POWER SECTOR REPORT IIPM CHENNAI

POWER INDUSTRY

ANALYSIS

Kaavya Ramachandran

Saravana Pandian

Deepan Babu

Jeeender lal

Saravanan

Pusparaj

Yuvaraj

Pankaj

PGP/FW/07-09/F3

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Contents

Introduction .................................................................................................................................................. 4

Growth of Indian power sector ..................................................................................................................... 4

Structure of power supply industry .............................................................................................................. 4

Generation mix ............................................................................................................................................. 7

Emergence of regional power systems ......................................................................................................... 9

Utilisation of installed generating capacity .................................................................................................. 9

Private sector .............................................................................................................................................. 10

Speedy environmental clearance................................................................................................................ 11

Viability of SEBs ........................................................................................................................................... 11

Regulatory bodies ....................................................................................................................................... 11

Power sector reforms ................................................................................................................................. 12

Capacity addition during 9th plan ................................................................................................................ 13

Power supply position at the beginning of 9th plan ................................................................................ 13

Ninth plan capacity addition programme ............................................................................................... 13

SWOT analysis ............................................................................................................................................. 15

Strengths ................................................................................................................................................. 15

Weakness ................................................................................................................................................ 16

Crude prices ........................................................................................................................................ 16

Lack of freedom .................................................................................................................................. 16

Government: Hands-off ...................................................................................................................... 17

Opportunities .......................................................................................................................................... 17

Equity Oil ............................................................................................................................................. 17

Natural Gas ......................................................................................................................................... 17

Threats .................................................................................................................................................... 17

Competition ........................................................................................................................................ 17

Continuing government interference ................................................................................................. 18

Environmental impact of thermal power stations ...................................................................................... 19

Air pollution ............................................................................................................................................ 19

Nitrogen Oxide (NOx) .............................................................................................................................. 19

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Sulphur Oxide .......................................................................................................................................... 19

Particulate matter ................................................................................................................................... 20

Water pollution ....................................................................................................................................... 20

Land degradation .................................................................................................................................... 20

Noise pollution ........................................................................................................................................ 21

Technology upgradation ............................................................................................................................. 22

Clean coal technologies .......................................................................................................................... 22

Refurbishment of existing thermal power stations ................................................................................ 22

Power Sector Reforms ................................................................................................................................ 24

At the Wrong End.................................................................................................................................... 25

Rural Electrification ..................................................................................................................................... 28

Lessons for the Future ................................................................................................................................ 30

Exhibits ........................................................................................................................................................ 32

4

Introduction

The power sector has registered significant progress since the process of planned development

of the economy began in 1950. Hydro -power and coal based thermal power have been the main

sources of generating electricity. Nuclear power development is at slower pace, which was introduced,

in late sixties. The concept of operating power systems on a regional basis crossing the political

boundaries of states was introduced in the early sixties. In spite of the overall development that has

taken place, the power supply industry has been under constant pressure to bridge the gap between

supply and demand. Growth of Indian power sector

Power development is the key to the economic development. The power Sector has been

receiving adequate priority ever since the process of planned development began in 1950. The Power

Sector has been getting 18-20% of the total Public Sector outlay in initial plan periods. Remarkable

growth and progress have led to extensive use of electricity in all the sectors of economy in the

successive five years plans. Over the years (since 1950) the installed capacity of Power Plants (Utilities)

has increased to 89090 MW (31.3.98) from meagre 1713 MW in 1950, registering a 52d fold increase in

48 years. Similarly, the electricity generation increased from about 5.1 billion units to 420 Billion units –

82 fold increase. The per capita consumption of electricity in the country also increased from 15 kWh in

1950 to about 338 kWh in 1997-98, which is about 23 times. In the field of Rural Electrification and

pump set energisation, country has made a tremendous progress. About 85% of the villages have been

electrified except far-flung areas in North Eastern states, where it is difficult to extend the grid supply. Structure of power supply industry

In December 1950 about 63% of the installed capacity in the Utilities was in the private sector

and about 37% was in the public sector. The Industrial Policy Resolution of 1956 envisaged the

generation, transmission and distribution of power almost exclusively in the public sector. As a result of

