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Transmission | August 2015

A static mission

With the government announcing Rs 26,000 crore projects under tariff-based competitive bidding (TBCB) route, the optimism of private transmission companies stems from the relatively high value of a business that is now up for grabs.

Private firms in the sector are keen on becoming integrated players by investing in the transmission sector, where the rate of return is on a par with the generation sector (around 16 per cent). Companies like KEC International, Kalpataru Transmission, Sterlite Grid, L&T Infrastructure Development Projects, Essel Infraprojects, Tata Projects and Adani Power will obviously be competing to enhance their portfolio in the sector that is dominated by the PGCIL.

But they do have an unequal competition in PGCIL, which has a robust balance sheet and gets a chunk of its projects on nomination basis, and which has also grabbed 30 per cent of the projects offered under the bidding route so far.

Although, our previous interactions with government officials suggested that the Centre is geared up to provide a level playing field for private players while awarding transmission projects worth Rs 33,900 crore, most private players are of the opinion that the government is biased while releasing transmission projects. They further allege that while projects are released to PGCIL on a nomination basis, the latter justifies this as due to the urgency of the project and reduction of bidding time. ´We have got the expertise in this field and are capable´financially and technically´to complete allocated projects in stipulated time,´ IS Jha, Director (Projects), PGCIL, explains.

Meanwhile, the transmission space offers huge opportunities for both private players and PGCIL. India has been one of the first movers to open up its transmission sector to private players and has attracted significant interest from them.

GÇ£While PGCIL can be competitive in TBCB segment, given its scale and in depth expertise, this route also offers a unique opportunity for private players to enhance their presence in the transmission space,GÇ¥ feels MN Ravi Shankar, CEO-BD & Power Trading, Adhunik Power and Natural Resources.

With almost Rs 26,000 crores worth of projects due to be awarded under TBCB route, it opens up a plethora of opportunities for the private sector to strengthen its roots. Introduced to bring about a thrust on private participation in transmission, TBCB has witnessed acceptance and increased participation from private players, despite initial hiccups and some continued drawbacks. Further, TBCB has matured over the years with participants placing more realistic bids in recent times, leading to lesser delays and suspension of projects.

Meanwhile, with other government initiatives such as implementation of the Point of Connection regime, transmission tariff structure has been further rationalised to allow more investor confidence in India´s transmission sector. Given the huge market size and opportunities, coupled with favourable government policies, PPP shall continue to grow in the near future. This is evident, as in the 12th Five Year Plan, $16 billion from a total $35 billion investment in the sector is expected from them.

´Private firms now stand a chance of having a bigger share in the transmission space much like their counterparts in the generation segment, but this depends on when the projects take off,´ says Rathin Basu, Chairman, Alstom India Ltd. However, analysts warn that the future of private sector firms in the transmission sector cannot be bright if the government continues with its policy of keeping TBCB as the second option.

The investments required
Enhanced private enthusiasm here is primarily driven by the lucrative rate of return of 16 per cent. The business currently offers huge opportunities and market for growth. For every Rs 1 of investment in generation, 50 cents need to be invested in transmission for integrated growth of the power sector.

However, this ratio currently stands at 30 cents, indicating the huge market potential and growth opportunity available. With almost 469 GW of power generation capacity expected by the end of the 13th Plan, the CEA has estimated a need for almost 126,650 MW of inter-regional transmission capacity during the same period.

This transforms into a fund requirement of around Rs 160,000 crore at the central level and another Rs 100,000 crore at the state level. Cash strapped SEB´s and limited investment ability at the Center, have led policy-makers to develop a favourable regulatory regime for enhanced participation of private players in the transmission sector.

On top of this, the government has also planned for an integrated, inter-regional, inter-state and intra-state transmission network. ´This 20-year plan shall require an investment outlay of Rs 260,000 crore,´ says Sanjeev Gupta, Managing Director, Nexgen Financial Solutions Pvt Ltd.

