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From the PGPMAX Class of 2013

Indian Electricity Sector - Overview

Electricity is the fulcrum of economic development in any country. India has installed power generation capacity of 210 GW as on November 30, 2012, which is about 154 times the installed capacity in 1947 (1362 MW). Electricity generation growth has been steadily improving year after year, and in the year 2011-12, the total electricity generation was about 876.8 billion units of energy with a growth of ~8% over the previous year. During the XI plan, the power sector made considerable progress with a capacity addition of ~58 GW which was significantly more than the capacity commissioned in the previous plans. Such an improvement in performance was possible mainly because of the strong private sector participation. However, India still faces the challenge of poor reliability and quality of electricity even leading to blackouts situation. Even as availability of power has increased substantially with significant investments on the supply side, the demand has consistently outstripped supply. India witnessed substantial energy and peak shortages of 8.5% and 11% respectively in the year 2011-12. The Indian power sector has been in a state of transition, from vertically integrated public utilities to unbundled entities, especially with more private participation on generation side. The changes have brought in improvement in efficiency and competition and offer opportunities with better price signals to incentivize the market participants across the value chain. Gaining confidence from these changes, India targets to set up substantially high ~88 GW of capacity in the XII plan which is also required to meet the growing demand. The XII plan target is definitely achievable; however, the sector needs to respond quickly and definitively to a number of new challenges that have emerged lately. These challenges continue to be both soft linked to policy as well as hard linked to project implementation. Some of the challenges can be resolved over time; however few critical challenges like the domestic fuel shortages, strengthening of transmission system, financially precarious condition of distribution utilities and the issues around competitive power procurement process needs to be immediately addressed.

Fuel Shortages

While most of the constraints on the capacity addition appear to be subsiding, few new challenges in the form of securing fuel supplies have emerged. Coal supplies declined on account of lower production by CIL and also slow progress of captive coal blocks which were allocated during past few years. These captive coal blocks came under the scrutiny of the Comptroller and Auditor General of India (CAG) and subsequently the Ministry deallocated~11 blocks in view of the unsatisfactory progress in development of the coal mines and end-use plants.

The uncertainty around availability of domestic coal compelled IPPs to take stakes in international mines for securing uninterrupted coal supply. However, the international coal market has its own challenges in terms of lack of logistic support, changing mining policies of coal rich countries and significantly high prices. Therefore import of coal may be a good short-term strategy but is not a sustainable option in the long-term. Indigenous coal production is required to grow at a faster pace to cope up with the increasing demand from IPPs. Though, it may take long for coal sector to be fully competitive, immediate actions are required to support the power sector.

Increased production of natural gas with the commencement of production from KGD6 block during initial period of XI plan attracted many private players to set up gas based capacity. However, with reduced production of KG-D6, most of the existing capacity is sitting idle. There is uncertainty on gas availability and production given the slow pace of exploration in the upstream. Limited interest has been observed in the recent NELP rounds primarily because of the gas pricing issue and the gas utilization policy. It is clear that if the country wishes to secure more domestic gas supply, producers will seek higher gas prices. The Rangarajan Committee has suggested new gas pricing formula aligning producer prices to higher global prices though the mechanics of how this will be done needs to be worked out. It is expected that if accepted, this will lead to more domestic gas supplies. Given the upward pressure even on domestic gas prices, the Indian power sector needs to adjust to higher cost of generation from gas based power plants. The policy framework needs to be developed to allow this relatively expensive gas based generation to maintain the flexibility in grid operations which in turn would lead to higher network reliability.