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this Resolution and facilitated by the Electricity (Supply) Act, 1948, the electricity industry developed

rapidly in the State Sector. In the Constitution of India "Electricity" is a subject that falls within the concurrent jurisdiction

of the Centre and the States. The Electricity (Supply) Act, 1948, provides an elaborate institutional frame

work and financing norms of the performance of the electricity industry in the country. The Act

envisaged creation of State Electricity Boards (SEBs) for planning and implementing the power

development programmes in their respective States. The Act also provided for creation of central

generation companies for setting up and operating generating facilities in the Central Sector. TheCentral

Electricity Authority constituted under the Act is responsible for power planning at the national level. In

addition the Electricity (Supply) Act also allowed from the beginning the private licensees to distribute

and/or generate electricity in the specified areas designated by the concerned State Government/SEB. During the post independence period, the various States played a predominant role in the

power development. Most of the States have established State Electricity Boards. In some of these

States separate corporations have also been established to install and operate generation facilities. In

the rest of the smaller States and UTs the power systems are managed and operated by the respective

electricity departments. In a few States private licencees are also operating in certain urban areas. From, the Fifth Plan onwards i.e. 1974-79, the Government of India got itself involved in a big

way in the generation and bulk transmission of power to supplement the efforts at the State level and

took upon itself the responsibility of setting up large power projects to develop the coal and

hydroelectric resources in the country as a supplementary effort in meeting the country’s power

requirements. The National thermal Power Corporation (NTPC) and National Hydro-electric Power

Corporation (NHPC) were set up for these purposes in 1975. North-Eastern Electric Power Corporation

(NEEPCO) was set up in 1976 to implement the regional power projects in the North-East. Subsequently

two more power generation corporations were set up in 1988 viz. Tehri Hydro Development

Corporation (THDC) andNathpa Jhakri Power Corporation (NJPC). To construct, operate and maintain the

inter-State and interregional transmission systems the National Power Transmission Corporation

(NPTC) was set up in 1989. The corporation was renamed as POWER GRID in 1992. The policy of liberalisation the Government of India announced in 1991 and consequent

amendments in Electricity (Supply) Act have opened new vistas to involve private efforts and

investments in electricity industry. Considerable emphasis has been placed on attracting private

investment and the major policy changes have been announced by the Government in this regard which

are enumerated below: The Electricity (Supply) Act, 1948 was amended in 1991 to

generating companies for setting up power generating facilities and selling the power in bulk to the grid

or other persons.

Financial Environment for private sector units modified to allow liberal capital structuring and

attractive return on investment. Up to

permitted for projects set up by foreign private investors in the Indian Electricity Sector.

Administrative & Legal environment modified to simplify the

projects.

Policy guidelines for private sector participation in the

plants issued in 1995.

In 1995, the policy for Mega power projects

to more than one state introduced. The Mega projects to be set up in the regions having coal and hydel

potential or in the coastal regions based on imported fuel. The Mega policy has since been refined

andPower Trading Corporation (PTC)

Projects. PTC would purchase power from the Mega Private Projects and sell it to the identified SEBs.

In 1995 GOI came out with

the quick capacity addition so as to avert a severe power crisis. Liquid fuel linkages (Naphtha) were

approved for about 12000 MW Power plant capacity. The non

orimulsion have also been permitted for power generation.

GOI has promulgated Electricity Regulatory Commission Act, 1998

Regulatory bodies both at the Central level and at the State level viz. The

Commission (CERC) and the State Electricity Regulatory Commission

levels respectively. The main function of the CERC are to regulate the tariff of generating companies

owned or controlled by the Central Government, to regulate the tariff of generating companies, other

than those owned or controlled by the Central Government, if such generating companies enter into or

otherwise have a composite scheme for generation and sale of electricity in more than one State to

regulate the inter-state transmission of energy including tariff of the

inter-state bulk sale of power and to aid & advise the Central Government in formulation of tariff policy.

icity industry. Considerable emphasis has been placed on attracting private

investment and the major policy changes have been announced by the Government in this regard which The Electricity (Supply) Act, 1948 was amended in 1991 to provide for creation of

for setting up power generating facilities and selling the power in bulk to the grid

Financial Environment for private sector units modified to allow liberal capital structuring and

attractive return on investment. Up to hundred percent (100%) foreign equity participation can be


Administrative & Legal environment modified to simplify the procedures for clearances of the

Policy guidelines for private sector participation in the renovation & modernisation

Mega power projects of capacity 1000 MW or more and supplying power



andPower Trading Corporation (PTC) incorporated recently to promote and monitor the Mega Power


liquid fuel policy permitting liquid fuel based power plants to achieve

acity addition so as to avert a severe power crisis. Liquid fuel linkages (Naphtha) were

approved for about 12000 MW Power plant capacity. The non-traditional fuels like condensate and

orimulsion have also been permitted for power generation.

