Indian Power Sector in Transition Mode

Beyond doubt, it needs to be reinstated that the government, the power project developers and the other stakeholders in the Indian power sector will have to address numerous issues through concerted efforts both for mid and long-term, if India will have to attain its mammoth power capacity addition of 85,000 MW during the twelfth plan period (2012-17) so as to realize GDP growth of over 7 percent during the period. P.P.Basistha delves into the details.

Congregations at frequent intervals on various platforms between the stakeholders in India’s power sector representing the crème de la crème and top echelons in the Union Power Ministry has almost become a routine exercise in the national capital, unseen even few years ago. The recent most notable one was in May this year when harried top brass of power project developers and senior government representatives met at Planning Commission where the former made a presentation to resolve the issue of gas availability. The second being in July 2012 third week interaction between the union power minister and the state power ministers discussed the worrying health of distribution utilities based on collective debt of Rs.2 lakh crore they are unable to pay. Close watchers of the Indian economy can tell the number of seminars held in Delhi on power sector alone, far outnumbering seminars and conferences held in 2012 on any other sectors. The growing interactions at short intervals unearth the growing interest of the stakeholders in Indian power sector given the enormous business potential it provides, based on India’s ambitious power capacity addition target of 85,000 MW during 12th plan entailing an investment of above Rs.13,725 billion. The targeted capital expenditure marks an investment of almost 33% over the 11th plan outlay of Rs.10,327.45 billion.

While India’s saga of sustained 13% peak power shortage is one reason behind growing interest in the sector among stakeholders. However, above all, it is the issues confronting the sector that is witnessing larger participation of stakeholders at various forums, awaiting to get the issues redressed through various platforms as large number of projects are lined up for commissioning in coal and gas.

According to the Union Power Ministry, capacity commissioned during the 11th plan period (untill March 31, 2011) was 41.3 GW. The capacity, although much higher than the earlier five year plans, indicating the resolve of the government to bring larger investment in the sector and put projects in the fast track, is however still short of the revised target. The planning commission and Union Ministry of Power are currently assessing the power generation capacity requirements during the 12th and 13th plans. According to industry insiders, given the ongoing intention of the government to materialize higher GDP growth, shortages in slippage are likely to happen due to persisting multiple issues, requiring intervention by the government and also by the private project developers by putting its act together.


According to Arup Roy Chowdhury, CMD, National Thermal Power Corporation Limited, (NTPC) "in single, the issues behind delayed implemen- tation and commissioning of projects are holistic in nature. They are across the value chain of the sector in face of the present scenario of high economic growth." Elaborating on the power behemoth he said, "the issues range from growing extended supplies of fuel to power purchase agreement by consumers. While availability of technical expertise to implement and commission projects are negligible factors as Indian power project developers are complete in the same at present." Faced by slackening domestic coal supplies the power major will start importing coal. There are also major price difference issues between NTPC and LNG Petronet where the former is insisting on supply of cost competitive imported LNG fuel to be shipped in through upcoming LNG Petronet’s Kochi Terminal. Pricing rift has resulted in delayed commissioning of NTPC’s major gas based Kayankulam project in Kerala.

Elaborating on the views for delayed commissioning of the projects in the country, Anil Sardana, Managing Director, Tata Power, says, "The major issue behind delayed implementation of projects in the recent times as compared to previous years is deteriorating coal supply on one end of value chain and poor financial outlook of discoms where the losses have been mounting to levels far higher than previous years. This is a matter of great concern as the buyer of merchandise has to be solvent and efficient, failing which the fiscal health of all associates in the value chain are getting impacted leading into vicious and unviable circle of uncertainty, resultantly slowing down project implementation. Power distribution still remains a segment that needs significant reform-intervention. Going forward, a combination of tariff increases, distribution reforms, open access and enforcement of the ‘obligation to serve’ is required."

Explaining the issues plaguing the sector, RVB Reddy-COO-Essar power said that the poor availability of fuels (both gas and coal), distribution losses, slow pace of obtaining statutory approvals for land acquisition and lack of funding are the critical issues.

