Heather Johnstone, Senior Editor
India is home to over 1.1 billion people, making it the world’s second most populous country after China. It is forecast to have the world’s largest population soon after 2030. It comprises 28 states and seven union territories and covers an area of 3 287 590 km2.
India currently has the fourth largest economy in the world, with a GDP of $4.2 trillion. Since 2000, the growth of its economy has heavily accelerated, averaging around seven per cent a year.In 2006, GDP grew by 9.7 per cent, which is in line with the government’s 11th Five-Year Plan, 2007-2012 target of nine per cent a year. As expected, this sustained economic growth, coupled with a rapidly increasing population, is having a profound effect on the country’s demand for electricity.
Power sector overview
India has the fifth largest power sector in the world, with an installed generation capacity of 141 GW, as of January 2008.
The majority of the power sector remains in public ownership. According to the latest figures from the Ministry of Power, 74.5 GW of the country’s total installed capacity is owned by the State Electricity Boards (SEBs), while just over a third is owned by central government. The private sector, which comprises independent power producers (IPPs) and industrial producers that generate electricity for their own use, controls around 13 per cent of the total installed capacity.
The central government control of the power sector is via a number of government-owned companies, including NTPC (formerly known as the National Thermal Power Corporation), the Nuclear Power Corporation of India Ltd (NPCIL) and the National Hydro Power Corporation (NHPC). NTPC is the single largest, with an installed capacity of approximately 26 GW and annual generation exceeding 180 TWh.
Central government also has exclusive responsibility for high-voltage bulk inter-state transmission, through the Power Grid Corporation of India, while transmission within states is the responsibility of state transmission utilities. The SEBs are responsible for the distribution of electricity.
The Indian government continues to pursue reform of its electricity market, in order to address chronic problems of underinvestment and poor quality of service. To date the single most important piece of legislation introduced is the Electricity Act of 2003, which initiated a much-needed overhaul of the sector.
The act consolidated the laws relating to generation, transmission, distribution, trading and use of electricity, thereby promoting competition and protecting the interests of consumers. It also laid out plans to rationalize electricity tariffs, although no concrete time frame is specified for the elimination of subsidies, which remain very large. Provisions in the act also ended investors’ obligation to sell to a single buyer.
The act did bring some clarity to the roles of different organizations and provides for better management of the regulatory commissions. It also allows for open access to transmission and distribution systems to encourage the development of competitive power markets, and permits private investment in generation and transmission.
The act requires the central government to consult with the Central Electricity Authority and state governments in formulating a national electricity and tariff policy. Accordingly, a new National Electricity Policy was announced in 2005 and a National Tariff Policy in 2006. These policies aim to provide everyone with access to reliable electricity supply and to make the power sector commercially viable through cost-reflective tariffs.
However, progress in the implementation of the Electricity Act has varied from state to state. Some states have successfully separated transmission from generation and developed open access regulations, while others have been less successful. If more significant progress, especially in grid expansion, is to be made it is imperative that all states implement the reforms.
Power shortages and fluctuations in voltage and frequency are the norm in India, and arise from insufficient investment in new capacity and the poor performance of existing equipment. The Indian government estimates that the current power deficit is close to nine per cent, increasing to 14 per cent at peak demand times. As in many developing countries, the distribution sector in India is the weakest part of the power supply chain. The levels of transmission and distribution losses in India are amongst the highest in the world. These losses occur because of insufficient investment in and poor maintenance of networks and from theft. India is now making efforts to monitor and reduce these losses.
Meeting the demand
According to the Ministry of Power, to achieve the government’s ‘Power for All by 2012’ India’s installed generationcapacity will need to be 200 GW by 2012. This mission forms the backbone of the 11th Five-Year Plan, which came into effect in April last year. The aim is to create 78 GW of additional capacity over the next five years. This is an ambitious goal when taken into account that this target is more than what has been added in the past 20 years.
To meet this goal and future targets India will have to make a huge investment in the electricity sector. The 78 GW target alone is estimated to cost in the region of $180 billion, and that is just the tip of the iceberg. According to the International Energy Agency, India will need to invest $956 billion in new power infrastructure up to 2030, $435 billion being invested in power generation, $164 billion in transmission networks and $357 billion in distribution networks (Figure 1). This level of investment will need to come from both the public and the private sector.
