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Power Sector Agenda for the New Government, Shri R V Shahi, Former Secretary, Ministry of Power

Power sector continues to provide the biggest challenge, as also the opportunities, in the Infrastructure group. Though there have been substantial shortfalls with reference to the targets in a number of other infrastructural segments such as highways, rural roads, urban infrastructure, coal, petroleum and gas, several components of Bharat Nirman, ports, airports etc., the shortfall in respect of power sector comes into sharper focus as it leads to shortages which are experienced most closely and most immediately. Power shortage affects public at large and, at the same time, adversely impacts manufacturing. Electricity has been rightly recognised as the lifeline of the economy. The UPA Government, in the previous tenure, inspite of best intentions, could not do many things, which were essential, primarily because of the dynamics of political configuration. On many occasions the Left Group, as also a few other coalition partners, almost vetoed on many of the Schemes and Programmes which impeded the reform initiatives in a number of areas of activities including infrastructure. The new UPA Government has a much more comfortable political structure. Therefore, it can be expected that the Government may act on all the initiatives which it could not because of the above constraint.

Power sector challenge emanates basically from some of the inherent technical difficulties of this sector, but more importantly it is constrained on account of the sector being mostly under the control of the State Governments. As a result, inspite of best of performance and highly satisfying financial results of all the public sector companies under the Ministry of Power, without exception, the Central Government invariably gets the major portion of the blame on account of inefficiencies and major shortfalls in performance of the sector as a whole. Failures of the State Governments, and their power utilities in a cumulative fashion, get pin-pointed to the federal Government. However, inspite of this basic limitation, the Central Government Ministry will be expected to provide the right leadership, persuade, motivate and, if needed, pressurise the State Governments to perform. An attempt is being made to briefly outline the important Action Agenda which the Ministry of Power may consider to take up.

  1. Ultra Mega Power Project (UMPP) Scheme needs to get the first priority. There are two issues - (a) The projects which have already been awarded - one to Tata Power and three to Reliance Power - need continued and close monitoring. The general perception is that they are not progressing, inspite of the two largest business groups of the country having been entrusted with these projects. The sizes of the projects and the enormity of the challenge make it imperative that in the matter of State Governments support, financing and any remaining clearances, the required co-ordination and assistance from the Ministry of Power and other Central Government agencies continues, (b) The second category of projects under UMPP are those which are yet to be finalised. Obviously, for variety of reasons, the most important being lack of support from some of the concerned State Governments, the pace of the whole activity has somewhat slowed down. Dedicated Task Force for each of these projects to support and guide the respective Shell Companies may be a good idea. However, even then, the issues which need to be resolved at the highest level in the State Governments, that is with the Chief Ministers, would need personal intervention of the Power Minister, and if required, of the Prime Minister.

  2. Revised Hydro Policy, no doubt, has been a very important initiative. Following actions would, however, be necessary to ensure financial closure and speedy development of these projects:

  1. Projects in the North-Eastern region have a major issue of transmission systems emerging as a costly proposition. Many of the developers are facing a number of concerns raised by lenders about the commercial viability of these projects in view of transmission tariff likely to be excessive. The global tariff formulation, in which there would be no need for specific transmission project linked tariff, is one solution which may partly mitigate this problem. However, in select cases of these transmission projects, Viability Gap Funding under the approved Public Private Partnership (PPP) Scheme may be necessary and would prove quite effective. This would require identification of specific projects, close co-ordination with Ministry of Finance and early finalisation of PPP tenders.

  2. It is now time that we evolve peak hour tariff for hydroelectric projects. The initial power cost of a number of North-Eastern region hydro projects will be high but would be very low after the assets are depreciated and debts have been paid. Peak hour tariff, which will be higher would improve the financial viability, leading to satisfactory financial closure.

  3. Long term debt funding will be useful as it will impact positively by way of reducing the cost of power. In the year 2004-05, Power Finance Corporation took a lead in increasing the tenure of loan for hydro projects to five years (construction) plus fifteen years. Considering the life of these projects and also the rates of depreciation that are allowed, there appears to be a necessity for further increasing the tenure of loan to five years plus twenty years.

  4. These special dispensations are being suggested to incentivise hydro project development and restore, as early as possible, a healthier hydro thermal mix which has got distorted over last few decades. Long term economies of power generation, global warming challenge, and peak hour higher power demand make it imperative that maximum support is provided for implementation of these projects.

