Power holds the key

After a relatively slow start in the early 1990s, India may finally have laid the groundwork for rapid power sector development.

Hubert H. Reineberg, Ekonocom International Arizona, USA

Beginning with the Electricity Act of 2003 and the formulation of a National Electricity Policy and Plan, the government of India has put a legal framework in place that may make it possible to achieve the goal of ‘Electricity for All’ by 2012. At the present time, about 80 per cent of India’s 1.1 billion inhabitants have access to electricity. However, services are unreliable because of regular power shortages and blackouts. Many industrial enterprises are resorting to self-generation due to reliability problems and the relatively higher tariffs they are paying.

Government statistics show, only 55 per cent of the population is connected to the grid and only 13 per cent of electrical output is consumed in rural areas where 70 per cent of the population lives. The goal to provide electricity for the entire country is only part of a host of infrastructure projects that the Indian government is planning. Additional plans include water treatment plants, sewer systems, roads, bridges and an expansion of rail and port facilities.

Table 1. The bulk of India’s installed utility capacity is in the south west of the country
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In May of this year, the Ratnagiri Gas & Power Project was finally restarted. The previously named Dabhol project had been idle for five years due to a tariff dispute with the Maharashtra State Electricity Board (MSEB), a part owner of Dabhol. The economic costs of the dispute with the MSEB were not insignificant. The 2000 MW of idle generating capacity deprived the economy of badly needed electricity. While the settlement sends a positive signal to international investors, a more expeditious process in resolving these types of conflicts would be more desirable in reducing perceived ‘Country Risk’.

India’s rapid growth has placed a severe stress on the nation’s entire infrastructure, which could impede its ambitious plans for further growth and development. In 2005, annual growth was in excess of 7.5 per cent. Members of the Government estimate that to support a 7 per cent annual rate of economic growth, power supply needs to increase more than 10 per cent per year.

Power generation

The government has developed a ‘Blueprint for power sector development encompassing an integrated strategy’, simultaneously, addressing power generation, transmission, distribution, regulation, energy conservation and communication. They include objectives like reliability, power quality, and optimum power costs. These objectives are considered and adopted as standard in developed countries, but they often remain illusive in developing countries, including India.

In May 2006, installed capacity in India totalled 124 827 MW. The government estimates, a minimum of 200 000 MW of capacity will be needed to provide access to electricity for all. To this end, the Delhi government initiated a series of Ultra Mega Power Projects through tariff based competitive bidding. Mega Projects are based on the concept that economies of scale will lead to less expensive electricity, by using the latest supercritical technology. The new generation units will use coal from either imported sources or from domestically designated sources.

Each project will have a minimum capacity of 4000 MW. The Megas are thought to be consistent with the National Grid concept, which allows for large bulk power transfers of over relatively long distances. If the projects can be launched successfully, state-specific projects of 1000 to 2000 MW based on competitive bidding are also envisaged.

Cutting bureaucracy

Five proposed Ultra Mega Projects are currently being considered in the states of Maharashtra, Chattisgarh, Gujarat, Madhya Pradesh and Karnataka. To cut through bureaucratic red tape and enhance investor confidence, project specific shell companies have been created. These companies’ role is to deal with site selection, secure fuel sources, and water for cooling, arrange for environmental and forest clearances and modernize port facilities. The shells are funded by the Power Finance Corporation and their work is to assure potential investors that the bureaucracy will not be a stumbling block in project development.

India has 14 nuclear reactors in operation and nine additional ones under construction. However, generating capacity from nuclear power accounts for a mere 3.1 per cent. On his recent visit to India, US President, George W. Bush, advanced a proposal under which the two countries would share nuclear technology for peaceful purposes.

The accord is subject to approval by both Houses of the US Congress. In July, the House of Representatives voted overwhelmingly to allow US shipments of civilian nuclear fuel and technology to India. US Senate approval of the accord is expected this autumn.