Electricity Regulatory Commission Act, 1998 for setting up of Independent

Regulatory bodies both at the Central level and at the State level viz. The Central Electricity Regulatory

State Electricity Regulatory Commission (SERCs) at the Central and the State



or controlled by the Central Government, if such generating companies enter into or


state transmission of energy including tariff of the transmission utilities, to regulate

state bulk sale of power and to aid & advise the Central Government in formulation of tariff policy.

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icity industry. Considerable emphasis has been placed on attracting private

investment and the major policy changes have been announced by the Government in this regard which

provide for creation of private

for setting up power generating facilities and selling the power in bulk to the grid

Financial Environment for private sector units modified to allow liberal capital structuring and an

participation can be


procedures for clearances of the

renovation & modernisation of power

of capacity 1000 MW or more and supplying power



ly to promote and monitor the Mega Power


permitting liquid fuel based power plants to achieve

acity addition so as to avert a severe power crisis. Liquid fuel linkages (Naphtha) were

traditional fuels like condensate and

for setting up of Independent

Central Electricity Regulatory

at the Central and the State



or controlled by the Central Government, if such generating companies enter into or


transmission utilities, to regulate

state bulk sale of power and to aid & advise the Central Government in formulation of tariff policy.

The CERC has been constituted on 24.7.1998.

The main functions of the SERC would be to determine the tariff for

grid or retail, to determine the tariff payable for use by the transmission facilities to regulate power

purchase and procurement process of transmission utilities and distribution utilities, to promote

competition, efficiency and economy in the activities of the electricity industries etc. Subsequently, as

and when each State Government notifies, other regulatory functions would also be assigned to SERCs.

The Electricity Laws (Amendment) Act, 1998

separate activity for inviting greater participation in investment from public and private sectors. The

participation by private sector in the area of transmission is proposed to be limited to construction and

maintenance of transmission lines for operation under the supervision and control of Central

Transmission Utility (CTU)/State Transmission Utility (STU). On selection of the private company, the

CTU/STU would recommend to the CERC/SERC for issue of transmission licence to the private

The Electricity Laws (Amendment) Act, 1998 provides for creation of Central and State

Transmission utilities. The function of the

of energy through inter-state transmission system a

coordination relating to inter-state transmission system with State Transmission Utilities, Central

Government, State Governments, generating companies etc. Power Grid Corporation of India Limited

will be Central Transmission Utility.

The function of the State Transmission Utility

through intra-state transmission system and discharge all functions of planning and coordination

relating to intra-state transmission system

generating companies etc. Generation mix

The share of hydel generation in the total generating capacity of the country has declined from

34 per cent at the end of the Sixth Plan to 29 per cent at the

per cent at the end of Eighth Plan. The share is likely to decline even further unless suitable corrective

measures are initiated immediately. Hydel power projects, with storage facilities, provide peak time

support to the power system. Inadequate hydel support in some of the regions is adversely affecting the

The CERC has been constituted on 24.7.1998.

The main functions of the SERC would be to determine the tariff for electricity wholesale bulk,



and economy in the activities of the electricity industries etc. Subsequently, as


Electricity Laws (Amendment) Act, 1998 passed with a view to make transmission as a



ines for operation under the supervision and control of Central


CTU/STU would recommend to the CERC/SERC for issue of transmission licence to the private


Transmission utilities. The function of the Central Transmission Utility shall be to undertake transmission

state transmission system and discharge all functions of planning and

state transmission system with State Transmission Utilities, Central


Transmission Utility.

State Transmission Utility shall be to undertake transmission of energy

state transmission system and discharge all functions of planning and coordination

state transmission system with Central Transmission Utility, State Governments, The share of hydel generation in the total generating capacity of the country has declined from

34 per cent at the end of the Sixth Plan to 29 per cent at the end of the Seventh Plan and further to 25.5



ort to the power system. Inadequate hydel support in some of the regions is adversely affecting the

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electricity wholesale bulk,



and economy in the activities of the electricity industries etc. Subsequently, as


ransmission as a



ines for operation under the supervision and control of Central


CTU/STU would recommend to the CERC/SERC for issue of transmission licence to the private company.


shall be to undertake transmission

nd discharge all functions of planning and

state transmission system with State Transmission Utilities, Central


shall be to undertake transmission of energy

state transmission system and discharge all functions of planning and coordination

with Central Transmission Utility, State Governments,

The share of hydel generation in the total generating capacity of the country has declined from

end of the Seventh Plan and further to 25.5



ort to the power system. Inadequate hydel support in some of the regions is adversely affecting the

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performance of the thermal power plants. In Western and Eastern regions, peaking power is being

provided by thermal plants, some of which have to back down during off peak hours.

