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Analysis | January 2016

Only Collective Growth is Sustainable

Indian power generation capacity has grown up by 201times since independence. In 1947, the total installed capacity was at 1362 MW and at the end of July 2015 it is at 275,911 MW. I want to ask one question that, Do Indian power sector had a collective growth?
Let´s try to find out the answer. Power sector is supported by three pillars (Generation, Transmission & Distribution) to get connected to the last mile of the power infrastructure. To cater to the requirements of power consumer all three segments have to be in sync with each other.

Generation: Most focused
Let us start with the economic reform of India. After a big bang economic reform of Indian economy, Indian power sector was opened for private investment in generation, but with a license to generate. Indian power generation capacity addition growth rate was in between 24-26 per cent during 8th-10th five-year plans, with installed capacity as on March 31, 2002, 85,795 MW to 132,329 MW as on March 31, 2007 respectively. Then a major change was observed in the power sector in the year 2003, power sector de-licensed the generation sector and few major policies are introduced like, open access, competitive bidding, regulator importance, ABT under the leadership of then power secretary Mr Ram Vinay Shahi (popularly known as R V Shahi). In the 11th Five-year Plan, the growth rate of capacity addition achieved 51 per cent with total installed capacity of 199,877 MW, a sudden rise of 67548 MW within 5 years superseding the average growth rate of 24 per cent in last 15 years. This flying growth rate is also linked to a few policies and amendments in Acts like, The Electricity Act-2007, National Electricity Policy-2005, National Tariff Policy-2006.

At present, the total capacity of generation is 275 GW. During 2005 to 2013, generation capacity was in the forefront in leading the growth rate. In the recent years, the sector has been facing growth constraints as about 36,000-40,000 MW power capacity is under stress for a variety of reasons ranging from lack of funds, cost overruns and lack of coal linkages, according to analysts and about 20,000 MW of power plants in the country are waiting for long-term PPAs. Nearly Rs 75,000 crore in loans could be at risk with power projects, with a combined generating capacity of 46,000MW facing viability issues due to the lack of long-term buyers for electricity, inadequate fuel supply and aggressive bidding to win projects and coal blocks. Generation capacity is no more a lucrative area of investment for private investors.

Transmission: Catching-up
In the year 1947, the installed circuit length (Ckt. KM) of transmission lines was 23,238 KM and at the end of March 2015, the total installed transmission line is of 10558,177 Ckt. KM, which is almost 453 times growth since independence. We found that neither economic reforms nor power sector reform have triggered any significant investment or growth in the transmission sector, in fact, the transmission sector has faced slowdown after 1991.

If we try to consider the same period, i.e. from 8th - 11th five-year plans, which we have considered for assessing generation growth, this sector has witnessed an average growth rate 15 per cent during 8th-10th five-year plan.

In the 11th five-year plan it showed a growth rate of 26 per cent as compared to 51 per cent growth rate in capacity addition.

There is no thumb rule or any kind of tool or any framework to compare that how much circuit length of transmission lines is required to cater to the needs of all domestic consumers matching the evacuation of generated capacity. So, here we can only consider the growth rate to compare the two sections of power sector. During the last three years, generation capacity has increased at a broader pace as compared to transmission growth.

The above table shows that there is continuous low PLF in the three financial year. The average PLF of these three years is 66.65 per cent, which indicates there is a loss of 25.35 per cent in capacity utilisation excluding (6.5- 8 per cent) auxiliary consumption. If we try to calculate the total loss in capacity then it will be 42,652 MW capacity loss. If we convert it in terms of additional investment at present then it will be Rs. 319,894 crore (Investment cost: 7.5crore/ MW). But we cannot attribute this total loss only to inadequate transmission infra¡structure, this includes outage, load shedding, inability of buying power of state electricity boards (SEBs), insufficient fuel supply etc., and transmission infrastructure carries major part of PLF loss. This inadequate transmission infrastructure has affected all stakeholders of the society.

