Request you to kindly drop in all your mails/queries to support@infraline.com or call us at
+91-120-6799125 (D); +91-120-6799100 (B)

Higher Growth in Power Sector - Challenges & Prospects, Shri R V Shahi, Former Secretary, Ministry of Power

Higher Growth in Power Sector - Challenges & Prospects
[R V Shahi's Weekly Column for Infraline, September 21, 2009]

(Part-I)

It is established beyond doubt that in order to achieve the targeted economic growth rate on the one hand, and improve the quality of lives of its people, particularly those in rural areas on the other, India has got to plan and achieve a growth rate in electricity supply of the order of 8%; in fact a 9% growth could provide a much better level of comfort, quality and reliability. The recent response, in last few years, to the power sector reform initiatives, by public sector, and more particularly by the private sector companies, is encouraging. The fact that a large number of power generation projects, aggregating to more than 80,000 MW of capacity are above the ground under construction, and would be completed in next one to four years is in itself a valid testimony and vindication of the interests which power sector players have demonstrated in last 4 to 5 years.

More than 20,000 MW, out of the total 80,000 MW under construction, is accounted for by the private sector companies. The shift is clear. In coming years, central public sector companies will increase their share in the total installed capacity. At present their share is 33%. The private sector share at present is 16% and that of the State sector is 51%. The projects already under construction would have a significant impact in realigning the share proportions of different groups. Of the 80,000 MW under construction, central sector organisations account for 42%, private sector is increasing its share to 27% and State sector declines to 31%. The target of 78,000 MW during the current year, it is assessed, may not be fully met, and some of these projects would shift to the initial years of Twelfth Plan. But, a total capacity addition of about 60,000 MW appears to be a reasonable possibility. This, by all standards, would be a great achievement considering the past performances.

It may be relevant to mention that, in order to develop electricity market, the Ministry of Power had launched another initiative aimed at development of merchant power plants, in 2006. We may also expect about 10,000 MW through captive and merchant routes during this period. All these are highly positive, and in fact satisfying, indicators to render a much higher growth in electricity supply. However, quite often among the developers, lenders and equity providers, a question keeps coming in their minds that if commensurate and compatible reform actions, with definite commitments, do not come forward, sustainability of interests to invest and, therefore, acceleration in capacity additions could be doubtful.

Last Week, I had an opportunity to participate in a Panel Discussion with about 20 participants from abroad to discuss about challenges, opportunities and prospects in the Indian power sector. The objective of the discussion was to enable the foreign participants to critically evaluate the policies and the outcomes of reform initiatives, which have been taken in the power sector in last few years, sustainability of these initiatives, sincerity and commitment with which various legislative and policy initiatives are being and would be implemented, and prospects of India's power sector programmes in coming five to ten years materialising. Though there were as many as twenty five issues which were raised during Panel Discussions, I would like to discuss a few of them which, I consider, would convey the core and thrust of the debate.

I briefly outline these issues and discussions:

(i)

Are the current power capacity addition plans realistic, keeping in view that in the past most of the plans did not meet with the desired degree of success?

It is true that in the past, the country could not achieve more than 22 to 25,000 MW capacity in any Five Year Plan. This was because the preparation during the years preceding the Plan were of the nature - premature and incomplete - that the programmes could not have materialised. Normally, it has been seen that the projects which atleast commence construction during the first year of the Plan, for which preparations have to be done much earlier, can be expected to be commissioned during the Plan period. For example, when we started the Tenth Five Year Plan in April, 2002, about 20,000 MW was under construction. In the first year of the Plan, i.e. 2002-03, we started construction on a few other projects. That is how we could do about 24,000 MW in the Tenth Plan. Accordingly, during the Tenth Plan period we started preparing for a large number of projects, with much larger total capacity, to be done during Eleventh Plan. The extent and quality of preparations was such that, when the Eleventh Plan began in April 2007, projects with more than 50,000 MW capacity were under construction. Also, in the first year of Eleventh Plan, based on previous preparations about 7,000 MW capacity was brought under construction. It is these specifics which give us confidence that it should be reasonable to expect that during the Eleventh Plan about 55 to 60,000 MW should get commissioned, with a high degree of confidence. Because of the problems that were faced in the Tenth Plan, and the noises that were made about the unpreparedness of equipment manufacturers to supply plant and machinery as also their unpreparedness on construction agencies, a lot of work has been done by them and these agencies are now better prepared than in the past, though, of course, may not be upto the desired level.