Expatiating on the subject, he stated that fuel availability has emerged as the biggest risk faced by thermal power projects in India. Coal production has not kept pace with power capacity addition in the current plan and developers have been forced to import coal at a time when international coal prices have shot up. Lack of clearance for mine developing has also chocked the supply of raw material. He further stated that the other key issues confronting the sector is the dismal financial health of distribution utilities. These have accumulated financial losses estimated at over Rs.70,000 crores in 2010–11 which is estimated to go up to Rs.100,000 crores by 2014. Besides, significant rise in the interest rates in the last 3 years has also affected fund raising. Availability of debt capital at reasonable cost is critical for any business, particularly infrastructure, as debt typically finances 75% of the project cost. The current state of capital markets is also not conductive to raising equity. Hence funding new projects has become extremely challenging, he informed.

Notwithstanding, taking into cognizance India’s power shortage major policy thrust will be required to encourage capacity addition. Major policy initiatives need to be taken in order to attract private investment. Policy reforms have to take place in generation, transmission and distribution sector comprising the entire value chain of the sector.

According to Anil Sardana, "The major policy decision that needs to be put in place for drawing investment from the private power developers will be to have a complete energy security policy in place, based on the fact that the most critical issue confronting the power sector today is the acute shortage of domestic coal in the country. The shortage has also led to apprehensions that the ambitious capacity addition targets of 90 to 100 GW in the upcoming twelfth plan period (2012-17) may not be met and may also cause avoidable stress on assets already built/committed by many in private sector. The country is likely to face nearly 20–30% shortage in domestic supply of coal and similarly there would be a gap in supply of domestic gas vis-a-vis projections. A well planned energy security policy in place will be able to address the issue and envision the need for feed stocks that would meet various compulsive needs of the power sector. The policy must also plan in pecking order a portfolio of domestic and imported feed stocks and must align the buyers of products to such portfolio of feed stocks. Today, no buyer would attempt to look for feed stocks that are expensive, as on date. They would rather look for competitive options without realizing that as a part of energy security needs, the entire portfolio is as important to be utilized as the known competitive feed stocks."

Sardana adds, "imported fuels (both coal and gas) have become a challenge today and if not dealt properly, would be a lost opportunity for India forever. Progressive governments elsewhere are not just aggressively scouting but are tangibly tying up resources known to be available globally. India needs to also get its act right. Besides, it needs to create enabling policy framework wherein use of such imported fuels would be dealt properly specially in terms of its commercial dispensation. Further, the rise in imported coal fuel prices due to regulatory issues in global markets including Indonesia, would also need to be dealt with or else the developers would not create downstream investments here in India to use imported coal."

However, to reiterate, capacity addition will materialize on sustained availability of fuel. To take of the issue, CIL (Coal India Limited) has been issued with Presidential directives to supply 80% coal to the power plants. Following the same, that CIL has signed fuel supply agreements with the power utilities. However, it now seems CIL will be unable to meet the obligation given the behemoth’s poor production track record. However, it has been now contemplating to meet the short fall through import substitution. On the other to liquidate its stocks from pit head CIL is mulling joint ventures with the railway’s to lay connectivity links. However, there are other teething well-known issues of rake availability with the railways. There has to be concerted efforts on the part of the railways and CIL to resolve the issue, even if CIL imports coal through the ports.

Sustained availability of gas is also a major issue that needs to be looked into. The government has been taking wholesome initiatives by developing LNG import terminals at Kochi, Dahej. Many others are being planned at east coast the major ones being IOCL’s LNG terminal at Ennore. However, imported LNG will continue costing more as the exporting countries are not willing to forge anymore long-term agreements with the buyers insisting for spot purchase. Buyers will have to negotiate the issue in order to get the right deal.

Policy reforms to ensure fuel availability and support for project execution and commissioning will be essential to increase financial exposure to the power sector, which has been declining in recent years.

