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Vibrant Gujarat: Performing Power Sector But Areas of Concern, Shri R V Shahi, Former Secretary, Ministry of Power

Vibrant Gujarat is a bi-annual event, launched a few years back by the Government of Gujarat. Since it is an initiative of the Chief Minister, Shri Narendra Modi, and he himself spends most of the time during the event, with various programme sessions and activities, the event attracts attention of national and international investors and full commitment of the entire Government machinery. It is precisely for this reason that the private sector of India and abroad try to formulate projects and schemes for which MOU's could be signed. They genuinely believe that these MOU's would receive appropriate support from the Government and the projects would be implemented. MOU's are signed in many States, and quite often in the presence of the Chief Ministers, but what makes the event in Gujarat different from all others, is the sincerity and seriousness with which the Government agencies pursue these MOU's. No wonder, therefore, projects do get implemented. Obvious outcome of these efforts is that the GDP growth rates in Gujarat, in last many years, have been far above the national average. In the Power Sector, the capacity has increased, in last three years, from about 9,000 MW to over 12,000 MW and is likely to cross 18,000 MW by 2012, which means, in five years, it would have risen from 9,000 MW to 18,000 MW. Obviously, it is a happening State, the fastest capacity addition as compared to any other State.

I had the privilege of giving the Keynote Address as Seminar Chairman of rather a long session on "Oil, gas and Power" with the caption "Swarnim Gujarat: The Emerging Energy Hub". During the session, a number of MOU's were signed, aggregating to investment of the order of Rs. 700,000 crores, in the presence of the Honourable Chief Minister. Presentations made by various Speakers covered the subjects of Emerging Global LNG Scenario, Exploration of Oil and Gas - Cairan India Technology, Potential of Shale Gas and Private Sector Participation in Power Transmission, besides regulatory issues with particular reference to Gujarat by the Chairman of Gujarat Electricity Regulatory Commission.

In the Keynote Address, I attempted to focus on (a) Challenges for Indian Energy Sector Development at national level, and (b) Challenges in the Area of Power to be addressed by Gujarat. I attempt to summarise the points made by me.

With reference to challenges for the Indian energy sector, I picked up, out of many the following six major challenges:

1.In order to implement the Integrated Energy Policy (2007-2032), with a view to enhancing the per capita electricity consumption, the challenge is to enhance the capacity from 167 GW as at present to 800 GW by 2032.

2.Together with increasing the per capita electricity consumption, the challenge is how to reduce the cost of power, so that for the large number of rural population as also for the industry, power is made available at affordable price.

3.With expansions of power sector, the financial sustainability of massive capital investments is emerging as a major challenge in view of continued financial losses of the electricity distribution business.

4.The need for accelerated growth in the energy sector is inevitably associated with increasing climate change concerns. The challenge is how to balance the two.

5.While Indian economy is starved of energy, quite paradoxically, we are also one of the countries which consume electricity and energy in most inefficient fashion. The challenge is how to address the issues concerning Demand Side Management (DSM).

6.Challenges in the petroleum sector are even greater and more serious. In the last two decades, India's dependence on import has gone on increasing and has reached unsustainable proportion. The challenge is how the proportion of import is gradually reduced, through increased domestic production and also through energy conservation.

Now I deal with each of the above six major challenges.

1.Enhancing Power Generation and Transmission Capacity:

For over 9% of sustained growth rate of GDP, growth in electricity generation has to be compatible. In the recent months, in view of declining prices in electricity market, transactions for which are through Trading and Power Exchanges, in certain quarters, a misleading conclusion is emerging that capacity addition has already been on a higher side and that so much of power demand may not be there. It is totally a false assessment fraught with complacency and inaction. There are a number of electricity distribution utilities, mainly in the Government sector, which are unable to handle the commercial aspects of electricity distribution appropriately and they are avoiding to purchase power and in preference they are indulging in massive load sheddings. It is a pitiable state of affairs - depriving consumers from availability of adequate electricity merely on the ground of inability distribution properly. The issue concerns both - the distribution utilities as well as the State Regulators. Utilities for their inactions or inadequate actions to control losses in distribution. And, Regulators for their lack of appreciation of commercial needs in the wake of ground realities faced by distribution utilities. A good part of the issue could also be rightly attributed to the State Government for their undue interference in the management of distribution utilities. Even after, as per Electricity Act, the tariff fixation has been completely distanced from the jurisdiction of the State Governments such interferences continue. We need to set right these issues rather than coming to hasty, flawed and misleading conclusions that we are already reaching near saturation in terms of availability of power. As a matter of fact, in developing power sector, we have a long way to go. In spite of more than 800,000 MW of capacity in China, with per capita consumption of more than 2,000 kwhr. per year, three times that of India, they do experience shortages and, therefore, they are further augmenting their power generation capacity. We need, therefore, to implement, in a determined way, the Integrated Energy Policy if we have to achieve our targeted economic growth rate.