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Emergence of regional power systems

In order to optimally utilise the dispersed sources for power generation it was decided right at

the beginning of the 1960’s that the country would be divided into 5 regions and the planning process

would aim at achieving regional self sufficiency. The planning was so far based on a Region as a unit for

planning and accordingly the power systems have been developed and operated on regional basis.

Today, strong integrated grids exist in all the five regions of the country and the energy resources

developed are widely utilised within the regional grids. Presently, the Eastern & North-Eastern Regions

are operating in parallel. With the proposed inter-regional links being developed it is envisaged that it

would be possible for power to flow any where in the country with the concept of National Grid

becoming a reality during 12th Plan Period. Utilisation of installed generating capacity

The size of the generating unit that has been used in the country in coal based power stations

has progressively increased from about 15 MW prior to the era of planned development to 500 MW at

present. With the introduction of new design of generating units, certain difficulties arose in their

efficient operation and maintenance. The availability of coal in the country is such that the higher grades

of coal, which have higher calorific value, have been exhausted and progressively lower grades of coal

are being made available for electricity generation in the power stations. This had resulted into

operational problems with the boilers designed for higher grades of coal and also put more pressure on

coal handling plants etc. As a result of these technical and managerial problems, the utilisation level of

coal based power stations in the country declined in the late 1970s and early 1980s. The all India

Thermal PLF which was as low as 27% at the beginning of First Plan progressively increased to 47.%% by

the year 1963-64 and than declined to around 42% by early seventies. During one year in the seventies

i.e. during 1976-77, the PLF touched 55.4% but this could not be sustained during subsequent years.

Several factors such as inadequate maintenance of generating units, the teething troubles faced in the

operation of the newly introduced 200/210 MW units and the deterioration in the quality of coal

supplied to power stations led to a gradual erosion in the PLF of the thermal power plants during 5th

plan period. During the 6th Plan, Department of Power and Central Electricity Authority undertook a

comprehensive programme to renovate and modernize old units located in different States. The

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performance of 200/210 MW units also begin to stabilize. Concerted efforts were made by Ministry of

Coal to monitor quality of coal supplies to power plants. As a result of all these measures the PLF of

thermal plants registered a gradual improvement during the 7th plan period. The plant load factor of

thermal power stations in the country, which was only 44.2% in 1980-81, increased to 56.5% by the end

of the 7th Plan. The all India Average PLF of the Thermal Power Plants has further increased to 64.4% by

the end of eighth plan. Private sector

The initial response of the domestic and foreign investors to the policy of private participation in

power sector has been extremely encouraging. However, many projects have encountered unforeseen

delays. There have been delays relating to finalization of power purchase agreements, guarantees and

counter-guarantees, environmental clearances, matching transmission networks and legally enforceable

contracts for fuel supplies. The shortfall in the private sector was due to the emergence of a number of

constraints, which were not anticipated at the time the policy was formulated. The most important is

that lenders are not willing to finance large independent power projects, selling power to a monopoly

buyer such as SEB, which is not financially sound because of the payment risk involved if SEBs do not pay

for electricity generated by the IPP. Uncertainties about fuel supply arrangements and the difficulty in

negotiating arrangements with public sector fuel suppliers, which concern penalties for non-

performance, is another area of potential difficulty. It is important to resolve these difficulties and

evolve a framework of policy which can ensure a reasonable distribution of risks which make power

sector projects financially attractive.

The capacity addition programme for the 9th Plan envisaged around 17,588 MW to be added by

private generating companies. In order to achieve the targeted private sector capacity addition during

the Ninth Plan, the following additional facilitating measures have recently been suggested by the

promoters. Most of these have been accepted while some of them are under the consideration of the

Government.

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Speedy environmental clearance

The Ministry of Environment and Forests has agreed to delegate the powers to States for

environmental clearance of: - all co-generation plants and captive plants up to 250 MW;

- Coal based plants up to 500 MW using fluidized technology subject to sensitive areas

restrictions;

- Power stations up to 250 MW on conventional technology.

