The Hindu Business Line : Power: How to ignite a revolution

The power sector is in serious crisis. The Government just has to come out with clear-cut, long-term growth plans for the sector, including a firm SEB divestment schedule, strategies to attract investment, a national fuel policy that accounts for rising crude prices and transportation options and, most important, a serious effort at tapping alternative sources such as hydel and bio-fuels.

THE new government is settling in and the old reformer is back as its head. It was the Prime Minister, Dr Manmohan Singh, who heralded the entry of private sector and foreign investors into the power sector.

He also set the tone for the reforms of the State Electricity Boards (SEBs). However, over the last 13 years the situation has deteriorated. The only light on the horizon over the last five years has been the passing of the Electricity Act 2003, supported by the BJP and the Congress(I).

The new Prime Minister has outlined his priorities on various issues such as infrastructure and industry: He said "The country needs good infrastructure. Roads are a national priority. Rural connectivity is a priority for the government. Ours will be an <243>investor- and entrepreneur-friendly government."

The power sector is in serious crisis and it is expected that the Government would come out with clear-cut, long-term growth plans for this sector. Some expectations are listed below:

No move towards divestment of SEBs

June 10, 2004 is the first anniversary of the notification of the Electricity Act 2003. By virtue of Section 172 of the Act, the State governments should have divested the Electricity Boards of all regulatory functions as well as initiated reforms process by segregating the transmission, distribution and generation functions of the Boards.

The regulatory functions should have been fully transferred to the ERCs. If this is not done by June 10, 2004, the regulatory functions automatically passes on to the ERCs. Any extension of time by a State is possible only with the consent of the Centre.

Several States, such as Tamil Nadu, Kerala, West Bengal, Bihar and Maharashtra, have not even moved towards reforms, except for forming the ERC for tariff approval. All other regulatory controls are with the SEBs. Thus the SEBs are still drained of resources, incurring expenses which should otherwise have been borne by the State governments through their Budgets.

Key issues such as open access can be made available only if the regulatory control passes to the ERCs. The EBs themselves do not want to give open access as they want to control the approval process. For example, in Tamil Nadu, commercial consumers are denied wheeling of electricity from their own generation plants for their consumption. While they are made to pay over Rs 5 per unit as tariff they are forced to supply power to the TNEB from their own plants at Rs 2.70 per unit.

This is in spite of the generation becoming free. Several States and the Left are likely to bring pressure to extend the time period under Section 172 and the Prime Minister should not succumb to such pressures.

While it is essential that the reforms need a safety net — in this case, the excess employees of the SEBs have to be provided a safety net before being retrenched — it is also essential that the regulatory functions of the electricity sector are handed over to ERCs as quickly as possible so that the EBs are free from political manipulations and can function efficiently.

Make the sector investor-friendly

The sector has to be made investor-friendly. International and domestic investors are wary of investing in this sector as several States have defaulted on their commitments to honour PPAs. The Dabhol project is a standing example of this default, both by the Centre and the Maharashtra State Government.

Eight years after the PPAs have been rescinded, a settlement on Dabhol is still not in sight.

Today, vested interests — domestic and foreign — are trying to restart the project at the cost of financial institutions. A semi-finished project lying idle for more than 10 years is beyond redemption and, hence, the thought of reviving this project should be given up.

However, the guarantees given by the Central and State Governments have to be honoured. The only answer is to ask Indian FIs to take over the foreign debts on negotiated basis and then for the Central and the State governments to pay the FIs by issuing long-term SLR bonds so that the FIs need not write off the debt in their books.

Dr Manmohan Singh will, it is hoped, see the benefit of this suggestion instead of the mockery of trying to revive the project. The project assets have to be sold to the highest bidder.

There are a few more mini Dabhols in Gujarat, Tamil Nadu, Karnataka, Kerala. These are IPPs based on liquid fuels such as naphtha, fuel oil and diesel and are not economical to run. Having signed these PPAs, the States have to stick to their contractual commitments of meeting the fixed charge rather than running them on regular basis and defaulting on payment commitments.

It may even be economical to abandon these projects by paying off the debt and project promoters as every PPA has a mechanism defined for such recourse. Only if the Government conclusively establishes and proves that the contractual obligations will be met, and on time, will new investments flow into this sector.

