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Power Industry: Priority agenda for immediate action (January 21, 2008), Shri R V Shahi, Former Secretary, Ministry Of Power

Power Industry: Priority agenda for immediate action
[R V Shahi's Weekly Column for Infraline, January 21, 2008]

Electrical manufacturing industry has done exceedingly well in so far as the top lines and bottom lines of various companies under this industry are concerned. Indian Electrical and Electronics Manufacturer's Association (IEEMA), which has a membership of almost 600 companies, has organized at Mumbai "Elecrama - 2008" on January 18 - 22, 2008. I recall, 10 year back IEEMA celebrated its Golden Jubilee and had invited me to be the chief guest and to deliver the key note address. I also recall that I used that opportunity to bring into focus a very important need of Indian power sector, and particularly for the Electricity Distribution Utilities, with regard to the quality of electrical meters. In this event, during my address I was somewhat critical of the approach of the electrical meters manufacturers in the country. This perception, and therefore the criticism, was based on my experience and experience of a number of Electricity Boards who were trying that the meter manufacturers should guarantee the performance of meters for five years whereas the manufacturers were agreeable to only one year guarantee. In the Golden Jubilee Celebration, I raised the issue as to why the Distribution Companies and Electricity Boards should not demand and should not get, from the manufacturers, 10 year guarantee which should subsequently be raised to 15 years guarantee. This suggestion of mine was based on the data I had collected from a number of countries where electricity distribution is better organized. Those days, and very unfortunately even now, my assessment is that 90% of power sector problems revolve around the distribution segment, and within the distribution segment, 75% of the problems center around meters - non functioning meters, tampered meters, by passing of meters etc. We all know that we lost more than 10 years of our struggle on power sector reform because of Distribution not being properly fixed.

Therefore, on this occasion when I was again invited to deliver the key note address (as a matter of fact IEEMA has been nice in inviting me on several occasions during their annual events and also in other programmes), I not only expressed deepest appreciation for the invitation but more importantly for the fact that my suggestion, made 10 year ago, on meters was seriously taken up - the guarantee period was agreed to be extended to 10 years and subsequently to 15 years. The Indian meters are today globally competitive both in terms of quality and price. Having said this I must also add that part of the problem regarding such a casual approach in the past on quality of meters could also be attributed to the mindset and approach of the State Distribution Utilities, which mostly went for lowest price meters. Such an approach for any measuring instrument cannot be acceptable. In fact, question of comparison of price should arise only after very clearly specifying the quality requirements. When the focus of reform has been reoriented to distribution in last few years, there is a visible shift and now almost all the Distribution Utilities are going in for good quality meters and they don't mind paying higher prices.

In one of the annual events of IEEMA in 2005, when I had the occasion to address them, I not only recounted their positive response and actions which have led to remarkable impact on reduction of aggregate technical and commercial losses in states, where metering and quality of meters have been paid due attention, I also made a suggestion that the next technological revolution that should take place in metering should aim at meterless (not measurementless) electricity supply. If it has been possible in case of telephones and mobile phones, where measurement of calls made or received together with various applications including SMS, E-mails etc. are all measured centrally in the control room, and there are hardwares and softwares to adequately handle this, why should it not be possible in case of electric meters? In case of telecommunication, in fact, the problem is compounded on two counts - one that it is wireless and second that there are numerous service and infrastructure providers particularly when calls are effected from one country to another country. As against this, in case of electric supply right from generator end to consumption point the entire flow is wired. It should be taken as a challenge and IEEMA members could demonstrate that the next generation metering of electricity is in effect meterless measurement of electricity.

Due to the accelerated growth in capacity addition in the recent years, post various legislative and policy reforms in the sector, the electricity manufacturing industry has been the biggest beneficiary. From a negative growth towards the end of 9th Five Year Plan (2001-02), this industry has experienced a growth of 7%, 12%, 16% and subsequently about 20% in last few years. The 570 IEEMA members, it is most gratifying, have registered an annual turnover of as high as Rs. 1,00,000 crores (approximately US dollars 25 billion). Order books of most of the manufacturers are more than full. In fact, with the capacities that they have, it looks virtually impossible that the target of 78,000 MW for the 11th Plan could be satisfactorily implemented and achieved in time. From a stage of virtually order books dried up, no new orders in sight and complete uncertainty about the future, a situation which characterized the power sector, in so far as electrical manufacturers are concerned, around 2000 - 01, today the table is turned and it is the manufacturers who are proving to be unable to fulfill these orders. Developers, lenders, equity investors are all enthused. Manufacturers have tremendous opportunities. What is required is to effectively and fruitfully avail of these opportunities.