- Gas/Naphtha based stations up to 500 MW. Viability of SEBs

The financial health of the SEBs will be improved through rationalization of tariff, restructuring

and reforms to make them economically viable and their projects bankable to generate energy on

economic rate, to provide quality services to the consumers and to ensure a fair return to the investors.

This can be best achieved by unbunding single entity (SEBs) and corporatising the same for the above

activities. In this context, some of the States have taken initiative by unbundling their respective SEBs

into separate companies for Generation & Transmission & Distribution. Regulatory bodies

The Government of India has promulgated Electricity Regulatory Commission Act, 1998 for

setting up of Independent regulatory bodies both at the Central level and at the State level viz. The

Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions

(SERCs) at the Central and the State Levels respectively. These regulatory bodies would primarily look

into all aspects of tariff fixation and matters incidental thereto. Current problem of power sector

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The most important cause of the problems being faced in the power sector is the irrational and

unremunerative tariff structure. Although the tariff is fixed and realized by SEBs, the State Governments

have constantly interfered in tariff setting without subsidizing SEBs for the losses arising out of State

Governments desire to provide power at concessional rates to certain sectors, especially agriculture.

Power Supply to agriculture and domestic consumers is heavily subsidized. Only a part of this subsidy is

recovered by SEBs through cross subsidization of tariff from commercial and industrial consumers. The

SEBs, in the process, have been incurring heavy losses. If the SEBs were to continue to operate on the

same lines, their internal resources generation during the next ten years will be negative, being of the

order of Rs.(-) 77,000 crore. This raises serious doubts about the ability of the States to contribute their

share to capacity addition during the Ninth Plan and thereafter. This highlights the importance of

initiating power sector reforms at the earliest and the need for tariff rationalization. Power sector reforms

The Orissa Government was the first to introduce major reforms in power sector through

enactment of Orissa Reforms Act, 1995. Under this Act, Orissa Generating Company, Orissa Grid

Company and Orissa Electricity Regulatory Commission have been formed. Similarly, the Haryana

Government has also initiated reform programme by unbundling the State Electricity Board into

separate companies and Haryana Electricity Regulatory Commission has already been constituted. With a view to improve the functioning of State Electricity Boards, the Government promulgated

the State Electricity Regulatory Commission Act for establishment of Central Electricity Regulatory

Commission at the national level and State Electricity Regulatory Commission in the States for

rationalisation of tariff and the matters related thereto. Subsequent to the enactment of ERC Act, 1998

more and more States are coming up with an action plan to undertake the reform programmes. In this

respect, Governments of Uttar Pradesh, Rajasthan, Madhya Pradesh, Goa, Karnataka and Maharashtra

have referred their proposals for setting up independent regulatory mechanism in their States. The Electricity (Amendment) Act 1998 was passed with a view to make transmission as a



maintenance of transmission lines for operation under the supervision and control of Central

13


CTU/STU would recommend to the CERC/SERC for issue of transmission license to the private company.

In this regard, the Government of Karnataka is the first to invite private sector participation in

transmission by setting up joint-venture company. Other States are also in the process of introducing

the reforms in the transmission sector. In view of the urgent need to reduce transmission and distribution losses and to ensure

availability of reliable power supply to the consumers reforms in the distribution sectors are also been

considered by establishing distribution companies in different regions of the State. The entry of private

investors will be encouraged wherever feasible and it is proposed to carry out these reforms in a phased

manner. The Governments of Orissa and Haryana have already initiated reforms in the distribution

sector by setting up distribution companies for each zone within their States. With these efforts, it is expected that the performance of power sector will improve because of

rationalisation of tariff structures of SEBs and adequate investment for transmission and distribution

sector. Capacity addition during 9th plan

Power supply position at the beginning of 9th plan The total installed capacity at the beginning of 9th Plan i.e. 1.4.97 was 85,795 MW comprising 21,658

MW Hydro, 61,012 MW Thermal including gas and diesel, 2,225 MW Nuclear and 900 MW Wind based

power plants. The actual power supply position at the beginning of the 9th Plan indicates peak shortage of 11,477 MW

