Global Economic Crisis – Impact on Power Sector

An Outline

Centre for Computer aided Power Sector Studies(C-CAPSS)

KSEB Officers' Association

Crisis – Some dimensions

Crisis surfacing after collapse of housing bubble in the US – spreading fast to Europe and to other economies

Most analysts consider the present crisis as the biggest and deepest since the great depression of 1930's

Fall in Industrial output, Growth in Unemployment, Failure of finance sector enterprises - all indicating deterioration on each passing day

January '09 – IMF projects a meagre 0.5 % growth for global economy

March '09 – WB forecasts that both the global economy and volume of global trade will shrink for the first time since world war II

Reasons, solutions...

There are differing school of thoughts

Nobel Laureate Paul Krugman sites huge and growing global imbalances

IMF sites poor or lack of regulation of finance sector, failure of market discipline etc

Major response to the crisis has come in the form of huge stimulus packages – either to boost demand in the economy or to salvage troubled financial institutions – so far failed to create any noticeable impact

Emerging picture....

Even though there are different views on the exact timing of a recovery, there is consensus that the crisis will remain for a long duration

Demand contraction is evident in almost all major economies

All major developed economies are in official recession and major developing economies has downsized their growth rates

Signs of political unrest is emerging from different parts of the world

Emerging picture...

Across the board call for intervention by and increased role of Government – stimulus packages, social security nets... There may be differing views on the exact ways for

government intervention – Keynesian or otherwise, but there is consensus for its need

Gone are the days of less government

Loss of faith in free markets – consensus for more and stringent regulation Dr. Manmohan Singh blaming casino capitalism Neo-liberal argument of self correction ability of

markets failed.

Crisis and the power sector

Correlation between GDP and energy consumption is well established

Relation between electricity consumption and GDP is more profound

Naturally there is a need for a review of the development plans/strategy for the power sector in view of the gigantic proportions of the crisis

There is also a need for a review of the existing policy framework which is built on the basic concepts of free market and less government

Impact on Electricity consumption

Industrial output in developed countries declined by 12 – 31%

In India as per reports of Central Statistical Organisation, industrial production has gone down for the second consecutive month in January

Growth in GDP is being lowered (latest figure is 5.25% for 2009-10 by IMF)

Growth rate of electricity generation has come down to 1.8% in January

Impact on Electricity consumption

Some industries in Kerala are reporting reduced consumption of up to 50%

All over India, lot of industries having captive generation capacity has started supplying surplus power to the grid from around October '08 onwards, pushing down market prices

Share of industrial consumption in the overall basket is around 35 – 40% across the country

Impact of the crisis in construction sector, services sector etc are yet to get documented

Impact on finances

The crisis has a profound impact on the finances of power utilities

The speculative price spiral witnessed in energy commodities like crude and coal has almost bankrupted many of the utilities. The price hike in these commodities has influenced the rate of power in the trading market in India. Utilities in Tamil Nadu, Punjab, Karnataka, AP, Rajasthan, Maharastra etc are the worst affected

Kerala was also affected during the period between May – October 2008

Impact on finances

For Kerala, speculative price increase of energy commodities coincided with the monsoon failure, reduction in Indian coal availability and accident at Moozhiyar all leading to more dependence on Naphtha/diesel power and power from open market

Additional financial burden in a month touched almost Rs 250 crores in June '08

The deepening of crisis in September and subsequent fall in crude prices has relieved the burden to a certain extent

Impact on finances

Even though Naphtha prices touched a low in December, it is showing an increasing trend thereafter. Appreciation of US $ is also affecting the price of fuel delivered

Present cost of power generation is about Rs 5/unit (which went up to Rs 13/unit) against an average retail tariff of less than Rs 3.5/unit

Fall in industrial consumption will affect the revneue of utility as well as profitability, due to loss of cross subsidy support

Fluctuation in price of construction materials also have a major impact on capital investment

Impact on capital investments

The turmoil in capital markets world over, marked by fall in stock exchanges, is bound to affect capacity addition plans in the sector

The reported drying up of credit will naturally impact the capital intensive power sector

However, the fall in interest rates represents an opportunity for raising finance at a lower cost

Bursting of construction (Housing) boom represents an opportunity for lower acquisition cost of materials for capital works

Resource requirement

11th plan target 78,577 MW

Fund requirement to the tune of Rs 5,00,000 crores

Private sector contribution expected is less than Rs 1,00,000 crores

In 12th plan a more active role of private sector was projected, with investment in UMPPs alone touching Rs 1,44,000 crores

Resource requirement

In Kerala, the 11th plan outlay of KSEB is Rs 5922.48 crores.

At present KSEB is looking for even a higher capital investment to clear inadequacies in the system In view of tremendous growth shown by different

sectors in the immediate past Large investment projects proposed in the State like

Vizhinjam port, Vallarpadam container terminal, LNG terminal, Smart city, metro rail etc

Internal targets for next year alone reworked as about Rs 2300 crore based on stake holder feed backs

Power projects for Kerala

Considering the present inadequacies in the distribution sector, massive annual investments of over Rs 1000 crore is anticipated for the next 2-3 years based on decentralised planning

Similarly an investment to the tune of Rs 2700 crores is anticipated in the transmission sector by 2012

In generation, 2400 MW cheemeni project alone calls for an investment of about Rs 10,000 crores. Coal mining project in Orissa is progressing

Major investments in hydel, wind etc are also coming up

Challenges and Oppurtunities

Power utilities in India has a huge backlog to clear, as is evident from the present demand-supply gap

Position in Kerala is not much different, even though power shortages are less

The economic crisis may, to a certain extent, reduce the demand-supply gap but is not expected to wipe it out in view of the GDP still growing and thrust on 100% village and household electrification etc

Challenges and Oppurtunities

Thus the crisis presents an opportunity to clear the backlog and close the demand-supply gap

The exact micro level requirement of network expansion may require case by case examination, taking into consideration the impact of the crisis on the user end projects

For capturing the opportunity, strategies for meeting the resource requirements are to be worked out, which lead to policy questions

Policy questions

In the current finance sector turmoil, anticipating huge investments from private sector may not be prudent. This calls for public sector investment

To ensure adequate public sector investment, some of the policy prescriptions in the neo-liberal era requires change. Instead of less government there is need for huge deficit financing by the Government

Financially healthy utilities like KSEB as well as central public sector utilities will be in a position to raise resources and shall play a major role

Policy questions

Huge public investments will also help in increasing demand in the economy and sustain growth in economy

Regulating the power market is an urgent necessity for restoring the financial health of most of the utilities PFC report on power sector utilities has brought out

the havoc created in the finances of various utilities (TNEB, PSEB etc) by the power market imperfections

In view of failure of markets in all most all sectors, the thrust for creating free market structures in power sector needs correction

To sum up....

The global economic crisis creates challenges and opportunities for the power sector

Increased role of Government and public investment in power sector is required for Overcoming the crisis of demand-supply gap in

power sector Generate demand in the economy and sustain growth

Free markets are not a solution. Socially controlled public investment and integrated structure of power utilities are required.

THANK YOU