The above plan target will bring down aggregated technical & commercial losses initially to around 20-25 per cent, and thereafter in the interim period to 15 per cent, and eventually to less than 10 per cent. It is estimated that, 10 per cent energy conserved translates to 100 billion units of energy conserved, which can light up 11 crore lives (after calculating per capita energy consumption = 917 units).

India´s current AT&C losses have been estimated to be around 27 per cent of the electricity generated. Such high AT&C losses are counted as one of the main reasons for the SEBs financial weak status. Transmission specialists observe that with each 1 per cent reduction in all India AT&C losses in the sector, there could be a 5 per cent decrease in cash losses up to Rs 3,900 crore. Then why has such a grim situation not been handled efficiently?

The facts
Over the past decades, power capacity has witnessed commendable growth with total installed capacity of 267 GW and peak power demand of 141 GW. However, when compared, the evacuation network is nowhere near these numbers. PGCIL´s, IS Jha explains that in the 11th Plan, it was decided to add 78,000 MW of power generation, however, power projects of around 1.50 lakh MW were added, considering the previous backlog of projects which missed their deadlines in the same period, creating a burden on the existing and planned network.

The southern region is facing acute shortage of power due to delay of about 8,000 MW generation projects´Kudankulam (2,000 MW), Krishnapatnam UMPP (4,000 MW), Tuticorin JV (1,000 MW), Neyveli TS-II expansion (500 MW) and Kalpakkam PFBR (500 MW). The problem has been compounded due to non-availability of gas for about 7,000 MW projects in Vemagiri, Andhra Pradesh. As a large number of generation projects were planned for commissioning in the southern region during the 11th Plan, this has resulted into a power surplus region, with no discoms having applied for long-term access to the region.

Of the 22,000 MW total long-term access sought by IPPs in Odisha and Chhattisgarh, only the 550 MW target to the southern region was sought. The Raichur-Sholapur transmission system was originally envisaged to transfer power from the southern region in the western region; but the line has now become a lifeline to the southern region as generation projects could not come up.

At the end, the buck always stops at transmission when it comes to the power sector. Now, with transmission being an emerging star, it is the collective responsibility of the Centre and all the state governments in India, to put more emphasis on last mile connectivity. Their approach should be more urgent in order to timely address the underlying issues and ensure that power demand in the future is effectively met.

POWER TODAY suggestions
Provide fixed Right-of-Way to transmission projects in the states.
The provision of continuous ROW will clear major, stuck transmission projects.
State governments shall refrain from changing the route of transmission projects.
Underwriting of 100 per cent of the debt requirement.
Using external commercial borrowings (ECBs), lease rentals, supplier´s credit, and bank guarantees to lower the cost.
Ensuring a level playing field between public and private transmission companies.

Evacuation obscurity
The Electricity Act, 2003, has enabled private participation in generation, transmission and distribution of electricity. The growth in generation has more than doubled in less than a decade. While power generation capacity has increased by 106 per cent since 2007 (from 132,329 MW to 272,503 MW), transmission capacity has been lagging. Addition in transmission lines has been 59 per cent (198,407 ckm to 3,16,281 ckm) since 2007.

While the generation capacity stands at 273 GW, the peak supply stands at just ~143 GW. Key issues contributing to this have been the shortage of fuel, inability of discoms to pay and inadequate evacuation infrastructure. Merchant prices of power are significantly higher in the south (and north in certain time periods) as compared to other regions of the country, due to transmission constraints.

Power evacuation and efficient distribution are posing a much bigger hurdle than power generation. While there is surplus power in Chhattisgarh and Odisha, there is a ~6-10 per cent power deficit in the neighbouring states of Andhra Pradesh and Telangana. The government has recognised this issue and called for bids establishing transmission system(s) for evacuation of power from Chhattisgarh. However, are delays in the process, could strand generation capacity for a certain period of time. Similar issues were faced over the last month where congestion in the transmission network prevented transfer of power from surplus regions to north India, leading to higher merchant prices there.

Further, given the planned increase in generation capacity, we are likely to have multiple states being power suppliers. To ensure power across India, it is necessary to ramp up transmission infrastructure.