(18%) and energy shortage of 47,590 MU (11.5%) on All India basis. To meet the growing demand and

shortages encountered, sufficient capacity would need to be added in subsequent plan periods. Ninth plan capacity addition programme The Working Group on Power, constituted by Planning Commission, in its report of December 1996 had

formulated, a need based capacity addition programme of 57,735 MW for the Ninth Plan which would

by and large meet the power requirements projected in 15th Electric Power Survey Report. However, it

was felt that this capacity addition of 57,735 MW is not feasible and a target for capacity addition of

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40245 MW was fixed for Ninth Five-year plan. The above target was finalised after considering the

status of Sanctioned/ongoing schemes, new projects in pipeline, likely gestation period for completion

of the projects and likely availability of funds. The Sector-wise/type-wise details are given below: Sector-wise / type-wise capacity addition programme during ninth plan (Figures in MW) Sector Hydro Thermal Nuclear Total

Central 3455.0 7574.0 880 11909

State 5814.7 4933.0 --- 10747.7

Private 550.0 17038.5 --- 17588.5

TOTAL 9819.7 29545.5 880.0 40245.2

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SWOT analysis

The energy sector has witnessed mixed news during the current fiscal so far. While crude prices

firmed up in the global market, the government's freeze on prices of petro-products affected margins of

oil companies in 1QFY05.

However, the government took a series of steps starting mid-June including excise duty

reduction and price increases. This was followed by another series of duty cuts (this time excise as well

as custom duties).

Given this backdrop, we feel that there is a compelling reason for a SWOT analysis on the oil sector at

the current juncture.

Strengths

• Developing economy: Historically, demand for petroleum

products has traced the economic growth of the country.

With GDP expected to grow at near 7% in the long-term, the

energy sector would benefit from the same, going forward.

To put things in perspective, diesel sales grew by nearly 12%

(which constitutes 40% of the entire petro-products basket),

petrol sales by 9% and a double-digit growth in LPG (liquefied

petroleum gas) in 1QFY05. While this rate is not likely to

sustain, we expect the industry to witness a 4% growth in the

entire product basket in FY05 and beyond.

• Government decisions: The recent price increases and

also the decision to allow oil companies to increase prices

within a band of 10% augurs well for the industry.

This step is likely to reduce government interference and

provide some autonomy to oil companies when it comes to increasing petrol and diesel prices in order

to protect margins. Further, the duty cuts are also likely to result in reduced under-recoveries by way of

subsidies on LPG and kerosene.

Consumption growth

(MMT) FY01 FY02 FY03 FY04

Diesel 38 36.5 36.6 37.3

(%) change -3.9% 0.3% 1.9%

Petrol 6.6 7 7.6 7.9

(%) change 6.1% 8.6% 3.9%

LPG 7 7.7 8.4 9.3

(%) change 10.0% 9.1% 10.7%

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Customs duties

Excise duty old (%) new (%)

Petrol 26 23

Diesel 11 8

Kerosene 16 12

Excise duties…

Customs duty old (%) new (%)

crude oil 10 10

petrol 20 15

diesel 20 15

LPG 10 5

Kerosene 10 5

Weakness

Crude prices

Nearly 70% of India's crude requirements are fulfilled by imports and this figure is likely to

increase going forward. Crude prices have breached the $45 barrier again and are likely to remain at

around $40 per barrel range.

As per IEA, India is one of the most inefficient countries among developing nations as far as energy

usage is concerned. Such high crude prices are likely to impact margins of oil marketing companies.

Given the political implications, retail prices may continue to lag the rise in input cost.

Lack of freedom

Although the government has decided to provide autonomy to oil companies to increase petrol

and diesel prices within a 10% band, other products such as LPG and kerosene continue to remain under

the government controlled price mechanism.

As per the current estimates, the subsidies on LPG amount to Rs 90 per cylinder after factoring in duty

cuts and that on kerosene is over Rs 6 per litre.

While the government has managed to reduce its share in subsidies, select oil companies are being

forced to absorb the losses.

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Government: Hands-off

Year Subsidies

(Rs) LPG/cylinder Kerosene/litre

2002-03 67.75 2.45

2003-04 45.17 1.63

2004-05 22.85 0.81

Opportunities

Equity Oil

Major oil marketing companies are now venturing into upstream exploration and production activities

so as to secure crude supply.

To put things in perspective, IOC and OIL India are likely to jointly bid for oil fields aboard. At the same

time, ONGC's wholly owned subsidiary, ONGC Videsh (OVL) has acquired stakes in over 9 countries in its

quest to attain the 20 MMT (million metric tonnes) by 2020. This backward integration is an opportunity

for IOC to secure at least 25% of its crude oil requirements for the refineries.