I should also cover this issue from the point of view of a long term perspective. We are planning almost 100,000 MW capacity, and subsequently even more, in future Five Year Plans. The pressure from the power sector on manufacturers and on the concerned Government agencies has resulted in a definite realisation that if India has to add 100 to 125,000 MW in the next few Five Year Plans, it has to have a substantial jack-up of the domestic manufacturing capability together with the infrastructure and capability for construction and commissioning. As a consequence, while BHEL itself has increased its annual capability to about 10,000 MW, up from less than 5,000 MW till 2007, atleast three more manufacturing factories are coming up. Thus, in the next three to five years, the domestic manufacturing capability is expected to rise to 20 to 30,000 MW per year. It is these developments that should give us confidence that India could scale-up its capacity addition programmes with reference to the targets that have been set out for the future.

(ii)

Financial strengths of the State Electricity Boards and State Electricity Distribution Companies continue to cause concern. What improvement have we seen in last 15 years and what kind of improvement can we expect in the future? If the present situation continues, can it sustain the huge expansions in generation capacities?

Indeed it is a fact that reform in Indian power sector, which was parallel to the reform of Indian economy in 1991, started from the wrong end of the industry. It was, however, recognised, rather belatedly, almost after ten years, that reform should have started from the distribution end rather than from the generation. Therefore, the focus of reform was realigned, starting from 2001-02 to distribution segment. During the Tenth Plan (2002-07), a number of important policy initiatives, such as Accelerated Power Reform Development Programme, Agreements with State Governments to improve Distribution, Rural Electrification Schemes, all aimed at Distribution Reform were launched. The most powerful initiative has been the Electricity Act 2003 itself followed by National Electricity Policy, Tariff Policy and a host of other Policies, each trying to bring about radical restructuring and reform of the electricity sector. These have neither gone unnoticed nor unresponded. The sector, which had presented a picture in 2001 of the type in which lenders, equity providers and developers all had lost their interests, has now been responded overwhelmingly by all these stakeholders. The response to Ultra Mega Project Scheme, Merchant Plant Policy and similar initiatives of the State Governments amply demonstrates the perception and, infact, the confidence about the improving viability of power sector.

Having said this, it must be underscored that barring a few States, the improvements have been to the extent that the sector is able to pay for the electricity that it purchases from generators. Further improvement will be necessary, and that too at a much faster pace, to enable the sector to generate adequate surplus, plough back the same to expand the industry and thus present a highly commercially vibrant sector. Pace of reform in distribution definitely is an area of concern. Gradually more and more States are getting to recognise the rationale of distribution sector restructuring and its viability. On balance, I should say that so far as investments in generation and transmission are concerned, there should be no difficulty in getting these adequately serviced by the buyers of power and receivers of transmission services. But, speed of reform in Distribution does require better attention and action.

(iii)

For Distribution Companies to be able to pay to generators, they need to ensure their own revenue streams, reduce losses, ensure collections and structure commercial tariff. Do these conflict with popular policies of some of the State Governments?

Electricity is a concurrent subject in the Constitution of India. Electricity distribution is fully under the jurisdiction of Provincial Governments. Experiences of last several decades indicated that populist policies of several State Governments, which did not permit appropriate tariff revisions, balanced tariff structure and harsh measures to control theft and enforce collections, were responsible for commercial losses and in most cases financial bankruptcies of State Electricity Boards. Post Electricity Act 2003, all these areas of weaknesses and deficiencies have been and are being tackled. States which want to subsidise certain sections of consumers including any free power, shall have to, as per the Electricity Act, pay to the distribution company and for doing so provide such amounts in the Government budget. This one provision of the Act, together with various other administrative measures which are being implemented, is leading to, one by one, State distribution utilities turning around. No doubt, the process has been slow, it could have been desirably faster, but the direction is unambiguously clear and consensus is overwhelming.