Figure 1: India’s energy infrastructure investment, 2006-2030
Public vs Private Investment
Financing for public-sector power projects in India comes mainly from the federal government budget, in the form of equity or loans coming mainly from the Power Finance Corporation (PFC), which operates under the Ministry of Power. PFC provided about $2.5 billion in loans in 2005.
The financial health of most of India’s State Electricity Boards has been deteriorating because of high operating costs, pricing policies that keep tariffs to most customers below the cost of supply, and failure to collect revenues for much of the electricity consumed.
Losses of electricity due to theft and technical factors remain high, averaging around 35 per cent of total generation. If poor bill collection is factored into the equation, it rises to 40-60 per cent of total potential revenue being lost, depending on the state.
Between 1991 and 2005, total investment in electricity sector projects involving the private sector amounted to $20 billion. Figure 2 shows that in 1991 à‚— when the market opened à‚— investment in India’s power sector accounted for 62 per cent of total investment going into electricity projects in middle and low income countries. Between 1992 and 2005 this share fluctuated between close to zero per cent and 13 per cent, with the exception of 2004, when investment rose again and the share reached 29 per cent.
Figure 2: Private Investment in India’s Electricity Sector, 1991 – 2005
The unprofitability of India’s power sector generally remains the major obstacle to attract private investment. Attracting private-sector investment in the generation sector is not exclusively a question of financial performance.
Private generation projects have suffered from other factors. Foremost is the need to ensure reliable and sufficient fuel supplies. Other obstacles in attracting private investment into generation are land acquisition and cumbersome procedures to obtain statutory approvals. These have often contributed to substantial implementation delays and escalating project costs, thus increasing generation costs.
Positive signs are appearing
Greater involvement of the private sector will be key to achieving the 11th Five Year Plan goal and beyond. Although, private entities have been able to participate in its power sector since the early 1990s, private investors, particularly foreign companies, have been hesitant to enter the market as they have been deterred by what they see as the preferential treatment given to state-owned energy companies and the slow progress on tariff reform. However, late last year AES of the USA announced plans to build power plants worth $2.8 billion in the country.
India also recently achieved its first successful public-private partnership in power transmission. The Powerlinks transmission project, which is a joint-venture between the private utility Tata Power Company and the state-owned Power Grid, became operational in early 2007. The 3000 MW system consisting of five 400 kV lines and one 220 kV transmission line over 1200 km from West Bengal to Delhi, brings power from the Tala hydro plant in Bhutan to the north of India.
In 2006, the Ministry of Power launched an initiative to develop new large-scale coal fired plants. They became known as ultra-mega power projects (UMPP), and each plant would have a minimum capacity of 4000 MW. The aim is to have nine such projects, with an aggregate capacity of 36 000 MW and an investment of Rs150 500 crore ($36 billion) through open, transparent, tariff-based competitive bidding. To-date three UMPPs have been awarded. The Sasan UMPP and the Krishnapatnam UMPP have been awarded to Reliance Power, part of Reliance Energy Limited. While private utility Tata Power won the UWPP in Mundra. All the UWPPs will use supercritical units.
In addition to increasing electricity generation, the government plans to build 30 GW of inter-regional transmission capacity by 2012, and create a proper national grid. Indian authorities launched an international competitive tender for two transmission schemes, which together have an estimated cost of more than $1 billion. The successful bidder for both projects was Reliance Energy Transmission. The first project is the Western Region System Strengthening Scheme and involves the laying of 1500 km of 400 kV lines that will benefit eight western region state transmission utilities and SEBs. The Parbati-Koldam project is smaller and involves the laying of 300 km of high-voltage transmission lines to take power from two hydroelectric power plants currently under development and connect them to the grid in Ludhiana. Both projects are scheduled for completion between 2009 and 2012, and are the first of 14 planned.
Reforms look to be on the right path but implementation needs to be strengthened, particularly between states. For the sizeable investments that India will need over the next 20-30 years, improving the investment conditions in its electricity sector and moving towards a transparent, predictable and consistent power-sector framework based on market principles and financially profitable must remain of paramount importance.