´Plant Load Factor: The ratio of the total number of kWh supplied by a generating station to the total number of kWh which would have been supplied if the generating station had been operated continuously at its maximum continuous rating.´

History of Transmission sector
Power Grid Corporation of India Limited (PGCIL) is the only major transmission company, which owns inter-state transmission system in India. This entity of power sector was created by transfer of transmission assets of NTPC and NHPC including human resource in year 1989. Just to give a glimpse of its size, it has transmission network of about 67,000 circuit kms. of Extra High Voltage (EHV) transmission lines with 116 numbers of EHVAC and HVDC sub-stations having power transformation capacity of more than 73,000 MVA. Currently, the transmission network handles inter-regional power transfer of about 18,700 MW.

The efforts of PGCIL in creating robust transmission network would need to be supplemented by involvement of private sector. Therefore, the Central government took certain initiatives to facilitate private sector participation in transmission by bringing about certain enabling changes in the legal framework.

PGCIL was notified as Central Transmission Utility (CTU), which spearheaded implementation of a few transmission projects through public-private partnership (PPP) model, joint venture (JV) route as well as independent private transmission company (IPTC) route. Few PPP projects, Tala Transmission Project, Parbati -II, Koldam Hydro Electric Projects, were noted as successful projects. But down the line, it was observed that private participation in transmission sector taking a back step despite initial good start.

A clear picture showing lack of investor interest was projected among private investors.

Meanwhile, The Electricity Act, 2003 was enacted and it opened the doors for private sector participation in the power sector through tariff-based competitive bidding as the Act provided for appropriate regulatory framework to encourage competition, efficiency, economical use of resources, good performance and optimum investments. Central Electricity Regulatory Commission (CERC) and PGCIL initiated the bidding process for implementation of Western Region Strengthening Scheme through IPTC route in 2005.

With the above backdrop, it is amply clear that the private sector participation in transmission projects is inevitable and therefore, it is also essential to try out tested models such as PPP (i.e. JVs, concessions, management and operating contract, BOT projects and DBOs) for development of some more projects. This would certainly help private companies to gain some confidence in implementation of transmission projects by holding hands with the central or state transmission companies.

In the recent days, few new initiatives the new government has tried to bring back private investment into the transmission sector. But this can only be possible with the help of new government on resolving the issues of right of way (ROW), land acquisition and clearances. There is no clear policy on ROW compensation to be paid to land owners. This leads to delay in commissioning of the lines and also an unexpected increase in project cost. One of our Adani group company, MEGPTCL, is carrying out a project of 765 Kv double circuits from Tiroda to Aurangabad. This project has also faced delay in commissioning of lines up to Akola due to ROW issue and facing the same problem in completing next phase of project up to Aurangabad.

In 2014, this section of Power Industry has seen some good signs with declaration of new projects envisaging Rs.26251 crore of investments.

Apart from these new projects declared, three projects are bagged by Adani Power as successful winner.
Apart from these new projects declared, three projects are bagged by Adani Power as successful winner.
It seems that, in the next five years, transmission section of the power sector will get a boom in investment, with a good amount coming from private sector.

Distribution: The laggard
This is the third pillar and the weakest pillar of the Indian power sector.
Distribution was under state SEBs from the beginning. It was ailing due to a number of factors, high transmission and distribution (T&D) and aggregate transmission and commercial (AT&C) losses, incompetent billing, inefficient collection, frequent outages etc. After the economic reform of India, Odisha was the first state which opened its distribution sector for private participation. BSES, a Reliance Group undertaking, took the opportunity and invested in distribution sector of Odisha. But it was not a success story, but in the current year Odisha distribution sector is matured enough and is an example of a successful distribution franchise.