  1. Thanks to a number of Policy initiatives of the Ministry of Power, private sector response, to say the least, has been overwhelming and almost all the business groups, big or small, are keen to develop power projects. Coal bearing States viz. Orissa, Chhatisgarh and Jharkhand have been insisting on unreasonable demands such as free power and other benefits. These issues need resolution at the highest level. Expectations of the State Governments are not in accordance with any established policy. The matter needs to be discussed in the National Development Council with the articulation that such expectations will only push up the price of power which will be detrimental to the interest of public at large. (Rehabilitation, resettlement and community development projects, as per Policy, must always be expected to be appropriately implemented by the project developers). A number of projects including Ultra Mega Projects are stalled and are not moving forward on account of the State Governments' insistence on these benefits. Even Public sector power projects are affected. Even prior to NDC meeting the matter needs to be discussed with Chief Ministers of these States.

  2. As we are aware, development of competitive electricity market has been overdue and has been considerably delayed. This requires not only regulatory Policies and Rules, but also there should be sufficient amount of power, outside the long term Power Purchase Agreements, which would catalyse and accelerate this process. Fortunately, a number of project developers are keen to develop merchant plants. A number of them have also been given either coal blocks or long term coal linkages. Following inputs from the Ministry of Power and other Government agencies may go a long way in ensuring that these projects happen:

  1. Funding of these projects has been discussed at length. Perhaps with some further interactions, it may be possible to convince the banks and financial institutions that in the interest of market development they should consider lending even if the entire capacities are not sold in terms of long term PPA. If about 60% of the capacity has been brought under PPA and balance 40% is kept for short term sales, which would really promote market development, lenders should be prepared to fund.

  2. For the 60% of the capacity to be on PPA, it is essential that Competitive Bidding under Case-I dispensation is offered by a number of State and private sector distribution utilities. This process has been abysmally slow. A few States which went ahead got into difficulties because of confusions and ambiguities in the tender papers. Bid documents, which are workable and which are evolved in consultation with the project developers, can make a difference. The most important reason for Case-I Bidding exercise not taking off has been the unreasonable and impractical conditions in the Bid document.

  3. Wherever a cluster of power projects in the same area have been provided coal blocks, such as in Chhattisgarh and Orissa, a number of common facilities like road and rail connectivity can be developed only in a co-ordinated manner and these infrastructures cannot be expected to be created by each of the power project developer on its own. Special Purpose Vehicles (SPV) supported by Government and also contributed by project developers is one possible solution to address these issues. If this is not done, these projects may remain non starters.

  4. It would also be necessary that these projects get the required transmission connectivity to the National Grid. It may not be practical to expect that Power Grid will connect each project to the National Grid System. SPV's in different clusters to set up inter-connecting transmission networks with all these projects and having access to the National Grid Hubs, which are already being considered, is the right approach. Organisations like IDFC Project Ltd. has been willing to undertake inter-connecting transmission system. This process needs to be facilitated and catalysed.

  5. The present procedure of allowing Open Access leads to a situation of "first - chicken - or - egg". While the position of the Transmission Utility may be right that they must know the destination of power, equally problematic it is for the developer to indicate, right in the beginning, the customers because the whole process of response to Case-I Bidding, finalisation of PPA etc. has its own cycle time. In any case, for the merchant capacity the developer does not know the destination. This is a live situation. Electricity market has also to be developed. Project developers have genuine constraints and would not be able to provide answers to all questions that are raised, in the initial stage, for allowing Open Access. It is essential that a pragmatic and workable solution is evolved. Here again, if this is not sorted out, most of these projects may remain non-starters.

  1. When the Ministry of Power launched the Ultra Mega Scheme in 2006, the Energy Secretaries of State Governments were advised, and there was a consensus, that at the State level also similar initiatives may be launched for projects in the range of 1000 - 2000 MW for which they could set up Shell Companies. Required capacity building for undertaking this would be necessary. PFC, REC and Merchant Bankers could be associated to provide advisory services. Atleast a dozen States, whose power shortage problems are more pronounced, could be asked to implement this in a time bound manner. Ministry of Power could monitor their response and action.

  2. The above issues relate to projects which are yet to receive financial closures and actions as suggested would facilitate their financing and consequent commencement of construction. These projects are indeed important for Twelfth Plan. But, even more important are the projects which are already off the ground. Experience has shown that most of the projects are getting delayed because of equipment suppliers not being able to adhere to the predetermined schedules and subsequently their construction agencies being unable to execute as per the programme. Both these aspects cumulate to inordinate delays. This is true not only for the major equipment manufacturer like BHEL, but is equally true for almost all the balance of plant manufacturers. While the pressure on BHEL and other manufacturers must continue with the objective that they should enhance their manufacturing capacities considerably and also enhance the construction capability commensurately, in the short and medium term rigorous monitoring, right from manufacturing works to deliveries and subsequently upto the stage of commissioning, is essential. This is easier said than done. A strong High Level Task Force entrusted with the task of regular and close follow-up appears to be necessary.

