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A few serious concerns of power project developers need urgent remedies, Shri R V Shahi, Former Secretary, Ministry of Power

India-Tech organized an International Summit on Power at Mumbai on 27 - 30th October, 2010. The event was inaugurated by Her Excellency, the President of India, Smt. Pratibha Devisingh Patil. Dignitaries in the inaugural included Governor of Maharashtra, Chief Minister of Maharashtra, Union Power Minister and Deputy Chief Minister of Maharashtra. I had the honour of delivering the Welcome Address on behalf of India Tech Foundation. Availing of this great opportunity, I attempted to flag a few major concerns of developers of power projects. Due to time constraints, I could only highlight, in a manner of outlining, the essentials of these concerns. In this paper, I wish to elaborate these concerns that I flagged. I would also draw upon important observations made by the Honourable President.

In the recent months, in view of decline in the price of power, sold and purchased through Power Exchanges or through bilateral trading, a feeling is getting created about the country nearing sufficiency in power capacity. This is totally a misplaced assessment and conclusion. Seasonal fluctuations are bound to happen. These conclusions might lead us to a situation of complacency and our efforts could inevitably get diluted. Honourable President rightly observed "As India accelerated its growth momentum, there has been a corresponding increase in our energy requirements. With over a billion people, India supports 17% of global population, and, therefore, needs to be assured of the availability of energy to sustain its growth to meet the aspirations of the people. The country expects that its power sector will provide uninterrupted and quality power supply for all sectors of its economy and will make available the basic service of electricity to all its citizens."

The president stressed on the growth in demand for electricity and advised all the stakeholders to take all possible steps to meet the objective of power to all by the year 2012. She said "While there has been improvement in the power sector, the growth in demand for electricity has over taken generation capacity and shortage of power continues to exist............. In this context I would like to highlight that coverage of all villages with electricity will constitute a significant achievement in our march towards the over arching goal of inclusive growth."

Now, I wish to elaborate the points made by me in the Welcome Address. India is targeting a sustained economic growth of 9 to 10% over next 25 years. Infrastructure in its totality must grow faster and at a higher rate. Among the entire group of infrastructure segments, power is the most crucial element. Accordingly, almost 50% of the total investment in infrastructure goes to the power sector. It has been the experience of the economy that if it operated in a range of 6 to 7% growth, availability of infrastructure is supportive. The moment it attempts to grow at 9 to 10%, stresses and strains in all infrastructural segments and logistics, but more particularly in power, become predominantly visible. Therefore, we need to fix this deficiency to a comfortable level, so that power becomes a reliable driving and propelling force to deliver 9 to 10% economic growth over a long period. China could do it in the last 25 years primarily with the support of accelerated growth of infrastructure, power being at the lead of the group. Therefore, what China could achieve in the last 25 years on infrastructural development leading to delivery of economic growth, India needs to do in the next 25 years. 700 Kwhr. annual per capita consumption of electricity is not even at par with the global average, let alone Chinese achievement on this front, which is three times of Indian per capita consumption of electricity. We need not even quote the corresponding figures of other industrialized nations.

Electricity Act 2003 has indeed been a turning point in the historical development of Indian power sector. Post Electricity Act (2003), National Electricity Policy (2005), Electricity Tariff Policy (2006) and a number of other policy initiatives, by the Power Ministry, have helped power sector grow, in terms of capacity additions, at a much faster pace, in last few years. At present, 1,15,000 MW of generation capacity is under construction. Several issues of the sector have been addressed in last few years. Re-orienting the focus of power sector reform towards Distribution, from the beginning of the Tenth Plan, was a major strategic decision. The two landmark policy initiatives - Accelerated Power Development Reform Programme focusing on urban distribution and Rajeev Gandhi Grameen Vidyutikaran Yojana focusing on rural electricity infrastructure, have proved that it is the distribution reform which can provide a solid base for a sustained power sector growth. In the last seven years, since 2003, there have been no defaults by the distribution companies or Electricity Boards in respect of payments to generation and transmission companies. This achievement has helped in enhancing the level of confidence of capital market as well as of private sector developers, who have demonstrated, through their definite response, to invest in a big way in this sector.