In the above background, on the occasion of 60 years of IEEMA, I used the opportunity to identify, out of many others, 25 Point Action Agenda and briefly explained what needs to be done now at the Government level - State Government, Central Government, and the Regulatory Commissions and by the members of IEEMA who constitute almost the entire electrical manufacturing industry.

[A] State Government
  1. Adopt Ultra Mega Scheme at State level.

  2. Reorganise Electricity Board if not done.

  3. List generation company with 10% (IPO) and then 20% (cumulative) additional equity.

  4. Use the fund to expand generation capacity.

  5. Invest liberally in Transmission/Sub Transmission.

  6. Franchise all District, Towns Distribution where loss is more than 15%.

  7. Sincere implementation of APDRP and RGGVY.

  8. Reduce about 10% through conservation.

[B] Central Government

  1. Even more vigorous implementation of UMP, APDRP and RGGVY.

  2. Larger dilution of CPSU's through fresh equity [upto 24%, later 49%].

  3. Support Merchant Plant capacity about 30,000 - 35,000 MW by 2017 and allow market to develop Fuel, Transmission, Financial tie-ups to be facilitated.

  4. Coal auction on similar line as UMP for lowest coal price, not for highest premium to Government (Power price has to be minimised).

  5. PFC and REC to support through equity funding ( 15 to 30%).

[C] Regulators

  1. Open Access in Distribution by January 2009. Announce definite plan now. Scheme to promote Open Access not to throttle it.

  2. Definite encouragement for renewables (10 - 15% target).

  3. Proactive measures to develop electricity market (Merchant Plant, Short term Sale).

  4. Multi Year Tariff - announce Scheme and Schedule.

  5. Cross subsidy, ? 20% of average tariff as per Tariff Policy - Announce Implementation schedule.

  6. National (Postage Stamp) Transmission tariff to be notified.

[D] IEEMA Members

  1. Manufacturing sector is letting down power sector - urgent action to expand manufacturing capacity.

  2. Encourage/facilitate new construction erection agencies on emergency basis.

  3. I.T. in metering technology should further improve - aimed at theft control, consumer services etc. Meterless measurement of electricity.

  4. Participate in a big way in distribution franchising initiatives of Governments.

  5. Upgrade technology (800/1000 MW is getting delayed).

  6. Focus on quality power (Filter Harmonics etc.).

[A] State Government

  1. The Ultra Mega Project Scheme, which was launched in early 2006, has emerged as a highly successful initiative of the Ministry of Power. It has demolished many of the myths and ill founded perceptions about sectoral reforms and about the nature of viable and profitable opportunities. The initiative has also yielded highly aggressive and incredibly competitive tariff. Two types of actions are needed - (a) at the Government of India level this scheme should be pursued even with greater vigour, after assimilating the lessons drawn during the learning curve period, so that more and more of such projects are brought on stream as fast as possible, and (b) right in 2006 the Energy Departments of various State Governments were advised to adopt this scheme for 1,000 to 2,000 MW capacity projects at the state level. They needed to put in place a mechanism of similar nature as we did at the level of Ministry of Power so as to provide necessary assistance, facilitation and co-ordination. This has happened in very few cases and what is required is that the State Governments should facilitate development of similar competitively bid projects for supply of electricity to their Distribution Utilities.

  2. In whichever states Electricity Boards have been re-organised and have been allowed to stabilize and function in the restructured setting with appropriate placements of senior functionaries at the Board and the Senior Management levels, experience shows that, results are satisfying. Generating companies have started focusing at expanding their capacity and improving their efficiency of operations. Distribution companies have started comparing their performance with other distribution companies in the state and those outside. Similarly transmission and sub transmission have started receiving better attention by the State level Transmission Company. What is necessary is that all such states as have not re-organised their Boards so far must do it immediately. The provision of the Electricity Act which allows continuation with the consent of the Government of India should not be allowed to be invoked any more.

  3. Until 2002 the Central Public Sector Undertakings under the Ministry of Power had also not thought of coming to the equity capital market by listing through IPO. Ministry of Power took up this initiative starting from 2003-04. Experience of Power Trading Corporation, NTPC, Power Finance Corporation and Power Grid, has been not only highly satisfying but also these initiatives have discovered the immense interests for power sector that have remained hidden so far among the investors. The concern about the financing gap in the sector must stop. State level generating companies, instead of approaching their Governments for equity support, should prepare for listing and raising financial resources from equity capital market. There is no reason why a large number of these companies, especially those which are performing very well, should not enhance their equity through IPO by 10% and subsequently by 20% and so on.