  3. Financing of power projects, when all the projects on the Agenda are to be brought into the pipeline of construction, may emerge as a constraint. Sometimes financing issues are over magnified. Experience has shown that if proper tie-ups of required inputs are arranged and developers are credible, financing has invariably been possible. We have to predict the inter-connecting inputs, likely problems and hurdles and provide required timely solutions. If this is done we can definitely expect that financing will happen. However, a few issues that may emerge are as follows and the suggested remedies are also discussed:

  1. Based on the suggestion of the Working Group on Power for Eleventh Plan and subsequently by the Deepak Parikh Committee, some relaxations were given on the sectoral capping for lending power sector. This need to be enhanced further and there is a strong case for doing so.

  2. Similarly, there are a few business groups (about a dozen) which have got enthused to get into power sector. This is a positive sign. We must remember that by the year 2001 all the private sector groups had abandoned the power sector. Till the time power sector is embraced by larger number of private players and interests of existing ones are reinforced, we should not lose the opportunity of project development by those who have shown their interests. Therefore, group capping on lending must also be relaxed.

  3. Equity support to developers will also be necessary. It may not be reasonable to expect that the promoters could bring the entire equity. This has not happened in any sector. PFC, REC, IDFC, IIFC etc. should evolve mechanism to create funds which could provide equity support to developers. There are a large number of projects where reasonable progress has been made, but these projects do face problem of not having adequate equity, in which case corresponding debts also become difficult. For genuine developers there is a need to evolve workable solutions.

  1. An Inter Institutional Group (IIG) of the type that had been set up in the Ministry of Power in the year 2004, with highly satisfying results, needs to be reconstituted with the enlarged brief that it would not only facilitate financial closure in terms of lending but will also address the issues concerning equity support. This Group should meet on a monthly basis and discuss with each of the developers their unique problems and evolve appropriate support, sometimes out of box solutions.

  2. At the macro level, to infuse capital into power sector, there should be no hesitation in diluting the Government holdings in the Central Public Sector Undertakings viz. NTPC, NHPC, Power Grid, PFC, REC, SJVNL, THDC, NEEPCO etc. upto 49% in a progressive manner. This alone may fetch, in different tranches, equity infusion of the order of 150,000 Crores. State Governments and their generating companies should also be persuaded to follow similar approach. Instead of State Governments being expected to provide, in the budgets, equity funding for their generating companies, which has been rare, it would be preferable that they are asked to access equity capital market. We may recall that until 2003, even the Central Public Sector Undertakings of Ministry of Power had not accessed equity market. When they have done so, the results have been highly rewarding. Similar initiative needs to be replicated by States all over the country.

  3. Provisions of Electricity Act and Rules relating to captive power plants are very liberal. This source of capacity addition has already started making its contribution. Performance on this score can be bettered if, in an institutionalised manner, the necessary support at the State Government level, from the regulatory system and from other agencies, is provided to them. On a periodic basis, if captive plant developers are approached and their problems ascertained with a view to addressing them, this category can create capacities for their own use and also for providing excess power to the Grid.

  4. A regular system of monthly review at the level of Secretary Power and Secretary Environment and Forest for all projects - Thermal, Hydro and for both Public and Private Sector would go a long way in speedy clearance of power projects. Such a system, introduced in 2005, did prove effective. Now since the projects are larger in number, the frequency of such interactions could be faster.

  5. Almost all hydroelectric projects involve forests and, in many cases, wildlife. Environment and forest clearance for these projects has become highly complex. Each case has to go right upto the Supreme Court. This is because of an earlier direction of the Supreme Court. Ministry of Power and Ministry of Environment need to take up this issue for a review of the earlier direction. Also, there is a need to review the present procedure of each case being examined by the Wildlife Board.

  6. Nepal has a hydro electric potential of more than 83,000 MW (some of the experts have opined that, if properly assessed, the potentials could be as high as 200,000 MW). There is a Joint Working Group with representations from Governments of India and Nepal. However, not much headway has been possible so far. A high level Task Force may be set up with the responsibility to plan for 10,000 MW in next 10 years and 20,000 MW in next 15 years, to work on this specific assignment in a focused manner.