Graph 1. Levels of Foreign Direct Investment between 1999 and 2003
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At present, 25.9 per cent of the country’s electricity is obtained from hydroelectric installations. The Ministry of Power estimates that the country’s hydro potential is about 150 000 MW, of which only 17 per cent have been tapped. The vast unused hydro potential, if developed, could play a much bigger role in India’s power sector portfolio. Due to a lack of peaking capacity, thermal generation is used for both, base load operation and peaking requirements, which tends to be highly inefficient. While hydro electricity may be clean energy and not subject to the vagaries of international energy markets, it is not entirely without environmental costs, as many of the hydro projects in America’s Northwest have shown.

Flow of power

While the planning and construction of new thermal and hydro generation is quite impressive, equally ambitious programmes for power transmission and distribution are being envisaged. According to a national development plan, to facilitate bulk power transfer over long distances an “expansion of the regional transmission network and inter-regional capacity is essential”. The country’s tenth and eleventh plan focuses on the creation of a phased in National Grid that will add about 60 000 km of transmission by 2012. The existing inter-regional power transfer capacity is to be further enhanced to 30 000 MW by 2012 through creation of the ‘Transmission Super Highways’. Distribution system reforms will focus mainly on system upgrades, loss reduction, power theft control, meter installation and customer services.

In order to attract new foreign investments, the Delhi government has been offering tax incentives to economic zone projects. The zone projects create infrastructure for service and manufacturing industries and for an agricultural base. One such project is being sponsored by Reliance Industries, the country’s largest non-state refiner. Investments in these projects represent additional efforts to improve infrastructure through private funding to earn a higher share of global export revenue and compete more effectively with China and other Asian economies. These enterprise zones circumvent many of the infrastructure problems faced by domestic and international investors when trying to do business in India.

The delivery of electricity to the countryside is a critical component of rural economic development. The Ministry of Power has initiated a programme “which aims at providing electricity in all villages and habitations in four years and provides access to electricity for all rural households.” Subsidy towards capital expenditure to the tune of 90 per cent will be provided, through Rural Electrification Corporation Limited (REC), which is the key agency for implementation of the programmes.

Investment opportunities

For most developing countries the financing of power projects is problematic, since in many cases electric tariffs fail to cover the cost of service of the existing system, thus requiring government subsidies. Such conditions make private funding, from either domestic or international sources unavailable.

As a result, external sources of financing are typically confined to the World Bank and Asian Development Bank. As a remedy, the Indian government has created the Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC). Both are under the Ministry of Power providing financial assistance and services for power projects. While the role of REC is to support rural development, the PFC has a much broader mission and it must also act “as a catalyst to bring institutional, managerial, operational and financial improvement in the functioning of the state power utilities”.

The transformation of India’s electricity sector would seem to provide excellent opportunities for private investors. Government estimates put the cost of modernizing and expanding the electric system at $73 billion and other infrastructure projects at $110 billion. Since huge cost over-runs often plague infrastructure projects, the actual capital requirements may be much higher.

Foreign support

To change the State Electricity Boards’ catastrophic electric tariff policies and enhance their commercial viability, the PFC has established performance standards analogous to rating criteria used by US rating agencies. They include sound tariffs policies, business risk and financial risk analysis and measurements toward attaining commercial viability.

Since the early 1990s, India has made great strides in creating an investment climate conducive to large inflows of Foreign Direct Investment (FDI), yet it is still lagging behind China and even Brazil. For the period ending March 2006, the FDI increased to $7.5 billion a jump of 41.5 per cent from a year earlier. By contrast China attracted $60.3 billion in FDI in 2005, and $14.3 billion in the first three months of 2006. Between the period 1999-2003, China received consistently in excess of $50 billion in FDI per annum, whereas India drew a mere $3-4 billion annually. While India has attracted billions of US dollars from multinationals from all over planet, little if any funds have gone toward the critically needed infrastructure. Only time will tell whether international investors will view the changes made this time, more positively.

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