  4. The fund generated through IPO by the state generating companies should be utilized for expansion of existing power plants and for setting up of new projects. We must recognize that almost 1,00,000 MW of capacity is owned by the state generating utilities. Their valuation would be more than Rs. 5 lakh crores ( US dollars 125 billions). A 20% dilution through IPO could mean almost Rs. 1 lakh crores ( US dollar 25 billions) of additional fund.

  5. Transmission and sub-transmission will need major augmentation to cope with the additionality of supply of power in next 5 to 10 years. The states need to liberally invest in providing additional transmission lines and sub stations, inter connecting these with State grid, Regional and National grids.

  6. Experience of privatising distribution has been rather limited. Except for Orissa and Delhi this initiative has not gone beyond. In a number of states there are various issues and concerns which have been raised. Politically also this issue has become sensitive. About 2 years back we had suggested that if there were problems on privatising distribution, franchising the distribution system could be one of the methods through which the pace of distribution reform could be accelerated. Maharashtra has provided the examples of an initiative on this line. First, Bhivandi and now Nagpur. It is reported that Bhivandi, which was the most difficult having a loss level of more than 60%, is already coming under the grip. In the country we have more than 600 district headquarters. In more than 80% of these district towns the distribution loss is more than 15%. We have waited enough. The present organizational framework has failed to bring down these losses. A determined and urgent action is needed to put all these district towns, where the distribution loss is more than 15%, on long term franchisee arrangement on the pattern of Bhivandi and Nagpur model.

  7. Both APDRP and RGGVY - the two schemes which were started in the 10th Plan - the first to improve distribution in urban area and the second to create and improve distribution systems in rural areas - have been extended to remain in operation during the 11th Plan also. A number of Central Government agencies were brought in to introduce right momentum and speed of action for implementing these schemes. State Governments must ensure that in the 11th Plan the remaining work of entire distribution both in towns/cities and in rural India are completed.

  8. Last but not the least, in so far as the role of the State Government is concerned, the energy conservation must be taken as a national necessity. We are wasting more than 20% of electricity. Some actions have happened. A lot more is required. Definite actions to save at least 10% could be a modest expectation from the earnest efforts that the State Governments could mobilize.

[B] Central Government

  1. Power Ministry has put in place a large number of policy instruments. What is needed is continued implementation of all these schemes. Implementation in last few years has thrown up a number of valuable experiences and lessons which could obviously be appropriately incorporated in the new projects and schemes. The objective should be to expedite the process.

  2. The Central Public Sector Undertakings under the Ministry of Power could consider to dilute Government holding up to 24% through fresh infusion of equity. This may be relevant for companies which have already been listed (NTPC, PFC, Power Grid), but the companies which are yet to be listed namely Rural Electrification Corporation and National Hydro Electric Power Corporation decision for whom was taken in 2006 itself, could dilute Government holding by 10% at the first tranche and subsequently up to 24%. Other companies of the Ministry of Power namely North Eastern Electric Power Company, Satluj Jal Vidyut Nigam, Teri Hydro Electric Development Corporation and DVC should also access the equity capital market. In the 11th Five Year Plan, perhaps each of these companies could generate adequate fund through this mechanism even if they diluted to the extent of 24%. In the subsequent plan, linked to their expansion programmes, further addition of equity and therefore dilution of Government holding could also be considered.

  3. Power market cannot develop unless in the next five years, to the extent of about 15,000 MW and in the subsequent five years an additional 20,000 MW of capacity comes up which is delinked from long term Power Purchase Agreements. These merchant plant capacities would help in creating market and responding to the short and medium term needs. This process alone, when a reasonable amount of such power, say about 15%, of total, is available in the market, will lead to price discovery through such competitive arrangement. As a concept this has the right strength of argument, but in implementation a lot of coordinating inputs are essential such as fuel tie-up, transmission arrangement and financing by organizations like PFC, REC, IDFC and other institutions. The Government could provide the required assistance in an institutionalized fashion so that merchant plant capacities are created in a smooth manner.

  4. It is reported that in the future coal block would be allotted through the process of auction. What is, however, somewhat disturbing to note is that this process is likely to be based on the premium that coal mines developers would be prepared to pay to the Government for allotment of coal blocks. This approach is antithesis of the objective with which Ultra Mega Power Project was conceived, structured and implemented. The sole objective was to minimize the price of power in larger interest of consumers. Coal auction goes totally counter to this objective. It would lead to increasing the cost of power. Coal block allotment therefore needs to be done in a manner that the price of coal produced is competitively established and the bidding criterion, therefore, should be the price of coal and not the premium to the Government. In any case, there is a provision of paying royalty on production and sale of coal.

