, as was
and the power plant, necessitating a in some of the PPAs, the country would the Cogentrix 1,000 MW project cost (from
contract with the Railways.21 have to pay an exorbitant price for foreign Rs 4,387 crore to Rs 3,950 crore).3' How-
Exchange fluctuation risk: The problem of participation. Several harmful features are ever, a part of the reduction in costs is
losing at limes when the rupee falls islisted below.24 claimed by critics to be cosmetic:32 for
avoided either by demnanding payment inAssured high PLF: Plants were to be instance, the Enron-LNG facility appears
dollar terms or by ensuring foreign assured of electricity sales at PLFs of under operating rather than capital cost,
payments into an international escrow> 68.5 per cent, these high PLFs being and customs duty reductions have been
accou nt.
buttressed by power purchase agreements. reflected as capital cost reduction.
Obtainizn clearancies: There are numerous This commitment implies that during the In cases where the prices of equipment
clearances - statutory and non-statutory daily- off-peak hours and the monsoon are falling,d adherence to the PPA prices
season, the existing plants would have to would be uneconomical for the power
to be obtained for starting a power project.22
The statutory clearances include cost be backed down, resulting in uneconomic purchaser (the SEB).
estimate clearance, techno-economic plant dispatch (that is, lower cost-per-unit High tariffs: In addition to the capital
clearance (TEC) from CEA. water- power would be replaced by higher cost component, the variable costs chargeable
avai lability clearance r-om the CWC/State power). Considering that several existing during the life of the projects are expected
government, pollution clearance from the
thermal plants that can operate at higher to rise, allowing the escalation of the costs
SPCB/CPCB. forest and environment than 68.5 per cent are backed down in of various components - fees (such as
clearance and rehabilitation and resettle- periods of good reservoir inflows in the Management Fee, Testing Fee, and Com-
ment clearance from the MoEF and the southern region, the situation would only missioning Fee), insurance charges, 'tax
SEB/state government clearance. The non- be worsened.25 incremental charges', etc, to be passed on
statutory clearances include land avail- Further, if the real ailment of the power to the purchaser.
ability from the state government, fuel sector is a shortage of peaking power rather Unfavourable financing: The rates of
linkages from the departments of coal and than energy, then the addition of base-load interest payable on dollar and rupee debt
petroleum and natural gas, transportation power stations is not likely to provide a have been fixed as on the date of financial
of fuel from the departments of coal/ solution.26 closure. Up to this stage (that is, financial
petroleum and natural gas, and theHigh return on equity: A relatively high closure and securement of counter-
ministries of railways. and shipping and(>11 per cent) rate of return (ROE) was guarantees), the perceived lender risks and
promised to the investor, at a capacity
surface transport, and financing from CEA/ the corresponding rates of interest are rela
DOP/department of economic affairs/FIs. utilisation of 68.5 per cent. This return tively high. However, as the project progres-
would be increased if the utilisation
All these can result in considerable delays ses, the risk falls and the debt could be re-
and thereby cost escalation. exceeded this level. More importantly, financed (that is, interest rates can be low-
However, from August 1996, power these returns were to be guaranteedered through re-negotiation). Despite this
by the
projects with investment of Rs 1,000 crore the utility is still bound by the fixed rates
central government if the state electricity
have been exempted from CEA and boards were unable to pay. Further Problems
environmental clearances. The earlier limit High capital costs of private plants: The
was Rs 400 crore, but il has been suggested capital costs of some projects (as per Technical
their losses and improvement of
that this limit be raised to Rs 4,000 crore. PPAs) were much higher than thosethe T and D system: Increasing the gene-
known
Several 'fast-track' projects were however,to be incurred both abroad and in Indiaa
above this limit. where international competitive bidding a This included items such as 'pre-operative'
Obtaining Jfel linkage agreements: Fuel did not take place. Forexample, the capitalexpenses of Rs 547.26 crore or Rs 0.787 crore/
linkage agreements (including licences for cost of Phase I of the Enron (Dabhol Power MW which inflated the capital cost.
