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Cover Story | April 2014

Rising up to the challenges

The primary objective for the incoming Power Minister should be to address the number of challenges have emerged in the sector over the past decade and fulfill the Ministry´s 2003 goal of ensuring reliable, consistent and affordable power to all Indians, says Umesh Agrawal

The Ministry of Power had set the goal of ´Mission 2012: Power for All´ in the year 2003, when India faced a peak power deficit of 12 per cent, electrification coverage was limited, aggregate technical and commercial (AT and C) losses were in excess of 40 per cent on average, generation was a licensed business and the sector was unable to attract any substantial private investment.

With the introduction of the Electricity Act, 2003, the sector has witnessed a sea change with increasing participation of the private sector and reforms being taken both at the Central and State levels. There have been significant steps taken to address the concerns of various stakeholders within the power sector.

Now, in 2014, the peak deficit is under 5 per cent, electrification coverage is more than 90 per cent, AT and C losses are below 30 per cent and more than $20 billion of investment has been brought in by the private sector. There has been a substantial increase in generation capacity over the 11th and 12th (ongoing) Five Year Plans contributed by the private sector.

However, India is still some way short of its Power for All target. Further, new challenges have emerged in the sector over the past decade. The primary objective for the incoming Power Minister should therefore be to address these challenges and fulfill the Ministry´s 2003 goal of ensuring reliable, consistent and affordable power to all Indians.

The following are the key issues warranting immediate and urgent intervention so as to ensure sustainable growth of the sector and allied economic development in the country:

Financial health of State distribution companies
Much has been written about this issue, but only because this continues to be the weakest link in the power sector´s ´chain´. Tariffs which are not reflective of distribution utilities´ cost of supply contribute to increasing accumulated losses, the need for load shedding and an inability to invest in upgrading critical network infrastructure. This spirals into a substantial loss of power on account of AT and C losses, which stood at ~25-30 per cent for FY 2012-13.

The preconditions of the Financial Restructuring Package (FRP) availed by state discoms annual tariff revisions, recovery of past losses and reduction in network losses must be tightly supervised across the board. Further, as noted by the Shunglu Committee in 2011, distribution franchisees should be encouraged to attract private capital in the distribution space, which would help bring in operational efficiencies, technical improvements and better customer service and satisfaction.

Shortage in coal and gas supply to power plants
69 per cent of India´s current 238 GW installed capacity is coal, gas or diesel-fired. A number of these plants are facing a fuel crunch, be it a shortage in supply of domestic coal necessitating costly imports, or a shortage of gas due to a fall in domestic production. To compound this issue, a whopping 95 GW more of thermal capacity is currently under construction across the country, expected to be commissioned before 2017.

The current situation is therefore totally unsustainable.
The Power Ministry must coordinate with the Ministries of Coal and Petroleum and Natural Gas to ensure proper planning and adequate supply of fuel to power plants. Concrete steps to fast track the competitive bidding and / or auctioning process for the development of domestic coal blocks are the need of the hour and stringent penalties must be imposed on Coal India Limited for inadequate supply of coal under its fuel supply agreements. While talk of an independent coal sector regulator has been doing the rounds for years, the time for implementation is ripe. Such a move would bring requisite stability and enforcement to a sector which will continue to occupy centrestage for at least the next few decades.

The other side of addressing the thermal fuel situation is a continued effort to drive growth and development of the unconventional energy subsector. While the Jawaharlal Nehru Solar Mission and various States´ efforts have seen India´s solar capacity shoot from <100 MW to >2GW in the space of a few short years, much remains to be done, especially in the areas of offshore wind power, energy efficiency, energy storage and nuclear power. A close look at the way the Renewable Energy Certificate framework has shaped up, along with suitable course corrections, must be on the Power Minister´s agenda.

Transmission constraints
There are significant bottlenecks in the country´s transmission network, especially pertaining to the synchronization of the SR and NEW grids. Separately, a number of projects have faced delays because of the inability of developers to acquire land or get timely clearances. In the last 5 years, power generation capacity has grown by ~50 per cent, whereas transmission capacity has increased by only ~30 per cent .

Issues linked to clearances and permissions will require continuous coordination with the various Ministries, Departments and Regulators to resolve. Enforcement of the new grid code, unscheduled interchange regulations and system operations is essential to avoid large scale mishaps like the July 2012 blackout.

Sector reforms
The introduction of the Electricity Act, 2003 has resulted in more than 50,000 MW of generation capacity addition by the private sector. The next set of reforms should be targeted at the distribution sector. Healthy competition at the retail level wherein consumers may choose their power supplier would bring in efficiencies, develop the broader power markets and improve the competitiveness of Indian industry.

The proposed amendment to the Electricity Act, 2003, chief among which is the separation of the wires and retail businesses of distribution companies, envisages such a scenario. Such reforms are important for holistic development of the sector and economy and must be implemented without further delay.

Keeping in mind the end objective of providing reliable, high quality supply of power to the consumers at a reasonable cost, the Power Minister may need to make some tough decisions. Proper planning, greater coordination with other Ministries and strict enforcement of rules and regulation will be the keys to success of the Ministry and progress of the sector.

The author is Associate Director Energy, Utilities and Mining, PwC

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