Over the past one year, the availability to credit to the sector has been impacted significantly by the fact that most of the banks have reached their exposure limits, along with monetary tightening by the Reserve Bank of India. Growing number of banks and financial institutions are also becoming stringent in lending to power companies.

During 2011-12, only three projects totaling 2,034 MW of capacity achieved financial closure at a cumulative investment of over 135 billion. This was a comedown compared to 11 projects aggregating 15,676 MW of capacity, which achieved financial closure in 2010-11.

According to S.K. Goel, Chairman & Managing Director, India Infrastructure Finance Company Limited, "stringent lending to power projects by financial institutions is due to host of problems, the major ones being increase in coal prices, inadequate fuel availability, high distribution losses, delays in project implemen- tation, necessary clearances from Union and state authorities and detoriating health of the state distribution companies." The views are endorsed by a top official from Industrial Development Bank of India and Kamal Verma, CEO, SREI Infrastructure Project Development. He says, "ambiguity over purchase power agreements between the generators and distributors is also an added cause behind financing getting stringent."

Taking cognizance of the lending issues, the government made efforts in the recent budget to neutralize the impact of the lending issues. According to Pranay Kumar, Director, Ministry of Power, "The government has taken a major decision to provide tax free bonds upto Rs.10,000 crores, allow external commercial borrowings (ECBs) and withholding tax on ECBs reduced to 5% from 20% for power sector. The initiative is well likely to attract investments in power and infrastructure sector. Waiver of the 5% import duty on coal, and exempting the thermal power plants from customs for 2 years are added financial incentives for the sector. The initiatives are likely to bring relief to new projects."

Commenting on this Tulsi Tanti, Chairman, Suzlon stated that this year budget demonstrates the Government’s unwavering support to building a low carbon economy. The allowance of ECB and improvement in tax free bonds for infrastructure funding, have paved the way to lower cost of fund, making projects more viable for investors. The extension of Section 80 IA, a vital fiscal instrument to attract investments into infrastructure projects, offers a huge relief to all investors financing pending projects, he said adding that the budget has several other elements of forward reforms such as developments on the direct tax code and goods and services tax.

However, according to Sardana, "the initiatives are likely to bring relief to new projects but not enough for the resolution of the existing problem of the UMPPs as there has been phenomenal increase in the cost of the imported coal. Nonetheless, certain relief to the mining sector also announced in terms of duty cuts will be beneficial." He says, "According to the focus of the government to provide major thrust to the power sector, it will be essential to resolve the supply side constraints on fuel and remove infrastructure bottlenecks pertaining to availability of railway rakes. Without the removal of the same, the sector is unlikely to attract robust investments."

However, he further says, "the announcement that GST, with a central GSTN and a shared platform for all states, that would probably be active from August 2012 is a welcome move. It remains to be seen whether electricity would be included in the GST regime, as then input tax credits can be availed which would to a certain extent balance the withdrawal of exemptions and concessions. The decision to implement Direct Tax Code (DTC) in the near future is also an appropriate move by the government." He adds, "given the long gestation period as well as life cycle of over 25 years, the power project requires debts of long tenure most often on non-recourse project finance basis. The decision by the government to extend the tax holiday under section 801A, is likely to augment electricity generation capacity in the country."

Nonetheless, it is felt by industry insiders, that the scope for financial incentives to the sector needs to be widened so as to attract larger private sector investment. According to Sujit Ghosh, Senior Consultant, BMR Advisors, "custom incentives should also be extended beyond mega and ultra mega projects for equipment. This will enhance smaller capacity additions with lower gestation periods."

The fiscal incentives provided by the government can be stated to be a temporary measure, given the fact that the new projects will be developed on capital intensive technologies bearing higher capital investments. Now, given the sector caps that Indian regulations impose on domestic lenders, the financial pool need to be widened further to meet the ambitious capacity addition targets and also on the perception of increasing fuel uncertainty, delays in project commissioning and deteriorating distribution utility finances.