There are several challenges in meeting these targets. The euphoric response from the private sector, that we are witnessing today, in developing power sector, must not be allowed to fade out. Specific challenges, experienced particularly in last one year, are in acquiring sufficient amount of land for the large power projects, in securing the environmental and forestry clearances, in getting the sufficient amount of water linkage, in fuel mismatches and in right of way for constructing transmission systems. Obviously the most difficult of these challenges is in relation to the recent stances of the Ministry of Environment and Forest. If their approach does not change, it is unlikely that in the Twelfth Five Year Plan and beyond the perspectives projected in the Integrated Energy Policy could be achieved. What we are witnessing today in the form of large number of power projects off the ground, under construction, close to commissioning and commissioned, is the outcome of what was done in last five to six years. Constraints and hurdles created by the Environmental Regulators are going to prove very costly and their impact would be experienced in the second half of Twelfth Plan and beyond. Some steps have been taken on coal sector reform and a lot more is needed to see that power generation capacity is not allowed to slip on account of serious gaps in fuel supplies. All of us need to recognize that import of fuel can only be a supplementary contribution. The major part of the fuel supply has to come from indigenous resources. Here again, Ministry of Environment and Forest needs to appreciate that near stoppage of coal mines development in India would jeopardize the entire energy development programme. Reliance of the country for fuel supply, if allowed to go the same way as we have in the petroleum sector, would lead to the whole issue of energy security and financial burden of import acquiring a very different and adverse condition. In respect of land, while on the one hand it is the technical challenge to optimize the layout and economise the need for land, on the other it is equally essential that policy and administrative initiatives lead to harmonious land acquisition and resolution of differences. If the Government attempts to run away from the responsibility of ensuring land acquisition for industry, it is not the interest of public or private sector companies which will not be served, indeed it is the interest of people at large which will be adversely affected. In relation scarcity of water, it is indeed a very real issue and is going to assume gigantic proportion in coming years when larger numbers of huge thermal power plants are set up. It really needs a technological solution. It is essential that need for water is reduced substantially. For coastal stations desalination systems will have to be made more cost effective. And, for power plants in the heartland, dry cooling system, with better economics than achieved so far, will need to be deployed.

Challenges in developing the transmission systems which are not only sufficient, but have the required amount of redundancies and cushions, to cope with the massive power generation capacity, are emerging as even more difficult. Right-of-way issues have started posing serious problems. There is complete disconnect between the policy and expectation of those whose land is affected due to these transmission lines. Appropriate policy interventions together with technological innovations are needed to address these issues. We need to consider upgrading the capacities of existing transmission lines through appropriate retrofits, enhancing the capacities existing conductors, having larger capacities of new transmission systems right from the beginning etc. are some of the initiatives that could partially mitigate the challenges ahead. On the policy side, we need to revisit the Law which entitles the Government use of right-of-way. Perhaps the land owners have a genuine case for a review.

2.Reducing the Price of Power For variety of reasons, which include, in a significant way, excessively high cost of distribution of power, due to losses in the system, price of power in India is considered to be high. Manufacturing sector has often been voicing its concerns that for the Indian manufacturing to be competitive it is essential that they are provided power at lower prices. Similarly, tariff for the commercial sector is also high. It is important that power generation is increased, so that there is enough power for all segments of consumers. But it is equally important that the price of power is reduced. Quite often people compare electricity sector with telecom sector. Fifteen years back, the users of mobile phone used to pay Rs. 16 per minute of usage, today it is less than Rs. 1 per minute. Higher prices attracted larger investments, which, in turn, led to stiff competitions with large number of players entering the sector. Supply became ahead of demand, prices reduced leading to increase in demand. Something similar to this has been witnessed in the Airlines industry as well. Therefore, the secret of reducing price lies in (a) improved efficiency of operations, and (b) larger competition leading to supply in excess of demand. Developing power projects requires a lot of support and facilitations by the Government. If that is ensured, as happened in the case of Ultra Mega Projects, the outcome can be highly satisfying. We need to keep the momentum, that has been generated by way of huge response by public and private sector companies, in expansion of the power industry, not only intact but through such Government supports the pre-construction risks need to be further reduced. Required amount of hand holding by the Government can make all the difference. Competitive Bidding of the type that was followed for Ultra mega project at the Central level for taking care of the electricity needs of a number of States, and similar initiative at the State level, have demonstrated their great advantages. Of late, the process has been somewhat slow primarily on account of land, water and environment clearance related issues. Once this process slows down, bringing the required momentum to the same level may prove very difficult. Therefore, co-ordination with State Governments on the one hand and with Ministries of Coal and Environment on the other is of utmost importance. Competition can lead to larger supply, a pre-requisite for a reduced price of power.

One of the other important reasons for higher price of power is continuing incidence of high technical and commercial losses. Several steps have been taken by various States but with mixed results. Some of the States have been able to turn around, many others are struggling. High incidence of technical and commercial losses inevitably increase the price of power. Management of cross-subsidy is another issue which has a bearing on price of power, particularly for manufacturing sector and for commercial category, which are cross-subsidising others. Absurd cross-subsidies need to be set right in terms of the Electricity Tariff Policy 2006.

3.Revenue Sustainability of Massive Expansion of Power Industry

The decade of 90's saw the bankruptcy of the power sector, with annual loss rising from Rs. 3000 crores in 1991 to Rs. 30,000 crores by the year 2000-01. Any investment in the sector was unsustainable precisely for this reason. Best of the Policies of the Government, promising very attractive returns, could not fetch any visible investments from private sector. Even the public sector companies were in difficulty in terms of mobilization of financial resources for capacity additions. Post Electricity Act 2003, followed by a number of other policy initiatives, situation changed. Rising trend of losses was arrested. In many States electricity utilities turned around. Payment default to generating companies stopped. However, in last few years, the trend is again highly disturbing. According to one estimate the annual loss of distribution utilities has crossed Rs.50,000 crores. Controlling theft of electricity, reducing technical losses, rationalizing tariff including appropriate management of cross-subsidies have emerged as important issues. Regulatory interventions to set right the distribution business both by way of causing them to improve their efficiency of operations as well as by timely interventions on tariff rationalization, are essential. Unless, revenue sustainability of huge investments is demonstrated, it is quite likely that the power sector may again face similar situation as in the year 2001 when it had been abandoned by developers, lenders and equity providers. Commercial viability of this sector, on a sustained basis, is one of the major challenges that this sector faces today.