Power Sector1

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INTRODUCTION

The Indian economy has experienced unprecedented economic growth over the last decade.

Today, India is the ninth largest economy in the world, driven by a real GDP growth of 8.7% in

the last 5 years (7.5% over the last 10 years). In 2010 itself, the real GDP growth of India was

5th highest in the world, next only to Qatar, Paraguay, Singapore and Taiwan. Sustained growth

in economy comes with growth from all sectors, among which growth in infrastructure sector is a

key requirement for growth in sectors within manufacturing and services. With in infrastructure,

growth in power sector is one of the most important requirements for sustained growth of a

developing economy like India.

Indian Economy has witnessed rapid growth in the past decade and to sustain a similar growth

trajectory of 9%, power sector needs to grow at atleast 8.1 % per annum - Planning

Commission. Electricity is one of the key drivers of Industry and so is undoubtedly the backbone

of any economy. Indias power sector Is the 5th

largest in the world. As on Jan 31, 2011 the

installed capacity including Renewable sources totaled to 170,228 MW.To meet the steady

growth of over 5% the Indian government has been implementing a variety of schemes including

plans for ultra-high capacity plants, regulatory approvals and changing focus to renewable

energy. Mckinsey predicts Indias power requirements in 2017 to exceed 300 GW. This report

considers various facets of the industry including regulations, current state of technology, main

players and the road ahead.

TRENDS AND PERFORMANCE

DEMAND - SUPPLY POSITION: The energy availability in the country has increased by

5.6% in 2010-11, while the peak demand met has increased by 6% in the same period. Despite

the increase in availability, India faced an energy deficit of 8.5% and a peak deficit of 9.8% in

2010-11. It is expected that the energy deficit and peak deficit will rise to 10% and 13%

respectively in 2011-12.

LOW PER-CAPITA CONSUMPTION: The average per capita consumption of electricity in

India is a mere 478 kWh (2010), compared to the world average of 2,300 kWh. The other

comparable countries, like the other BRIC nations, have significantly higher per capita


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consumption compared to India. The average per-capita consumption has grown steadily at 1.3%

CAGR annually over the last 10 years.

.

FUEL AVAILABILITY

Indias power requirement over the years has largely been dominated by coal based generation,

with close to 55% of the 182 GW of installed capacity being coal based power plants, accounting

for over 80% of the total units generated in the country. India has a coal production to reserve

ratio of 0.94 compared to 2.83 for China, which indicates that Indias current production, is far

less compared to its potential. Hence, it is imminent that India boosts its coal production. While

additional gas supply from KG Basin has eased shortage to a limited extend, supply constraints

for domestic coal remain and are expected to continue going forward. Consequently, public and

private sector entities have embarked upon imported coal as a means to bridge the deficit. This

has led to some Indian entities to take upon the task of purchasing, developing and operating coal

mines in international geographies. While this is expected to secure coal supplies it has again

thrown upon further challenges. For example, the main international market for coal supply to

India Indonesia, poses significant political and legal risks in the form of changing regulatory

framework towards foreign companies. Similarly, coal evacuation from mines in South Africa is

constrained by their limited railway capacity and the capacity at ports is controlled by a group of

existing users making it difficult for a new entrant to ensure reliable evacuation. In this case it is

essential to manage the risk of supply disruption by different options like diversification of

supply, due diligence on suppliers, unambiguous contracting and strict monitoring among others.

The failure to achieve the planned target from the captive coal blocks presents itself as a major

challenge to the power sector, as only 24 blocks have become operational out of the total 210.

Experts believe that the non-operational status of majority of these blocks is attributed to land

acquisition (R&R) issues, permit delays and infrastructure problems. In addition, the developers

As shown by planning sector reports, the

Government has failed to meet targets in every 5 year

plan. Various reasons have been provided for

inability to meet plans. For example the following

table explains why the 7th

five year failed to meet its

demands.


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who have been given the charge of captive blocks are not putting diligent efforts to expedite the

mining operations due to their lack of experience in coalmine development. Coal is the mainstay

of the power production in India and is expected to remain so in the future. Additional power

generation is likely to require incremental amount of coal transportation by Indian Railways

within the country and increasing unloading at ports in India for imported coal. In both cases

India currently faces capacity shortage. Hence, a project developer has to account for and

manage its logistics chain in a manner that minimizes disruption to its fuel supply.