Natural Gas

Natural gas has the potential to be the fuel of the future with

demand outpacing supply by more than two times. Such high scarcity of

natural gas provides a big opportunity for oil companies. The below

mentioned table indicates the allocation to the various core sectors and the

shortage faced by them, thereby giving an idea of the potential for growth.

Although Petronet LNG has now started importing natural gas, the future

holds promise as Reliance Industries' Krishna Godavari Basin goes into

commercial production in FY06 and Shell commences its terminal at Hazira.

More exploration activities are in the pipeline and this could reduce the

country's dependence on crude in the long term.

Threats

Competition

Until FY04, oil-marketing companies had complete control over the downstream marketing business

while private sector players were restricted to only refining.

Supply as a (%)

age of allocation

Supply

Power 52.0%

Fertilizer 65.0%

Others* 51.0%

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However, with entry of private players such as Reliance, Essar Oil and Shell (in the waiting), the sector is

likely to witness increased competition going forward. The oil PSUs had hitherto developed a fortnightly

pricing mechanism, which is likely to discontinue.

The price of petrol and diesel is artificially kept high so as to cross-subsidize LPG and kerosene. Since

private players will not be bound to provide for these subsidies, PSU marketing players are likely to

suffer from lower throughput per outlet.

Continuing government interference

During the first six months of the current fiscal year, the oil marketing companies were refrained from

increasing product prices due to political reasons.

This affected margins of downstream players. Going forward, if the government interference continues,

oil-marketing companies will be at a disadvantage.

Although we believe the industry is likely to witness increased competition, the initial retail rush by

private sector players has slowed down. PSU marketing companies have already stepped up their

expansion plans and to that extent, have created significant entry barriers for private players.

Although throughput per outlet (sales per outlet) is likely to decline in the future, we believe that any

substantial entry of the private players would indirectly benefit the PSUs, as the government's pricing

policy will not hold much water and the market forces would determine pricing.

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Environmental impact of thermal power stations

Thermal Power Stations in India, where poor quality of coal is used, add to environmental

degradation problems through gaseous emissions, particulate matter, fly ash and bottom ash. Growth of

manufacturing industries, in public sector as well as in private sector has further aggravated the

situation by deteriorating the ambient air quality. Ash content being in abundance in Indian coal,

problem of fly ash and bottom ash disposal increase day by day. The fly ash generated in thermal power

station causes many hazardous diseases like Asthma, Tuberculosis etc. Air pollution

Initially, perceptions of objectionable effects of air pollutants were limited to those easily

detected like odour, soiling of surfaces and smoke stacks. Later, it was the concern over long

term/chronic effects that led to the identification of six criteria pollutants. These six criteria pollutants

are sulphur di-oxide (SO2), Carbon Mono-oxide (CO), Nitrogen oxide (NO2), Ozone (O3), suspended

particulates and non-methane hydrocarbons (NMHC) now referred to as volatile organic compounds

(VOC). There is substantial evidence linking them to health effects at high concentrations. Three of them

namely O3, SO2 and NO2 are also known phytotoxicants (toxic to vegetation). In the later part Lead (Pb)

was added to that list. Nitrogen Oxide (NOx)

Most of the NOx is emitted as NO which is oxidised to NO2 in the atmosphere. All combustion

processes are sources of NOx at the high temperature generated in the combustion process. Formation

of NOX may be due to thermal NOxwhich is the result of oxidation of nitrogen in the air due to fuel

NOx which is due to nitrogen present in the fuel. Some of NO2 will be converted to NO3 in the presence

of 02. In general, higher the combustion temperature the higher NOx is produced. Some of NOx is

oxidised to NO3, an essential ingredient of acid precipitation and fog. In addition, NO2absorbs visible

light and in high concentrations can contribute to a brownish discoloration of the atmosphere. Sulphur Oxide

20

The combustion of sulphur containing fossil fuels, especially coal is the primary source of SOx.

