Can India SolveCan India Solve

its Power Crisisits Power Crisis

88thth May 2007May 2007

The findings and opinions expressed in this paper are the sole rThe findings and opinions expressed in this paper are the sole responsibility of esponsibility of

the author. The findings and opinions expressed in this paper althe author. The findings and opinions expressed in this paper also do not so do not

necessarily reflect the views of the World Bank, its executive dnecessarily reflect the views of the World Bank, its executive directors, or irectors, or

the countries they represent.the countries they represent.

The beginning...The beginning...

The first

generating station

set up in the

Darjeeling hills in

1880s

Electricity

generation and

distribution

largely localised

Most of the

capacity result of

private or

municipal

initiative

Current situationCurrent situation

�� Approx 105,000MW Approx 105,000MW ––

�� Produce 659 Produce 659 bnbn kWh pakWh pa

�� +/+/-- 44thth largest power system in the worldlargest power system in the world

�� Coal Coal –– main fuel (55%)main fuel (55%)

�� Per capita consumption approx 600kWhPer capita consumption approx 600kWh

�� 80% villages electrified 80% villages electrified

�� but < 44% houses connectedbut < 44% houses connected

�� 1010--15,000 MW annual growth required15,000 MW annual growth required

Traditional structureTraditional structure

Ministry of Power Government of India

Planning Commission Government of India

Central Electricity Authority

Central public sector Power companies

Such as NTPC, POWERGRID

State Electricity Boards

State Ministry of Power

IssuesIssues

�� Not enough power (10% deficit, 13% at peak Not enough power (10% deficit, 13% at peak demand)demand)

�� Not enough paying customersNot enough paying customers

•• Av Av realisationrealisation Rs 2.4/kWh against Rs 2.4/kWh against avav cost of Rs 3.5/kWhcost of Rs 3.5/kWh

�� High Technical and commercial losses >30%High Technical and commercial losses >30%

�� Utility financial losses Utility financial losses –– approx Rs 4 approx Rs 4 BnBn(excluding Rs 1.5 (excluding Rs 1.5 BnBn subsidy) subsidy) -- >1% GSDP>1% GSDP

�� Agriculture consumes 30% of the power and pays Agriculture consumes 30% of the power and pays 5% of the cost (often not metered)5% of the cost (often not metered)

Drivers for ChangeDrivers for Change

Reduced Investment not matching demand

growth

Skewed Investment in favour of Generation

Overloaded lines -Technical losses

Theft & Pilferage -Commercial losses

• Electricity access as basic need• Middle-class growth

• Increase in pump irrigation

• Industrial Expansion

Economic Factors:

• Govt. interference in operations & mgmt.

• Uneconomic tariff setting

Political Factors

Weakened SEB

Finances

Reform process began in earnest Reform process began in earnest

in the late 80s early 90sin the late 80s early 90s

Cash crunch

Subsequent stepsSubsequent steps

1975

NHPC established

1989

PGCIL established

1975

NTPC established

1995

OER Act

1998

CERC Act

1991

IPP policy

1999

Orissa privatisation

• To encourage private participation in energy

generation (Fast Track Projects)

• Ushering reforms in the State Power Sector

• Establishment of CERC

• Allows private investment in power transmission

• To encourage large power projects catering to

multiple States

• Removal of capacity limit on liquid fuel projects

shifting emphasis from naphtha to LNG

• To purchase power directly from Mega projects

and selling it to multiple SEBs to improve

bankability of Mega projects

• Provides operational code for regional grids and

defines role of private investors in Transmission

IPP Policy 1991

ERC Bill 1998

Power 1998

Transmission Bill

New Liquid 1998

Fuel Policy

Indian Electricity 1999

Grid Code

Mega Power Policy 1998

Power Trading Corporation 1999

Orissa ER Act 1995

Impetus to private investmentsImpetus to private investments

DistributionDistribution

Reform of the state electricity boards Reform of the state electricity boards

(SEBs)(SEBs)

State Electricity Board (SEB) ReformsState Electricity Board (SEB) Reforms

Policy Decisions : STATE GOVT.

Regulation : Autonomous REGULATOR (E.R.C.)

Operation : Unbundled entities - corporatised &

commercialised

GENCO TRANSCO

Generation Transmission & distribution

TRANSCO DISCOMS

Tariff: Dis-aggregation,

Inter-utility commercial arrangements : PPA; BSA

Commercialisation: metering; reading; billing; collection; disconnection

State Govt.

