1 January - 2009

January - 2009 2

When Thomas Alva Edison origi

nated the concept and imple

mentation of electric-power

generation and distribution to homes, busi-

nesses, and factories; he would never have

imagined the widespread implications his

discovery would have on a country as mam-

moth in diversity as India.

Today, it is a unanimously derived factual

conclusion that the Indian Power sector is

in shambles. Plagued by the insincerities

and limitations that can be, the Indian

power sector had been dreaming of a sil-

ver lining, quite often.

But now, India is looking at a silver lining.

With the Power for All 2012 agenda on pri-

ority, hope has sprouted. It is rekindled

everyday, either through political rhetoric

or a billion dollar private investment plan.

The hope seems healthy if one does not look

back on the Indian power sectors history.

But time changes everything and the hope

is surviving on this fact.

As we hope that the Power for All 2012

agenda lives up to be a reality, the Indian

Express Group thought of analyzing the sec-

tor in its present form and its future shape

through this edition of Energising India. In

its second year, this edition has a futuristic

touch to it, primarily because of the theme

Power for All 2012.

While we have taken the KPMG report, a

terse planning commission report, the XIth

Five Year plans agenda for Power, and the

Central Electricity Authoritys December

report on installed power generation capac-

ity, we have ensured that the hope contin-

ues to be alive.

The edition is an optimistic approach to the

future of the power sector in the country

and we hope that this approach, inspite of

all its uncertainty, will come true as sched-

uled.

And for that hope, its now that India needs

to rise, its now that India needs to live up,

its now that India really needs to Power

up.

Foreword

3 January - 2009

January - 2009 4

5 January - 2009

January - 2009 6

He means what he says andhe says what he means.Though the election feverhaunts every ministry,Sushil Kumar Shinde,Minister for Power, is aman who never getsdisturbed on getting electedor not. Having seen theessence of power during histwo decades of power indifferent sectors and atdifferent levels, he isdedicating himself to make adifference in the powersector. No gimmicks, nomagics, but a reality thatpresents a scintillatingpicture on power sector.After he took over the reinsof administration, Shindebrought new agendas tomake a visible land markthat covers all mega powerprojects, converting powergenerating organisationsinto manufacturingcompanies, introducingpower reforms on par withWestern countries andfinally power for all.Converting a myth into arefreshing reality withoutcompromising on thecommon minimum programof the UPA Government. Theexcerpts speak in volumeshow Shinde is redrawing theagenda of the power sectorto benefit not only the poorbut also industries.By P R Subas Chandran.

7 January - 2009

conditioners has been launched. The Bachat

Lamp Yojana envisages promotion of CFLs.

Under the scheme high quality CFLs will be

provided to domestic consumers at a rate

comparable to that of an incandescent bulb.

The difference is to be made up by earning

Certified Emission Reduction (CERs) under

the Clean Development Mechanism (CDM)

which would lead to a potential reduction

of about 4000 MW of electricity. BEE is pro-

moting energy efficiency measures through

the performance contracting route and has

empanelled 37 Energy Services Companies

(ESCO) to facilitate implementation of en-

ergy efficiency projects. These ESCOS have

been accredited by independent third party

agencies like CRISIL and ICRI.

Under the Standards and Labelling Scheme

notification of mandatory labelling for four

equipments / appliances is at an advanced

stage and the scheme has been introduced

on a voluntary basis for six other equip-

ments / appliances.

During the last three years the total avoided

capacity addition achieved by various

schemes of energy efficiency and conser-

vation is around 1200 MV.

Power Projects in Private

Sector

Three Ultra Mega Power Projects with an

aggregate capacity of 12000 MW have been

awarded to the private sector. This will in-

volve an investment of another Rs. 48,000

Crores over and above the investments in

the private sector mentioned above. Fur-

ther, bidding process in respect of Tilaiya

is currently on.

Total Generation

The total generation in the country during

2006-2007 was 662.5 Billion Units (BU) as

compared to 617.5 BU during 2005-2006,

showing a growth of 7.3% as compared to

a 5.1% growth in 2005-2006 over the pre-

vious year. The total generation during

2008-2009 (upto November, 2008) was

479.774 BU as compared to 466.699 BU

during the same period of last year with a

growth of about 2.80%. Excluding neuclar

power total generation during the same

periods was 469.517 BU against 455.202

BU with a growth of 3.14%.

Installed Capacity

The Installed generation capacity in India

has been increased from 1,23,901 MW as

on 31.1.2006 to about 1,47,000 MW as on

30.11.2008 which means a capacity en-

hancement of about 23099 MW or a growth

of 18.64%.

New Power Projects

Thirty three power projects in the private

sector have been initiated, out of which 9

are Hydel and 24 Thermal totaling a capac-

ity of additional 27766 MW. For likely ben-

efits during the 11th Plan. Further 41

projects (13 Hydel and 28 Thermal) total-

ing a capacity of 37908 MW are presently

under various stages of development for

likely benefits during the 12th Plan.

Statutory changes

By amendments to the Electricity Act of

2003 the Central Government was made

responsible for rural electrification and a

move for inclusion of provisions to check

electricity theft was passed in Parliament.

Rural Electrification

Under the Rajiv Gandhi Grameen

Vidyuitikaran Yojana, 53,048 unelectrified

villages were electrified and 66,808 villages

were intensively electrified. Free electric-

ity connections have been provided to 40.75

Lakhs BPL households. 94,770 villages were

covered under Franchisee Development in

14 States. 558 projects with an estimated

outlay of Rs. 25679.64 Crores have been

sanctioned. A total Capital Subsidy of Rs.

10079.87 Crores has been released by the

Government.

Energy Saving

Energy labelling scheme for fluorscent tube

lights and frost free refrigerators and air

January - 2009 8

Overall Plant Load Factor

The overall Plant Load Factor of thermal

power stations in the country improved sig-

nificantly from 73.6% during 2005-2006 to

76.4% during 2007-08.

Further improvement in PLF would have

been possible during 2008-09 but for short-

age of coal, delay in synchronisation and

commercial operation of units due to lack

of completion of balance of plant works by

contractors.

The Energy Conservation

Building Code: (ECBC)

This has been launced for five climatic zones

(hot and dry, warm and humid, composite,

temperate, and cold).

Energy conservation measures have been

initiated in 300 Government buildings in

which investment grade energy audit is

being undertaken.

For the new commercial buildings having a

connected load of more than 500 MW or a

contract demand of 600 KVA, the ECBC has

been developed. The targeted avoided ca-

pacity under the scheme is expected to be

around 500 MW.

Rural Electrification Policy

Rural Electrification Policy under Section 4

and 5 of the Electricity Act, 2003 was noti-

fied.

Foreign Players

Twenty one agreements have been signed

with external funding agencies viz., World

Bank, Asian Development Bank, JBIC and

Germany bringing in approximately US 4.5

Million Dollars for the Indian Power Sec-

tor.

Power Exchange Capacity

Inter Regional Power Exchange Capacity

was a enhanced to 17000 MW from 9500

MW.

New Transmission Projects

Six New Transmission Projects with a total

estimated cost of Rs. 7293 Crores were

approved by the Union Cabinet. In addition,

35 transmission projects at a total esti-

mated cost of Rs. 27518.46 Crores have

been approved by the board of the PGCIL

during this period.

5668 MW was added in the Hydro Sector

by the commissioning of 17 Hydro Electric

Projects in Central / State / Private Sector

including difficult areas.

Hydro Electric Policy

The Union Cabinet has approved the New

Hydro Electric Policy in February, 2008. In

this new policy, private entrepreneurs can

take up projects on the basis of MoUs till

January, 2011 and they will be allowed

merchant sale of upto 40% of the saleable

power.

The policy also envisages exemption from

tariff based bidding till January 2011, mer-

chant sale of 40% of saleable power al-

lowed, 1% free power above the 12% ear-

marked for local area development.

The New Hydro Power Policy, 2008 goes

one step ahead of the National Rehabilita-

tion and Resettlement Policy (NRRP), 2007

so far as R & R provisions for Hydro Power

projects are concerned.

These provisions shall be applicable even

is one family is affected by the development

of a Hydro Power project.

Setting up of ITIs

Setting up of Industrial Training Institutes

to train locals for employment in the

projects an International Conclave was

organised by the Central Electricity Author-

ity and Ministry of Power on the 4th and

5th July, 2007 on Key Inputs for Acceler-

ated Development of Indian Power Sector

for 11th Plan and Beyond.

Participants included State Governments,

Ministry of Labour & Employment, Power

9 January - 2009

Utilities from Central, State and Private

Sectors besides Research institutions.