  5. Power Finance Corporation and Rural Electrification Corporation, the two excellently performing finance companies under the Ministry of Power have rendered valuable service by way of providing loan funds to various companies including those in the private sector. Their portfolio for equity funding should expand. If last mile equity requirement by providing 15 to 30% of equity could be facilitated by these companies and similar other companies, it would go a long way in developing a number of projects where the promoters need such assistance.

[C] Regulators

  1. According to the Electricity Act 2003 Open Access in distribution has become an obligatory provision. Some of the state regulators have prepared definite plans and schedules of action. Most others have not done so. It is important for the regulatory institutions to recognize that this is one of the most powerful provisions of the Act to introduce competition in power industry. It is urgently necessary that each regulator announces the scheme of implementation. But, the caution is that the scheme should promote Open Access and not throttle it. So far, no where this has picked up well.

  2. Climate change issues have become global concerns. India's energy programmes centers around coal. We will continue to be under tremendous global pressure, even though we may succeed in not taking any obligations for targeted CO2 reductions. However, it is important that we must encourage non fossil fuel based power generation. Electricity Policy and Tariff Policy have provided definite directions. Regulatory Commissions need to formulate targets, bring out schemes which encourage generation from such renewable sources. In the next five years we should aim at least 15% of power generation through such sources.

  3. Regulatory Commissions at the Center and the State level have, by and large concentrated their efforts in the area of tariff determination. Proactive measures for development of electricity market are very few, seen in exceptional cases. This is neither the letter nor the spirit of Electricity Act. Definite actions from their side on facilitating development of capacities which get aligned to short term and medium term purchase and sale such as merchant plants, captive plants, will go a long way.

  4. Formulation and notification of Multi Year Tariff (MYT) is a legal requirement. This is aimed at providing predictability of the regulatory decisions. In some states it has been done; in most others it has not been done. Distribution reform will remain handicapped in absence of MYT.

  5. Tariff Policy has a very important provision on rationalizing and managing cross subsidy. It has to be brought within ? 20% of the average tariff. This again has not been planned by most of the Regulatory Commissions. This provision holds tremendous potential for a significant impact on distribution reform.

  6. National Transmission Tariff is another important provision of the Tariff Policy. Its absence has been affecting power trading arrangement and therefore to some extent constraining the process of market development. Some attempt is made in this regard but the finality has to be given. Here again the objective should be to promote and facilitate inter-state and inter-regional sale of power through short and medium term arrangement - an essential prerequisite for development of a true market.

[D] IEEMA Members

  1. Today over 60,000 MW capacity is under construction. Almost in all cases timely supply of plant and machinery is an issue. Inspite of the intervention of Ministry of Power way back in early 2005 with definite suggestion that manufacturing sector should take immediate steps to augment their capacities because preparation for 11th & for 12th Plan would be so advanced that these agencies would have enormous amount of orders compared to their existing capacities, the response of manufacturing sector, particularly of major plant and equipment manufactures, has been slow. Even now they should take urgent actions to augment their capacities.

  2. When the plant and machinery reach the project site, in most cases, we are experiencing the situation of their inadequate preparation and lack of manpower for construction and erection. There has been a slip on their part not to have encouraged creation of new agencies and expansion of existing construction and erection companies. This again calls for immediate action.

  3. Interface of IT in metering technology has considerably increased. But, there is further scope to improve. These technologies should aim at complete control of theft and improved consumer services.

  4. The IEEMA members should participate in a big way when States offer franchisee arrangement of the distribution of various towns and cities. It is gratifying that Crompton Greaves is taking a lead in this direction. This is a challenge to improve distribution, and a great opportunity for growth of IEEMA members.

  5. Introduction of 800/1000 MW technology into Indian manufacturing is getting considerably delayed. Similar in the case in extra and ultra high voltage transmission systems particularly HVDC technology. This again calls for prompt response by Indian manufacturing sector.

  6. Quality power for certain select consumers like software technology park is essential. Manufacturers need to focus on quality of power and on issues such as filter harmonics etc.

In conclusion, I said in the conference "Many of the IEEMA members have asked me now and in recent past whether 78,000 MW during the XI Plan will be realised. My answer is - it will be possible because of you the manufacturers, and if it does not happen it will be primarily because of you". A lot is at stake. Sincere efforts of IEEMA members will make a significant difference.

Copy right : Shri R.V. SHAHI