  7. Performance of power sector, particularly on capacity addition and power generation, is greatly dependent on Coal Sector. While radical restructuring of the power sector has been done - and the process continues - starting from Electricity Act 2003, coal sector reform process has remained stagnant. There is an urgent need to revive the Bill which is pending consideration of the Parliament. Unless coal sector reform takes off, power sector reform and restructuring would not yield the desired outcome.

  8. Allocations of Captive Coal Blocks for power projects has been the second best solution. An item which has remained outstanding, however, is the interpretation of the phrase "Captive". In the Power Ministry, the consensus has been that so long as the end users are identified, any Special Purpose Vehicle could develop coal mines. Legal opinion supports this interpretation. This needs to be further followed-up, so that in the absence of the Coal Bill not materialising, this interpretation, when implemented, could more or less meet the requirement.

  9. Implementation of the captive coal block allotments is another issue which needs close monitoring. There are a number of developers who may have to be advised to be more serious. Also, there are a number of developers who are committed and serious but they need right support from Coal Companies and Coal Ministry. Power Ministry could play a catalytic role to ensure that the non-serious developers are replaced timely by others and the serious developers get the required support and assistance.

  10. In the year 2008-09, substantial amount of power generation loss was faced because of coal shortage. Most of these generation losses could have been avoided if the utilities took timely action for import of coal. In the future also, as the new capacities get created, the problem of coal shortage will have to be addressed. Review and monitoring of coal import will need an institutionalised approach.

  11. For an enhanced energy security, it had been decided that the public and private sector power companies should acquire coal mines abroad. While some of the private organisations have been more proactive, in case of public sector companies, actions have been slow. In the next two to three years targets in terms of acquisition and of million tonnes of production from such mines abroad could be fixed and monitored.

  12. With the production of gas from the KG Basin and consequent allocations to the existing gas based power plants, the Plant Load Factor of these plants will definitely improve from the present level of about 60% to about 90%. Future increase in gas production could lead to substantial power capacity additions. Ministry of Power and Ministry of Petroleum and Natural Gas could work out, in next three months, as to how additional 10,000 MW, if not more, could be planned to be commissioned in next 2 ? to 3 years. Gestation period of gas based power plant being shorter, if this decision is taken now, it should be possible to get these capacities within this Plan period.

  13. For the ambitious capacity addition programmes to fructify and for generating right level of confidence among bankers and financers to ensure such expansions, it would be imperative that distribution sector reform continues to occupy the right priority. APDRP may focus on 1,000 towns including the 600 plus District Headquarters. Focus may slightly be realigned from the State as a whole to the town specific projects. Capital cost and sequential deliverables may be predetermined and implementation carried out accordingly. In all these towns, wherever the AT&C loss is more than 20%, the States may be asked to agree to introduce Franchisee Schemes as a pre-condition to cover these towns under APDRP. It needs to be recognised that the Franchisee Scheme, implemented in Maharashtra, has proved very effective, and some of the States including U.P. have taken action in respect of a few towns. This needs to be extended to 1,000 towns in the next two to three years.

  14. Delhi Model has finally vindicated itself, though it did undergo somewhat longer gestation. From AT&C levels of 48 - 60% as in 2001-02 to now between 18 - 25%, in different zonal companies, is indeed a remarkable achievement. This Model has also provided a few learnings. Keeping these in view, we should target to replicate this initiative in a number of cities.

  15. Under Rajeev Gandhi Grameen Vidyutikaran Yojna, the Scheme of Franchisee was started in a few States. It has been slowed down. Franchisee is an essential condition of this Scheme. Without this, the whole RGGVY will be unsustainable. We must insist on the States that they should implement this provision or else the benefit would not be available.

  16. With the rising demands for power, it is unlikely that the shortage situation will be eliminated in next 5 to 10 years. The first impact of shortage is passed on to the rural area with massive load sheddings. Decentralised Distributed Generation, using the rural distribution infrastructure, free of cost, may become a workable solution to this problem in a number of States.

  17. Several initiatives have been taken on Energy Conservation. On lighting and cooling/heating of office buildings, it should be made mandatory for all the State Governments to cover all their large office buildings under Energy Audit and consequent energy efficiency projects. This may be a programme of next one year.

  18. Most of the Schemes by the Bureau of Energy Efficiency were started with the initial approach of voluntary compliance. While this approach may continue for new initiatives, the earlier ones must now be made mandatory.

These twenty five Action Points do not obviously cover everything that needs to be done, nor has an attempt been made to include comprehensively all the issues. However, they do represent the most important tasks which should receive urgent attention.