The power sector needs to plough back earnings into capacity addition, which will translate into better returns over the long term.

D. Murali
C. Ramesh

From being considered a technological novelty to becoming an election issue, India's power industry has come a long way.

The power sector is now seen as an index of the status of a country's development and the degree of comforts its citizens enjoy. A simple illustration would be comparison of per capita consumption of India and the US 606 kWh compared to more than 13,000 kWh.

Though power has been a crucial element in the overall India development story, the policy issues that govern its generation and distribution have only hobbled its growth and its true potential remains locked, according to Mr V. Balakrishnan, President and CEO, Electrical Projects Division, GEA Energy System (India) Ltd.

Speaking to

Business Line

on issues facing the power sector in India, he says that since India adopted the socialistic model, "power has always been excessively regulated and controlled as it is considered a common man's service."

Revenue `seepage'

The biggest challenge that the sector faces, he says, is revenue seepage. "Some States have recorded commercial losses of over 45 per cent. This means that for every unit generated and pumped into the grid, only 55 per cent is accounted for in the revenue model. Unless this is addressed, no business model can facilitate such losses (which are politically considered as subsidy)."

Sourcing of primary fuel remains another major challenge, he adds. "If Nuclear energy growth has been stalled, the shift to liquid fuel-based generation projects has proved to be a disaster, what with liquid fuel prices skyrocketing." Which explains the emphasis on coal including imported which has become the fuel of choice, thanks to abundant availability and lower volatility.

According to Mr Balakrishnan, the third and most important challenge is environment. "Cheap hydro-electric power, which can strengthen the country's self-reliance, gets challenged time and again on environmental grounds. Transmission lines that cut across forests and fertile lands sometimes get delayed by activists, who are not ready to look at alternatives."

India continues to rank very low in the world power market, in terms of consumption. But the technical prowess of key Indian players, such as BHEL, is recognised and respected the world over.

"Our transmission companies that build cross-country lines bag large projects in the face of international competition. Today, India is becoming a sourcing base for power equipment."

Indian power companies are also aggressively shopping for overseas acquisitions. Besides, the country's mega expansion plans have attracted MNCs to set up shop in India and invest in the sector.

Policy reform

Tracing the evolution of the Indian power sector, Mr Balakrishnan says that in the early 1900s, the Shivanasamudram hydro-electric power station was set up on the banks of the Cauvery. It was Asia's first such station.

"Bangalore's lighting scheme was completed based on alternating current through the longest transmission line in the world in 1902, from Shivanasamudram to KGF, covering 147 km. Similarly, in 1943, in the adjoining areas of the same province, the Geological Survey of India started drilling operations near Neyveli and struck lignite."

As the industry evolved, policymakers were faced with the issues of increasing under-recovery of costs, the need to add capacity in terms of higher generation, provide new transmission corridors and work towards the objective of achieving 100 per cent electrification.

This, in the late 1990s, led to recasting of the State Electricity Boards, which were till then operating as a single entity responsible for generation, transmission and distribution. For this purpose, the Government enacted the Electricity Regulatory Commission Act 1998, the Electricity Act 2003 and also framed a National Electricity Policy.

The Central Electricity Regulatory Commission (CERC) was set up together with State-level Electricity Regulatory Commissions (SERCs).

"Various models have been tried for `unbundling' of the boards, some with success. The models are still being refined and as of today, two are seen to be successful," says Mr Balakrishnan. "One is the trifurcation of each board into three distinct fully State-owned companies a generation company (GENCO), a transmission company (TRANSCO) and distribution companies (DISCOMS)." Each State will have one GENCO and one TRANSCO, but may have multiple DISCOMS, depending on the geography.

Key success factors

Mr Balakrishnan asserts that this paved the way for operating each of the major activities as distinct profit centres and bring in a greater degree of accountability and transparency.

"The second model entails the presence of integrated private sector players with their own generation plants."

In this, there are four major players: Reliance Energy, Tata Power, CESC and Torrent Power.

Each has its own generation and distribution licences for a given geography. According to him, the regulators are now pushing for increased "open access" and establishment of a power exchange, which will promote increased competition and empower the consumer with choice.

On the crucial issue of providing power subsidy, Mr Balakrishnan says: "Some responsible Governments transfer it as a grant to the board, which is an acceptable way of managing the subsidy at the macro level." In the absence of subsidy, there would be deficit in revenue, consequently harming the capital expenditure programme, with serious long-term detrimental effects. But the sector is seeing a new era of sustained growth and assured returns, thanks to the Electricity Act 2003 and the lead taken by progressive electricity boards and private entities.

The current tariff-setting norm assures a guaranteed return on investment (ROI) of 14 per cent, he says.

"Every player has an in-built incentive to improve returns by enhancing efficiency. For instance, while the tariff is calculated at the plant load factor (PLF) of 80 per cent, any excess generation that gets accepted in the grid is rewarded with an incentive."

The key ratios for efficient performance of a generating unit are PLF and fuel efficiency. While PLF of 80 per cent is the industry benchmark for thermal power plants, it can be as high as 92 per cent in plants whose operations have an internationally comparable basis.

Mr Balakrishnan believes that the ROI can be significantly enhanced for pure power players by ploughing back earnings into capacity addition. "These translate into capital appreciation for the investor and in the long term, better return on original investment."

On the contrary, power plants of combined operators such as sugar mills with co-generation plants and steel plants with integrated power plants see much better ROI. He feels that with significant changes on the cards through innovative policy initiatives, there is enough scope for targeting better ROI in the medium term, even for pure power players.

With power gaining recognition as a key political issue, with the potential to unseat Governments, the sector is getting the attention it deserves. "To increase efficiency, the Government is encouraging backward integration for pure power players taking the thermal plant route by allocating dedicated coal mines. By improving efficiency at the mines, the net variable cost of power is being driven down."However, he adds: "These are pithead stations (generating stations located close to mines); hence, the cost of transporting coal is very minimal. However, one has to pay for transportation of electricity for receiving the power at home or factory."Before arriving at the true cost of power transmitted to home or establishment, the cost to service the investment on transmission lines, which transfer power generated from stations to major load centre, has to be factored in, as must transmission losses and distribution charges.Power companies are being encouraged to invest in new technologies such as coal gasification. Besides, green power generated through renewable sources of energy, such as wind and solar, isincreasingly gaining acceptance. Per capita consumption is growing and there is a marked improvement in the quality of power as well.Going beyond costs, Mr Balakrishnan says, the need to achieve energy security has become the policy of any forward-looking Government, even at the State level. "In the energy basket, electricity makes a significant contribution. At the State level, reaching self-sufficiency and becoming a net exporter of electricity is acknowledged as the best way to guarantee sustained growth."In conclusion, he says: "It is also important to remember that there are more than one lakh villages yet to be electrified and the households in these villages, a million of them at the least, still do not have electricity!"http://Venturions.blogspot.com

(This article was published in the Business Line print edition dated May 20, 2007)
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