It was noted at the Conclave that the large

capacity addition planned in the generation,

transmission and distribution sectors offers

a great opportunity for employment genera-

tion and building up of a large skilled man

power base.

Shortage of skilled man power was flagged

as an issue of concern, more so in the con-

text of competing requirements on account

of the infrastructure development boom in

the country.

It was agreed that one of the steps required

to be taken urgently is to train the required

additional man power from the existing ITIs

to suit the requirements of the power sec-

tor. There was a consensus in the Conclave

that the project developers should contrib-

ute to building up of a trained manpower

base which could be utilized by them and

their contractors/sub contractors.

One of the recommendations of the Con-

clave was adoption of ITIs located close to

the project site by the project developers

and major EPC contractors who would con-

tribute by means of providing necessary in-

frastructure at the ITIs and also assist in

organizing practical training programmes at

the project sites under the technical ap-

prenticeship programme.

The issue of ITI adoption came up for dis-

cussion during the 18th Bimonthly Coordi-

nation meeting held by Secretary (Power)

on 18th July,2007 wherein, it was agreed

that the CPSUs would adopt one or more

ITIs at their places of choice near to the

project sites to build up the required trained

manpower.

During the Seminar on Requirement and

Availability of Highly Skilled Manpower for

the Power Sector organised by the Minis-

try of Power on 3rd October 2007, in which

representatives of Central Electricity Au-

thority, CPSUs/Autonomous Bodies/Statu-

tory bodies under the administrative con-

trol of Ministry of Power, AICTE, Director

General (Employment & Training), Ministry

of Labour, Power Secretaries & Secretar-

ies (Technical Education) from the States,

representatives of ASSOCHAM, FICCI, CII,

IPPs etc. participated, the power develop-

ers were impressed upon to adopt ITIs near

their project sites to develop the base of

skilled manpower for the power sector.

So far 14 ITIs have been adopted by vari-

ous CPSUs under Ministry of Power and 26

ITIs are under process to be adopted.

Damodar Valley Corporation

DVC signed an agreement with DTL to

power the October, 2010 Common Wealth

Games in Delhi. 2500 MW from 3 New

Projects viz. Mejia TPS Phase II, Durgapur

Steel TPS and Koderma TPS Stage 1 will

go to Delhi.

Capacity Addition

DVC has placed orders / LoA for capacity

addition of 6250 MW including 500 MW tar-

geted for December, 2008 against an in-

stalled capacity of 2710 MW.

The overall Plant LoadFactor of thermal powerstations in the countryimproved significantly

from 73.6% during2005-2006 to 76.4%

during 2007-08. Furtherimprovement in PLF

would have beenpossible during 2008-09but for shortage of coal,delay in synchronisation

and commercialoperation of units due to

lack of completion ofbalance of plant works

by contractors.

January - 2009 10

11 January - 2009

So far, 53,000 villages have been elec

trified and by 2012 everyone will get

electricity, said Power Minister

Sushilkumar Shinde. 1,20,000 villages are

being targeted. But having previously been

criticised for hyping up miniscule achieve-

ments, this ambitious announcement must

have been made with calculated refine-

ment.

RGGVY was launched in 2005 with the ob-

jective to electrify all villages in the coun-

try where there is no power. Under the

scheme, Government provides 90 per cent

The Government of Indiarecently announced that53,000 villages in thecountry have been electrifiedand promised electricity forall by the year 2012. TheMinistry of Power has set atarget to electrify 1,20,000villages in the current FiveYear Plan (2007-12) underthe Rajiv Gandhi GrameenVidyutikaran Yojana(RGGVY). The Indiangovernment, in the EleventhFive-Year Plan (2007-12),has increased its target ofcapacity addition to 90, 000MW from the initial 78,530-MW to meet the countrysrising energy demands,taking the total generationinstalled capacity from1,46,902 MW as onNovember 2008 to 2,38,902MW by 2012. It is a big taskindeed and even if Indiadoes not touch the target, itwould have still reached afairly substantial capacity.

subsidy for electricity distribution infra-

structure and 100 per cent subsidy for pro-

viding power connections to the rural

household. Government has already pro-

vided electricity connections to 18-lakh Be-

low Poverty Line (BPL) households out of

the targeted 50 lakh such families this fis-

cal.

It has earmarked a total capital subsidy of

Rs 33,000 crore for providing electricity

connections and for the distribution infra-

structure to the rural household.

A subsidy of Rs 28,000 crore has been pro-

vided for the XIth plan period for rural elec-

trification. During the previous five year

plan period, we got a subsidy of Rs 5,000

crore, said Chairman and Managing Direc-

tor REC, P Uma Shankar. We have made

arrangements for electrifying 1,20,000 vil-

lage during XIth plan period, she added.

But to achieve the target Mission of Power

for All by 2012 would mean achieving the

target of 1000 KwHr (Units) of per capita

consumption of electricity by this period.

Achieving this would mean that there is an

immediate need to attract US $ 250 Billion

Investment into the sector. (FDI & Domes-

tic Investment Combined); adequate capac-

ity growth to Sustain GDP Growth at 8%plus; reliable & quality power On 24 x 7

basis, at least in Urban & Industrialized

areas; 100% Rural Electrification with ad-equate & qualitative power for irrigation

purpose; increasing the role of Hydel &

Renewable Energy in the energy mix; ur-

gent need to develop the alternatives, both

in the Fuel & Technology terms, and focus

on implementation.

MoPs Blueprint

The Ministry of Power has prepared a com-

prehensive Blueprint for Power Sector de-

velopment encompassing an integrated

strategy for the sector development with

following objectives:-

Sufficient power to achieve GDP growth

rate of 8% Reliability of power

Quality power

Optimum power cost

Commercial viability of power industry

Power for all

Strategies to achieve the objectives:

Power Generation Strategy with focus on

low cost generation, optimization of capac-

ity utilization, controlling the input cost,

optimisation of fuel mix, Technology

upgradation and utilization of Non Conven-

tional energy sources

Transmission Strategy with focus on devel-

opment of National Grid including Interstate

connections, Technology upgradation &

optimization of transmission cost.

Distribution strategy to achieve Distribution

Reforms with focus on System upgradation,

loss reduction, theft control, consumer ser-

vice orientation, quality power supply com-

mercialization, Decentralized distributed

generation and supply for rural areas.

Regulation Strategy aimed at protecting

Consumer interests and making the sector

commercially viable.

Financing Strategy to generate resources

for required growth of the power sector.

Conservation Strategy to optimise the uti-

lization of electricity with focus on Demand

Side management, Load management and

Technology upgradation to provide energy

efficient equipment / gadgets.

Communication Strategy for political con-

sensus with media support to enhance the

genera; public awareness.

January - 2009 12

APDRP

The government has proposed to introduce

a restructured Accelerated Power Develop-

ment and Reforms Programme (APDRP) in

the 11th Five Year Plan to cut transmission

and distribution losses, early 2008.

The APDRP was launched in 2002-03 with

the objective of encouraging reforms, re-

ducing aggregate technical and commercial

loss and improving quality of supply of

power.

The Distribution Reform was identified as

the key area to bring about the efficiency

and improve financial health of the power

sector. Ministry of Power took various ini-

tiatives in the recent past for bringing im-

provement in the distribution sector. 29

states have signed the Memorandum of

Understandings with the Ministry to take

various steps to undertake distribution re-

forms in a time bound manner.

BMI Report

According to India Power Report from Busi-

ness Monitor International (BMI), which

publishes specialist business information

on global emerging markets for senior ex-

ecutives in more than 125 countries, the

forecast is that the country will account for

12.12% of Asia Pacific regional power gen-eration by 2012, with a growing generation

shortfall that requires rising imports. BMIs

Asia Pacific power generation assumption

for 2007 is 6,865 terawatt hours (TWh),

representing an increase of 9.6% over theprevious year. It is forecasting an increase

in regional generation to 9,435TWh by 2012,

representing a rise of 37.4%.

Asia Pacific power generation in 2007 was

5,407TWh, accounting for 78.8% of the to-tal electricity supplied in the region. BMIs

forecast for 2012 is 7,155TWh, implying

32.3% growth that reduces the marketshare of thermal generation to 75.8% -thanks partly to environmental concerns

that should be promoting renewables, hy-

dro-electricity and nuclear generation.

Indias thermal generation in 2007 was

622TWh, or 11.50% of the regional total.By 2012, the country is expected to account

for 12.49% of regional thermal generation,says the BMI report.