Rapid growth in generation has been possible largely due to the participation of private players. The sector can also see significant growth with their participation. However, till date private participation in transmission has been far from expectated. PGCIL still dominates the sector and operates ~90 per cent of the inter-state/inter-regional networks. Utilities too dominate in their respective states.

A reason for limited private sector participation is the limited opportunities and domination of PGCIL/state utilities. Given that transmission is a central planned licensed business, it needs to go through additional planning and regulatory approvals, which is time consuming. Further, within the states, there have been very few projects awarded through the competitive bidding route, leading to domination by state utilities that face little or no competition.

The government has realized that to ensure that the power story stays on track, it is vital to address bottlenecks across the value chain. Transmission could be one such bottleneck which could scuttle the government´s intention of 24x7 power by 2019.

Government initiatives
The GoI had notified 14 transmission schemes worth Rs 33,900 crore in FY2014-15. It has targeted to award projects worth Rs 100,000 crore before the end of FY2015-16. There is a sense of urgency to award projects through a transparent competitive bidding process. It is also proposing changes to present bidding norms for transmission projects by bringing in a reverse bidding mechanism. This is likely to lead to discovery of lower transmission costs, but may put pressure on the margins of developers.

There has, however, not been any concrete step to help remove issues faced by developers relating to land acquisition Right of Way (RoW) and delayed clearances should be focused on going forward.

Every step of the value chain, from supply of fuel for generation, to distribution of power is vital to ensure that the end objective of 24x7 power to all at a reasonable tariff is achieved. For transmission, the key issues being faced by developers include those related to RoW, land acquisition and clearances. There is no clear policy on the 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. Priority should be on clear compensation policy providing certainty to developers and land owners. Projects are also delayed on account of delay in permissions for transmission lines passing through forests. Strict timelines for the approval is a necessity.

With increasing focus on RE and a targeted capacity addition of more than 100,000 MW in the next 7 years, the government´s plan for the green energy corridor (transmission infrastructure and other related services for integration of large scale envisaged renewable capacity into the grid) should be fast-tracked. PGCIL has received board approval for an investment of Rs 7,432 crore for the green energy corridor project.

PGCIL has a ~90 per cent market share and a majority of its transmission projects are on a cost-plus basis. Further, a number of projects are awarded to PGCIL on a nomination basis (and therefore cost-plus) on account of reasons such as shortage of time/necessity of expertise. To ensure greater private participation, the roadblocks faced by developers need to be removed. Further, the projects handed out to PGCIL on a nomination basis should be reduced to a minimum by ensuring adequate planning. For projects that are being bid out, it would be ideal if the government secures necessary clearances or approvals beforehand, to provide greater certainty to developers and this could also lead to lower transmission charges.

It is estimated that $75 billion investment is needed in the transmission sector for the 12th and 13th Plans. Considering the significant requirement, the government may also consider focusing on enabling an environment for the latest and most efficient transmission technology to be manufactured or developed in India (adding to ´Make in India´).

This could help cut transmission losses, reduce land requirement, help in quick commissioning of projects and reduce operating costs.

The sector has potential to grow at a tremendous pace and provide an enormous investment opportunity, provided the roadblocks are tackled. Active government involvement in addressing issues faced by developers, and execution of a well-planned integrated sector roadmap (considering load centers, generation centers, transmission bottlenecks and time for clearances or bidding or execution) would help take the sector forward.

Transmission projects to be awarded
Project Estimated cost (in Rs.cr)
System for renewables in northern region 4,440
Import of power into southern region 8,570
System strengthening beyond Vemagiri 7,032
North Eastern regional system 1,652
Common transmission system for phase-II & OPGC project in Odisha 2,748
Transmission system streengthening for HEPs of Bhutan 1,809
Total 26,251

By Umesh Agrawal, Director ´ Energy, Utilities & Mining, with inputs from Ashwin Durga, Manager - Energy, Utilities & Mining, PwC India

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