Even NTPC would not be inclined to invest in new projects without these commitments met on time. The intentions have to be clearly established. The Prime Minister has to set up a task force on emergency basis to tackle this aspect.

Fuel policy

The need for a national fuel policy assumes serious significance in the light of the accelerating prices of crude and imported coal. Crude has already crossed $40 a barrel and the market expectation is that it would cross $60 by the year-end. This is doomsday for developing countries, and India is no exception.

While, on the one hand, we have to live with this fuel price hike by controlling consumption of petrol and diesel and subsidising kerosene as well as running an efficient public transport system, we cannot invest too heavily in petro-specific projects.

LNG terminals, LNG-based power plants, liquid fuel projects, etc., are to be slowed down with immediate effect and we need to look at alternative fuels. The suggestion to abandon liquid fuel IPPs must be seen in this light. The country has to move away from the crude-specific power generation model.

Developing nuclear projects could be a long-term alternative. These have been fairly safe over the last 50 years and with more stringent safety norms, nuclear fuel could be a good alternative.

Accelerating gas exploration within the country, developing a harmonious relationship with Bangladesh to seek its gas resources in return for us developing its power and other infrastructure, and inviting this neighbour to share the prosperity in water resources by extending the river-linking projects into Bangladesh are our medium-term needs.

Domestic coal could be a major source of fuel for power projects. A lot more investment in the mining and cleaning of domestic coal is a high priority. A detailed analysis of the prices of imported coal indicates that while basic coal prices have been more or less stable, the reason for the steep hike in imported coal is the high transporting cost.

In the light of the possibility of crude going up to $60 plus, a national fuel policy as well as an energy security policy is an urgent need.

Transporting coal

Ship freight was $9-10 per tonne a few years ago but is now as high as $45 per tonne. Good grade coal has risen steeply from $32 to $70 a tonne in recent months.

If this Government feels there is a greater need to invest in public sector projects, it could look seriously at building a national coal carrier fleet to bring coal into India from Australia and Indonesia.

Today international shipping lines go wherever the rates are high, and naturally so. China has been the destination of all these shipping lines in the last two years.

Even though the Chinese bubble is beginning to burst in shipping, steel and other bulk commodities, the freight rates will continue to be high as the international shipping lines have been buoyed by the rate surge.

A domestic shipping fleet dedicated to carry our own cargo will insulate us from the international price pressures in coal, oil and other bulk commodities.

Hydel resources

Tapping hydel resources is another urgent need. The North-East has vast potential — almost up to 50,000 MW — for hydel resources. While tapping this through private resources may be a good economic alternative, dedicating this cheap source of power exclusively to the rural requirements of energy maybe a national priority.

This would naturally mean that public investment has to go into hydro-electric projects in a big way. This can also be done through giving tax benefits to investors — international and domestic — to encourage them to invest in these projects. The rural markets are not looking for freebies-because they know that freebies come with low quality power — they are willing to pay a price for continuous good quality power and it is essential that they get this at far lower cost so that agriculture becomes a profitable industry, and attracts labour from all the areas. This will prevent large-scale migration from rural areas to the cities.

Bio-fuel

Encouraging bio-fuel is another area of priority. Plants like Jatropha offer a great potential for developing bio-fuel across over the country. Over the next decade, bio-fuel will become a serious alternative to petroleum as crude prices hit the roof and it becomes essential to switch over to alternative fuels.

In addition, with the continuing trend of river basins becoming dry, we need to look at alternative crops such as jatropha, which are not only profitable but also generate large-scale employment along the dry river basins. Jatropha, and similar crop, plantations can be started in the Cauvery basin as an alternative to paddy and sugarcane.

It is essential that we educate the farmers and persuade them to shift to these crops. The Cauvery is already a large natural gas basin. It has the potential to become a bio-fuel basin as well.

Captive plantations for biomass projects

Large-scale afforestation — particularly in dry areas across the country will be a part of the energy security initiative. Providing fuel for biomass projects for rural areas and providing such bio-fuel at site will eliminate large-scale investment in transmission to rural areas.

Distributed generation can take care of specific needs of the local community and this will need large-scale investment and detailed attention.

The long-term objective should be to provide stable, continuous power at an affordable cost without depending on sources that would threaten our existence and this should be the priority of the new government. One hopes Dr Manmohan Singh will ignite a revolution in the power sector.

(The author is a Chennai-based power consultant.)