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Challenges of Power Capacity Additions in Twelfth Plan, Shri R V Shahi, Former Secretary, Ministry of Power

Successes secured and failures faced during implementation of the projects identified for the Tenth Plan gave us a lot of learnings. It is well known that, generally in the power sector, projects planned in one Five Year Plan can be expected to get commissioned in the next Five Year Plan. This is so because of the comparatively much longer gestations from concept to commissioning of these projects. If we take a typical coal based project, and count from the stage of site identification to commissioning, inclusive of various sanctions and clearances, the completion may take a minimum of five years or more. In the case of hydroelectric projects, investigations themselves take around two years, and, therefore, till commissioning the cycle time may be seven years or more.

During the Tenth Plan, therefore, almost right from the beginning, Ministry of Power, in association with Central Electricity Authority, started a mechanism called "Monitoring of Letter of Awards Schedule Matrix". The underlying principle was that unless the project development activities are tracked and monitored right from the beginning of the preliminary project activities, it is meaningless to create a Table of capacity addition programmes, and basketing them into Central, State, Private Groups and similarly into hydroelectric, thermal, nuclear segments. The project development programmes have to follow a bottom up approach and not a top down statement of intent. This approach will obviously throw up various issues, which stand in the way of projects maturing to qualify for being eligible for a particular Five Year Plan. These issues would include gaps like fuel linkage not being available, unavailability of sufficient water or unavailability of confirmation for linkage of water, environmental clearance, forest clearance, difficulties of land acquisition, problems of financial closure etc.

This new approach led to another initiative in the Ministry of Power viz. Inter Institutional Group (IIG) of Financial Institutions. Financial closure exercise for any project brings out all such areas of concerns and this in turn enriches the process of project planning.

It is on the basis of this approach that at the end of Tenth Five Year Plan, it was possible to have almost 50,000 MW of projects already under construction for the Eleventh Five Year Plan. This was in addition to the 11,000 MW of projects which had slipped commissioning from the last year of the Tenth Plan to Eleventh Plan. Gratifyingly the process of monitoring of LOA Schedule Matrix continues. What has, however, been put on the back burner is the Inter-Institutional Group. I would strongly recommend that this is brought back into the system with periodic interactions and monitoring. Inputs drawn from this exercise should lead to periodic interventions and interactions by and between various Ministries to mitigate the areas of concerns - fuel linkage, water linkage, transmission evacuation, PPA's etc.

Eleventh Plan was based on the recommendations of the Working Group on Power and the overall capacity addition projected was of the order of 67,000 MW. Together with the projects which had slipped from Tenth Plan into Eleventh Plan the aggregate capacity worked out to 78,000 MW. We have discussed, in various papers, the inadequacies which power generating organisations face on account of lack of manufacturing capacities, construction agencies, commissioning teams etc. As a result, scheduled deliveries of plants and equipment, not only from main plant manufacturers like BHEL, but also from suppliers of Balance of Plants get delayed. After these are received, suffering delays of six months or more, another problematic issue emerge on account of lack of capabilities, in terms of numbers and quality of construction and commissioning agencies. This is why, even after lessons of Tenth Plan, though good amount of awakening has been created, the Eleventh Plan also may not meet the desired targets. The criticisms, pressures and persuasions have not remained unrewarded, though the full benefits of preparations that have been made by various agencies, in last three to four years, may deliver much better results in coming years. Eleventh Plan may not get 78,000 MW, but there is reasonable expectation that it could deliver about 60,000 MW. This shows how advanced preparations could make significant difference.

It is under this background that preparations for Twelfth Plan have to be analysed. By various estimates, it is observed that the Twelfth Plan may have a target of more than 90,000 MW. The most important and gratifying aspect is that more than 55,000 MW of Twelfth Plan projects are already under implementation. Further additions to the targets will obviously be based on status of preparations for different projects. Before a project matures to reach the stage of placing Letter of Award for main plant, followed by contracts for other packages, it must have gone through all the initial stages of land acquisition, environmental clearance, fuel linkage, water linkage and finally financial closure. If finance for the project is not tied-up, an effective Letter of Award cannot be placed. I am making this point because there are examples of "Theoretical" Letter of Award to the main plant suppliers, which is predicated to happenings of a number of events. Such Letters of Awards cannot be termed to be effective and, therefore, such projects cannot be listed in a manner that they would be commissioned within the time frame being stipulated.