b A combined-cycle plant involving a gas-turbine
importing fuels - coal, naphtha, diesel and Company) LNG-based plant was Rs 4.23 driven by natural gas would cost roughly about
LNG or higher grade Indian coal) have, $ 600-700/kW and a similar plant driven by
at times, been difficult to obtain. In addition, LNG-handling equipment. Thus, a LNG-based
a The National Working Group on Power Sectorcombined-steam-electric plant.
the rules pertaining to the use of some fuels
had in a detailed September/October 1994 study
c This project was excuted on a turnkey basis by
have not been clear or have been changed.shown that the capital costs of both combined- Alsthom of France.
This indecision has delayed several pro- cycle gas-turbine and coal-based plants are lower
d This has been experienced in the international
with indigenous technology.
jects. Furthermore, the charges that have to market.

1430 Economic and Political Weekly June 5. 1999

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, ation capacity is necessary but not suffi- as a whole and have spurred on the authority to decide on plant despatch, that
cient for supplying electricity to consumers; restructuring and regulation process. This is, to decide which plants should be
the transmission and distribution system is being described below. operated to meet demand and those that
has to be extended and maintained to ensure would have to back down in case of a fall
Regulator), Colmmissions in demand. on the basis of the merit order
the efficient evacuation of power from the
generation sites. Without improved T and The Indian Electricity Act of 1910 and operation clause. To strengthen grid
D facilities, the technical inefficiencies the Electricity (Supply) Act of 1948 were management and enforce grid-discipline,
will continue. amended in 1996 to enable the setting the REBs have been granted legal status.44
A separate trading enterprise forT and Dup of state and central level electricity regu- However, doubts have been expressed
(for example. GRIDCO in Orissa) thatlatory commissions.37 Each state and union regarding the efficiency of co-ordination
needs to collect a certain ROI would entail territory was to set up an independent State between the REBs, the SERCs, the CERC
much higher tariff-rates which some ElectricityRegulatory Comnission (SERC) and the CEA.45
consumers may be unable to bear. to deal with tariff fixation, that is, to deter-
Foreign Equity Participation
Commercial losses on the Tand D system:mine the tariff for wholesale or retail sale
The losses incurred along the distributionof electricity and forthe use of transmission Foreign equity participation up to 100
system due to theft of electricity have notfacilities. Some states have established per cent has been extended for electricity
been addressed by introducing more gene-their regulatory commissions, while others generation, transmission, and'distribution
rators into the system. In fact, the SEBs'are in the process of doing so.38 (except for atomic reactors).
financial position would worsen if electri- At the centre, a Central ElectricityFiscal Measures
city purchased at higher prices (the costs-Regulatory Commission (CERC) has been
plus-return formula) were not paid for by formed to deal with all state-level appeals The tax holiday, granted to the power
the users. sector, has been extended up to the year
and inter-state tlows.39 From April 1, 1999,
Privatisation ofthe TandD system: Private the Central Electricity Authorit' 'CEA) 2003.46
participation in the transmission and has entrusted the CERC with the task of
Mega-Power Policy
distribution of the electricity system has regulating power tariffs of central govern-
also presented problems. The evaluation ment power utilities, inter-state generating This policy-formulated in October 1998
of assets in cases of transfer to new owners companies and inter-state transmission for large power projects at strategic
has to be carefully worked out.33 Forjoint- tariffs.40 An important objective of the locations-is applicable to the construction
venture undertakings between an SEB and CERC is to improve operations in the and operation of hydro-electric power
a private firm/consortia of firms. the SEB power sector, by measures such as in- plants of at least 500 MW and thermal
is liable to lose control.34 In addition, the creased efficiency, big investments in the plants of at least 1,000 MW.
