The Hindu Business Line : Power: Reforms gridlocked in politics

The passage of the Act was seen as a major reform that would wipe clean the mess in the industry. There was a discernible positive sentiment and the stock market aided that by marking up the stocks of electricity and equipment companies.

One year down the line, things appear to be back to square one. The new Government's decision to revisit some provisions of the Act and the U-turn on free power supply to farmers by States such as Andhra Pradesh, Tamil Nadu, Punjab and Maharashtra have reignited doubts in the minds of prospective investors in the sector. Is electricity reform once again being sacrificed at the altar of competitive populism?

Unfortunately, the latest setback has come at a time when things were on the mend in the sector with the State electricity boards (SEBs) making their payments on time to the central utilities enabling the latter to push ahead with their own investments.

Energy deficit

There is an energy deficit of 7.1 per cent in the country today with the peak deficit being as high as 11.2 per cent. Though new generation plants are being commissioned, the demand is running far ahead of supply. While policy planners are concentrating on the supply side by stimulating investment in generation capacity, the demand side remains largely ignored.

Neither the Government nor the utilities have been able to tackle the major problem of transmission and distribution (T&D) losses, put as high as 35 per cent.

There is a need to also regulate demand by adopting measures such as differential tariffs based on the time-of-day and the season. SEBs can also shift the agricultural load to the nights by regulating the distribution to this sector.

Generation — driven by central utilities

Private investment in generation has yet to take off in a big way but central utilities such as the National Thermal Power Corporation (NTPC), the National Hydroelectric Power Corporation (NHPC) and the Nuclear Power Corporation have stepped up their investments. Each has lined up an ambitious capacity addition programme over the next five years.

NTPC is investing Rs 41,500 crore in this period which will see the company add 9,370 MW, 43 per cent of its existing capacity of 21,435 MW. NHPC is implementing projects adding up to 4,300 MW — almost twice its existing installed capacity of 2,475 MW. Others such as Neyveli Lignite Corporation are also investing aggressively in capacity expansion.

The Tenth Plan has set an ambitious target of adding 41,110 MW capacity, of which about 55 per cent will come from the central utilities, 27 per cent from the SEBs and 17 per cent from the private sector.

But if experience is anything to go by, the target appears a trifle optimistic. The last two Plans had equally ambitious targets but the achievement was 54 per cent in the Eighth (target of 30,538 MW) and 47 per cent in the Ninth (target of 40,245 MW).

Interestingly, while the SEBs managed to almost achieve their targeted capacity addition in the Ninth Plan, it was the central utilities and the private sector that failed, achieving just 37 per cent and 28 per cent of their targets.

Private players such as Reliance Energy and Tata Power are planning big projects that will add about 5,000 MW in the next four years. Reliance has signed an agreement with the Uttar Pradesh Government for a 3,500 MW plant to be fuelled by gas from the Krishna-Godavari basin while the Tatas are planning a 1,500 MW plant near Delhi, again gas-based.

Merchant plant

Tata Power is implementing the first merchant-power plant in the country at Jojobera. The 120 MW plant, slated for completion by the last quarter of 2005, will sell power to Power Trading Corporation and to North Delhi Power Ltd, the Delhi distribution subsidiary of Tata Power.

Merchant power plants, as their name suggests, sell power to more than one buyer based on demand and have been made possible by the passage of the Electricity Act.

Given the prevailing environment, there appears little possibility of any foreign investment in generation. The adverse publicity that the country got from its handling of the Dabhol project still hangs over the industry when it comes to foreign investment.

The most unfortunate part of the Dabhol project is not the way it was conceived or the way it was handled, rather it is the way that a state-of-the-art asset, comprising the power plant, has been left to idle at a time when Maharashtra can do with the power flowing from there.

Share of gas rising

Thermal power in India has traditionally meant coal-based plants but gas is entering the sector in a big way now. Driven by the new gas finds in the country as also the establishment of the first liquefied natural gas (LNG) project at Gujarat, new generation plants are being planned based on gas.

While gas is indeed a cleaner, cheaper and more efficient fuel compared to either coal or liquid fuel, the crucial factor is availability and price. The experience with gas-based plants has not been very encouraging mainly because of the non-availability of adequate quantities of gas.

NTPC operates four gas-based plants, at Gandhar, Kawas, Anta and Auraiya, but their average plant load factor (PLF) is only around 68 per cent due to non-availability of adequate gas. The company recently signed a contract with Reliance Industries for supply of gas for its Gandhar and Kawas plants where it is expanding capacity by 1,300 MW each from the current 650 MW.

NTPC appears to have got a good deal for itself, with a price of $2.97 per million British thermal unit on a gross basis, but it is early days yet; Reliance has to make large investments on the ground for production and transportation of the gas to NTPC's plants and it has to do all this by 2007 when supplies will begin.

The Petronet LNG project as well as that of Shell, to go on stream in the next few months, is also driving investment in gas-based projects.

The long-term evolution of this segment will largely depend on the successful implementation of the NTPC contract by Reliance as also the pricing of LNG by Petronet and Shell in future.

Hydro focus

The share of hydroelectric power in the total installed capacity is 25 per cent only at present; the ideal ratio between thermal and hydro ought to be 60:40.

Hydro stations may be capital and time intensive but over the long-term they supply power at rates less then Re 1 a unit. They are also ideal for managing peak power demand as the turbines can be operated at short notice unlike thermal plants.

Unfortunately in India, the focus has been more on thermal plants and the few private players have also taken the liquid-fuel route which is quick to implement but produces expensive power. There is now renewed focus on hydro power with the lead player in the sector, NHPC, working on an ambitious programme of increasing its current capacity of 2,475 MW ten-fold over the next eight years.

The company plans to invest a whopping Rs 1,00,000 crore for this purpose in various projects with the Brahmaputra valley in Arunachal Pradesh being harnessed for its hydel potential in a big way. NHPC hopes to put up projects that can generate a total of 22,000 MW in Arunachal Pradesh alone; the first 2,000 MW is already under implementation at Subansiri.

Meanwhile, NHPC's joint venture with the Madhya Pradesh Government, Narmada Hydroelectric Development Corporation, is close to fully commissioning its 1,000 MW project on the Indira Sagar dam while yet another 520 MW project downstream at Omkareshwar is expected to go on stream by 2007.

NTPC is also implementing a 800 MW project at Kol Dam in Himachal Pradesh that is set to be commissioned by 2008.

Together, these projects could correct the distorted thermal-hydel mix.

Regulatory role

The Central Electricity Regulatory Commission (CERC), which regulates the central utilities, has reduced the return on equity for generation and transmission to 14 per cent post-tax from 16 per cent earlier.

While this will hit the earnings of the utilities it probably signifies the intent of the regulator to gradually move towards a competitive pricing mechanism in the medium-term.

The next few years could see the emergence of tariff-based competitive bidding for power.

Economists would say that competitive bidding and power deficits cannot co-exist but the regulator appears determined to bring in this critical reform measure that will enable users to source power at optimal costs.

In fact, companies such as NTPC have begun preparing themselves for such a situation where the lowest bidder will get to supply power first. The merit order despatch mechanism in transmission already ensures that the cheapest power is tapped first.

However, the real reform will be when generating stations turn into power merchants and the practice of signing long-term power purchase agreements based on cost-plus tariff with assured return is done away with.

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