Power Sector in India - My views in the Power Line magazine
Could you list the noteworthy achievements of the power sector in the last one year? How did the sector score in meeting demand, improving efficiency and how was the sector’s overall growth?
The power sector achieved a milestone in power generation capacity addition in the last one year crossing 10,000 MW for the first time, with greater role being played by the private sector. However, it must be looked at in perspective that during the 11h Plan Period (2007-12), India planned to add 78,700 megawatt power but revised it downward to 62,000 megawatt and India may still fall short of target by 10,000 megawatt by the end of March 2012. Public private partnership in inter-regional transmission through tariff based competitive bidding is positive considering that the deficit in transmission capacity is greater than that in generation. In distribution sector, various States have been attempting distribution franchise model. There has been a reduction in peak power deficits, which, for example, stood at 8.7% in the month of June 2011. There have also been efforts in demand side management and energy efficiency improvements with some degree of success. But these may not paint an optimistic picture of the sector that continues to have potential for growth but is falling short on accounts of sluggish reforms, shortage of fuel and risk perceptions.
What were some of the impeding issues and factors that hindered growth of the sector?
The top three key issues in power sector are fuel supplies, hurdles in project implementation and the financial health of the State owned distribution companies. Coal is and will remain the mainstay of Indian power generation and the domestic coal supplies have not been able to keep pace with the growth in demand. 2010-11 saw negligible growth in coal production which was compounded by problems of logistics. While there were coal shortages at power plants the inventory at pit heads remained at nearly 70 million tonnes. The vast resources of coal and shortages remain dichotomous as CIL and captive coal block owners have struggled to operationalize the mines. Imports have become expensive with continued rise in coal prices and Indonesian laws mandating all transactions at market linked benchmarks. The levels of shortages forecast also indicate that international markets may be distorted due to Indian demand which will aid the stiffness in pricing. The availability at such high prices is still not a guarantee.
It has been reported that 50% of the power sector loans have remained unused caused by project execution milestones being missed due to problems in fuel linkages and clearances. Like the coal mining sector, power sector too has struggled with land acquisition. There are serious challenges in obtaining other clearances and approvals. The unpredictability of these processes lend uncertainties to project development that also impacts their financial attractiveness. Equipment shortage and lack of human resources with relevant experience have also been concerns for project implementation.
Financial health of the state owned distribution companies is worrisome and these tend to raise the elasticity of demand. Higher cost power may remain unsold as distribution companies resort to load shedding, this while there is demand for power. The supply chain through distribution companies has had this negative impact all the while the open access has been advocated with limited implementation. The obvious side of the story is that power generation capacity addition gets impacted due to counter-party risks wherever the financially weak distribution company signs the power purchase agreement.
What kind of policies and strategies are needed to overcome these issues and accelerate growth?
For the fuel supply issue the key is to focus on the development of domestic market, which must include participation of independent coal miners. The captive model has resulted in slower development as the utilities tend to have limited experience and expertise, and are seen to share risks disproportionately with the mine developers and operators (MDOs). While the industry waits for the Parliament to pass the Coal Mines Nationalization (Amendment) Bill 2000, there are options for participation by the independent miners. The definition of ‘captive’ which in the current form applies to miners with a signed fuel supply agreement with a power project can be eased further to allow miners to execute fuel supply agreement with a stipulated time (say, 6 months) since the allocation of coal block. There is perhaps a scope of implementing Ultra Mega Coal Mines (UMCM) through a cost-of-production based bidding in which coal miners may participate and sign the coal supply agreement with CIL or coal thus produced by these mines be distributed by the mechanism of Standing Linkage Committee.
The other issues for coal sector are those of policy and fiscal stability. Competitive bidding has been debated as the way to go for coal allocation but there is no clarity yet on the details. Added to this is the proposal for 26% profit share for project affected people and local area development. While the merit for this has to be debated, it goes without saying that a final word sooner will settle the rules of the game for life to move on.
On imported coal, the focus should be on development of infrastructure for coal handling and transport within the country as also for providing fiscal incentives for coal mine acquisitions abroad. Bidding guidelines for tariff based competitive bidding may need to be revisited so that financial viability of imported coal based project is not threatened. There may be merit in the argument that developers cannot be expected to bear fuel price risks related to changes in law in coal exporting countries as applicable under the existing bidding guidelines.
For the project implementation issues, the simplification of procedures will certainly go a long way. Land acquisition bill is being debated and there seems to be no consensus still in terms of role of Government in facilitating land acquisition and modes of compensation. Environmental clearance procedure needs to be made predictable for an outcome and effective monitoring of the application through information technology intervention is a must.
On the financial health of distribution companies, the reforms are a must which can range from various models of distribution franchise to outright privatization though that may not be politically palatable. It must be considered that beyond the weak distribution companies there are power consumers who have the appetite and necessity for power, and, as someone said, no power is more expensive than no power.