We may expect that the biggest constraint, in not meeting the targets, which was inadequate domestic manufacturing capacity, should be now behind us. BHEL's annual capacity has increased and may increase further to around 15,000 MW per year. Three more main plant manufacturing companies may also now start delivering power plant equipment. Therefore, for the Twelfth Plan we may definitely expect an annual domestic manufacturing capacity of the order of about 20,000 MW, which may rise further toward the later half of the Twelfth Plan and whose benefits would be available in the Thirteenth Five Year plan.

A reality check on the manufacturing capability of Balance of Plants would be necessary to see whether they are adequate to meet the target of the order of 90,000 MW or more in the Twelfth Plan. Tentative judgement is that they are not. However, even now there is time that necessary actions are taken, so that the gaps are eliminated. This will require a two fold strategy - (a) interact with the existing manufacturers and inspire them to expand their capacities, and (b) encourage new entrepreneurs, and business groups of other products, to enter power equipment manufacturing field. The latter will, however, require that the generating companies prescribe appropriate qualifying requirements, of course with necessary safeguards, so that new manufacturers come in the field of Balance of Plants and help the power industry. This approach is missing today, and its adverse impact is felt by none other than power generating utilities themselves.

Availability of fuel is going to be the most critical factor. It is estimated that in the Twelfth Plan, more than 70,000 MW would be based on coal. As in the beginning of the Eleventh Plan itself, considering the production programmes of Coal India subsidiaries, there is a likelihood of demand supply gap being of the order of 75 million tonnes, which will need to be addressed through imports. In the Twelfth Plan the situation may worsen. Specific actions which may mitigate the problem are as follows :

  1. Taking up with Coal India the matter, so that they could re-consider their expansion plans, either on their own or through a chain of joint venture initiative with domestic and international organisations to substantially augment their existing production programmes.

  2. We need to set up a high level institutional mechanism with full involvement of Ministry of Power, Ministry of Coal and Railway Board to go into details of the specific issues which are hindering the progress of captive coal block development. There are genuine issues which only Governmental interventions can handle.

  3. Master Plan in different coal fields which would take care of the needs of common infrastructure such as road and rail connectivity cannot be expected to be developed by each captive coal mine operator.

  4. Similarly, there are issues on geological surveys and investigations, in which progress could be faster if Ministry of Coal and Coal India modify and streamline the procedure. Even for Investigations forest clearance is needed from Ministry of Environment and Forest. This could be easily dispensed with, if such investigations do not involve tree cutting. We need to get this decision of getting automatic clearance for such requirements.

  5. Both public and private sector coal companies have been complaining, and for valid reasons, about the in-ordinate delays they face in getting environment and forest clearances. This suggestion that once for all, the Ministry of Environment and Forest could identify "Go" and "No Go Areas", has not been receiving a positive response. It is urgently needed that Ministry of Power and Ministry of Coal secure higher level interventions to make the Ministry of Environment and Forest understand and appreciate the rationale and logic of this approach.

  6. Equally challenging is the issue of land acquisition, and this again is relevant to both public and private sector coal companies. The proposed amendment to the Land Acquisition Act, it is felt, is going to further aggravate this problem. One thing is definite that we have to add enormous amount of power generation capacity, and equally definite is the fact that it is not possible unless we have land for power projects and land for coal mines. We need to make our compensation package more attractive, need to have the land owners as equity partners in our endeavours (equity could be in combination with their compensation package), work out reasonably good rehabilitation and resettlement packages etc. All these issues have been talked over the years. What is required is definite actions, so that impediments to project progress are removed.