The loss-making discoms show their losses in financial statements/ account books as ´Regulatory Asset´. In 2001, when reforms in the sector were introduced in the power sector, SEBs losses amounting to Rs.35000 crore were shown as regulatory assets and it was envisioned that the state SEBs will outperform and distribution section will be revamped. But there is no change in the situation over the years. Again the distribution sector has piled up with debt burden of Rs.1.9 lakh crore by 2012. The Shunglu Committee appointed by the Planning Commission in July´ 2010 to assess the´Financial Position of Distribution Utilities´ and look into the financial problems of SEBs and suggest corrective steps. Prior to Shunglu committee report, Indian power distribution section had tried another distribution franchisee model at Bhiwandi Circle. Torrent power under PPP model invested in Bhiwandi Circle and achieved success. Started in the year 2007, its success story made many states to follow the model by bringing down the ever-increasing AT &C as well as T&D losses. Bhiwandi, the most notorious circle for power thefts (both industrial and commercial) was given out to Torrent Power. Industry observers were surprised when the company had brought down the AT&C losses from 58 per cent to a mere 19.3 per cent in the Bhiwandi Circle in the 2013-14. Where as in Agra, the company had brought down the losses to 43 per cent from 51.26 per cent. Simultaneously in Surat, Ahmedabad and Gandhinagar, AT &C losses were one of the lowest in the country - Just 7.6 per cent. And more players were interested in jumping on to the bandwagon. But during 2009-13 many private players had burnt their fingers in the bidding process and were not happy with the state electricity boards taking all credit for bringing the AT&C as well as T&D losses down.

Bhiwandi success was a true PPP success in terms of execution, but the state govt. took all the credit for it. This move from Maharashtra sent out a wrong signal to the stakeholders involved in the process.

Earlier, in Bhiwandi, Agra, Surat projects there was a tremendous support from the state governments in terms of basic inputs and inclusion of well-qualified private companies while bidding. But gradually with the success of a few models, the governments seemed to have forgotten the best practices applied earlier. Despite increased benchmark rates formulated by many SEBs during bidding, many non-core players who did not have any experience in the distribution sector participated aggressively, making it relatively impossible for other distribution companies to bid for these sections.

As a result, despite lower benchmark price of Rs.4.13 per unit for the selection of distribution franchisee for Patna, the SEB did not receive a single bid from private power firms after its fourth attempt in 2013.

In the recent past, a few initiatives announced by the current government may augur well for the sector. All the state regulators have to work in sync with the government policies to bring a turnaround in all discoms. For this, the state regulators have to revise tariffs at regular intervals, so that DFs and state-run discoms will match the cost of supply to its purchase price and to minimise the gap.

New scheme like Integrated Power Development Scheme (IPDS) and Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) will bring down the gap in tariff realisations. The DDUGJY has initiated to separate the feeders of agricultural, domestic and HT consumers. This will clearly bring out the inefficiencies in services to different sections of consumers. But the results will come forth only after 2-3 years, when private participation in distribution will rise. First, we have to gain investor confidence before expecting some investments to flow into the sector.

Conclusion
Power sector is the most important of infrastructure sectors in the country. Availability of reliable and inexpensive power is critical for the sustainable economic development of our nation. Thus, it is imperative that the growth in Power Sector should be commensurate with the target GDP growth rate of around 8-9 per cent.

The situation which is prevailing now in the Indian power sector is because of unequal importance given to different sector of the power industry. Generation infrastructure was the first to garner attention and efforts, by the time generation capacities were in place transmission infrastructure failed in measuring up to generation capacities. Now, thrust is given to transmission sector to push growth. Whereas, distribution has always been a laggard over the years.

The initiatives of this government will bring changes in 2-3 years. The current unenviable situation in distribution segment is because of mixing power with politics. Unless we separate politics from the power sector, the distribution sector cannot be turned around. State regulators should have the supreme authority to fix competitive tariff and to revise the same at a regular intervals, but they are independent for name shake only. At any given time, there is only one sector where all the efforts are concentrated neglecting rest - sometime back it was generation, now it is transmission and in future may be it is distribution. So, if we want India to regain its highest GDP growth rate of 10.3 per cent in 2010s, then we have to take a rethink about the power sector. A co-ordinated and collective effort is required in all the segments of power sector.

Author: Tusar Pal, Associate Manager - Tiroda, Adani Power Maharashtra Limited.

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