The report further states that, For India,

coal is the dominant fuel, accounting for

51.4% of 2007 primary energy demand

(PED),followed by oil at 31.8%, gas at 8.9%and hydro-power with a 6.8% share of PED.Regional energy demand is forecast to

reach 4,915mn tonnes of oil equivalent (toe)

by 2012, representing 32.9% growth overthe period. Indias 2007 market share of

10.94% is set to rise to 11.49% by 2012.The countrys17.8TWh of nuclear demand

in 2007 is forecast to reach 30TWh by 2012,

with its share of the Asia Pacific nuclear

market rising from 3.27% to 4.65% overthe period.

India is still ranked second, behind China

in BMIs updated Power Business Environ-

ment rating, thanks to its vast market size

and excellent growth prospects. Certain

country risk factors offset some of the in-

dustry strength, but the country seems des-

tined to vie with China at the head of the

table for the foreseeable future.

BMI is now forecasting Indian real GDP

growth averaging 8.25% per annum be-tween 2007 and 2012, with the 2008 fore-

cast being 9.00%. Population is expectedto expand from 1.16bn to 1.24bn over the

period, with GDP per capita and electricity

consumption per capita both forecast to

increase significantly. The countrys power

consumption is expected to increase from

890TWh in 2007 to 1,471TWh by the end of

the forecast period, leaving a theoretical

shortfall in generation rising from 115TWh

in 2007 to328TWh in 2012, assuming 7.8%annual growth in generating capacity.

Between 2007 and 2018, BMI forecasts an

increase in Indian electricity generation of

115.4%, which is among the highest for theAsia Pacific region. This equates to 37.7%in the 2013-2018 period, down from 47.6%in 2007-12. PED growth is set to fall from

39.6% in 2007-12 to 32.6%, representing94.3%for the entire forecast period. An in-crease of 88.5% in hydro-power use dur-

13 January - 2009

ing 2007-18 is a key element of generation

growth. Thermal power generation is fore-

cast to rise by 113.4% between 2007 and2018, with nuclear consumption up by

197.2%.

The Target

The Indian government, in the Eleventh

Five-Year Plan (2007-12), had initially rec-

ommended a capacity addition of 78,530-

MW to meet the countrys rising energy

demands, which was later revised to

78,577-MW. The proposed capacity addition

has again been revised to 92,000-MW. The

earlier estimate of 78,577-MW consisted of

16,553-MW of hydropower, 58,644-MW of

thermal power and 3,380-MW of nuclear

power.

According to the Central Electricity Author-

ity (New Delhi), the Indian governments

statutory organization for regulating the

power sector, projects with a total capac-

ity of 11,404-MW have been commissioned

through August 2009 for the Eleventh Five-

Year Plan. The energy mix includes 8,472-

MW from thermal power, 2,712-MW of hy-

dropower and 220-MW of nuclear power.

The total installed power generation capac-

ity of the country currently stands at

146,902.81 MW, consisting of 92,892.64

MW of thermal power, 36,647.76 MW of

hydro power, 4,120-MW of nuclear power

and 13,242.41 MW from renewable

sources. In the earlier target of 78,577-MW,

the contribution of the private sector was

10,760-MW, compared with 27,952-MW by

state and 39,865 from the CEA.

An estimated 7,530-MW of additional ca-

pacity was planned for the fiscal year 2008-

09. Of this, 2,141-MW has already been

commissioned. The remaining 5,389-MW is

targeted to be operational before March

2009. Some of the projects under construc-

tion that will be commissioned by the end

of this fiscal year include:

NTPC Limiteds (New Delhi) 500-MW

thermal power plant in Kahalgaon

Torrent Power Limiteds (Ahmedabad,

Gujarat) 752-MW thermal power plant

at Sugen in Gujarat

Oakwell Power Limiteds (Hyderabad,

Andhra Pradesh) 445-MW thermal

power plant at Konaseema, Andhra

Pradesh

Gautami Power Private Limiteds

(Secunderabad, Andhra Pradesh) 464-

MW thermal plant in Andhra Pradesh

Nuclear Power Corporation of India

Limiteds (Mumbai) RAPP units 5 and 6

in Rajasthan and Kaiga Unit 4 in

Karnataka.

While the ongoing prevalent global liquid-

ity crunch is likely to affect proposed

projects that are yet to obtain financial clo-

sure, the government has stepped in to pro-

vide credit for those projects which have

obtained financial closure. All the projects

listed above are currently on schedule. The

Standing Linkage Committee of the Indian

government recently approved coal link-

ages to power projects with an aggregate

capacity of 35,000-MW that are scheduled

to be commissioned and start production

by the end of the 2012. If all projects under

the plan are commissioned under the plan,

the countrys total generation capacity

would be 237,554-MW in 2012.

The proposed 92,000-MW capacity addition

is a very ambitious initiative, representing

more than four times the additional capac-

ity achieved in the Tenth Five-Year Plan

(2002-07), from which project slippage was

inherited by the Eleventh Five-Year Plan.

The governments vision of meeting the

soaring energy requirements of the coun-

try domestically will serve as a catalyst for

growth.

Coal Needs

According to the working group of the Plan-

ning Commission, India will have to import

100 million tons of coal during the Eleventh

Five-Year Plan (2007-12) to fulfill increas-

ing domestic demand, which is projected to

730 million tons by 2012.

The group also indicated that the countrys

production capacity by 2012 will be around

680 million tons per year, said the Indus-

trial Info Resources, a marketing informa-

tion service specializing in industrial pro-

cess, energy and financial related markets.

Indias largest coal producer, Coal India

Limited (Kolkata, West Bengal), has agreed

to increase production from 520 million tons

per year to 600 million tons per year by

2012. In an effort to bridge the supply-de-

mand gap, for the first time, CIL will import

4 million tons per year this fiscal year.

Compared with the previous five-year plan,

the company has reported an 8 percent in-

crease in coal production in the current

period, but the increasing demand is prov-

ing this growth to be inadequate. NTPC Lim-

ited (New Delhi), Indias largest power pro-

ducer, is also importing 8.2 million tons per

year of coal during the 2008-09 fiscal year,

The Indiangovernment, in the

11th Five-Year Plan ,had initially

recommended acapacity addition of78,530-MW. The

capacity addition hasagain been revised to

92,000-MW.

January - 2009 14

and reports indicate that the imports are

likely to rise.

Indias power sector is facing acute coal

shortages and power companies have been

asked to immediately increase imports.

Thermal power plants have coal stocks of

4.9 million tons, although the requirement

is 22 million tons. Out of the 77 thermal

power plants monitored, 55 have less than

a weeks supply of coal. India has 256 bil-

lion tons of coal reserves, but only 455 mil-

lion tons are mined every year. Indias cur-

rent imports stand at 40 million tons and is

expected to touch 50 million tons by the end

of this fiscal year. Domestic demand is ex-

pected to rise to 2 billion tons per year by

2016-17.

It has become inevitable for Indias Minis-

try of Coal to earmark expansion plans to

reduce the supply deficit. There have been

187 captive coal blocks allocated for min-

ing to private players with reserves of 41

billion tons. Only 20 blocks are now opera-

tional, producing about 30 million tons per

year of coal.

The rest have either been allocated recently

or are awaiting environmental and proce-

dural clearances. Steps are now being

taken to expedite the clearance procedures

and make these blocks operational. CIL and

public sector companies, such as the Steel

Authority of India (New Delhi), NTPC and

National Mineral Development Corporation

have set up a special-purpose vehicle, In-

ternational Coal Ventures, to explore min-

ing opportunities overseas. International

Coal Ventures plans to raise $1 billion to

develop coal mines with potential of 10 mil-

lion tons per year in Mozambique.

There are also plans to acquire assets in

Canada, Indonesia, Mozambique, South Af-

rica and Australia. The current economic

crisis in the United States has gained Indias

attention. CIL is in talks with U.S. mining

companies to acquire assets. CIL also plans

to revive 18 abandoned mines belonging to

its subsidiaries Eastern Coal Fields, Bharat

Coking Coal and Central Coal Fields. The

50:50 partnership with global companies

will develop six mines belonging to Eastern

Coal Fields, eight from Bharat Coking Coal

and four from Central Coal Fields. The com-

bined potential of these 18 sites is expected

to be about 1.6 billion tons per year.

ArcelorMittal (Luxembourg) and Ispat In-

dustries Limited (Kolkata, West Bengal)

have expressed interest in this project. CIL

has also received bids from international

players like Walter Mining Company

(Brisbane, Australia), Anglo American Plc

(London) and Rio Tinto Plc (London).