Many of energy professionals believe that a very powerful instrument to reform distribution could have been large scale privatisation of distribution - on the pattern of Delhi Model. In 2002, when it happened, I thought that in subsequent three to four years, if this Model succeeded effectively and got wider acceptance, there would be demands from various corners in the country for duplication and replication of this Model. Unfortunately this did not happen. Since the private distribution companies were not able to bring about radical changes with speed which people expected, which no doubt has happened now, such a perception and, therefore, such a demand did not get generated. Also, in 2004, the new Government which was supported by the Left Group, could not have been expected to project this Model of privatisation for wider implementation. As a consequence, we worked on another concept, which is short of privatisation, to have Franchisees managing and operating the Distribution Systems. It started with one of the worst areas of electricity distribution, with one of the largest distribution losses in the country, viz. Bhiwandi in Maharashtra. The responsibility of Franchisee was given to Torrent, one of the best private distribution utilities in the country, which has been running the distribution of Ahmedabad and Surat in Gujarat. Within a period of two years they could achieve remarkable success. This Model is being implemented in a few other towns of Maharashtra and now also in U.P., Bihar etc. I believe this will happen in many other places, particularly in areas where Distribution losses are high.

In order to achieve revenue sustainability in rural electricity distribution, commercial operations through Franchisees is an essential ingredient and condition of the Government of India Scheme on rural electrification, which has a 90% grant funding by the Government in order that this is attractive enough to go along with the Scheme and achieve the target of rural electrification by 2012 without affecting commercial viability. Thus, there are various instruments which have been deployed, of both the types - some of these incentivise and some of these by way of regulatory interventions - all aimed at revitalising the commercial health of the electricity distribution business.

(iv)

State Governments in India may have different approaches to economic and energy Policy. The may not be fully attuned to the policy initiatives of the Federal Government. Would it not adversely affect the direction and outcome of power sector reform?

Electricity Act 2003 is a Federal Government Legislation. It is binding on all the States. As per the Constitution of India, the State Governments could bring about amendments but these amendments cannot be in conflict with the objectives of this Act. They will also need to have prior concurrence of the Federal Government before bringing about these amendments. In any case, electricity as a service has now acquired a dimension that every State Government is being expected, in fact being tested at the time of Elections, on whether it is able to deliver or not. This has led to a significant change in the mindset of political group. The very fact that almost all the State Governments have restructured and reorganised their State Electricity Boards in accordance with the provisions of the Electricity Act 2003, are by and large complying with the decisions of the Regulatory Commissions, are sincerely implementing the Accelerated Power Development and Reform Programme and Rural Electrification Scheme, are indicative of a general consensus across the country on reforms and actions in line with various policy initiatives which have been taken by Government of India in last five to six years. If there are deviations, they are more by way of minor exceptions. The larger picture is that the power sector in the country is moving forward on the basis of, and in accordance with, the major legislative framework and policy directions of the Federal Government.

(v)

Every State has the Electricity Regulatory Commission, apart from the Central Electricity Regulatory Commission. Two issues arise - (a) Would the State Regulators make rules which widely vary across the country? And (b) Are the State Regulators independent from political establishments?

Electricity Act 2003 has provided for State Regulators because in a country like India, with diverse issues and problems, State specific needs must be properly recognised and dealt with. However, whether it is Central Regulator or State Regulators, all have to be guided by the Electricity Act, National Electricity Policy and National Electricity Tariff Policy. Besides, all the State Regulators have to be guided by the Terms and Conditions of Tariff Determination which have to be formulated by the Central Electricity Regulator. It is these Policy documents which define the contour and limits under which State Regulators have to function. Therefore, possibility of any major deviation across the country is rather remote. Electricity Act 2003 has also provided for an institution viz. Forum of Regulators. This Forum is expected to evolve consensus, among the Regulators, on approaches to be followed on common issues. With these provisions, therefore, it is unlikely that on similar issues there would any significant difference in approach, policy and implementation.

As regards the independence of the State Regulators from political establishment, it needs to be appreciated that the selection of Regulators, their tenure and the difficult - almost impossible - way in which they can be removed, is such that the Regulators, just like judges in the High Court, can be expected to feel free and function independently. They are not under the control of State Governments. They cannot be transferred nor can they be removed easily. The procedure of functioning of the Regulatory Commission has been so envisaged that transparency is at the core of the whole process. Therefore, we can reasonably expect that Regulators can function independent of political establishment and can do so without any fear. Last few years of the functioning of Regulators has demonstrated that this institution is getting stabilised, the process of tariff fixation has become more transparent, there is wider acceptance and respect for their decisions and stability of institution is getting firmly footed.

In this piece I have been able to cover five issues and in the next Weekly Article, I propose to cover the rest of the issues.