SEBs sometimes define the requirements T and D systems, time-of-the-day pricing, The project promoters are insulated from
for transmissions contractsa such that there and power flow from surplus to deficit the lack of credit-worthiness of the SEBs
are very few companies capable of fulfilling regions.41 Further, the central government because electricity can be sold either
the criteria as defined. so that negotiation or the CERC can grant a transmission directly to a 'cluster' of large consumers
is even more difficult.35,36 licence to anyone to construct, maintain, orto the PowerTrading Corporation (PTC)
Non-subsidised electricity: The consumers and operate any inter-state transmission which can withdraw funds from the state's
(mainly domestic and agricultural) system under the direction, control. and central share (Central Plan Allocation, etc)
currently provided electricity at subsidised supervision of the central transmission if the SEB defaults on.its payments. There
rates would be unable to handle "user-cost utility.42 will also be benefits for these mega power
recovery", that is, to pay cost-reflective projects: customs duty on the import of
Restructuring of the SEBs capital equipment has been waived, and
tariffs. Further, if only these consumers are
left to the SEBs. their financial position The power ministry has circulated detail- some sales tax/octroi concessions have
would be far worse than at present. ed guidelines on power sector reforms to been provided.47
Fuel imports: In spite of the availability of SEBs. The SEBs are expected to "un- However, the reaction to the mega-policy
indigenous sources of electricity (-hydro- bundle" their activities, trifurcating them has not been very favourable. Repre-
power, coal, biomass), foreign power between generation, transmission and sentatives of SEBs oppose the idea of the
producers tend to opt for imported fuel. distribution'. The process of reforms should mega projects bypassing the SEBs and
The larger the number of foreign power take place in a phased manner: independent attracting large customers.48 IPPs feel that
producers in the field. the greater will be divisions should be created and then 'cor- this policy will be a hindrance to smaller
the country's dependence on imported fuel poratised'. The amendment to the Electri- projects,49 and would prefer that the con-
for power generation, worsening its debt city Acts also provided for private invest- cessions extended to mega projects be
levels still further. ment in transmission and the CERC has extended to all IPPs.50
sent guidelines to the SEBs regarding their
RECENT INSTITUTIONAL DEVELOPMENTS New Financial Arrangemlents
granting licences to private sector under-
The problems experienced seem to have takings for the transmission of power.43Additional institutions: For the purpose of
triggered discussions on the power system financing the power sector, new arrange-
Regional Electricit) Boards (REBs) ments have been made in recent times.
a For example. the minimum qualifying criteria
listed in the request for qualification for the Regional ElectricityBoards (REBs) have These include setting up of the Infra-
Mangalore Evacuation Project stated that the been given (in November 1996) the structure Development Finance Company,
lead promoter "demonst rate successful develop- broadening the scope of the public sector
ment in the past of EHV systems (operating at a This trifiurecation has already been effected in the Power Finance Corporation (PFC),
not less than 3 80kV) of not less than 2.0()0 ckm state of Orissa, while in Haryana. the Haryana
and at least 10 EHV sub-stations (operating at ERC has granted a licence to Haryana Vidyut allowing an active role for the PFC in
not less than 380 kV)". Prasaran Nigam ftor transmission and distribution. negotiating loans from international banks

Economic and Political Weekly June 5, 1999 1431

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and foreign capital markets, constitution decreasing the unit cost of installed capacitylosses would be borne by the distributors
of a Power Development Fund by the power (say, Rs crore/MW). alone.