Recently, an agreement was reached be-

tween officials of the ministries of coal and

power, and representatives from CIL, NTPC

and the Central Electricity Authority that 10

to 15 percent of coal required for new

power projects in India will be imported. It

has also been indicated that the cost of

power from imported coal will be higher

than power produced from domestic coal.

But coal waste will be low since the quality

of imported coal is higher than domestic

coal. The Ministry of Power will facilitate

the fuel-supply agreement between power

utilities and CIL. It was also announced that

the imported coal may be used in existing

power plants. Coal India plans to increase

its production target from 380 million tons

per year to 405 million tons per year by

2009-10. Experts indicate that at the rate

at which Indias coal demand is rising, the

country will lose 60 billion-70 billion tons of

its coal reserves by 2040-41. It has become

imperative for the Ministry of Coal and CIL

to explore new mining avenues both inter-

nationally and in the domestic front to sus-

tain demand.

Renewable Energy

The Indian government has set a target of

generating 14,000 MW additional power

through renewable resources in the 11th

Five-Year Plan (2007-2012), taking the to-

tal generation to more than 26,000 MW,

according to Minister for New and Renew-

able Energy, Vilas Muttemwar.

We are doing remarkably well in generat-

ing power from renewable resources, as we

are at the fourth spot after Germany, Spain

and the US in harnessing the wind energy.

But still there is much more potential that

goes unused, Muttemwar said. According

to the Minister, India has the potential of

generating 70,000 MW of power from wind.

We are one of the luckiest countries,

where we have plenty of sunshine through-

out the year. With this solar energy, we can

fulfill the energy needs of the whole world

if we harness it in proper channel,

Muttemwar said. India is in a process to

establish a solar thermal energy project at

Nagpur in Maharashtra which will be Asias

biggest solar power generation project, ac-

cording to Minister Muttemwar.

We will also establish many special eco-

nomic zones (SEZs) exclusively for renew-

able projects at various locations of the

country, he said.

References:

Ministry of Power www.powermin.nic.in

http://en.sxcoal.com

Industrial Info Resources: A marketing

information service specializing in industrial

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India PR Wire

PTI

15 January - 2009

The Ministryof Power has set atarget to electrify 1,20,000villages in the current Five YearPlan (2007-12) under the RajivGandhi Grameen VidyutikaranYojana (RGGVY).

Power for All by2012 mission achievementwould mean achieving the target of1000 KwHr (Units) of per capitaconsumption of electricity by thisperiod. Achieving this would meanthat there is an immediate need toattract US $ 250 Billion Investmentinto the sector.

BMI forecast is that thecountry will account for 12.12%of Asia Pacific regional powergeneration by 2012, with agrowing generation shortfall thatrequires rising imports.

146,902.81 MWis the total installed powergeneration capacity of the countrycurrently, consisting of 92,892.64MW of thermal power, 36,647.76MW of hydro power, 4,120-MW ofnuclear power and 13,242.41 MWfrom renewable sources.

January - 2009 16

17 January - 2009

The 11th Plan aims at putting the

economy on a sustainable growth

trajectory with a growth rate of ap-

proximately 10 per cent by the end of the

Plan period. It will create productive em-

ployment at a faster pace than before, and

target robust agriculture growth at 4% peryear. It seeks to reduce disparities across

regions and communities by ensuring ac-

cess to basic physical infrastructure as well

as health and education services to all. It

recognises gender as a cross-cutting theme

across all sectors and commit to respect

and promote the rights of the common per-

son. Among other sectors in focus by the

planning commission towards the 11th plan,

Energy finds an important place. Its signifi-

cance is immense and it surely stands as a

sector which will govern most of our lives

in the near future.

Energy

GDP growth of 9% is not possible withouta commensurate increase in supply of en-

ergy, electricity, coal, oil and gas and other

fuels. Further, with nearly half the countrys

population without electricity and without

a consistent supply of any other form of

commercial energy either, distribution of

energy is as crucial to bridging the divide

between the haves and the have-nots. En-

suring lifeline supply of commercial energy

to all is essential for empowering individu-

als, especially women and girls, who have

the back-breaking, time consuming and

unhealthy task of collecting and using non-

commercial fuels that remain the primary

energy source for cooking in over two thirds

of the households. Provision of clean fuels

or at least wood plantation within one kilo-

meter of habitation and dissemination of

technology for use of clean fuels is vital for

good health.

Electric Power

Rapid growth of the economy will place a

heavy demand on electric power and this is

an area of weakness at present. Reforms

in this sector have been under way for sev-

eral years and they have brought about

several important institutional changes

which were needed to make the power sec-

tor efficient and more competitive: The Elec-

tricity Act 2003 is in place; The National

Electricity and Tariff policies envisaged in

the Act have been notified; Regulators are

in place in the states and have issued a

series of regulatory orders which are be-

ginning to reduce the wide dispersion in

electricity tariffs that have existed tradition-

ally and to contain tariffs charged for in-

dustries; Many states have unbundled their

SEBs into generation, transmission, and

distribution companies for better transpar-

ency and accountability.

The greatest weakness in the power sec-

tor is on the distribution side which is en-

tirely the domain of the states. Aggregate

Technical and Commercial (AT&C) losses of

most State Power Utilities (SPUs) remain

high and have made SPUs financially sick

and unable to invest adequately in gener-

ating capacity. For the same reason they

have also had only limited success in at-

tracting private investors to set up power

plants.

The Accelerated Power Development and

Reform Programme (APDRP) initiated in

2001 was expected to bring down AT&C

losses to 15% by the end of the 10th Plan.In fact, the average for all states is closer

to 40% (including uncollected bills). How-ever, there are encouraging success sto-

ries in loss reduction in a number of cities

and small areas as a result of intensified

management efforts. Some states, for ex-

ample, Tamil Nadu and more recently

Andhra Pradesh, have shown a much bet-

ter performance than the national average.

This gives hope and provides guidance on

how to restructure APDRP, using techno-

logical tools such as smart metering and

GIS mapping for real time, monitoring and

accountability at each distribution trans-

former. State governments should adopt

the goal of bringing down AT&C losses from

the current level of around 40% to at least15% by the end of the 11th Plan. This canbe done if managements of SEBs are

professionalised and given autonomy of

operation without political interference.

The Rajiv Gandhi Grameen Vidyutikaran

Yojana (RGGVY) is a key initiative providing

electricity access to all households and ac-

tually connecting all BPL households. How-

ever, the success of this commendable ef-

fort depends critically upon adequate avail-

ability of electricity and actual electrifica-

tion of all households. Mere access with-

out supply of power will only add to frus-

tration.

The 11th Plan provides anopportunity to restructurepolicies to achieve a newvision based on faster,more broad-based andinclusive growth. It isdesigned to reduce povertyand focus on bridging thevarious divides thatcontinue to fragment oursociety. The energy sectorprominently features in thePlanning commissions11th plan and offers certainstrategic solace to thesector, both in terms of theplan period as well as longterm sustainability.

January - 2009 18

Utility-based generation capacity is ex-

pected to rise by less than 30,000 MW in

the 10th Plan but we should plan for an in-

crease by 60,000 MW in the 11th Plan to

move to a comfortable situation consistent

with a growth rate between 8 - 9% per an-num. The 11th Plan must evolve policies that

can ensure completion of on-going projects

quickly and that generation capacity of this

order is created in an efficient, least cost

manner while emphasizing exploitation of

Indias hydro potential and nuclear capa-

bilities especially in the field of fast breeder

reactors. Renewables such as wind power

can play a useful role in the 11th Plan. These

can be set up in a short time and though

they have a low load factor with a good

transmission system, can be balanced by

hydro power and can contribute to meet-

ing peak demands.

Establishment of new generation capacity

and reducing cost of power will require ac-

tion on many fronts:

Availability of fuel such as coal or natural

gas for new power plants must be as-

sured;

A national consensus on royalty rates for

fuels and compensation for host states

also needs to be worked;

Long term finance should be made avail-

able to lower capital charge;

The presently provided guaranteed rate

of post tax returns for CPSUs should be

lowered to reduce cost of power and aug-

ment resources of state power utilities;

An efficient inter-state and intra-state

transmission system of adequate capac-

ity that is capable of transferring power

from one region to another;

An efficient distribution system which

alone can ensure financially viable expan-

sion;

Rehabilitation of thermal stations through

R&M to augment generating capacity and

improve PLF;

Rehabilitation of hydro stations to yield

additional peaking capacity;

Improving supply side and demand side

efficiencies to effectively lower primary

energy demand by 5-7% during the 11thPlan period;

Ensuring use of washed coal for power

generation; and

Harnessing captive capacity to support

the grid.

