The Hindu Business Line : Powering a resurgent India

With a target GDP growth rate of 8-10 per cent, India’s energy requirement is expected to grow at 6.4-8 per cent. This would mean a five-fold increase in energy needs over the next 25 years. Along with private participation, there is a move to bring in market mechanisms to improve the efficiency of the power sector, says VIRENDRA PANDIT.

Private participation in the hydro sector will be important to meet the target of an additional 45,000 MW of hydro capacity within the next ten years.

India’s recent interest in ensuring energy security has found expression in the IPOs of such companies as Power Grid Corporation of India Ltd (PGCIL) and Reliance Power Ltd which received overwhelming response from investors and others.

In December 2007, the former Union Power Secretary, Mr R. V. Shahi, said in Ahmedabad that India’s energy sector would require $500 billion worth of investments during the Eleventh Plan period cycle.

The power sector companies have achieved 154 per cent growth in market capitalisation, reflecting investor confidence.

Growth cycle positive

The power sector companies grew by 19 per cent in 2006 compared to 16 per cent the year before. The growth cycle turned positive in 2002-03 and, has been growing continuously since then.

Utility power, which is produced by the State electricity boards, along with the private sector, is now at 1,35,000 MW and is expected to touch 800,000 MW in the next 25 years.

For the Eleventh Plan, Mr Shahi said the government has set a target of adding 78,000 MW capacity, of which 55,000 MW is already in the process of commissioning.

According to Mr Sudhir Trehan, Chairman, India Energy Conclave and Energy Expo 2007, India offers a 19.33 per cent return on investment compared to 14.3 per cent by China, which indicates better investment opportunities in the former.

New age transformers and accurate meter reading and digital meter reading from remote locations would help solve power problems to a large extent.

A KPMG Report on “India Energy Inc. — Emerging Opportunities & Challenge” dwelt on the rapidly growing economy which requires an investment of around $120-150 billion over the next five years in the energy sector. By 2032, an estimated 19 per cent of energy needs can be reduced, mainly by more efficient utilisation.

Another 5.8 per cent of energy would be saved due to efficiency in thermal power generation, with the remaining being trimmed due to improvement in transportation.

Private sector participation

With a target GDP growth rate of 8-10 per cent and an estimated energy elasticity of 0.80, energy requirement is expected to grow at 6.4-8 per cent. This would mean a five-fold increase in India’s energy requirement over the next 25 years.

The KPMG report emphasised the need for strong private sector participation to complement the public sector generation and to bring in the required capabilities and technologies.

Policies have increasingly recognised the need to promote private investment. Private interest in captive coal mining, oil and gas exploration and the power sector has increased significantly and is also envisaged in the nuclear sector.

According to the International Energy Agency, the per capita electricity consumption (in kilo watt per hour, KwH) in India is not even one-fourth of the world’s average of 2516 (KwH) as recorded in 2004. By world standards, India’s current level of energy consumption is low.

For 2004-05, the total annual energy consumption for India was estimated at 572 million tonnes oil equivalent and the per capita consumption at 531 kilograms oil equivalent.

Energy transport infrastructure, such as ports, railways, pipelines and power transmission networks, need significant investments. Some private sector activity is already underway.

Tariff reform in the energy sector and distribution reform in the power sector to phase out subsidies or to target them effectively, are needed to bring in greater efficiencies in the power sector.

Market mechanisms

Along with private participation, there is a move to bring in market mechanisms in the energy sector under independent regulatory oversight. A gradual approach is important till the supply-side position improves and more players enter the sector so that markets can work effectively. The report also highlights the key opportunities in the sectors:

Coal: Thirty-eight coalfields have been identified and are in the process of being allocated, involving a total capital requirement of around $1.5-2 billion. Investment activity is also seen in other parts of the value chain, including washeries.

Oil: A number of private investors have entered this segment attracted by the government’s policies for upstream exploration and production. There is a huge potential in refining due to the strategic advantages of low cost and location, and India is already a net exporter of products. The downstream marketing sector is also now open to private participation.

Natural Gas: Gas discoveries of around 700 bcm in the last decade hold tremendous promise. While in the near term, potential for LNG may be limited due to inability of key sectors to absorb high international prices, in the longer term there would be place for LNG as the share of natural gas in India ’s energy mix increases.

Gas coverage in at least 30 cities is likely to see active interest from both private and public players in the next few years.

Nuclear: India has one of the largest reserves of the nuclear fuel, thorium. However, the nuclear energy programme will continue to be uranium-based until commercial production based on thorium becomes feasible. If the Indo-US nuclear deal goes through, there will be a boost to nuclear energy and private participation.

Hydro: India is endowed with a hydroelectric potential of about 1,50,000 MW. However, only 17 per cent of this potential has been harnessed so far, with another 5 per cent under various stages of development. Private participation in the hydro sector will be important to meet the target of an additional 45,000 MW of hydro capacity within the next ten years.

Renewable Energy: India has a vast potential for renewable energy sources, especially in areas such as solar power, biomass and wind power. The current installed capacity of renewable energy is around 9,220 MW, constituting about 7.3 per cent of the total installed generation capacity. India is already the fourth largest in the world in terms of wind energy potential and there has been significant investment activity in this area. There is still huge potential for development of solar power and bio-fuels. According to the report, to meet the country’s large and growing energy needs, there are certain imperatives for the energy sector:

Key imperatives

Private sector investment should complement the public sector — reliable and economical energy supply will require capital investment and capabilities and efforts from both these participants. This sector will need huge investments of around $120-150 billion by 2012. Areas including pricing of products and stability in policy framework need more clarity to further encourage private investment.

Encourage market mechanisms with a credible and independent regulatory oversight for bringing in efficiencies and encouraging investments by minimising regulatory risks. With an improving supply-side situation, market mechanisms have been gradually introduced in various segments of the energy chain, which should be extended to other ignored sectors, such as coal block allocation, to encourage private sector participation.

Reduce vulnerability to price and supply shocks. The biggest challenge is to gradually replace coal (exhaustible in about 40 years), representing 51 per cent of the energy basket, and oil, which is heavily dependent on international supply in the short term, with natural gas, hydro and renewable sources.

Reforms in energy transport infrastructure. To reduce the high inter-regional disparity to match demand and supply centres, significant investments in ports and railways, pipeline and storage networks and infrastructure are underway.

Tariff and power sector reforms. Heavily distorted power and energy prices have resulted in inefficient end-use and energy choices. Policy measures and political will are necessary to address these issues as are the distribution reforms to cut down on network losses due to theft and pilferage.

Government support for energy efficiency. Policy framework incentivising energy efficiency is urgent. The environment should encourage the development of energy-efficient technologies by companies to help them operate more profitably.