ministry for speedy implementation and The former can be lowered through
execution of power projects as also to Surplus Energy/Capacity
improved efficiency in electricity use (i e,
finance feasibility studies for setting up demand-side measures),53 while the latter In some regions of the country, with the
power plants, mooting a Power Trading by reducing the electricity costs per unitcompletion of projects under construction,
Company (PTC) to purchase power from (less expensive generation options, there has come to be (except perhaps during
power-surplus regions and sell it to power- reducing T and D losses and/or generationperiods of peak demand) an excess of
deficient regions, launching of 'Infra-
at the consumption sites through non- electricity availability over that required
structure Bonds' to channel householdconventional decentralised technologies).by customers at the tariff payable.5 This
savings to the power sector, and involving
Apart from the improvement of end-usesurplus may not have occurred ifelectricity
efficiencies, the efficient production and connections were extended to all homes,
provident funds as a potentially important
source of funding. transmission of conventional energy and and if rural areas were supplied throughout
the harnessing of non-conventional
Sources of finance still limited. According the day. However, with these consumers
to the Asian Development Bank,decentralised
in sources of energy could be unlikely to be paying the PPA tariffs for
quicker and could reduce the financial electricity, commissioning of new private
November 1996, Asia required $ 100 billion
a year in capital to develop new power
requirements of the power sector. One power plants could lead to a surplus.
must
generation plants, of which only 5- 10 perendeavour to arrive at a mix of The electricity surplus is also due to the
technologies - centralised generation,
cent could be met by developmentbanks.51 de- industrial recession, coupled with
present
centralised
Hence, internal generation of funds is still generation, and efficiency
the shift of several industrial units to captive
required. generation because of their earlier experi-
improvement, to bridge the demand-supply

CONCLU.SIONS
gap at the lowest possible cost. ence of inadequate/unreliable grid supply.
However, an upswing in the industrial
Efficiency and Costs of Supply
IPPs Have Not Yet Made Major cycle could expand the electricity require-
Contributions ment, so that the current surplus position
If the cost of supplying electricity through
private producers was expected to bemay lowernot be sustained.
Quite contrary to the confident expecta- than that of state-run plants (due to higher
tions in 1991-92, the private sector has efficiency, etc) this cost-reduction has DevelopmentNeeds May Be Undermined
not
hardly contributed thus far to bridging the occurred. Some customers - lower-income house-
power demand-supply gap. Only a few IPPs The proposed electricity tariffs (including holds and small farms - may be unable
have actually commenced generation, fuel escalation. etc) at private plants appear to afford electricity at its marginal cost.
perhaps due to the problems experienced. to be higher than those of similar plants Thus far. electricity has been subsidised
However, i f all the proj ects under consider- at state undertakings (for example, electri- by the state for such consumers. However,
ation do come on streani, the share of private city from coal-based thermal plants). it seems likely that profit-maximising
producers will increase substantially. Hence, even if these plants are technically private power producers/distributors will
more efficient, this benefit may not reach jettison public benefits and economically
Public Sector tUnder-takings Retain the consumer. weak consumers (connected and yet-to-
Their Imnportance
be-connected). Correspondingly, the SEBs'
System Losses
Public sector undertakings have con- financial position would worsen further if
tinued to remain the main players in the Adding the costs of transmission and they lost only their higher-paying (industrial
field, particularly as they have been con- distribution (including system improve- and commercial sector) consumers to
structing generating plants on, and even ment and maintenance) to the generation private power suppliers.
ahead of, schedule. For example, Karnataka costs at private plants would result in even
Power Corporation's Raichur TPS Units higher tariffs. Further, if system improve- Fundamental Problem of Private
V and VI and National Thermal Power Power Projects
ments were not brought about, the technical
Corporation's Kayamkulam TPS are being
losses currently suffered by the SEBs would The importance of the state in the power
completed ahead of schedule. hamper private distributors too. generation sector has not lessened in spite
Thus it would be useful to concentrate of the entry of the private sector. In fact.
Excessive Focus on Supply Rather
on improving the efficiency and thereby
the delays in the projects of the IPPs reveal
Than Developnent and Efficiencv that the IPPs need the intervention of the
the financial position of state undertakings.
