To achieve an efficient power supply in India is not easy. But there is hope...
India’s power sector ranks among the world’s top five electricity markets on many counts, but is seen locally a letdown in terms of continuing shortages, missed targets and inefficiency. But, as in all large populations, the tipping points are less visible but are important guides for policy makers and investors to pursue. Following are the transformational trends for 2010-11 and the near-term...
An unfinished agenda
The promise to extend power for all is not an easy one, even as many States have made fresh strides to expand rural electrification. The nature of the challenge needs to be understood better. The States can finance network investments with grant funds under RGGVY, and develop new generation (an estimated 7000 MW is needed to provide lifeline supply covering all unconnected households) through PPP route. The hurdle, however, is the recurring annual cost of Rs.135 billion to run these plants, with State utilities scarcely in a position to fund this at current tariffs and governments already defaulting on past subsidy commitments. Tariff reform is thus the key; and to achieve universal electricity access, existing residential consumers who have benefited by subsidised tariffs for several years must share that benefit by willing to accept higher cost.
private sector: the new promise
The emergence of the private sector and competitive markets is perhaps the most powerful game changer at this time. The share of private sector in generation is likely to grow from 13% (in 2007) to 21% (in 2012). Private entry has brought with it a new dynamism, innovation, and lower costs, and has put positive competitive pressure on all segments of the value chain. The contribution of new capital and generation capacity and lower tariffs achieved through private sector bidding is a positive for universal access. It is important to ensure the integrity of the bid process is not lost by parties resorting to renegotiation or abandoning contracts, a trend that seems to rear its head on occasion. Two other dimensions are important, first, to maintain low entry barriers in competitive bids to permit new players, and second, to avoid market power from reduced competition such as from price-based auctions of coal blocks and selective gas allocation to large players. It is desirable that such auction / allocation set aside certain capacity for new or mid-cap players.
t&d: the missing link
The distribution segment holds the single largest chunk of value that can be recovered. In fact, if we reduce the all-India distribution losses from current 35% by 7.3%, it would release sufficient MWh to fulfil our promise to provide “power for all” without spending a penny on new capacity for now.
To achieve this, serious attempt at distribution reforms is necessary, and franchisees are a useful transition as efficiency and incremental capex will show in the books of the private operator which will help them finance investment, while the ownership remains with the State utilities. Several States viz. Uttar Pradesh, Madhya Pradesh, Maharashtra, and Bihar, have awarded or run process for distribution franchisees, and more are growing in confidence to offer larger and more complex urban areas. Given the potential value recovery, it represents the single most attractive opportunity for private investors, whether their strengths are capital or innovation and systems.
Private investment is now back in the game with the first Ultra Mega Transmission Project awarded at national level and with private transmission lines being approved in Maharashtra and Gujarat. Apart from these, new transmission developers can provide cost-effective evacuation for new generation of coastal merchant plants, captive hydro-projects, and green IPPs that State utilities find hard to finance or slow to develop.
less art and more science?
India is the world’s 4th largest electricity user, and even a modest growth will demand large new capital investment. Delays in project development are expensive in locked up capital (for example, a year’s delay raises power costs by 10 p/kWh) and economic loss (which is typically 4-5 times the financial losses). A review of project delays suggests that design changes, poor standardisation, and insufficient review mechanisms are the causes of delay. It is necessary to bring in a scientific approach and better monitoring tools to project management. A lot more therefore remains to be done, that is challenging and needs continued collective pressure to achieve the goals of an efficient and competitive electricity industry.
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Source :
IIPM Editorial, 2010.
An Initiative of
IIPM,
Malay Chaudhuri and
Arindam chaudhuri (
Renowned Management Guru and
Economist).
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