One of the major concerns towards the end of Tenth plan was about the highly inadequate preparedness of the power plant equipment manufacturing sector to cope with the massive expansions which were unfolding on account of the policy and regulatory environment and opportunities that were created after Electricity Act 2003. When these concerns were highlighted, rather in a highly critical fashion, it is gratifying that because of expansions of manufacturing sector, including emergence of new manufacturing establishments coming up, it can be reasonably expected that this problem would be behind us. However, the situation has been, and continues to be, alarming in respect of the adequacy and preparedness of the construction sector. Almost all power project developers are facing this constraint. We need to have more construction agencies, more skilled manpower and modern construction machineries. Perhaps, we have reached a level of adequacy in this sector that 10,000 to 12,000 MW per year could be handled. But our plan is 15,000 MW to 20,000 MW and then to 25,000 MW per year. To achieve these, construction, erection and commissioning strength in terms of number, expertise and quality will have to be suitably augmented. Gaps in these areas are not only causing delays in commissioning of projects, but also leading to avoidable financial losses in terms of enhanced capital cost of the project besides revenue loss on account of delays in electricity generation. Manufacturing sector, no doubt, has taken several initiatives in last five years for expanding their production capacity. They should think in terms of initiating proactive measures to see that existing construction agencies improve their capacity and capability and several new agencies are also developed.

Secondly, the concerns about mismatch in respect of fuel supplies were always there, but, what has emerged in recent months is the likely severity of this mismatch. A few measures have been taken in the coal sector. But, a major coal sector reform has been overdue. Power sector reforms initiated with enactment of Electricity Act 2003 can deliver fully only if accompanying reforms in closely linked sectors such as coal are also carried out. Liberalization of Captive Coal Block Allotment Policy, started in a significant way during 2005-06, was indeed a step in the right direction. But, a lot more is required in the coal sector to continue to support the ambitious power sector expansion programmes. Equally important is the uncertainty on the front of future gas production and supply.

Thirdly, the Environment Ministry, in last one year has given a clear message that due to its activism (which some people do feel was overdue and others contend that it is on extremely high side) the overall development process has got to slow down. While the Prime Minister of India, in a recent Conference, unambiguously stressed that environment was indeed important, but it could not be allowed to perpetuate poverty in the country. Unfortunately, actions by Ministry of Environment, even after such a clear message from the Prime Minister, do not reflect the concerns of the Prime Minister. The interventions of the Environment Ministry in cases of thermal power projects, hydroelectric projects and coal mine development projects clearly indicate the slow pace which will be the resultant of such actions, leading , in turn, to inevitable dampening of the interests of power sector developers and financiers. A few issues have emerged so seriously that developers as well as lenders are rightly concerned about investments and lending in the power sector. These are outlined below :

  1. Some of the projects in the hydro sector have been stopped to proceed further, even though they had already received the environmental clearance. Obviously, sanctity of such sanctions for any project could be in doubt. Lenders would obviously be over cautious. Similar is the case with thermal power projects where construction work has been stopped. Many other developers feel threatened. For future projects, financial closures have become a major challenge.

  2. Categorisation of coal blocks into "Go" and "No Go Areas" has led to complete uncertainty about the coal mines development programmes and, therefore, consequential uncertainties also about the coal based thermal power projects.

  3. Of-late, departing from the earlier practice, Ministry of Environment has been insisting that thermal power project would be considered for environmental clearance by the Expert Committee only if coal linkage has been accorded. The Guidelines for coal linkage, by the Ministry of Power, require acquisition of land by developers. The issue is as to why developers would acquire land if they face uncertainty about environmental clearance. Guidelines of MOEF are unworkable.

These new developments in the Ministry of Environment have severe adverse impact on future power project developments in the country.

Fourth, at the level of State Government, many of the provisions of the Electricity Act and Electricity Policy are not being implemented seriously. In fact, in some cases these important provisions are attempted to be negated. Reorganisation of Electricity Boards, facilitating Open Access in Distribution, appropriate management of cross-subsidy etc. are some of the issues, in which indifferent approaches are leading to throttling of competition on one hand and financial burdens on distribution utilities on the other.

Fifth, it is reported that the State distribution utilities have again gone into excessive aggregate annual loss exceeding Rs. 45,000 crores. Seriousness with which the sector reform was re-oriented towards distribution during the Tenth Plan seems to be fading. If financial sustainability of huge capital investments in the massive expansion of the sector gets into doubt, the situation that prevailed towards the end of 90's, when the sector had been virtually abandoned by power sector developers, lenders and equity providers may again be faced. Distribution reform, therefore, needs to be brought into the centre of reform initiatives.

There are several other issues confronting the power sector developers. These include land acquisition, water availability, fuel linkage etc. In this paper, I have tried to highlight only five major issues which need to be addressed on priority.