The growth-oriented supply-side con- It is not clear whether or not 'commercial state in innumerable ways even though the
sumption directed paradigm seems tolosses' have or theft can be reduced by private constant demand is for the state to vacate
dominated the decision-making insuppliers; the obviously if these losses were the power sector and leave it to the market.
energy-sector, to the exclusion of end-useavoided, their operational efficiency would This contradiction is primarily because of
efficiencies. be higher than that of the SEBs. However, the intrinsic long gestation and payback
A development-focused end-use orientedthere is no reason to conclude that in dealing and low interest rate of these projects.
service-directed paradigm, promoted with as many dispersed connections as the Commercial ventures are associated with
among others by the International EnergySEBs, private suppliers will be more suc- a much shorter payback period and a much
Initiative,52 shifts the emphasis fromcessful at eliminating theft. Further, it does higher interest rate which justify the risks
increased consumption to increased energy not seem likely that restructuring of the involved.
services. It explores the possibility of SEBs, that is, assigning the activities of
Public Debate and Informed Discussion
lowering the investment required - eithergeneration, transmission and distribution
by decreasing the energy-intensiUy (energyto separate organisations can improve this Thanks to controversial power projects,
required per unit ol GDP) and/or by situation, except that the brunt of such there has been public debate and informed

i432 Economic and Political Weekly June 5, 1999

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discussion. However, there should be Fuel-specific details include: and transporter, particularly when they are
(1) Liquid -fuels: The Liquid-fuel policy
greater transparency in decision-making, monopoly companies; the railway autho-
greater public participation (particularly
had permitted IPPs to use heavy petroleum rities do not wish to undertake the risks
stockof(HPS), low sulphur heavy stock
from civil society) and greater spread and pay demurrage in cases of defaults.
information. (LSHS). heavy furnace oil (HFO), and (c) Fuel suppliers should be allowed to sell
natural gas as primary fuels for power fuel to a third party if an IPP fails to honour
Annexure 1: Arrangements for Fuel
projects, but disallowed high speed diesel its fuel offtake commitments; in such a
Linkages (HSD). case, the power company will have to pay
Independent power producers have (2) Naphtha:
to (a) In August 1996. the a penalty for the difference, if any, between
specify fuel-linkages, because these commerce
often ministry refused licences for the contract price and the actual price paid.
involve imported fuel. Currently,the import of naphtha for power plants. This is unacceptable to the IPPs, but
fuel
linkage agreements have to be made (b) Later
on guidelines (completed in government officials contend that if a power
the basis of the Techno-Economic December 1996) on the basis of which fuelgenerator can demand compensation in
Clearance. The latter is not awarded till linkages came to be awarded were drawn lieu of the shortages in supply, the fuel
the environmental clearance is obtained, supplier should be compensated for any
up. Here, the relevant state's peaking power
which in turn is dependent on the type shortage
of was taken as the chief criterion
shortage in fuel offtake.
fuel to be used. Further, certain paymentsfor allowing the use of naphtha.
Annexure 2: Current Financial
have to be made to compensate for the (3) LNG. (a) In 1996, the petroleum
import facilities. ministry directed that a new undertaking
Requirements
Costs: The charges for fuel-linkages- the LNG Corporation of India - be According to current (1998) guide-
included commitment charges of Rs formed 16 to set up facilities for the import lines.59 the following criteria must be met
lakh per MW, import-handling chargeof ofLNG. Meanwhile Enron signed a letter when pri vate power promoters obtai n funds
of intent for a partnership with GAIL to for a project:
3.5 per cent of the cif value of the quantity
of fuel imported, service charges of 4 persupply LNG annually to its own Dabhol (a) the promoter's share in a private
plant and to Gujarat.
cent of landed costs of fuels for providing sector power project must be at least 11
(b) LNG has the advantage of being a
storage and handling services at port/inland per cent of the total outlay,
terminals and for incurring stock-loss, 'clean' fuel, but its transportation costs are (b) the company is allowed adebt:equity
inventory-carrying costs, etc, liquidated considerable. ratio of 4:1,
damages up to 5 per cent of the fuel cost (c) With the global slow-down in the (c) up to 40 per cent of the total outlay
to be received from the oil companies demand
on for LNG, most major producers can be raised from Indian financial
have been desperately searching for new
the shortfall quantity of fuel supplied, and institutions and banks. and
guarantee charge of 8 per cent premium customers and critics56 of the LNG-based (d) no single FI/bank can lend more than
in view of accepting liquidated/conse- power policy feel that India has needlessly 25 percent of its net worth to an individual
quential damages.55 succumbed to international pressure company or project, and not more than 15
Later. in September 1997, all thesewithout scrutinising the feasibility of option per cent of its total outstanding loan and
charges were reduced. The commitment for such an LNG-based programme. guarantee portfolio to a single industry.