The power sector achieved a milestone in power generation capacity addition in the last one year crossing 10,000 MW for the first time, with greater role being played by the private sector. However, it must be looked at in perspective that during the 11h Plan Period (2007-12), India planned to add 78,700 megawatt power but revised it downward to 62,000 megawatt and India may still fall short of target by 10,000 megawatt by the end of March 2012. Public private partnership in inter-regional transmission through tariff based competitive bidding is positive considering that the deficit in transmission capacity is greater than that in generation. In distribution sector, various States have been attempting distribution franchise model. There has been a reduction in peak power deficits, which, for example, stood at 8.7% in the month of June 2011. There have also been efforts in demand side management and energy efficiency improvements with some degree of success. But these may not paint an optimistic picture of the sector that continues to have potential for growth but is falling short on accounts of sluggish reforms, shortage of fuel and risk perceptions.
What were some of the impeding issues and factors that hindered growth of the sector?
The top three key issues in power sector are fuel supplies, hurdles in project implementation and the financial health of the State owned distribution companies. Coal is and will remain the mainstay of Indian power generation and the domestic coal supplies have not been able to keep pace with the growth in demand. 2010-11 saw negligible growth in coal production which was compounded by problems of logistics. While there were coal shortages at power plants the inventory at pit heads remained at nearly 70 million tonnes. The vast resources of coal and shortages remain dichotomous as CIL and captive coal block owners have struggled to operationalize the mines. Imports have become expensive with continued rise in coal prices and Indonesian laws mandating all transactions at market linked benchmarks. The levels of shortages forecast also indicate that international markets may be distorted due to Indian demand which will aid the stiffness in pricing. The availability at such high prices is still not a guarantee.
It has been reported that 50% of the power sector loans have remained unused caused by project execution milestones being missed due to problems in fuel linkages and clearances. Like the coal mining sector, power sector too has struggled with land acquisition. There are serious challenges in obtaining other clearances and approvals. The unpredictability of these processes lend uncertainties to project development that also impacts their financial attractiveness. Equipment shortage and lack of human resources with relevant experience have also been concerns for project implementation.
Financial health of the state owned distribution companies is worrisome and these tend to raise the elasticity of demand. Higher cost power may remain unsold as distribution companies resort to load shedding, this while there is demand for power. The supply chain through distribution companies has had this negative impact all the while the open access has been advocated with limited implementation. The obvious side of the story is that power generation capacity addition gets impacted due to counter-party risks wherever the financially weak distribution company signs the power purchase agreement.
What kind of policies and strategies are needed to overcome these issues and accelerate growth?
For the fuel supply issue the key is to focus on the development of domestic market, which must include participation of independent coal miners. The captive model has resulted in slower development as the utilities tend to have limited experience and expertise, and are seen to share risks disproportionately with the mine developers and operators (MDOs). While the industry waits for the Parliament to pass the Coal Mines Nationalization (Amendment) Bill 2000, there are options for participation by the independent miners. The definition of ‘captive’ which in the current form applies to miners with a signed fuel supply agreement with a power project can be eased further to allow miners to execute fuel supply agreement with a stipulated time (say, 6 months) since the allocation of coal block. There is perhaps a scope of implementing Ultra Mega Coal Mines (UMCM) through a cost-of-production based bidding in which coal miners may participate and sign the coal supply agreement with CIL or coal thus produced by these mines be distributed by the mechanism of Standing Linkage Committee.
The other issues for coal sector are those of policy and fiscal stability. Competitive bidding has been debated as the way to go for coal allocation but there is no clarity yet on the details. Added to this is the proposal for 26% profit share for project affected people and local area development. While the merit for this has to be debated, it goes without saying that a final word sooner will settle the rules of the game for life to move on.
On imported coal, the focus should be on development of infrastructure for coal handling and transport within the country as also for providing fiscal incentives for coal mine acquisitions abroad. Bidding guidelines for tariff based competitive bidding may need to be revisited so that financial viability of imported coal based project is not threatened. There may be merit in the argument that developers cannot be expected to bear fuel price risks related to changes in law in coal exporting countries as applicable under the existing bidding guidelines.
For the project implementation issues, the simplification of procedures will certainly go a long way. Land acquisition bill is being debated and there seems to be no consensus still in terms of role of Government in facilitating land acquisition and modes of compensation. Environmental clearance procedure needs to be made predictable for an outcome and effective monitoring of the application through information technology intervention is a must.
On the financial health of distribution companies, the reforms are a must which can range from various models of distribution franchise to outright privatization though that may not be politically palatable. It must be considered that beyond the weak distribution companies there are power consumers who have the appetite and necessity for power, and, as someone said, no power is more expensive than no power.
posted by Dipesh Dipu @ 9:50 PM
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