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Dr Arbind Prasad, Senior Advisor, Planning Commission

18 Oct 2011

The Working Group on Power is in the final phase of discussions on the requirements of the Indian energy sector for the XII Plan. The XI Plan saw unprecedented capacity addition in the power generation segment, even though it fell short of its target. However, the last few years also put the spotlight on several problems faced by the sector, some of which are soon taking the shape of a crisis.

InfralineEnergy's Jayashree Maji speaks to Dr Arbind Prasad to explore the issues discussed by the Working Group on Power and to find out the path that the power sector is expected to take during the upcoming XII five-year Plan.

Edited excerpts.

What would be the focus areas in the XII Plan?

Apart from the focus on adding more generation capacity, the new five-year Plan will seek to address the critical issue of the inadequacy of the coal transport infrastructure by adopting a two-pronged strategy. We will not only concentrate on developing infrastructure for both the domestic as well as the imported coal but also focus on building more coal washeries which would help in reducing the need to transport coal.

Another focus would be on increasing the use of underground mining technology which would not only help in providing access to deeper coal reserves but will also give us plus points on the environment front. Focus on solar and wind power will continue.

The rise in the consumption pattern has brought the focus on the issue of power management and meeting peaking requirements. On the distribution side, the focus will be on separate tariff structure for different timings of the day which, in turn, would increase the emphasis on the load management.

Also, hydro and gas resources can be better regulated in terms of response to the need of any particular given time of the day. This would help in better utilisation of the infirm power in terms of solar and wind.

The increase in the capacity addition will put greater emphasis on the management of the grid, which can be better managed. In addition, we understand that the distribution system will evolve further which will enable the distribution companies to have better control over their consumers in terms of providing different tariffs to the different users at different times.

"The power industry is facing a severe coal crisis, fuelling this is the fact that the coal production did not grow at the level that was required. At the time that the power sector was focusing on increasing generation capacity nobody could predict this shortage of coal, at least not at this level. Adding to this scarcity is the addition of more than 50,000MW of generation capacity during the XI Plan."

These are the broad issues which the XII Plan will focus on.

Having said that, it is only after the Steering Committee meeting on October 22, 2011, that we will have a clear picture of the issues highlighted in the discussion of these working groups. In a few more days, an overview of the energy sector for the XII Plan will start emerging.

Coal crisis has triggered a financial crisis in the power sector. Banks have stopped disbursing loans to the upcoming projects and the condition is set to worsen further. Infraline has estimated that by FY `20, the domestic shortfall of thermal coal would be close to 300-400 MT. What is your take on this?

The power industry is facing a severe coal crisis as the coal production did not grow at the level that was required. The last few years have seen a shift in the problems faced by the Indian power sector from power shortage to coal shortage.

It was only a few years earlier that the power sector was complaining about the lack of power to distribute to its consumers which compelled the Electricity Act of 2003 to focus on the opening of generation capacity in lieu of the power shortage. The sector has, since then, shown positive development in the generation segment. A sustained effort on adding capacity has ensured that no state government can now justify power blackouts or the inability to supply power.

After this, the problem shifted towards the distribution sector which has been labouring under heavy losses. Even though the electricity was now available, the utilities found it difficult to buy this power owing to their poor financial conditions. Even as the issue of distribution is being sorted out to a certain extent through various measures, the power sector is now under the grips of a new crisis which is the scarcity of coal.

"As a policy matter, India has not shelved its nuclear power plan. On the contrary, we are very aggressively pursuing nuclear power."

At the time that the power sector was focusing on increasing generation capacity, nobody thought of coal shortages, at least not to this level. Adding to the scarcity of coal is the addition of more than 50,000MW of generation capacity during the XI Plan.

What we need today is for captive blocks to go for increase in production to help in tiding over the shortages. However, in order to not repeat the mistake of the past in focusing on one problem at the cost of other, we also have to ensure that the reforms continue in the distribution sector in addition to the coal development. The negligence of the distribution sector will result in the absence of buyers for the electricity produced which will be an impediment in the development of the fuel sector.

With Japan deciding not to expand its nuclear power base, and Germany and Switzerland vowing to phase out nuclear power altogether, what are India's plans on nuclear power?

India is not on the same footing as Japan or Germany in terms of nuclear energy. Firstly, their share of nuclear energy is much higher than what India can talk of right now. India has around 4.78 GW of installed capacity. The issue with the nuclear power in India at present is more of implementation. We have the domestic Pressurised Heavy Water-based power plants, which NPCIL is installing domestically. Moreover, we have a nuclear power plant in Kudankulam, which should come into production in a few months. Another two plants are expected to come up soon. This is to prove that as a policy matter, India has not shelved its nuclear power plan. On the contrary, we are very aggressively pursuing nuclear power.

How will nuclear power figure in India's power generation mix?

The issues with the nuclear power are related to safety. It all boils down to addressing these safety issues so that the country becomes less vulnerable to the kind of accident that occurred in Fukushima.