  7. In addition to Captive Coal Block Policy, the proposed amendment may facilitate development of coal mines through private sector and through public private partnership. But the Model that needs to be followed in this regard should be broadly structured on similar lines as was done for Ultra Mega Power Projects. The objective should be to get coal produced at the minimum price. This alone will enable less expensive power supply to all the consumers. Ministry of Power needs to effectively put this point of view across, because there is an apprehension that coal mine bidding may adapt the approach of petroleum sector where the criterion for evaluation was based on the premium which the developers would offer to the Government. This is totally contrary to the objective of minimising the price of energy.

  8. Import of coal to take care of the gaps between demands for coal and domestic production is inevitable. Dependence on Coal India could be one option. But, there is an issue of conflict of interest. Coal India has never viewed import of coal as a favourable initiative for variety of reasons. An alternate strategy could be to quickly set up a company with NTPC, PFC, REC, and a few other major power generating organisations which could try to optimise on the cost of import of coal. This outfit could take care of the needs of imported coal for various power generating utilities. An associated issue is augmentation of ports and commensurate arrangements for transport of coal from ports. This again will need to be co-ordinated by Power Ministry with concerned authorities and agencies.

  9. Acquisition of coal mine abroad was a decision that was taken by the Energy Co-ordination Committee presided over by the Prime Minister in early 2005. While some private sector companies have made reasonable progress in this regard, and have been able to secure such mines, in the case of public sector the process has been abysmally slow. Here again, to what extent dependence on Coal India will be helpful is a matter that needs serious evaluation. Perhaps power generating utilities could themselves co-ordinate and organise procurement of such coal mines.

  10. Often the delays in development of coal mines by captive developers are highlighted attributing these delays to lack of commitment on the part of power project developers. If lack of commitment is demonstrated, there should be no delay in cancellation of these allotments. This will definitely put the right pressure on other allottees to sincerely pursue development of mines.

Financing of power projects in the Twelfth Plan may need a few supports by way of policy initiatives of the Government. Some of these suggestions are same as were also highlighted by the Working Group on Power for Eleventh Plan. These include:

  1. Accessing Provident Fund, Pension Fund and Fund from Insurance Companies for long term financing of power projects. This would need appropriate policy changes.

  2. PFC and REC could be allowed to access external commercial borrowings without having to go to secure specific approvals from the RBI.

  3. PFC and REC could be allowed to float Tax Free Bonds to fund power projects.

  4. In the central public sector companies, when the funds are raised from the equity capital market, the same may be allowed to be retained in the respective companies to meet their expansion needs. We need to convince Finance Ministry on this.

  5. The central power generating companies could be allowed to access equity capital from the market in several tranches depending on their needs and this process could be allowed until they reach 51% equity held by the Government of India. This will itself generate enough funds to meet the long term expansion needs of these companies.

  6. A number of power generating companies under the State Governments are performing very well. Using their technical, commercial and financial fundamentals, they could also adopt the strategy followed by central sector organisations like NTPC, Power Grid and NHPC for raising fund from the market. Ministry of Power could initiate dialogues with various State Governments to catalyse this process.

Capacity additions of the order of 90,000 MW or more in the Twelfth Plan are really massive programmes. Commensurate transmission systems, keeping pace with the schedules of commissioning, shall be essential. Though Power Grid is a highly effective organisation, the Scheme of private sector participation in development of transmission projects will not only need to be expanded to cover larger number of projects, but also the procedure itself will need to be re-visited to ensure that developments of these projects are achieved as per the targeted schedules. Both PFC and REC, which have been identified as the Nodal Agencies, may be asked to keep these specific projects, as per the pre-determined targets, in their MOU with the Government, so that these activities receive required priorities both in these organisations as well as in the Ministry.

There are a number of other issues which are relevant. Last, but not the least, we must highlight the issue concerning inadequacies of not only executive and managerial technical personnel and other professionals, but also scarcity of skilled manpower. Initiatives already taken in this regard, at policy level, seem to be in order. What is, however, necessary is to ensure their implementation through appropriate monitoring. Involvement of power generating and transmission utilities on the one hand and of manufacturing organisations on the other will be essential for these initiatives to succeed.