charges were reduced to Rs 9 lakh per (d) As a wide range of prices prevail in
Notes
MW. Of this. Rs 5 lakh would be payable the world market, the eventual deal depends
by demand drafts in two equal instalments,on the bargaining power of the buyer. I A A Churchill and R J Saunders, 'Financing
while the rest would be secured with (4) Petro-coke. There has been indecisionof the Energy Sector in Developing Countries'.
irrevocable renewable bank guarantees; regarding this type of fuel. (The 500 MW 14th Congress of the World Energy Conference,
the payment of Rs 5 lakh would beReliance re- project has been delayed and Montreal, September 14-22, 1989.
funded with 18 per cent interest over IOC has
a decided to shift to a different 2 PDevarajan, 'PowerFunding: SEBs the Weak
Link', Business Line, Bangalore, September9,
period of 10 years through rebates on
fuel).57
1996, p 6.
fuel purchase. Correspondingly. (5) theCoal: Coal India has been made to 3 P Devarajan, 'Private Power Undertakings:
other charges were reduced: the import- supply the required grade of coal to fast- Tripped at Every Stage', Business Line, March
handling charge was reduced to 1.5track per power projects5 (the Hinduj a' s 1,040 16, 1998, p 8, citing ICICI's Study entitled
cent of the cif value, the service chargesMW Vishakapatnam plant and the Nippon- Infrastructure Financing - Key Issues.
4 Report in the Decclan Herald. July 11, 1996,
were reduced to 3.75 per cent for naphtha-Denro-EDF-GE promoted Bhadravati
p 6.
based and 3.5 per cent for fuel-oil-based plant), although the price has not been 5 P Devarajan, 'Private Power Undertakings...'
plants, and the guarantee charge lowered specified.a op cit.
to 5 per cent. The liquidated damages There have been contentious conditions in 6 Report in the Deccan Herald, December 12,
payable by the oil companies werethe im- Fuel Supply Agreement (FSA) of 1997: 1998, p 12.
proved to as much as 17 per cent of(a) the
The developer is required to bear the 7 S BanerjeeandS Mukherjee. 'Neither Fast, nor

project cost. risks of fuel supply, but the developers on Track, The Economic Times, Bangalore,
December 22, 1996, p 7.
In specific cases, agreements had to be insist that these risks should be borne by
8 M Ramesh, 'IPPS - More Questions than
reached between several parties. For the fuel supplier and transporter. Answers', Business Line, Bangalore,
instance, in the case of the 1,000 MW coal- (b) The developer is required to enter into November 16, 1998, p 3.
fired plant of Hinduja National Power tripartite agreements with the fuel supplier
9 Report in the Deccan Herald, December 18,
Corporation. the promoters are insisting 1998, p 9.
on guaranteed low-ash coal supply at the 10 P Devarajan, 'Private Power Undertakings...'
a The cost of setting up washeries can be passed op cit.
site; this required agreements between them
on to the power generators, but these could 11
in Sanjay Bhatnagar, managing director, Enron
and both Coal India and the railways turn pass the price-escalation to the electricity India, as quoted in 'Enron Announces Financial
ministry. purchasers. Closure of Dabhol Phase-lI', Business Line,

Economic and Political Weekly June 5, 1999 1433

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 Bangalore, May 7. 1999, p 2. 34 'Where It Runs Counter to Shakarguruswamy 48 'States' ResponseMixed to Mega Power Policy';
12 P Devarajan, 'Private Power Undertakings...', Report'. "Mangalore Evacuation Project: Business Line, Bangalore, November24, 1998.
op cit. Lop-Sided Pre-Bid Methodology", and 'Back- p 2.