Coal

Coal will remain the dominant primary

source of commercial energy and total de-

mand for coal is projected to increase from

432 million tonnes in 2005-06 to 670 mil-

lion in 2011-12.

The need for the power sector itself would

increase by 180 million tonne taking the

total to about 500 million tonnes in 2011-

12. Meeting these demands poses a formi-

dable challenge in increasing coal produc-

tion.

Coal India is aiming to increase production

by an unprecedented 60% during the 11thPlan period inclusive of the recently ap-

proved emergency production plan. How-

ever, realistically speaking, this level of in-

crease in output together with the neces-

sary rail infrastructure to move the addi-

tional coal production may be difficult to

achieve by Coal India alone.

Coal production is nationalized at present

and private investment in coal mining is only

allowed for captive mines supplying coal to

designated sectors power, steel, and ce-

ment.

Taking a longer term view of energy pro-

duction there is a strong case for de-na-

tionalizing coal so that private sector invest-

ment can come into this crucial area.

If petroleum, which is much scarcer than

coal, is open to the private sector there is

no reason why coal should not also be

opened up, especially if we take a longer

term view of energy constraints and also

the need to absorb new clean coal technolo-

gies.

Pending a consensus on this issue, every

effort should be made to expand coal pro-

duction through the route of captive mines.

Large coal users, especially in the power

19 January - 2009

sector, can be given available proven coal

blocks for developing captive mines.

Preliminary estimates suggest that in ad-

dition to coking coal we may also need to

import 40-50 million tonnes of superior

grade thermal coal by the end of the 11th

Plan. Thermal power stations on the south-

ern and western coasts can be competitive

using imported coal and the countrys elec-

tricity requirement does justify such import.

This would require necessary port handling

capacity and coast based power generation

capacity of around 12000 to 15000 MW to

absorb the imports.

Coal pricing and marketing also needs to

be modernized. The e-auction route which

has been opened recently has worked well,

and has helped to nudge consumers to-

wards more rational coal pricing. This win-

dow can be expanded over the 11th Plan.

The method of pricing coal also needs to

be rationalized by shifting to gross caloric

value instead of useful heat value and by

having more finely graded price bands.

Oil and Gas

India will remain dependent on crude oil im-

ports. Fortunately, the demand for petro-

leum products has grown at only 2.7% perannum in the first 4 years of the 10th Plan.

Consumption of petroleum products is likely

to rise from 112 MT in 2005-06 to about 135

MT by the end of the 11th Plan with net

crude oil imports reaching 110 MT. Gas con-

sumption is forecast to rise to about 55

MTOE with imports reaching 20 MTOE

unless the recent finds announced in the

KG basin actually start flowing in significant

quantities by the terminal year of the 11th

Plan. This assumes that Naphtha based fer-

tilizer production switches completely to

gas by the end of the 11th Plan.

The scope for transnational gas pipelines

needs to be explored from a longer term

perspective, but no pipelines are likely to

become available for this level of gas im-

port during the 11th Plan. Thus LNG imports

would need to rise to four times from the

current level of 5 million tonnes.

The most important policy issue in this sec-

tor relates to pricing petroleum products.

The recent increase in oil prices is now ex-

pected to persist for some years and al-

though prices of some petroleum products

have been raised the increase still leaves a

large uncovered gap. This gap is being

borne partly by the oil companies and partly

by the issue of bonds by the government to

the companies, which is equivalent to a

government subsidy. Other critical issues

facing the oil and gas sector relate to:

pricing of domestically produced natural

gas and its allocation to the power and

fertilizer industry;

strengthening upstream regulation in the

oil and gas sector; and (iii) ensuring com-

petition and open access in the proposed

pipeline transportation and distribution

grid.

In the longer run, the only viable policy to

deal with high international oil prices is to

rationalize the tax burden on oil products

over time, rationalise existing pricing

mechanisms which give the oil companies

an excessive margin, realize efficiency

gains through competition at the refinery

gate and retail prices of petroleum prod-

ucts, and pass on the rest of the interna-

tional oil price increase to consumers, while

compensating targeted groups below the

poverty line as much as possible.

The current method of determining prices

for petroleum products needs reconsidera-

tion. Full price competition at the refinery

gate and the retail level needs to be

adopted. India is deficient in crude oil but

has developed surplus capacity in products.

January - 2009 20

Many products are exported in sizable

quantities. Product price entitlement should

therefore be based on trade parity pricing,

which would be much lower than import

parity. The 10% duty on products has beenreduced to 7.5% which is a step in the rightdirection. There is a strong case for further

reducing the duty on products to 5% toequate it with the duty on crude.

Other Energy Initiatives

More broadly, as we move into the 11th

Plan, we need to take an integrated view of

energy policy towards different energy sub-

sectors. While the Central and state sec-

tors will continue to dominate the energy

sector in the 11th Plan, energy policy should

not be determined sector by sector where

the dominant public sector players often

have significant vested interests. We need

to move towards a more transparent policy

framework that treats different sources of

energy in a similar fashion. Such a frame-

work must meet the following objective:

Ensure energy competition in each sub

segment of the energy sector and remove

all entry barriers so as to realize optimal

fuel and technology choices for extrac-

tion, conversion, transportation, and end

use of energy.

Ensure energy pricing that leads to effi-

cient choice of fuel, inter-fuel substitu-

tion, and technology so that resource al-

location takes place based on market

forces operating under a credible regu-

latory regime.

Incentivize rational use of energy across

all sectors including, agriculture, indus-

try, commerce, domestic, personal trans-

port, public transport, and haulage.

Ensure an institutional framework that

provides a level playing field to public sec-

tor and private sector players and pro-

vides comparable incentives to produc-

ers across all energy sectors.

Ensure a consistent tax and regulatory

structure across all energy sub-sectors.

There is no reason why energy resource

should be taxed much more than others

unless there are some externalities in-

volved.

Meet social objectives as far as possible

through direct and tradable entitlements

offered to those in genuine need.

Treat environmental externalities uni-

formly under the polluter pays principle.

Thus renewables should be given appro-

priate incentives.

Promote energy efficiency and energy

conservation.

A consistent policy framework embodying

these principles would minimize distortions

across sectors and maximize efficiency

gains.

Institutions for promoting and forcing the

pace of energy conservation and improve-

ment in energy efficiency also need to be

strengthened. Development and use of re-

newable and nonconventional energy

sources have not progressed to the extent

they could have.

The 11th Plan will restructure incentives

and support from supply driven

programmes to demand driven

programmes and technologies. It will also

link subsidies and support to outcomes in

terms of renewable energy generated,

rather than to capital investments.

Available fossil energy resources must be

optimally exploited using enhanced recov-

ery techniques. Coal bed methane must be

fully exploited and fossil fuel reserves en-

hanced through more intensive exploration.

Renewable energy sources such as wind

energy, bio-mass and bio-fuels account for

a very small percentage of total energy but

they could increase to 2 - 3 percent in the

course of the 11th Plan period.

The 11th Plan must also set up a robust

energy R&D system to develop relevant

technology and energy sources to enhance

energy security and lead to energy indepen-

dence in a cost effective way in the long

run.

Source: www.planningcommission.nic.in

21 January - 2009

9 per cent GDP growthis not possible without acommensurate increase in supplyof energy, electricity, coal, oil andgas and other fuels. Further, withnearly half the countrys populationwithout electricity and without aconsistent supply of any otherform of commercial energy either,distribution of energy is as crucialto bridging the divide between thehaves and the have-nots.

The greatestweakness in thepower sector is on the distributionside which is entirely the domainof the states. Aggregate Technicaland Commercial (AT&C) losses ofmost State Power Utilities (SPUs)remain high and have made SPUsfinancially sick and unable toinvest adequately in generatingcapacity.

The 11th Plan mustevolve policies that can ensurecompletion of on-going projectsquickly and that generation capacityof this order is created in anefficient, least cost manner whileemphasizing exploitation of Indiashydro potential and nuclearcapabilities especially in the field offast breeder reactors.

Coal will remain thedominant primary source ofcommercial energy and totaldemand for coal is projected toincrease from 432 million tonnesin 2005-06 to 670 million in2011-12.

