Powerplay

The grim power scenario in India needs to be addressed before the country can join the frontline nations of the 21st century

Ranjit Bhushan Delhi

Can a country be regarded as a frontline nation without electricity? While the Manmohan Singh government must be congratulated for putting energy on the national agenda during the first two years of the United Progressive Alliance (UPA) regime, there is now growing concern that India’s power sector, which is central to its developmental plans, has not responded to economic liberalisation in the same way as have other sectors such as Telecom and Information Technology. Backward infrastructure, inability to increase substantially capacity addition, slippages and delays in implementing hydro and thermal power projects, cash-strapped state electricity boards (SEBs) and little money to invest in infrastructure and a long gestation period for returns characterise the sector. Unscheduled power cuts and industrial breakdowns in many states are only symptoms.

In the modern world, growth of real gross domestic product is the driving force behind the demand for electricity. Thus, a nation's capacity to generate and distribute electricity is an important indicator of its level of economic development and future prospects for economic growth. Currently, India's capacity to generate electricity from all sources is about 123,000 MW. India expects to connect about 5,600 MW of new capacity to the grid in 2006. By comparison, China's installed generating capacity is in excess of 500,000 MW. US's generating

capacity is about 993,500 MW. In terms of actual generating capacity, China is expected to catch up with the US by 2010.

In recent years, increased social spending on the part of the central government, to provide for its growing population, has left the electricity sector with insufficient funds for the capital expenditures needed for the modernisation and expansion. In India, as in many developing countries, the power sector is plagued by untenable tariff structures, based on favouritism and subsidies rather than return on rate base and cost-of-service concepts. Consequently, cost recovery is almost nonexistent. The notion of charging users or the typical economic incentives that make western-style, regulated power utilities work more efficiently is conspicuously absent. The implementation of electricity tariffs based on the cost of service would go along way in resolving the SEBs’ financial worries. Moreover, financial solvency would also make the sector attractive to external capital and perhaps alleviate some of the current shortfalls of infrastructure investments.

As an outcome of supplying farmers with electricity free of charge, electricity usage has been skewed heavily in favour of the agricultural sector. Between 1990 and 2002, on average, agriculture consumed about 28 per cent of electrical output. However, independent observers say that government's statistics were too low for several reasons, with the actual figure being closer to 40 per cent, for electricity metering of individual users in rural areas of the country is virtually nonexistent because of the lack of meters. The industrial sector's share of electricity usage for the same period averages about 38 per cent. Thus, many industrial companies attempt to generate their own electric power because of lower costs and greater reliability. As a result, the share of electricity consumption of the industrial sector, as reported by the government for the 1975-2002 period, fell from roughly 62.4 per cent to 33.3 per cent. The share of electricity used by households same period increased from 9.7 per cent to 24.7 per cent.

According to a recent assessment by the Ministry of Finance, huge infrastructure investments will be required in order that economic growth can continue at current levels. The Ministry report says that to support a 7 per cent annual rate of economic growth, the rate of growth of power supply needs to be over 10 per cent annually. At the current level of generating capacity of about 123,000 MW, that would require a minimum annual addition of 12,300 MW. To date, that goal has never been reached.

In the 1990s, India's new openness toward foreign investments was met with strong interest by global investors. The goal was to set up independent power projects (IPPs) in support of the nation's economic development strategy, most of the largest projects never became reality, thanks to regulatory obstacles and in some cases a simple failure to secure financing. While several projects actually won government approval, in the end they were never built. Projects that did begin construction ran into other difficulties. One of them was the infamous Enron-backed Dabhol Power Project, which has been idle since 2001. The Dabhol Project has to date been India's largest foreign direct investment (FDI) project. The dispute surrounding Dabhol signalled to many international investors that the country may not yet be ready for large infrastructure projects funded with private capital. Thus, FDI in infrastructure projects have been virtually nonexistent.

With the lack of new foreign infrastructure investments forthcoming and to meet the challenges of the century, the government has made significant legal and institutional changes. The most important piece of legislation to become law, symbolising the policy shifts toward the energy sector, is the Electricity Act of 2003. The purpose of the Electricity Act is to establish a "liberal framework for the power sector" without the strong hand of government. The Act consolidates or replaces existing laws concerning the generation, transmission, and distribution of electric power. It promotes energy trading, competition, free transmission access, competitive bidding, and the protection of consumer interests, including the availability of electricity in all areas of the country.

The Electricity Act is in part a response to the poor financial conditions of the SEBs, whose annual financial losses make the expansion of the electricity sector virtually impossible. The government asserts that this legislation "seeks to bring about a qualitative transformation of the electricity sector through a new paradigm”. Additional provisions mandate the formation of regulatory commissions at the state and federal levels. At the state level, the commissions are charged with the responsibility to bring order and consistency into the tariff process, to eventually make the SEBs financially self-sustaining.

To provide electricity for "all of India" by 2012 involves the most ambitious series of investment projects ever undertaken by the government. Currently, about 56 per cent of rural households have no access to electricity. In non-rural areas the figure is about 44 per cent. Under the "Building India" plan, which extends over a four-year period, the government intends to furnish 250 million rural homes with electricity and provide safe drinking water to 74,000 villages.

To achieve the goal of 200,000 MW of total installed generating capacity by 2012, the actual construction of new generating capacity may well exceed the 100,000 MW currently estimated by the government. The Ministry of Power reports that the average plant load factor (PLF) ranges from a low of 26.8 per cent in the north-eastern regions to a high of 65.6 per cent in the southern regions, accounting for frequent power shortages and periods of forced outages or blackouts. Many of the poorly performing and aging existing units, in particular thermal units with a capacity of 120/140 MW, will have to be modernised or replaced if the goal of supplying electricity to the entire country is to be realised.

At a bare minimum, a doubling of power plant capacity will dictate an increase in the capacity of seaports, pipelines, refineries, coal mines, rail and other transportation systems. The price tag for the various infrastructure projects seems staggering. Rough cost estimates made by the Ministry of Power suggest that it may cost in excess of $200 billion. The modernisation of the national grid through the construction of high-voltage transmission lines may still require $20 to $30 billion. The Transmission Superhighway is estimated to cost at least $15 billion. Apart from the infrastructure mandated to support the additions to the electric system, the government is also planning to make huge investments in water treatment facilities and telecommunications. Clearly, the government figures tend to be rather preliminary. Typically, due to their long gestation period, planning for infrastructure project tends to be complicated and such projects tend to be plagued by huge cost overruns.

The writer is a freelance journalist and consulting editor energylineindia.com