13 Report in The Hindu, Bangalore, January 26, to-Back Implications" by Balaji C Mouli, 49 Report in The Economic Time.s. Bangalore,
1999, p 3. Business Line, Bangalore, August 21. 1997, November 25. 1998, p 3.
14 Report in The Economic Tines, Bangalore, p3. 50 Recommendations from the seminaron 'Mega
January 26, 1999, p . 35 'Hurdles in Privatising Power Distribution'. Power Policy and Energy Trading Options',
15 'One Watt at a Time', The Economist, July 7, quoted above. Hotel Taj Coromandel, Chennai, January 27,
1996, pp 75-76. 36 Balaji C Mouli, 'Karnataka Transmission 1999.
16 IJ Ahluwaliaand A Berry, 'Perspectives: Focus Project: It is a One-Horse Race' in Business
5 1 Statement of Vladimir Bohun, deputy director
on Indo-Canadian Business and Economic Line, Bangalore, August 5. 1997, p 2 of ADB's energy and financial sector, cited in
37 Report in The Economic Times, Bangalore. a report in The Economic Times, November 29.
Issues'. sponsored by the Canadian International
Development Agency. 1996, cited in The
January 1, 1997, p 3. 1996. p II
Economzic Timie.v. August 3. 1996, p 3.38 Econom'ic Siurvey, /998- 99. excerpts quoted 52in
Brochure of the International Energy Initiative,
17 S Mukherlee, 'Fls Seek Quality Escrow the newspapers of February 25, 1999. 25/5 Borebank, Road, Benson Town. Bangalore
Accounts for Loan to IPPs', The Econo,nic 39 'Power Sector Reforms ata Slow Pace', Business560 046.
Times. Bangalore, November 14, 1998. p 1. Line, Bangalore. December 30, 1998, p 5.53 China has reduced its energy intensity from
1 8 'The Escrow Fiasco'. a report in India Pow\er 40 News Brief in India Powterand Infrl.'structulrearound 1.4 in 1978 to around 0.8 in 1993.
lrand Infraistructure- Re,porte-, Vol 2, No 3, Relporter, Vol 2, Number 3, p 2. 54 Already Pakistan is experiencing this surplus
March 1999, p 9. 41 S LRao, chairman oftheCERC. in an interview which is why there has been interest in selling
19 R K Jain, RBI Occasional Pap)ers. Vol 19. in India Power and(1 Infias.tructure Reporter. surplus power to India.
No 3, excerpts quoted in The Hindu Bu.silne.ss Vol 2, No 3, March 1999, pp 10-13. 55 Report in Busines in lne Bangalore, September
42
Reviewv. 'Financingof Power Projects in India', Cover Story, India Power atnd Infi-astr-ucture 20, 1997, p 1.
February 3, 1999, p 25 and 'Hurdles in Private Relporter, March 1999, quoted above. 56 Kannan Srinivasan, 'LNG Policy for Power:
Financing of Power Projects', February 10, 43 Report titled 'CERC Finalising Licence Norms', More Questions than Answers' in Economic
1999, p 25. in Business Line, Bangalore, November 11, atnd Political Weekly. December 21, 1996,
20 'Mitigating Risks in the Power Sector in 1998, p 5. pp 3284-86.
India', Conference Doculmentation, IPPAI, 44 'Power Sector Reforms... Slow Pace', op cit. 57 'RPL Project Hit by CEA's Indecision', The
June 1998. 45 S N Roy, 'Will Regulatory Bill Bail Out SEBs?', Economic T7imes, Bangalorc, December 28,
21 K Parbat. 'Governient to Reconsider Move to 1998. p 3.
Business Line, Bangalore, December 30. 1998,
Put Liquid Fuel on SIL', The Economic ll Tilmes. p 14. 58 Report in The Economic Times, Bangalore.