January - 2009 22

The Electricity Act, 2003 was awatershed regulation in theGovernments attempts towardscreating a conduciveenvironment for development ofthe Indian Power sector. Thiswas further supported by anumber of policies andregulations; however, almost fiveyears down the line the sector isyet to achieve the desiredprogress.The inflection point is stillawaited by many; the pointwhere a consumer can freelychoose his electricity providerand generators have multiplechoices for the sale of the powerthey generate and can managerisks through evolvedcontracting instruments.Recently, Confederation ofIndian Industries (CII) hadorganised a conclave - IndiaEnergy Conclave 2008 whereinKPMG prepared a report whichexamines some of the recentdevelopments that are importantin the move towardsCompetitive Power Markets. Ithas also presented its view onthe expected developments andidentified potential roadblocks.

A KPMG REPORT

23 January - 2009

The Demand-Supply Equation

The big question on every project

developers mind today is likely to be When

will the demand and supply curves for

power cross each other?.

While the country is facing a very signifi-

cant power deficit today to the tune of

20,000 MW (18 percent peak deficit), there

are plans for very large supply additions

going forward. Until the Xth Plan (FY 2007),

the 5 year plans were dominated by Gov-

ernment capacity additions and constraints

to capacity additions were mainly due to

Government procurement procedures,

equipment sector constraints and project

implementation delays.

Going forward, the constraints would

largely occur on account of fuel sector is-

sues including allotment and development

of coal mines. While over 81 coal mines

have been allotted, delays are being seen

in mine development on account of reasons

ranging from land acquisition, delays in

obtaining Government clearances, multiple

mine allottees for a given mine with differ-

ing viewpoints on mine development plans,

and even lack of mine development capa-

bilities.

As market forces play out in creation of new

capacities, some of the constraints, particu-

larly relating to project management capa-

bilities, equipment procurement and even

technical capabilities related to mining are

expected to ease out.

We, therefore, expect supply side response

to the current deficit to speed up and catch

up with the demand curve during the XIIth

Plan.

The Government would still have a very im-

portant role to play if this has to be achieved

sooner than later. One, it should evolve a

more efficient and transparent solution to

coal mine allocation and two, the proce-

dures related to Government clearances

should be further streamlined.

The recent turmoil in the financial and com-

modity markets has been a cause for con-

cern and there are apprehensions about the

extent to which this would delay the cross-

over point of demand and supply. Financ-

ing for new projects is a challenge in the

current environment.

However, assuming that the effects of the

current turmoil will last for 12-18 months,

we expect that the overall impact on the

cross-over point would be to a lesser ex-

tent, as supply will eventually catch up and

the demand side impact would also be

present during the current slowdown.

Our estimate is that the cross-over is likely

to happen in the timeframe FY 2015 to FY

2017.

This is based on an assumption of GDP

growth rate of 8 percent till 2017.

The Role of Power Markets

Power markets have an important role to

play in making the country achieve this ca-

pacity requirement.

The phenomenon of aggressive merchant

plant build-up can already be attributed to

short-term price signals in the power mar-

ket today. Short term power prices are at

times as high as INR 8.0/kwh with the av-

erage price for FY 2007-08 being INR 4.50/

kwh.

The existence of a power market has meant

that merchant plants have been able to find

a market for sale of their produce and

thereby it has become easier to justify vi-

ability and achieve financial closure.

In the short run, it has also increased effi-

ciency of utilization of generation assets by

trying to match surpluses with deficits.

The trading market got a further boost in

February 2007, when CERC issued its

Guidelines for grant of permission for set-

ting up and operation of a Power Exchange.

Till date, the central regulator has granted

A KPMG REPORT

Demand

Supply

Supply (Impact of

Financial Market Crisis)

January - 2009 24

permission to two applicants; the Multi

Commodity Exchange led India Energy Ex-

change (IEX) and the National Commodity

& Derivatives Exchange led Power Ex-

change of India (PXI).

The IEX started operations in June 2008.

According to the CERCs Market Monitor-

ing Report for the month of August 2008,

~ 5 percent of short-term trading transac-

tions were done through the IEX, ~ 57 per-

cent was traded through bilateral contracts

and ~ 38 percent through the UI route.

Though this represents a small percentage

of the total transactions, the demand for

such a platform can be judged from the

quick ramp-up of volumes traded on these

power exchanges; while the IEX has re-

ceived total purchase bids for more than

2,000 Million Units (MUs) since its incep-

tion on June 27, 2008 the PXI received pur-

chase bids to the tune of 63 MUs on its first

day of operation (October 23, 2008).

The availability of such a platform is likely

to provide a boost for sector development

since it acts as an open and transparent

platform for buyers and sellers and simul-

taneously provides a price signal for upcom-

ing generation plants.

The other benefit of a vibrant trading mar-

ket is that this could lead to the evolution

of contracting strategies of utilities. Cur-

rently, the contracting behavior of utilities

in India involves long-term base load con-

tracting.

As power market liquidity improves, con-

tracting behaviors are likely to change to

reflect different types of contracts for base

load and peak load requirements as well

as for long term, medium term and short

term requirements.

Key Enablers for Deepening

the Power Market

In order for the power markets to deepen,

the country needs rapid addition of new ca-

pacity so that there can be adequate trade-

able stock of power.

Merchant plant developers face certain dif-

ficulties in achieving financial closure.

These include assurance of fuel supply,

comfort of a certain minimum level of power

off-take and comfort that transmission

bottlenecks will not be constraints.

The Government has to facilitate fuel ac-

cess and market opening through distribu-

tion open access. Market forces are then

likely to play out to build capacity.

Some of the key enablers to overcome these

are as follows:

Transparent and speedy process for coal

allocation

The Ministry of Power (MoP) in order to

facilitate capacity addition through MPPs,

has been coordinating with the Ministry of

Coal to identify coal linkages (for 1000 MW

plant) and coal blocks (for 500 - 1000 MW

plant) for allotment to such plants.

However, the framework for such fuel allo-

cation is yet to be notified and this uncer-

tainty is causing delays in plans for new

capacities.

A KPMG REPORT

25 January - 2009

Strengthening of the national transmission

grid and efficient transmission access and

pricing Uncertainties in availability of trans-

mission system capacities had been a con-

cern for some of the MPPs who are not sure

of their power off takers.

A large portion of new capacity (approxi-

mately 30 percent) is coming in the coal belt

states while the demand centers are in the

North and West of the country.

According to the CEA Plan, the incremen-

tal inter-regional power transfer capacity

will be 21,000 MW by 2012. Building this

out in a timely manner is critical for the

power market to function effectively.

To augment transmission networks, signifi-

cant investments are required. Unlike

power generation, capacity addition in

power transmission through the competi-

tive bidding route has been slower and till

date only two projects6 have been awarded

to private developers. Considering the ur-

gent need to augment the transmission net-

work in India, the MoP has taken steps to

speed up the bidding process.

The ministry has now issued draft Standard

Bid Documents for selection of Transmis-

sion Service Provider. The MoP has also no-

tified PFC and REC to act as the Bid Pro-

cess Coordinators to undertake the bidding

for a few identified projects.

Retail market opening through distribution

open access

Freedom and ease of getting open access

A KPMG REPORT

down to the retail consumer level is the last

leg in the development of a fully competi-

tive power market and will likely ultimately

lead to depth in the power market.

Today, merchant power developers have to

depend largely on tenders issued by state

utilities through the Case 1 route to tie up

capacities through long-term contracts.

This is essential for them to get the com-

fort of minimum off-take and achieve finan-

cial closure. However, if the retail segment

were to open up, then access to large cus-

tomers would have provided an alternate

option for tie-up on medium to long-term

basis.

Merchant developers could then be proac-

tive in identifying buyers to make their

projects viable rather than wait for tenders

to be floated and procurement processes

to be completed for setting up power

projects. This could speed up capacity ad-

dition. Most of the SERCs had fixed a

timeline of end 2008 for opening up the dis-

tribution open access for consumers with

connected load of less than 1 MW.

January - 2009 26

Further, taking cues from the National Tar-

iff Policy, few state regulators have passed

orders for reduction of cross-subsidy sur-

charge in the recent past.

This will likely promote open access as re-

duction in cross-subsidies will likely help

maintain the attractiveness of a cheaper

power source.

Few regulators like the Maharashtra State

Electricity Regulatory Commission have

kept a zero level of cross-subsidy surcharge

so as to promote competition.

While the retail market represents a

miniscule proportion of the power market

currently, this will likely increase going for-

ward. As the demand-supply gap begins to

narrow down, competitive advantage will

likely begin to shift towards access to cus-

tomers. In some states, this is likely to hap-

pen sooner.