In India, nuclear power is at a very nascent stage though without doubt, it has a huge potential. This potential can be best exploited when we reach the third stage of the nuclear power because of the variety of the nuclear fuel that is present in India including Thorium.

We are at the second stage where the fast breeder reactors (FBR) of 500MW are under implementation in Kalpakkam. It is expected to be operational in the next financial year. We would require three to four more FBRs before we can start developing the Thorium-based power plants. If all goes according to plan, in another 20 years, we can expect the Thorium-based power plants to start contributing about 15 to 20 percent in the country's electricity generation mix.

"When a business decision is taken to bid for a 20-year-project, the issues are evaluated differently by different bidders. The point to note is when one bids for a competitive bidding project; it is all boils down to how one assessed the business risks in a different environment."

When it comes to wind energy potential, it is at present assessed at around 50,000MW. The recent studies show that the technology evolution would help in harnessing more wind power. At the same time the potential of gas is increasing globally. However, the share of gas in the generation mix depends on the extent to which we can explore shale gas as well as other forms of gas and also at the rate the gas market develops globally. Twenty years down the line, in my personal view, the share of nuclear would increase substantially in the power consumption while the share of the solar and the wind energy will also be higher as well as hydro will also be exploited to its full extent.

Moreover, we cannot ignore the impact of the energy efficiency which will result in substantial reduction in our own needs. At the nine percent growth rate of our economy, we need to achieve around seven percent of energy consumption in order to enhance efficiency levels. I personally feel that we are on track though we do need to continuously monitor all sectors and not just one.

What is the future of the Case I-Case II projects based on imported coal? Will these projects go back to the RoE regime?

Individual developers might be facing different challenges depending on what they projected about international coal prices or power tariff on long-term basis. So there are issues for those who bid at different tariff rate, particularly depending on what variable component they had put in their bid. That is how they might be getting affected for a year or two. But the point to remember is that these bids are for a longer term of, say 15 years, 20 years or 25 years. It will be improper to evaluate any particular bid on short-term basis and on basis of that, trying to re-evaluate it.

The competitive bidding guidelines have been introduced but investors are suffering because of the coal shortage and they now have to import more expensive coal from other countries. Does that mean that the competitive bidding mechanism has failed?

The competitive bidding guidelines were framed from a long term perspective. If you observe the international coal pricing, though at present it is much higher than what it was a year back, it is not as high as it was a few years back i.e., in 2007 or 2008. It is still less than what it was in 2008. So, it all depends on how one analyses the coal pricing.

When it comes to any bid there are always other bidders in the fray who do not qualify as they have a different perspective on the fuel cost, on the market cost or on the variable cost versus the fixed cost. The assessment of someone may go wrong. You never know how the power sector will perform in the next two years. When a business decision is taken to bid for a 20-year- project, the issues are evaluated differently by different bidders. The point to note is when one bids for a competitive bidding project it all boils down to how one assessed the business risks over different time periods in future.

A few policy makers have suggested that the Case I and Case II projects cannot be pursued and they will come back to the RoE regime. What does the future hold for the power sector in this respect?

I don't think that India would go far away from the path of market economy. It is not going to be an entirely controlled environment where fixed rate of return will be given on the capital and the tariff will be fixed. That would take away the broad efficiency of the market to which this bidding process was addressed. It was precisely because of this problem of the regulated regime that India opted for competitive bidding mechanism. The bidding regime enables the private sector in making a much better assessment and also in sourcing their inputs from different sources as opposed to a regulatory regime where everybody is assured of a particular rate of return without taking into account the source of the fuel or the location or the management of the power plants.

"The time is ripe for the distribution sector to reform itself and come to a level where the users will be in a position to pay the tariff at which the electricity is supplied."

I don't think that the overall framework of bidding is going to be dismantled. Of course, some developers would make noises because they could not bid successfully. The policy does provide for bidding considering both the variable cost and the fixed cost. You cannot bid on a year-to-year basis when you go for a 25-year long project.

State government subsidy and inadequate tariff were the reasons quoted for discoms' losses for the past ten years and in spite of suggested reforms and probably for this reason the discoms are still displaying a lukewarm attitude in implementing the reforms. With such response how are they expected to handle the losses?

I don't think they are showing a lukewarm attitude. We have 28 states and seven Union Territories, so we cannot paint them with one brush. They have separate issues and the state governments are addressing those.

The most important issue is to look carefully at the losses of the distribution utilities in order to prevent the passing on of the inefficiencies in the management of the utilities to the consumers. After this, an adequate tariff has to be fixed, proper billing has to be done and the revenue collection has to be made. The entire business cycle in terms of distribution has now come into the focus and I am sure that most of the state governments are paying very close attention to it.

Even the banking sector from which these utilities were earlier borrowing to manage their losses are giving due attention to these details. The time is ripe for the distribution sector to reform itself and come to a level where the users will be in a position to pay the tariff at which the electricity is supplied.

(InfralineEnergy thanks Dr Arbind Prasad, Senior Advisor, Planning Commission for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)