In the past few years, the financial pool available for power projects has widened and shifted away from traditional sources such as government and domestic banks lending to include international markets, private equity players and dedicated funds created for the sector.

The government has taken initiatives to facilitate larger participation of private investors in power sector over the years which includes, 100% FDI permission in generation, transmission & distribution under the automatic route, provision of Electricity Act 2003 and National Electricity Policy 2005. Income tax holiday for a period of 10 years in the first 15 years of operation, waiver of capital goods import duties on mega power projects (above 1,000 MW generation capacities). The other initiatives include, setting up of independent regulators: Central Electricity Regulatory Commission for Central PSUs and inter-state issues. Each state has its own Electricity Regulatory Commission. Allowing foreign equity participation up to 100% in the power sector under the automatic route. Permission to the private sector to set up coal, gas or liquid-based thermal projects, hydel projects and wind or solar projects of any size and un-bundling of the State Electricity Boards (SEBs) into generation, transmission, and distribution companies for better transparency and accountability.


Among these the major ones has been the 1991 Independent Power Producer Policy (IPPP) which was formulated to tackle India’s balance of payment crisis, which forced the government to liberalise the economy. The IPP policy was announced by amending the electricity supply act of 1948 with hope of attracting substantial investments from the private sector in power generation. Thus, for the first time private sector role was envisaged in the power sector dominated by monolithic integrated State Electricity Boards. The package of incentives of the policy which accompanies amended provision under the legislation comprehensively covered the legal, administrative and financial environment to make private sector investments attractive. The policy envisaged bulk sale of electricity to SEB’s at negotiated rates based on a cost plus formula. A large number of memoranda of understanding (MoU) were signed with 80,000 megawatts.

The other major initiative was reforms in distribution process. With inefficiencies in the distribution sector, there was never enough money flowing upstream, posing a serious concern on the viability of the sector. Getting its act together for improving distribution, the government launched the Accelerated Power Development and Reforms Programme (APDRP) in 2002-03 with the objective of reducing aggregate technical and commercial losses, improving the quality of power, increasing revenue collection and improving customer satisfaction. Electricity Act 2003 was one of the major acclaimed most reformative legislative actions in the country till date on the power sector. The act paved way for unbundling of the SEB’s into generation, transmission and distribution functions and envisaged private sector participation in all the three segments. Further, a fourth segment was created namely trading. Generation was deliscensed and captive generation was freely permitted. Major initiative also included the Ultra Mega Power Project (UMPP) started in 2006. Through this initiative, the government proposed to develop nine projects of 4000 MW each under the tariff based on competitive bidding process.

Though, the initiative has allowed large scale private sector participation in developing power projects, according to the industry, the reforms and policy initiatives have to widely address ground issues that have been holding up development of projects in recent years.

According to Dr. D.G. Kadkade, Chief Advisor, Jaiprakash Associates Limited, "policies and reforms should address serious ground issues on resettlement and land acquisition and preparation of project reports linked to hydro power projects. There should be complete policy for land acquisition required for construction of projects and land submergence after formation of reservoirs. Besides these, there should be resettlement and rehabilitation policy for developing a system of participation for those who have been affected due to construction of hydro power projects. This will facilitate smooth execution of the projects. It is necessary to define what all welfare measures could be taken by the project developer well in advance which will give the displaced person a sense of belonging in the project resulting in early completion and ensuring sustainable development of the project." He notes, "Even African countries who are small in size and resources have evolved such methods to develop a sense of participation among those people whose lands were acquired for projects. Infrastructure works to be completed before the project work starts, more so for persons whose land is submerged or acquired for the project."

He further says, "In inter-state projects, there has been instances of delay in taking decision on resettlement of affected people where more than one state is involved. In the case of Sardar Sarovar Hydroelectric Project (1200 MW) in Gujarat, the beneficiary Sates like Madhya Pradesh, Gujarat and Maharashtra could not reach to a decision for land acquisition, resettlement & rehabilitation."

