The Hindu Business Line : International Energy Agency report — India must plug into China's approach

At a time when the coalition government in India is finding it an arduous task to convince allies on cost-reflective prices to public utilities, the eminently workable reforms in China and the suggestions made by the IEA could provide some lessons, says G. SRINIVASAN.

Comparing India and China has become the norm, notwithstanding the patently dissimilar political structures of the two countries and the distinct economic policies followed by them. But there is a point of convergence between the two and that is in relation to their pursuit of economic reforms. China, of course, began reforms a decade or so before India, which did so more out of compulsion than choice in the early 1990s.

In the crucial power sector, India's record has been anything but inspiring, while the Middle Kingdom has made vital and valiant efforts to reform its power sector over the last two decades. According to the Paris-based International Energy Agency's (IEA) latest report, China has gone in some areas "further than many other reforming countries, including some in the OECD."

India is struggling to evolve a competitive power market and power utilities still remain mainly in the hands of the State governments, with generation, transmission and distribution not yet fully unbundled across the country.

China's challenges

In contrast, China has made power sector reform a priority area for faster action. It has set for itself two formidable strategic goals: Doubling its GDP by 2010 and reducing the economy's energy intensity by 20 per cent over the next five years.

The IEA report on `China's Power Sector Reforms: Where to Next?' rightly begins thus: "A reliable power sector is important to support economic development. In a very broad sense, China has succeeded in supplying the electricity needed to drive economic growth and raise living standards."

The report points out that chronic supply shortages have the potential to undermine sustained future economic growth. It reckons that China's challenges in the electricity sector pertain to four key areas: One is a supply-demand imbalance between power generation and consumption in many provinces.

For instance, chronic supply shortages afflicted the country between 2002 and 2005. As a result, 25 of China's 31 provinces and major municipalities sustained substantial power losses.

Two, rising energy intensity in economic activity following a decline lasting nearly two decades. The intensity started to rise again about four years ago. Three, the rising pollution levels — China is home to five of the ten most polluted cities in the world — with the power sector emerging as the single largest culprit. Four, the need for additional investment. More than 10 million rural Chinese still have no access to electricity and China's power sector relies heavily on public funds.

Some estimates suggest that $50-70 billion per year may need to be invested in generation. This is roughly double the current rate (at least, as regards the grid) and has never been achieved in the past.

Reform record

While noting that China has made considerable headway in reforming the structure, governance and institutional framework of its power sector, the IEA states that this has been "a long drawn-out process of transition that began in the 1980s" within the wider ambit of economic reforms to foster growth and economic development.

By the end of 2002, China had moved from a single, vertically integrated utility to two grid companies (a large one covering most of the country, and a small one in the south) and a diverse set of generation companies (five large companies that were spun off the original incumbent and large number of other companies). Over and above, China launched competitive power markets on a trial basis in three regions (more are planned) and took the first step towards independent regulation by establishing the State Electricity Regulatory Commission.

China's installed generation capacity reached 440 GW (Giga Watt) in 2004, having expanded at an annual rate of some eight per cent for more than 20 years. During the 1980s, the proportion of hydropower capacity declined from 30 per cent to 25 per cent, but has remained relatively steady since then. In 2004, the sector saw a construction boom with an increase of 12 per cent in total generation capacity compared to five-six per cent in 1999-2002 and nine per cent in 2003. Raising the capacity of generating units used in new plants has been a key component of the national strategy for power generation.

Currently, 82 per cent of China's total power is generated from fossil fuel combustion with hydroelectricity supplying a further 16 per cent.

Growth record

China has six nuclear power plants with a total capacity of 7,000 MW, amounting to 1.6 per cent of total generating capacity. Non-hydro renewable, mainly wind, sources account for less than one per cent.

Among the fossil fuel units, coal supplies over 90 per cent, while approximately 4-5 per cent of the total thermal capacity is fuelled by oil. The per capita power consumption has more than quadrupled, from 340 kWh in 1983 to 1470 kWh in 2003. In 2003 and 2004, nearly 75 GW new capacity was installed, and in 2005 a further 66 GW. More than 70 GW is likely this year.

In 2004, China's power sector generated more than 2100 TWh (trillion watt hour), 15 per cent more than in 2003 and a record level of expansion. Installed capacity surpassed 500 GW towards the end of 2005 and the total is likely to be about 570 GW by the end of 2006. The IEA report highlights the fact that the trend towards increasing scale is more evident among fossil-fired plants. By the end of 2003, 83 plants with a capacity of 1000 MW or more were in operation, seven of which were commissioned the same year.

The proportion of units with capacities of 300 MW or more increased from 36 per cent in 1999 to 43 per cent in 2004. Most new approved projects have a minimum capacity of 300 MW and the government encourages the construction of plants with capacity of 600 MW or more. Despite this trend, some 4,000 units, representing 20 per cent of installed capacity in 2003 had capacities of 50 MW or less.

In the Eleventh Plan period (2006-2010) coal-fired plants are projected to play a major role in capacity expansions. Hydro would account for another 20 per cent and nuclear of 1.2 per cent, with the balance accounted for by natural gas (mainly natural gas) and oil.

The report also refers to huge investments made in the distribution grid, by China. Between 1998 and 2002, China carried out an urban and rural distribution network construction and reconstruction project, investing roughly $47 billion (390 billion yuan) in 269 urban distribution networks and 2,000 county distribution networks.

As a result, the distribution network is greatly improved through better quality and reliability of electrical power supplies, especially in the rural areas.

Concerns

The report contends that managing demand while strengthening supply holds the best prospects for mitigating supply-demand imbalances. China's continuing dependence on coal as the main fuel input to generate power calls for a robust approach to tackling pollution.

The current efforts to test competition in some regions cannot progress very far, the report cautions, "without a strong regulatory framework and a more soundly based cost-reflective pricing policy" in place. The IEA also urges China to consider whether it can take some basic steps towards cross-regional or provincial trading on a competitive basis.

In short, the report rests its case on the overarching need for building competitive markets and making power prices cost-reflective as part of the ongoing reform process in China.

At a time when the coalition government in India is finding it an arduous job to convince allies about cost-reflective prices to public utilities, the eminently workable reforms in China and suggestions made by the IEA make sense for India. These reform issues, no doubt, hold the key to surmounting India's infrastructure deficit, in general, and power sector problems in particular.