Banaglore, August 7. 19991, p 16. 46 E'cono/nmic Surv'e, 1998-99. August 7, 1996, p 8.
47 Report in the Deccatnl Heraild, November 4,59 R K Jain, RBI Occasional Pape-rs. Vol 19,
22 B Ramachandra Rao, 'Risks in Power Projects:
SEBs May Be the Best Bet', Business Line 1998, p 8. No 3, op cit.
Bangalore. July 22, 1)97, p 8.
23 Repor- in The E(coomic Times, Bangalore,
January 2, 1997, p 16
24 Ainulya K N Reddy and Antonette D'Sa, 'The
Call for Papers
Enron and Other Similar Deals vs the New
Second Annual Conference on Money and Finance in
Energy Paradigm', E on'omic atld Political
Weekl\, Vol XXX, No 24, June 17, 1995, the Indian Economy
pp 1441-48.
25 The case of APSEB's thermal units has been
The Indira Gandhi Institute of Development Research (IGIDR) will be hosting
described in S Morris. 'Political Economy of
Electric Powerin India'. Economnicand Political
its second annual conference on Money and Finance in the Indian Economy
Weekly, May 18. 1996, pp 1201-10. during November 30 to December 2, 1999. The conference will consist of
26 S N Roy. 'Formulae for Power with Domestic invited papers, which would be state of the art surveys of various aspects
Money', 'le Economic Timies, Bangalore, of the broad Money and Finance area and contributed papers for which
Novemtber 25. 1996, pi 5. submissions from scholars working in the broad money and finance area are
27 The capital cost of Rs 3,029 crore quoted in
invited. The range of topics is to be broadly interpreted: from issues of general
various articles has been reduced here by de-
leting the development fee of Rs 86.4 crore in theoretical and/or empirical relevance in the broad macro/money area to
accordance with the assertion of Rebecca Mark. emerging issues and anticipated macro/monetary problems of the Indian
chairperson and CEO. Enron Developlment economy.
Corporation, in her letter to the editor Bustllees
Line, March 28, 1995, p 8, that there is no Abstracts of papers should be sent to Raghbendra Jha at the address noted
developmlent fee. below so as to reach him by August 31, 1999. Complete papers should reach
28 Exchange Rate of US $ = Rs 31.00. him by September 30, 1999. All papers will be refereed. Authors will be
29 N Ram. V Sridhar and Perez Chandra, 'The
informed by end October. Authors of accepted papers may also be requested
Extortionate Enron Deal" 'IDBI Objections
Squashed' and 'World Bank Had Said 'No'. act as discussants for other papers. Some subsidy for travel to and from
to
Busine.ss Line, March 21, 1995, pp 1,7,9 andthe conference for authors (within India) of accepted papers may be available.
The Scandalous Enron Deal - What the Secret Accommodation and local hospitality will be arranged by IGIDR.
Documents Reveal' in Frlontlile, April 7.1995,
pp 24-31. Kirit Parikh (Director) and Raghbendra Jha (Professor)
30 Also in S Mois, 'Political Economy ..', op cit. Seminar Coordinators
3 1 Report in 777e Econo,mic Tinles, Bangaloric
July 17, 1996, p 8. Address for Correspondence:
32 P Purkayastha. 'Power Sector Reforms - Prof. Raghbendra Jha,
Groping about in the Dark', T7le Tinles of lndia, IGIDR. General Vaidya Marg
Bangalore, June 8. 19)6, p 8. Goregaon (East), Mumbai 400 065
33 S K Agarwal, 'Hurdles in Privatising Power Fax: +91-22-840-2752 Phone: +91-22-8400919
Distribution'. India Pow'er tand Intlf a-
Email: rjha@igidr.ac.in
structutre Repo-'ter, Vol 2, No 2. February
1999,p 8.

1434 Economic and Political Weekly June 5, 1999

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