According to Dr. Kadkade, work of infrastructure like roads, power supply, water supply etc. for various projects should be allotted to the organizations like DGBR so that the required infrastructure facilities could be made in advance before starting the project work. This would save lot of time in implementing hydro power projects. Though the concerned fact has been highlighted at various important platforms but the project implementing agencies are yet to take a decision on this paradoxically making a point that cost of infrastructure could be charged to EPC builders.

He further says, "for hydro power projects hydrological surveys involved in deciding submergence areas are not ready in advance. Hence, lot of time is wasted in finding out the submergence areas whether owned by private parties or by government agencies including forest department.

Environment clearances, both from states and the central government should be made available in time and conditions required to be fulfilled should be defined in these clearances. This is also very time consuming. He says, "Non availability of correct records required for land acquisition continues to be teething issue. Delaying the process further is non computerisation of land records, which otherwise could have facilitated faster decision making in acquiring land. Policies and reforms should also address these issues."

According to Dr. Kadkade, "Earlier governments have made a target to generate about 50,000 MW hydro power in the next 10 years. Projects were identified by Central Water Commission (CWC) and Central Electricity Authority (CEA) by working out Project Feasibility Reports (PFRs) for defining probable sites which could be viable for construction of serialized capacitated projects based on hydrology and geographical features. However, progress at ground level has continued to be slow in taking up the projects. Primary reason for this was lack of political will by the states to implement the projects. The reaction of some North-Eastern States where major hydro power potential located was not adequate." North Eastern States of Arunachal Pradesh, Assam, Meghalaya, Mizoram, Tripura, Manipur posses hydro power viability. States of Uttrakhand and Himachal Pradesh also posses requisite hydro power potential.

Larger generation of capacity by the government and the private sector has to commensurate with adequate reforms in transmission and distribution. The role of the states remain vital towards the same. Uddesh Kohli, former Chairman and Managing Director of Power Finance Corporation and one of the early proponents of power sector reforms in the country, strongly believes that transmission and distribution losses have to be adequately capped. This can be ensured through tackling the issues of power theft. Unless tackled adequately the finances of the state power utilities are unlikely to see improvement.

According to the mid-term appraisal of the 10th and 11th five year plan of the planning commission, the state utilities are incurring huge losses due to the unsustainable level of technical and commercial losses caused by pilferage, inefficiencies in metering, billing and revenue collection. The aggregate transmission and distribution losses in states comprising Assam, Orissa, Madhya Pradesh, Haryana, Karnataka, Uttar Pradesh and Maharashtra are reported to be over 30%.

One way to solve the problem, industry insiders feel is to privatize the distribution network as done in Delhi. What many acknowledge is that after most of the distribution network was privatized in Delhi in July 2002, the T&D losses has come down drastically from 50% to 20%.

According to Gopal Saxena, Chief Executive, BSES Rajdhani Power Limited, "The way forward for power sector is to accelerate distribution reforms as this would have a direct impact on the sector’s commercial viability and ultimately affect the consumers and generators. Distribution PPP model is a good route to bring private investments in the distribution business and should be implemented in other states. The sector has been plagued by high distribution losses (as high as 35-40%) and low billing recovery, which has resulted in poor financial health of the utilities."

He says, "at least 25% financial savings can be accrued by reducing distribution losses. This can help offset increase in fuel and energy costs.

Though the concept of privatization of the distribution network could be a welcome decision but it may not be relished by political parties and altogether consumers in general. Instead a private franchisee model can be explored. The model has worked satisfactorily in the state of Assam which is implementing the SPPS (Single Point Power Supply Scheme).

The reforms in the sector has to be carried out through concerted efforts at the central and state levels. On the state levels, it will be important to allow the distribution companies to recover costs at market determined prices of electricity. This has to be combined with a system of open access-wherein a consumer can buy electricity from any source as a generating company can sell to any buyer. On a broader role or even coordinated role at both levels necessary investments have to be carried in transmission infrastructure to create a genuine national grid that makes seamless evacuation of power from surplus to deficit regions possible. This will call for doing away with piece meal solutions and instead resort to coordinated action.