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Home > Business > Special


India's power woes may finally be over

Vandana Gombar | April 22, 2006

Sushanta K Chatterjee is a young technocrat who works at the Central Electricity Regulatory Commission.

Having just released the thousand-page Commentary on the Electricity Laws of India, he knows well enough what is right, and not so right, with this sector. So I am pretty stunned when he categorically says that he would be more than willing to invest in power since the risk-reward equation is favourable.

Favourable? The Planning Commission data is telling me that the aggregate commercial losses of the states total over Rs 23,000 crore (Rs 230 billion) in 2004-05, and that these are projected to increase.

It also shows that the rate of return of the state electricity boards is a negative 32 per cent for that year. It is one sector where reforms seem to have been a non-starter as most of us are still suffering power cuts and paying for the inefficiencies of the power producers and distributors.

The apparent oxymoron can be resolved if we disaggregate data. There are state utilities today, which are cash positive. Yes, you read that correctly: c-a-s-h p-o-s-i-t-i-v-e. There are over 10 states that are earning a cash profit according to the latest data available (see table), though this figure includes the subsidy that has been being paid out by the respective state governments.

THERE IS CASH FLOWING IN
State

Cash profit 2004-05 Rs cr
(on subsidy and sales revenue
realised basis)

Chattisgarh476
Goa161
Gujarat649
Karnataka621
Maharashtra2,209
Orissa464
Pondicherry (UT)79
Sikkim56
West Bengall713
Andhra Pradesh1,231
Punjab1,315
Source: Power Finance Corporation

The very fact that subsidies are being released (in fact, subsidies are being deposited with the utilities upfront by state governments like Andhra, which dole out free power) is a good sign and we have to thank the discipline imposed by the electricity regulators for that.

There have been periods when committed subsidies have not been disbursed, causing a back hole in the entire chain of generation, transmission and distribution.

Though the data from the Power Finance Corporation (across 70 utilities) does not match that collated by the Planning Commission, which counts just a handful of states that are not incurring commercial losses, it does not refute the fact that some state utilities have seen a turnaround.

The most dramatic turnaround has been in Gujarat, which shows a cash profit of Rs 649 crore (Rs 6.49 billion) in 2004-05 against a cash loss of Rs 343 crore (Rs 3.43 billion) last year. But more on that later.

There are other positive signs too. The combined cash losses of all states have reduced sharply from Rs 18,918 crore (Rs 189.18 billion) in 2001-02 to Rs 3,438 crore (Rs 34.38 billion) last year (2004-05), after touching a low of Rs 2,268 crore (Rs 22.68 billion) in 2003-04.

There is an improvement in profit/reduction in losses across 36 utilities in 2004-05 (over the previous year) totalling Rs 2,718 crore (Rs 27.18 billion), though this stands dwarfed by the deterioration in profits/ increase in losses in 29 utilities amounting to Rs 4,536 crore (Rs 45.36 billion).

Here is something more to digest. Return on capital employed was "positive" for 53 utilities, but negative for 17. Excluding the states which have done badly - Uttar Pradesh, Punjab, Haryana, Jharkhand and Assam - the Rs 1,295 crore (Rs 12.95 billion) aggregate cash loss of performing states in 2003-04 (including subsidy released) was converted to a cash profit of Rs 1,730 crore (Rs 17.3 billion) in 2004-05.

The fruits of the labour put into the seminal Electricity Act of 2003 are finally coming to light. The law took five years and eight drafts to take shape and lays the framework for competition in all areas of the GTDC-chain or generation-to-transmission-to-distribution-to-consumer-chain.

Transmission lines have been thrown open (open access), allowing any power generator or trader a fixed-fee-based ride on the transmission lines. There are as many as 19 power traders who are wheeling power on these lines from one end of the country to another and pocketing obscene margins, which the regulator has recently stepped in to curb.

Large consumers (1 mw or above) are gradually being given the option to choose their source of power (open access at the consumer's end). Of course, there is a "surcharge" payable on each unit of power consumed to compensate the distribution licensee for the capital cost that such a move entails and also to cross-subsidise the not-so-large-users.