& SEB

SEB

Distribution

Orissa Orissa –– ground breaking reformground breaking reform

�� Orissa passed an electricity reform act in 1996, aimed at Orissa passed an electricity reform act in 1996, aimed at unbundling and unbundling and privatisationprivatisation –– one of the poorest states in one of the poorest states in the countrythe country

�� Did Did privatiseprivatise discomsdiscoms and generating companyand generating company•• But one But one discomdiscom investor walked awayinvestor walked away

�� Considered a failure as costs and losses continued to Considered a failure as costs and losses continued to increaseincrease

�� UNREALISTIC assumptions (by regulator et al)UNREALISTIC assumptions (by regulator et al)

�� LACK of Government support LACK of Government support –– thought they could thought they could privatiseprivatiseand walk awayand walk away

�� Other states learnt a lot of lessons but it dampened Other states learnt a lot of lessons but it dampened enthusiasm for enthusiasm for privatisationprivatisation

Distribution

Andhra PradeshAndhra Pradesh

�� 1999 Reform Act1999 Reform Act

�� Unbundled only (Unbundled only (privatisationprivatisation ““laterlater””))

�� Improved efficiency Improved efficiency –– and seen as successfuland seen as successful

�� BUT Government then announced free power to BUT Government then announced free power to farmers farmers –– paying subsidy and subsidy bill paying subsidy and subsidy bill gradually reducing as efficiency improvesgradually reducing as efficiency improves

�� Subsidy was 3% of GSDP (FY04) now 1.4% Subsidy was 3% of GSDP (FY04) now 1.4% (FY07)(FY07)

Distribution

Other states followedOther states followed……....

Delhi power Delhi power privatisationprivatisation (2002)(2002)

�� Learnt from other statesLearnt from other states

�� PrivatisationPrivatisation based on loss reduction bids based on loss reduction bids (clear benchmarking)(clear benchmarking)

�� Investors were existing Indian companiesInvestors were existing Indian companies

�� Large fund set up to pay for subsidy bill Large fund set up to pay for subsidy bill during transition (during transition ( -- not replicable for not replicable for other parts of Indiaother parts of India))

�� Initially seen as not very successful, now Initially seen as not very successful, now starting to show efficiency improvementsstarting to show efficiency improvements

Distribution

Generation Generation –– the push for private the push for private

powerpower

Fast Track ProjectsFast Track Projects

� Promote private sector investments

� Provide incentives under IPP Policy, 1991 within

reasonable time

� High Powered Board set up to serve as a single window

to expedite implementation with GoI and state

government representation

� GoI Counter Guarantee & Tariff in Forex

FAILED TO BEAR FRUIT : ENRON, COGENTRIX, etc.

Generation

Mega Power PolicyMega Power Policy

� Began in 1995 – min 1000 MW – big role for

POWERGRID, NTPC and CEA

� 1997: Offer projects after all clearances are in

place + GoI appointed Standing Independent

Group (SIG) to oversee + Power Trading

Corporation to provide security of offtake

� Little success…..

Generation

Encouraging signsEncouraging signs�� MORE POWERMORE POWER -- Mega power projects now appear to be reaching Mega power projects now appear to be reaching

closure (although gas shortage constraining other closure (although gas shortage constraining other IPPsIPPs). ). Hydropower also getting a strong push as a clean alternative to Hydropower also getting a strong push as a clean alternative to coalcoal

�� MORE REGULATION MORE REGULATION -- Increasingly effective regulation at central Increasingly effective regulation at central level CEA, CERC and level CEA, CERC and SERCsSERCs (independence issues at state level (independence issues at state level in some cases?) in some cases?)

�� MORE REFORM MORE REFORM -- Electricity Act 2003 has started a process which Electricity Act 2003 has started a process which now looks difficult to reversenow looks difficult to reverse

�� MORE GRID STABILITY MORE GRID STABILITY -- Bulk Supply tariff Bulk Supply tariff –– (Availability based (Availability based tariff) has done much to improve grid stabilitytariff) has done much to improve grid stability

�� MORE TRANSPARENCY MORE TRANSPARENCY -- Subsidy is becoming more transparentSubsidy is becoming more transparent

�� MORE FINANCIAL CONTROL MORE FINANCIAL CONTROL -- Payments to central power Payments to central power suppliers improvedsuppliers improved