State Cross-subsidy Surcharge

Maharashtra INR 0.00/kWh

Delhi * INR 0.00/kWh

Gujarat INR 0.37/kWh

Source: Open-access orders of SERCs

* Only for Domestic category consumers

Generators and power players would do

well to start planning to develop their ca-

pabilities and strengthening their presence

in this area as the retail supply segment

begins to open up.

Once we overcome the supply deficit and

retail compe- tition establishes

freedom of c h o i c e

in its true sense a n d

availability of products and information

symmetry among consumers; we believe

the inflection point can be reached.

A well functioning power market can also

go a long way in helping ensure that the

prolonged history of power deficit in the

country does not repeat itself in future.

A KPMG REPORT

27 January - 2009

(18percent peak deficit) is thepower deficit faced by thecountry today.

will bethe

incremental inter-regional powertransfer capacity by 2012,according to the CEA Plan.Building this out in a timelymanner is critical for the powermarket to function effectively.

is thehigh

point for short term prices withthe average price for FY 2007-08being INR 4.50/kwh. So, thephenomenon of aggressivemerchant plant build-up canalready be attributed to short-term price signals in the powermarket today.

ofnew

capacity is needed in order for thepower markets to deepen within thecountry so that there can beadequate trade-able stock of power.

20,000 MWINR 8.0/kwh

Rapid addition21,000 MW

January - 2009 28

KPMG recently concluded astudy of the Indian CEO/CXO

covering around 70 suchrespondents aimed at

understanding the position ofIndian business leaders on theissue of climate change. The

study covered a wide range ofindustries with the aim of

understanding their level ofinterest, knowledge and

preparedness on the issue ofclimate change and how itimpacts their businesses.

A KPMG REPORT

29 January - 2009

The study revealed a high level of

awareness (83 percent) amongst

Indian businesses on the issue of

climate change. The intent for action on

their part was encouraging, with 48 per-

cent of respondents perceiving climate

change as a crucial issue that should be

near the top of the business agenda.

The industry captains also felt that India

should be leading the way (65 percent) in

action against climate change. However,

the leadership role in bringing about change

in the areas of education, leading by ex-

ample and adoption of technology was

largely left to the Government.

Significantly, businesses are of the opinion

that the Government is currently not doing

enough in these areas. However, the prime

motivation for action by businesses was the

need to comply with expected regulation,

though there were other factors that are

also catalysts for change. The benefit of the

whole community and the desire to align

with a global trend of climate friendly busi-

ness practices emerged as other significant

influences.

Whilst a number of businesses claim to be

aware of the need to reduce their carbon

impact and believe they are taking steps

towards it, only 21 percent of respondents

have taken the crucial first step of measur-

ing their carbon footprint. Further, whilst

94 percent of businesses undertake the sig-

nificant step of using energy efficient ap-

pliances, much fewer businesses are en-

gaged in other primary drivers of emission

reduction.

Key Drivers for Carbon Sen-

sitive Growth in the Indian

Power Sector

The thermal power industry which is the

single largest contributor of the Green-

house Gas (GHG) emissions globally -

started largely as a reluctant player to in-

troduce GHG mitigating measures. How-

ever, today it is considered as a central is-

sue, for these units to baseline their emis-

sion levels and make efforts to reduce them.

The reasons vary from existence of a car-

bon tax or outright non-approval to set up

these units in some of the annex 1 coun-

tries. Even in developing countries like In-

dia it is recognised as a key requirement

which is reflected in the National Action Plan

where GHG emission from thermal power

has been accorded the highest priority.

Multiple Drivers for Change

The need for the power sector in India to

explicitly account for emissions in the gen-

eration of electricity and to actively develop

alternative sources of energy comes from

a combination of the following factors.

Emission-Intensity of Power Generation in

India

The power sector is the largest source of

GHG emissions in India, estimated to con-

tribute approximately 40 percent of total

emissions. This is significantly higher than

the global average contribution of this sec-

tor, which is estimated to be 25 percent.

This can be attributed to a large extent, to

the dominance of fossil fuels in the fuel-mix

of Indian power stations, with coal gener-

ating 72 percent of utility supplied elec-

tricity in the country. Global attention is

likely to shift to India and China post 2012

since their collective cumulative emission

levels by 2030 are likely to be more than

that of the US or EU.

Pursuit of Energy Security and Access to

Energy Resources

Geo-political events of the early 21st cen-

tury, most notably those in Iraq and Rus-

sia, have underlined the importance of en-

ergy security for preserving a countrys

economic growth, sovereignty and stabil-

ity.

Indias current options for base-load power,

namely coal and nuclear, do not provide

complete energy security owing to their

reliance on raw material imports.

In the case of nuclear power, the numer-

ous stumbling blocks overcome in the re-

cently concluded 1-2-3 agreement highlight

the vulnerabilities of complete reliance on

nuclear technology for base-load power.

Issues with the quality and availability of

domestic coal is expected to increase the

demand-supply gap in the future. Thus im-

ported coal is likely to constitute a signifi-

cant portion of coal utilization for power

generation in India.

Renewable energy sources, by their very

nature and design, are far more decentral-

ized and afford the host country with almost

complete autonomy in electricity genera-

tion. A greater uptake of renewable energy

is not only desirable for its environmental

benefits, but can also go a long way in

achieving the countrys stated primary aims

of energy security, economic growth and

poverty alleviation. This would likely vindi-

cate Indias position in international climate

negotiations, which is based on the pursuit

of these very aims, at the expense of ac-

cepting binding emission targets.

Thus, a diversification of the energy source

base through expansion of renewable

sources would be a useful tool for mitigat-

ing potential supply risks and augment

Indias energy security and self-reliance.

The Nature of Electricity as an Intermedi-

ate Good

The nature of electricity as an intermedi-

ate good which is used by industries in the

January - 2009 30

A KPMG REPORT

production process implies that the higher

the emission-intensity of the electricity sup-

plied by the grid, the larger is the carbon

footprint of the end product. This is because

electricity consumption is a necessary com-

ponent of the scope of the carbon footprint

of a product.

This becomes particularly important in the

context of proposals by US, UK and Austra-

lia to impose import restrictions on goods

manufactured in countries with less-strin-

gent environmental regulation, such as In-

dia. These measures, designed to prevent

carbon leakage, may take the form of a car-

bon tax or a requirement to purchase emis-

sion permits.

As such, the penalties on goods manufac-

tured in India would be commensurate to

the emission-intensity of the production

process, including electricity, used in their

manufacture.

Thus, it is in the interest of a wide variety

of manufacturing and service sectors of the

economy that the emission-intensity of the

power sector is rationalized as far as pos-

sible.

Benefits of Carbon Sensitive Growth

It is evident that carbon sensitive growth

in power generation is beneficial from the

point of view of mitigating the various risks

outlined above.

Whilst this is a compelling reason for con-

certed, rapid change in itself, the case for

explicit action is strengthened when the

potential benefits afforded by this expan-

sion in the market for green energy are

taken into account.

Employment Generation

It has been established that renewable

energy has the potential to generate con-

siderable number of jobs when compared

with employment opportunities in fossil fu-

els. This is evidenced by international ex-

perience in China, where a large popula-

tion is already employed in solar thermal

making and installing products such as so-

lar water heaters. In Nigeria, a bio fuels

industry based on cassava and sugar cane

crops has generated significant employ-

ment.

Positive Externalities

Investments in renewable energy technolo-

gies, apart from providing the direct ben-

efits outlined above, can spur complimen-

tary growth in other sectors through posi-

tive externalities. The call by India at the

G-8 summit in July for increased global co-

operation in the areas of carbon capture,

development of low cost solar

photovoltaics and energy storage have the

potential to spur an uptake in research and

development and education in a range of

industries and ancillaries related to these

technologies. Further, the countrys pro-

posed joint ventures in bio-energy, includ-

ing biomass and biogas-based power gen-

eration, built-in environment and distributed

generation may also lead to a host of ben-

efits for associated industries. Thus, not

only is carbon sensitive growth in the power

sector prudent from the view of mitigating

potential risks, but the benefits of quick,

concerted action now also have the poten-

tial for significant payoffs across the

economy.

Interventions to effect change

India is expected to become the third larg-

est emitter of GHG after US and China in

the next 10 years. Also, given the fact that

most of our carbon stocks are likely to build

up in the next 25 years, it is important that

we take measures to mitigate emissions.

Thus, moving from the largely accepted

point of departure of Indias need to curb

its emissions (for a multitude of reasons),

interventions in the power sector can be

justified as being both, effective (the power

sector is the largest source of GHG emis-

sions in India) as well as efficient (impact-

ing a large number of upstream and down-

stream economic agents).