Industry officials say that the surcharge is so high - it ranges from 115 paisa per unit in Karnataka to 184 paisa per unit in Gujarat - as to make the option of switching the source of power prohibitive for the consumer.

Nevertheless, there are a few companies, which have made use of the open access provisions, mostly to switch to captive power (see table). This number is likely to go up as surcharge calculations are harmonised across states (substituting average cost of supply and embedded cost method to a mix of avoided cost and embedded cost, as per the tariff policy), and as more states finalise such regulations.

Carrot-and-no-stick policy

The power story is not all hunky-dory though. While the basic administrative, legal and regulatory framework is in place for an efficiently functioning sector, there are still large potholes on the road to serious efficiencies across the whole GTDC chain.

The biggest battle will, of course, continue to be with the albatross of transmission and distribution losses, which still drain away almost 37 per cent of the power generated on average, against an acceptable limit of 10-15 per cent.

The T&D losses are reducing by 1-2 per cent every year, more in some states than in others, but it is also true that they have gone up in some states.

This is despite thousands of crores {over Rs 7,500 crore (Rs 75 billion)} spent on programmes like APDRP (Accelerated power development and reform programme), which provide funding and incentives to states for distribution reform.

"APDRP in its current form has not sufficiently improved efficiencies. At the Planning Commission, we feel that there is a need to expand the scale of APDRP and improve incentivisation," says the deputy chairman of the planning commission, Montek Singh Ahluwalia.

So there is an APDRP II on the anvil which will focus on taking metering one more step closer to the consumer - and make it that much easier to track and eliminate leakages. The target is to bring down the AT&C losses to 15-20 per cent on a much sharper time curve.

The wise old men at the Planning Commission talk of technology-led initiatives like GIS (geographic information system) mapping of consumers, some of which have been successfully tried in turnaround states like Gujarat. Here is what the state is doing right. It has divided the state territory into smaller manageable circles and made each one a separate profit centre.

There is an intensive metering exercise and regular energy accounting and auditing for each centre and this has improved collections dramatically. Theft is down, thanks partly to police stations set up exclusively to check thieving. The optimists say that if one state can do it, so can others. There is of course a case for imposing penalties on states with increasing T&D numbers (see table) but I am told that pragmatism dictates a carrot-and-no-stick policy.
Catching the other end

While there are attempts to stem the leak from the power bucket, an ambitious plan has been chalked out to augment supply to the bucket in the form of ultra-mega power projects, seven at last count (see box).
THE GOOD, BAD AND UGLY
Reduction in AT&C* losses in
2004-05 vsyr ago

States

0-2%9Meghalaya, Tripura, J&K,Punjab, Karnataka, Kerala,Pondicherry, Tamil Nadu,Gujarat
2-4%3Bihar, Sikkim, Chattisgarh
Above 4%9West Bengal, Assam,Mizoram, Nagaland, Delhi,Rajasthan, Uttar Pradesh,Goa, Maharshtra
Increase in AT&C* losses in
2004-05 vs yr ago

States

0-2%1Haryana
2-4%2Jharkhand, Uttaranchal
Above 4%6Orissa, Arunachal Pradesh,Manipur,Himachal Pradesh, Andhra Pradesh, Madhya Pradesh
*While T&D loss measures the gap between energy supplied and energy billed, AT&C (Aggregate Technical and Commercial loss) is seen as a superior measure as it gauges the gap between energy supplied and actual rupees recovered.
Source: Power Finance Corporation
7 MEGA POWER PROJECTS
Pithead-based locations based on domestic coal
* Madhya Pradesh (Sasan)
* Chattisgarh (Akaltara)
* Orissa
Coastal locations based on imported coal
* Gujarat (Mundra)
* Maharshtra (Giriye)
* Karnataka (Tadri)
* Andhra Pradesh (Krishnapatnam)

At 4,000 mw each, these plants would require an investment of about Rs 16,000 crore (Rs 160 billion) each. To get the private sector to cough up this kind of money, without any payment guarantees from the state or the central government, a controversial package of incentives has been put together.

The projects are being parked in shell companies and will be auctioned through competitive bidding to Indian and foreign investors, with the main bidding criteria being the price at which power will be supplied.