FINANCIAL

Rapid buildup of the generation capacity is being aided by setting up of Ultra Mega Power

Projects (UMPPs) each of which is 4000 MW. Of the 12 proposed UMPPs only one, Mundra

UMPP in Gujarat has started execution. However, the execution of the Ultra Mega Power

Projects (UMPP) is a significant challenge as India has not witnessed an execution of such a

large scale power project before. Furthermore, with each UMPP costing above INR 16,000 Crore

, financing such a large project is a critical constraint for any developer. In addition, considering

the high financial stake involved through private investments, delay in payments may put severe

pressure on developers/suppliers to meet the performance commitments.

EQUIPMENT SHORTAGE

Equipment shortages have been a significant reason for India missing its capacity addition

targets for the 10th five year plan. While the shortage has been primarily in the core components

of Boilers, Turbines and Generators, there has been lack of adequate supply of Balance of Plant

(BOP) equipment as well. These include coal-handling, ash-handling plants, etc. Apart from

these, there is shortage of construction equipment as well. The Working Group on Power for

11th Plan has outlined the requirement for construction equipment for Hydro and Thermal power

plants.

LAND ACQUISITION AND ENVIRONMENT CLEARANCE

Land Acquisition poses an increasingly significant challenge in the Indian Power sector. Power

plants and utilities face major constraints and delays regarding the availability of land and

obtaining the requisite environment and other clearances for the projects. The new Bill relating


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to land acquisition has continued to face political opposition. While it provides for acquisition by

project development agencies to the extent of 70 percent of the land required for a project, with

the balance to be obtained by the Government In addition, it has been reported that in some

cases, even after land owners were asked to sell and handover their land in Public Interest, the

project was not completed for several years due to other delays, a fact that eroded the credibility

of both the industry and the government. Consequently there is a significant mismatch of

expectations from the Project Affected Persons (PAP). Stakeholders or other land owners may

collectively object of the project execution. In such cases, it is essential to proactively manage

the environment and stakeholders expectations.

STRUCTURAL REFORMS

The process of reforms and restructuring in Indian Power Sectorbegun in the early 1990s with a

few State Governments enacting state level legislations to reform and restructure integrated State

Electricity Boards (SEBs) prior to enactment of the Electricity Act, 2003 (the 2003 Act). The

first state to restructure its integrated SEB under a state level legislation was Odisha in 1995.

Later, Haryana, Andhra Pradesh, Rajasthan, Uttar Pradesh, Karnataka, Delhi and Madhya

Pradesh followed suit. Though power is a concurrent subject in the Constitution, the first major

policy thrust from Central Government came only in 1998 when it enacted the Electricity

Regulatory Commission Act, 1998 to pave way for formation of Central and State Electricity

Regulatory Commissions and distancing of Government from tariff determination. The most

significant and wide-ranging change in legislation was the promulgation of the 2003 Act, which

superseded all the previous electricity related legislations and created a more open environment

for investment and competition in the sector. The 2003 Act also required statutory restructuring

of integrated SEBs and separation of trading function from transmission and system operation.

States like Odisha, Haryana, Rajasthan, Andhra Pradesh, Madhya Pradesh and Uttar Pradesh

unbundled their electricity boards and created multiple distribution licensees. While states like

West Bengal, Maharashtra and Chhattisgarh formed a single distribution utility model to

Restructure themselves, recently unbundled states like Tamil Nadu and Punjab have segregated

the transmission business from the overall SEB operations to meet Electricity Act 2003

requirements.


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Metering & energy audit Most of the sector reforms program designed and implemented by the

State Governments and the utilities have given importance to develop a robust energy accounting

system to identify the energy and revenue loss in the system. Despite the focus given to proper

energy accounting and mandatory requirement of the Act to have all consumers metered, the

metering especially for rural domestic and agriculture consumers is still to be completed. This in

turn puts a question mark on the veracity of the distribution loss figures reported by the utilities

based on estimated consumption taken for unmetered consumers. The Electricity Act specificallymandates all licensees to ensure that electricity is supplied only through installation of correct

Electricity meters. Despite giving fixed timelines for completing cent percent metering

installations, there are a significant proportion of unmetered connections, connections with

electromechanical meters and connections with defective metering in the countrys distribution

system. Moreover, while most of the distribution utilities have achieved interface metering, they

are struggling to achieve cent percent energy accounting & audit metering covering all feeders

and constituent DTs. The recent Forum of Regulators (FoR) Working Group report on metering

issues has recommended a series of metering interventions including:

Evolving a robust and cost effective technology for Automated Meter Reading (AMR),

specifically for rural areas

State Regulators to lay down a time frame for replacing electromechanical meters with

advanced technology meters focusing on high loss areas;

Remote reading enabled DT metering and consumer indexing to be undertaken to enable

energy accounting

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