Government has been also exploring the pooled price approach both for coal and gas sector. While this may help some stranded assets in the short term, it could have severe implications on domestic production if continued for a long period of time. Some of the reforms that could fast track fuel supply augmentation are as follows:

• Monitor development of captive blocks very closely and take appropriate action with allotted firms for their non-performance.
• Speeds up the auctioning process and enforce stringent criteria to ensure only serious and capable players participate.
• Speed up finalization of a bankable fuel supply agreement
• Allow captive mines to sell surplus coal at market prices (e-auction, linkage to imported coal, domestic bidding) which will incentivize additional production.
• Accord natural gas a declared goods status so as to avoid variation in tax rates across states
• Define a mechanism and allow for swapping of Gas/LNG to minimize the incidence of taxes. This is likely to benefit stranded capacities to a large extent
• Price pooling to be treated as a stop gap arrangement and should be phased out in a time bound manner

Transmission Congestion

Power despatch till date has not been a major problem on account of insufficient transmission infrastructure. However, given the aggressive plans of the private developers to set up generation capacities, the evacuation of power is likely to become a big bottleneck leading to stranded capacities. It is time we deliberate whether a highly planned approach for transmission sector can keep pace with the unbridled growth in the generation sector else like fuel sector, it may not be able to complement the growth in generation. The issues pertaining to Right of Way, environment and forest clearance, land acquisition etc. needs to be dealt with to enhance transmission capacity. An aggressive policy for the private sector participation in transmission sector needs to be formulated as has been implemented in the generation sector. Some of the reforms that could enhance system strengthening are as follows:

• Periodic and regular assessment by independent body to check system reliability
• Transmission planning should be dynamic to take into account of developments which can change the dynamics of load flow. It may be required to encourage setting up of privately owned lines that may be procedurally integrated into the system overtime. A more concerted effort on part of the state governments, PGCIL and private players is needed. So far, very few private projects have taken off. Private participation needs to be encouraged particularly at state level through proper project planning and offering.

Financial Health of Distribution Utilities

The financial position of the electricity distribution sector has been a concern for over a decade now. The inability of the State-owned distribution utilities to remain financially and commercially viable is putting at risk the significant investments being pumped into the electricity sector by private and public players. The accumulated loss of all State distribution utilities has been estimated at Rs2.4 lakh crore as of March 31, 2012. In order to bail out the ailing state utilities, the government announced the financial restructuring plan. The scheme focuses attention on the short-term liabilities of discoms and requires the State Government to take over 50 per cent of these liabilities in the form of bonds duly guaranteed by it. Six states - Rajasthan, Uttar Pradesh, Tamil Nadu, Andhra Pradesh, Haryana and Jharkhand have formally communicated their agreement on the terms and conditions of the financial restructuring package (FRP), including reduction of aggregate technical and commercial (AT&C) losses and timely tariff revisions. The restructuring is expected to bail out the power sector only temporarily but in the long term a number of steps like functional autonomy of Discoms, reforms at the distribution level and investments to augment capacity is required in addition to financial re-engineering. With last one year as the exception, most of the states in India did not revise their tariffs for many years whereas their power purchase cost on account of fuel price kept on increasing substantially leading to a growing gap between the operating costs and revenues. Expectedly, many Discoms are finding them in financially precarious situation with high financial losses and almost no cash left with them for repayment of interest and principal. Post implementation of the FRP, if the Discoms don't revise their tariff regularly and don't improve their operational performance, they will again end up in a similar situation in the next few years. Some of the suggestions that need
to be considered by the utilities, regulators and planners are-

• Enforce utilities to make tariffs to be cost reflective and incentivize them to buy electricity and meet their USO obligation
• Ensure quality of service and enforce Universal Service Obligation (USO)
• Enforce Systematic Procurement Planning for long-term, medium-term and short term
• Promote peaking power and ancillary service market
• Enforcement on implementation of Case 1 and Case 2 bids on a time bound basis
• New SBD guidelines to ensure optimal risk allocation. For example generators have very little ability to control fuel prices, in such a case generators should not be allowed to take fuel price risk.
• Create an action plan to achieve significant gain from DSM measures: Promoting initiatives like real time metering for heavy users, enforcing energy efficient standards for new constructions, more widespread introduction of energy efficient appliances through utilities under large scale DSM programs
• Parallel licensing in urban areas and distribution franchisee to be encouraged to bring in competition and improve operational performance

To sum up, a difficult yet realizable roadmap lies ahead. If efforts are taken in right direction, India is poised for a faster, more inclusive and sustainable growth.

By
Vikram Tandon
PGPMAX 2013