CERC

SERC

Central

Generating

stations

Mega Power

ProjectsIPP/ Captive

Licensee

ownedGeneration State

Owned

Transmission POWERGRID (Central Transmission Utility) REB/RLDC

SEB / State Transmission Utility

SEBs Distribution Distribution

Company/

Licensees

Snapshot of the present sector Snapshot of the present sector

structurestructure

REB – regional electricity board RLDC – regional load dispatch centre

More powerMore power

Mega PowerMega Power

�� Recently pit head plants bid out with Recently pit head plants bid out with

associated coal mines (bid on tariff) associated coal mines (bid on tariff) –– first first

two 4000MW eachtwo 4000MW each

�� Bids came in for one plant at 2.7 US Bids came in for one plant at 2.7 US

cents/kWh (cents/kWh (levelisedlevelised over the life of the over the life of the

plant) plant) –– much below India hurdle rate of 5 much below India hurdle rate of 5

US cents/kWh (other plant was 5.2 US US cents/kWh (other plant was 5.2 US

cents)cents)

�� But But –– can they reach financial closure...?can they reach financial closure...?

Encouraging signs: Encouraging signs: -- More PowerMore Power

Push to add hydropowerPush to add hydropower50,000 MW Hydro initiative launched

• Draft pre-feasibility reports received for 132 schemes (37,378 MW)

• Pre-Feasbiliity Reports finalized for 103 schemes (31,150 MW)

• Private player entering for smaller plants

Encouraging signs: Encouraging signs: -- More PowerMore Power

More regulationMore regulation

More regulation More regulation

seems to suit Indiaseems to suit India�� Central Electricity Authority Central Electricity Authority –– for Technofor Techno--economic clearances; Generation and T&D economic clearances; Generation and T&D planning standardsplanning standards

�� Central Electricity Regulatory Commission Central Electricity Regulatory Commission –– for for Grid Code; Availability Based tariffs; Tariff norms Grid Code; Availability Based tariffs; Tariff norms for Central Generating stationsfor Central Generating stations

�� State Electricity Regulatory Commissions for State Electricity Regulatory Commissions for ––Licenses; tariff orders; Captive power policy and Licenses; tariff orders; Captive power policy and related ordersrelated orders

�� New appellate tribunalNew appellate tribunal

Encouraging signs: Encouraging signs: -- More RegulationMore Regulation

More reformMore reform

Electricity Act 2003 main actionsElectricity Act 2003 main actions

�� All states must have regulators in placeAll states must have regulators in place

�� Trading must be separated from Trading must be separated from

transmissiontransmission

�� Appellate tribunal to appeal regulatory Appellate tribunal to appeal regulatory

decisionsdecisions

�� Open access in transmission, phased open Open access in transmission, phased open

access in distributionaccess in distribution

�� Secondary distribution licensesSecondary distribution licenses

�� Special courts and penalties for theftSpecial courts and penalties for theft

Encouraging signs: Encouraging signs: -- More ReformMore Reform

More stabilityMore stability

Bulk Supply Tariff Bulk Supply Tariff –– ““Availability Based Tariff (ABT)Availability Based Tariff (ABT)””

�To provide incentives and to secure

grid discipline

� History of low frequency in peak hours vs.

High frequency in off-peak hours

� Rapid & wide frequency fluctuations : up to 1

Hz. In 5/10 minutes

� Frequent grid disturbances : tripping,

interruption & disintegration

� Generators incentive on Plant Load Factor -

generate regardless of grid circumstances

Encouraging signs: Encouraging signs: -- More StabilityMore Stability

Availability Based Tariff (ABT) continuedAvailability Based Tariff (ABT) continued

� Scheduling of Availability of Generation by

Generating Stations.

� Load forecasting by SEBs – scheduled on 15

minute basis

� Allocation and energy accounting by Regional

Electricity Board

� Dispatch carefully monitored & controlled

� “Unscheduled interchange” Charges for deviation

& penalties for non-compliance

� Phased in by region

Encouraging signs: Encouraging signs: -- More StabilityMore Stability

�� Unscheduled interchange charges related to Unscheduled interchange charges related to frequency frequency –– improved grid discipline and thus improved grid discipline and thus frequency profile.frequency profile.