With the power sector accounting for ap-

proximately one fourth of total CO2 emis-

sions globally and being one of the foremost

targets of proposed sectoral caps, a con-

certed effort to reduce the Indian power

31 January - 2009

sectors emission intensity would be timely

and prudent. The imperatives of change for

the Indian power sector emanate from the

aforementioned sources through a range

of vehicles, which may take one or more of

the following forms:

Carbon Tax

The Energy Coordination Committee has

mulled a proposal to impose a carbon tax

on polluting power stations in the country.

Such a tax is widely prevalent in Europe in-

cluding in the UK. The proposed system is

likely to start by taxing power plants emit-

ting above a certain accepted level (which

still needs to be determined) and allowing

them to pass on this cost to consumers for

a specified period of time (e.g. 5 years).

However, the accepted level of emissions

is likely to decline over time, thereby rais-

ing the bar and forcing plants to achieve

ever-increasing levels of efficiency. After

the expiry of the initial indemnity peiod,

plants emitting more than the dynamically

reducing efficiency level will be taxed and

not be allowed to pass on this additional

cost to the consumer. They will then have

to either shut down (because operations

become unprofitable after the tax), imple-

ment abatement measures to reduce emis-

sions or pay the additional tax / purchase

emission allowances from other more-effi-

cient plants in order to continue operating.

In this manner, power plants have an eco-

nomic incentive to evolve towards cleaner

production methods. Such a system would

fundamentally affect the operation of ev-

ery power station in India and is likely to

have far-reaching effects on industry.

The impact at the level of the overall

economy however, will be determined

largely by the use of the tax revenues thus

collected, and will be discussed at a later

stage.

Stakeholder Pressure

Ever-increasing accuracy in climate theory

and modelling and an accumulation of com-

pelling evidence have brought increasing

public attention to the issue of climate

change and intensified the calls for action.

Whilst public opinion around environmen-

tal issues in India has been relatively weak

in the past, the historical record of populist

pressure vis--vis social and environmen-

tal issues demonstrates that pressure for

change from customers, investors and em-

ployees does not grow at a steady state,

but rather increases exponentially once a

critical mass is achieved. As such, the In-

dian power sector would do well to heed to

the still-nascent calls for action from the

local public domain, given the recent expe-

riences in the same industry in US, a coun-

try which is considered as the leader of the

environmental movements.

A poignant example of this increasing pub-

lic pressure in US is the veto of the expan-

sion of a power plant in Kansas on environ-

mental grounds. The governor of the state

successfully vetoed a bill allowing expan-

sion of the power plant after the project

failed to secure a permit from the State

Department of Health and Environment on

the grounds that it would produce 11 mil-

lion tonnes of CO2 annually. Despite at-

tempts by the legislature to override the

veto, the decision still stands and the

project is not allowed to commence.

Similarly, in an unprecedented move in the

albeit environmentally-conscious state of

California, the city of San Francisco is striv-

ing to oust its existing power utility as its

future supplier on the grounds that it uses

too little renewable energy. This is envi-

sioned to be achieved through tabling

Proposition H, which would require the city

to get 51 percent of electricity from renew-

able sources by 2017, and 75 percent by

2030. The decision to oust the existing util-

ity, PG&E on the stated grounds is even

more significant when considered in the

January - 2009 32

light of the fact that 11.4 percent of the

utilitys electricity came from renewable

sources, which is far greater than the na-

tional average.

Finally, the proposal tabled by former Vice

President Al Gore that called for all of USs

energy to be procured from renewable

means in the next ten years has won sup-

port from both presidential candidates.

Whilst it is unclear whether the next Presi-

dency would follow through with this radi-

cal and ambitious proposition, it signals an

important and definite shift in policy direc-

tion in the worlds biggest polluter. Thus,

even though customers and investors in the

Indian power sector are not yet vociferous

in their calls for change, the industry would

be well served to learn from the lessons of

a country such as US, long regarded as en-

vironmentally irresponsible. As such, it is

in their best interests to make greater

strides towards securing a larger propor-

tion of electricity supplies from renewable

sources and reducing emissions from cur-

rent methods.

Emissions Trading Schemes and Interna-

tional Collective Agreements

The recently passed the UK Climate Change

Bill may have an important bearing on all

sectors and industries of the economy not

only in the UK, but potentially in the rest of

the world, including India. Widely regarded

as the worlds first legally binding frame-

work for the transition to a low carbon

economy, the bill commits to reducing the

UKs emissions by 80 percent by 2050 from

a 1990 baseline. Importantly, whilst the ini-

tial draft of the bill did not include emis-

sions from international aviation and ship-

ping, backbench pressure has compelled

the Government to take account of pro-

jected emissions from these industries

when setting the five yearly budgets. How-

ever it will not force the industry to make

particular cuts because as yet there is no

way to measure accurately each countrys

contribution to international transport emis-

sions. Whilst this may temporarily immunise

the aviation and shipping industries, it im-

plies that all other sectors of the economy

in the UK will be faced with more stringent

targets to absorb the additional emissions

included in the purview of the budget. Thus,

the cap-and-trade system that all sectors

of the economy are subject to will likely

become more stringent, requiring deeper

and more frequent cuts. Should such a cap-

and-trade system linked to the European

ETS be extended under a subsequent inter-

national collective agreement which in-

cludes India, the sheer size of the Indian

power sector and its large relative and ab-

solute contribution to emissions would

make it vulnerable to intense pressure for

urgent reform.

How businesses should re-

spond to this

A structured response at individual busi-

ness leaders level would involve the fol-

lowing components:

Measurement of the carbon footprint of

the business

Projecting the likely carbon footprint if

the business continues to grow under the

Business As Usual (BAU) scenario

Analysis of the risk of climate change is-

sues to the sector including upcoming

regulations and the business

Identification of opportunities within the

business, and beyond (CDM projects,

clean technologies, renewable sources,

etc.) to maintain growth, but with a dif-

ferent approach

Preparation of a time bound action plan

for reducing the carbon footprint com-

pared to the projected carbon footprint

Institutionalize the action plan in busi-

ness processes

Institutionalize a measurement and veri-

fication system to monitor progress

against the plan

Periodically report progress to stakehold-

ers.

A KPMG REPORT

33 January - 2009

from now,India is

expected to become the thirdlargest emitter of GreenhouseGas (GHG) after US and China.

respondentsof a survey

conducted by KPMG have takenthe crucial first step of measuringtheir carbon footprint. According tothe survey, number of businessesclaim to be aware of the need toreduce their carbon impact andbelieve they are taking stepstowards it.

is when,mostlikely, India and

China, post 2012 , willcollectively have acumulative emission levelmore than that of the US orEU.

10 yearsis thecontribution

of the power sector in India, of thetotal, making the sector the largestsource of GHG emissions. This issignificantly higher than the globalaverage contribution of this sector,which is estimated to be 25percent.

40 percent

Only 21%

2030

January - 2009 34

With a PowerSector orderbooking worthRs.41,069 Crore forsupply andinstallation of14,556 MW ofgeneratingequipment as wellas services andsupply of spares,which claimed to bethe highest everorder booked byPower Sector infinancial andphysical terms,Bharat HeavyElectricals Limited(BHEL) is looking ata new era throughup-gradation oftechnology and aforay into newproduct segment &ratings like 660 MWSupercriticalthermal sets,Advance Class 9 FAGT CCPP, newrating of 270 MW,525 MW, 600 MWTurbine Generatorand SecondaryPiping for NuclearSet based on FastBreeder Reactor. KRavi Kumar, CMD,BHEL sheds light.

35 January - 2009

BHEL is one among the

Navaratnas of India that has

contributed immensely for the

development of the Indian

Power Sector, Could you please elaborate

on your companys performance in terms

of business in the last financial year and

how has it improved from the previous?

We have reported turnover of Rs. 21,401

Crore in 2007-08, registering a growth of

14% over the previous year, while PAT rose18%, to Rs.2,859 Crore, against Rs 2414Crore in the previous year. Order inflow

during the year FY07-08 was at Rs 50270

Crore. Our outstanding order book in-

creased 55% and stood at Rs 85,200 Crore,the highest ever both in physical and finan-

cial terms. During the year, capital invest-

ment of Rs.726 Crore was made towards

augmentation of manufacturing capacities

and modernization of facilities in manufac-

turing units and at power project sites reg-

istering an increase of 100% comparedwith capital investment of Rs.362 Crore

during FY06-07. BHEL spent Rs.464 Crore

on R&D during FY07-08, which i