The Shell companies will do the groundwork of getting statutory linkages and clearances in place to ensure a smoothand expeditious take-off of operations. The target date for selection of developers and hand-over of these special purpose vehicles to them is December 31, 2006.

"But why are we encouraging mega plants only?" asks Planning Commission member Dr Kirit Parikh. Sure enough, the country needs all possible additions to capacity, be it mega, mini or micro mini. And there is the history of non-success of fast-track mega projects.

"We should not discriminate between size or fuel when extending incentives to power plants," says Parikh. Of course, the economies of scale of such large projects means that power would be available at a very competitive price, even without incentives. So there are those who argue that such projects require no special incentives.

Leaving the arguments for and against incentives behind, let's look at the people who will be pumping in the funds. What is the business case for these plants?

In a power-deficit country, merchant plants generating competitively priced power will always find takers.

"That is a no-brainer," says executive director at infrastructure financier IDFC, M K Sinha. But there is a reason why the moneybags may not exactly rush in to set up plants, and it is not directly related to power.

With exposure in private energy producers like GMR, the infrastructure funding IDFC knows the pitfalls, and rewards, of investment in power. It has an appetite for power generation and is specifically interested in pithead-based coal-fired plants, which, according to the funding agency, are the best bet to generate power at "competitive prices".

It is also positive about the prospects of small hydro plants. However, these projects need to show more promise than what competing, and much less complex, sectors like transport offer.

"Transportation will absorb a lot of capital relatively...and a lot faster (than power)," predicts Sinha.

Nevertheless, there are some companies who are willing to bet a few thousand crores on the Indian power sector, despite the shadow of the Dabhol fiasco (I am told that the "D" word did not come up at the various bidders' conferences held so far). Then, there is the positive experience of merchant plants like GMR to draw comfort from.

The company has 420 mw of operational capacity in south India and another 400 mw under construction. Receivables are down to 45 days, from a high of 90 days in the bad old days, and the company has an operational escrow too, perhaps the only one in the country.

Says a proud director of GMR Energy, P B Vanchi: "We have got a success story." The group has also secured a trading licence and is looking at investments in the less risky transmission sector (no fuel-risk) as well as mega power projects.

Other companies which have shown interest in the mega power projects include AES and Khanjee Holdings from the US, Sumitomo, Itochu and Mitsui from Japan, Korea Electric Power Co, China Line Power, Tronoh Alco Combine from Malaysia, UK's Duncan Machneil and Electricte De France. Indian entities like Reliance, Tata, Ashok Leyland, Aditya Birla Power, Torrent, Essar and L&T Power are also looking at these projects.
USING OPEN ACCESS
Companies which have switched power source
RajasthanAditya Cement,
DCM-Shriram,
Hindustan Zinc
West BengalElectrosteel Castings,
Bhushan, Indal
Himachal PradeshGujarat Ambuja

"Generation is a very controllable business," explains the head of the energy practice at KPMG, Partha Bardhan. With an all-India installed capacity of 124,000 mw (Thermal 66 per cent; Hydro 26 per cent; Nuclear 3 per cent; Renewable 5 per cent) and a shortage of 8-12 per cent, this will be a seller's market in the near-to-long term.

What an investor needs to do, says Bardhan, is to make power purchase agreements stronger and tighter (insist on that escrow) and diversify risk by having multiple customers, though there are some in the industry who believe that multiple customers increase the risk of default multi-fold.

The mood in the power sector can be summed up with these words of A K Basu, chairman of the Central Electricity Regulatory Commission: "We have all become wiser."

The laws are in place - "I cannot think of a more comprehensive law than the Electricity Act," says Basu - and are being continuously buttressed with orders and regulations from CERC.

The improvements in the numbers of some states are there for all to see. The power producers have learnt the importance of competitive pricing of power, and as for additional supply of power, there is captive, mega, mini and possibly even nuclear in the pipeline. Come 2012 and there may actually be power for all.


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Number of User Comments: 1




Sub: India's power woes may be over

I seriously doubt it! Politicians will see to it that State Electricity Boards do not enforce the law but rather, they look the other way ...


Posted by labrea




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