�� Overall impact of ABT Overall impact of ABT -- reduced frequency reduced frequency variation variation –– improved equipment function improved equipment function ––significantly for irrigation pumpssignificantly for irrigation pumps•• Use of pump storageUse of pump storage

•• OptimisationOptimisation of hydropowerof hydropower

•• OptimisationOptimisation of use of captiveof use of captive

�� States States ““gaminggaming”” system system –– leads to leads to optimisationoptimisation

Encouraging signs: Encouraging signs: -- More StabilityMore Stability

Availability Based Tariff (ABT) continuedAvailability Based Tariff (ABT) continued

Impact of ABT Impact of ABT -- frequency variationfrequency variation

Encouraging signs: Encouraging signs: -- More StabilityMore Stability

Impact of ABT Impact of ABT –– peak demand metpeak demand met

Encouraging signs: Encouraging signs: -- More StabilityMore Stability

More transparencyMore transparency

Increasing transparency of subsidiesIncreasing transparency of subsidies

�� Huge bills to Government Huge bills to Government –– but has increased but has increased transparency transparency –– (cost was always there but not (cost was always there but not transparent)transparent)

�� Andhra Pradesh and Tamil Nadu Andhra Pradesh and Tamil Nadu –– paying for paying for ““free power to farmersfree power to farmers””

�� Cross subsidy no longer increasingCross subsidy no longer increasing

�� ALSO more transparency from ALSO more transparency from ““Right to Right to information actinformation act””

�� BUTBUT……. Subsidy still a MAJOR political issue. Subsidy still a MAJOR political issue

Encouraging signs: Encouraging signs: -- More transparencyMore transparency

More financial controlMore financial control

Payments to central power suppliersPayments to central power suppliers

�� States used to avoid their financial troubles by States used to avoid their financial troubles by not paying the centre for power (NTPC, Coal not paying the centre for power (NTPC, Coal India, India, PowergridPowergrid etc.)etc.)

�� Under Under ““tripartite agreementtripartite agreement”” -- Past debts Past debts converted into bonds and incentives provided for converted into bonds and incentives provided for prompt payment in the futureprompt payment in the future

�� Amounts deducted from central plan allocations if Amounts deducted from central plan allocations if not paidnot paid

�� Dramatic improvement in payments Dramatic improvement in payments –– and hard and hard budget constraint on states.budget constraint on states.

�� AlSOAlSO SOME TRADING EMERGINGSOME TRADING EMERGING

Encouraging signs: Encouraging signs: -- More financial controlMore financial control

�� Power Trading Corporation set up in 1999Power Trading Corporation set up in 1999

�� Others have followed (NTPC etc.)Others have followed (NTPC etc.)

�� India is now considering setting up a India is now considering setting up a

market/exchangemarket/exchange

Emergence of tradingEmergence of trading

Encouraging signs: Encouraging signs: -- More financial controlMore financial control

Power Traded by PTC (MUs)

28.35 5601617

4178

11029

0

2000

4000

6000

8000

10000

12000

99-00 00-01 01-02 02-03 03-04

Power Traded by PTC as a Percentage of

Total Power Generated

0.01% 0.11%0.31%

0.79%

1.99%

0.00%

1.00%

2.00%

3.00%

99-00 00-01 01-02 02-03 03-04

BUT BUT –– problems still aboundproblems still abound

�� Power heavily Power heavily politicisedpoliticised and and ““Free Free

powerpower”” haunts the sectorhaunts the sector

�� Technical and commercial losses are not Technical and commercial losses are not

coming down coming down

�� Generation is taking time to build upGeneration is taking time to build up

�� Distribution companies have only limited Distribution companies have only limited

independence in some statesindependence in some states

�� Payments between state companies often Payments between state companies often

fudged to avoid hard budget issuesfudged to avoid hard budget issues

So can India Solve its Power So can India Solve its Power

Crisis?Crisis?

�� If continue on current track If continue on current track --•• The increase in megaThe increase in mega--projects projects –– including including large Government owned thermal and hydro large Government owned thermal and hydro --will improve supplywill improve supply

•• The implementation of Electricity Act 2003 The implementation of Electricity Act 2003 ––will bring about reform will bring about reform –– particularly open particularly open accessaccess

•• Regulation and payment regime are tighter so Regulation and payment regime are tighter so subsidy is more transparentsubsidy is more transparent

•• Current Government emphasis on rural Current Government emphasis on rural connectionsconnections

�� BUTBUT…….. Can so easily be derailed by Can so easily be derailed by --Political imperatives Political imperatives –– particularly with particularly with respect to respect to ““free power for agriculturefree power for agriculture””