About 97 to 99% of SOxemitted from combustion sources is in the form of Sulphur Di-oxide which is a

criteria pollutant, the remainder is mostly SO3, which in the presence of atmospheric water is

transformed into Sulphuric Acid at higher concentrations, produce deleterious effects on the respiratory

system. In addition, SO2 is phytotoxicant. Particulate matter

The terms particulate matter, particulate, particles are used interchangeably and all refer to

finely divided solids and liquids dispersed in the air. Water pollution

Water pollution refers to any change in natural waters that may impair further use of the water,

caused by the introduction of organic or inorganic substances or a change in temperature of the water. In thermal power stations the source of water is either river, lake, pond or sea where from

water is usually taken. There is possibility of water being contaminated from the source itself. Further

contamination or pollution could be added by the pollutants of thermal power plant waste as inorganic

or organic compounds. Land degradation

The thermal power stations are generally located on the non-forest land and do not involve

much Resettlement and Rehabilitation problems. However it's effects due to stack emission etc, on flora

and fauna, wild life sanctuaries and human life etc. have to be studied for any adverse effects. One of

the serious effects of thermal power stations is land requirement for ash disposal and hazardous

elements percolotation to ground water through ash disposal in ash ponds. Due to enormous quantity

of ash content in India coal, approximately 1 Acre per MW of installed thermal capacity is required for

ash disposal. According to the studies carried out by International consultants if this trend continues, by

the year 2014-2015, 1000 sq. km of land should be required for ash disposal only.

Noise pollution

Some areas inside the plant will have noisy equipments such

pumps, milling plant, compressors, boiler, turbine etc. Various measures taken to reduce the noise

generation and exposure of workers to high noise levels in the plant area will generally include:

Silencers of fans, compressors, steam safety valves etc.

Using noise absorbent materials

Providing noise barriers for various areas

Noise proof control rooms

Provision of green belt around the plant will further reduce noise levels

Some areas inside the plant will have noisy equipments such as crushers, belt conveyors, fans,



essors, steam safety valves etc.

Using noise absorbent materials

Providing noise barriers for various areas

Noise proof control rooms

Provision of green belt around the plant will further reduce noise levels

21

as crushers, belt conveyors, fans,



22

Technology upgradation Clean coal technologies

Clean coal technologies offer the potential for significant reduction in the environmental

emissions when used for power generation. These technologies may be utilised in new as well as

existing plants and are therefore, an effective way of reducing emissions in the coal fired generating

units. Several of these systems are not only very effective in reducing SOx and NOx emissions but,

because of their higher efficiencies they also emit lower amount of CO2 per unit of power produced.

CCT's can be used to reduce dependence on foreign oil and to make use of a wide variety of coal

available. Blending of various grades of raw coal along with beneficiation shall ensure consistancy in quality of coal

to the utility boilers. This approach assumes greater relevance in case of multiple grades of coals

available in different parts of the country and also coals of different qualities being imported by IPPs.

Ministry of Environment and Forests vide their notification dated 30th June 1998 had stipulated the use

of raw or blended or beneficiated coal with an ash content not more than 34% on an annual average

basis w. e. f. 1st June 2001. CPCB has constituted a Steering Committee consisting representative from some SEBs, CPCB, Ministry of

Coal, Ministry of Power, CEA and World Bank to carry out cost benefit analysis of using clean coal

technologies and assess and prioritize technically feasible and economically viable measures to improve

coal quality. Refurbishment of existing thermal power stations

Continuous deterioration in performance of thermal power stations had been observed during

early 80's. Therefore, Renovation and Modernisation Schemes(R&M Schemes) were drawn and

executed for improving the performance of existing thermal power stations. Pollution control measures

in these power stations being a capital-intensive activity, it accounted for major portion-around 40% of

Rs. 12 Billion kept for R&M schemes under phase-I. During phase-I, 163 units of 34 thermal power

stations were covered. As a result of R&M schemes these achieved 10,000 million units of additional

generation per annum against the target of 7000 million units. Encouraged by the results achieved, R&M

23

phase-II programme is presently under progress. Total estimated cost of these works is Rs. 24 Billion.

Most of the Electricity Boards or other generating agencies are facing financial constraints to carry out

R&M activities. Therefore, this area has to be taken on priority to arrange financial assistance.

24

Power Sector Reforms

Comprehensive power sector reforms, particularly in the transmission and distribution

segments, have been discussed at least since 1993 when a Committee of the National

Development Council comprising six chief ministers was set up. Conferences of chief

ministers/power ministers were held in 1996, 1998, 2000 and 2001. However, in spite of the

hardy ritual of conferences and resolutions without any seriousness of purpose – just to give

the appearance of progress where there is in fact none – there is no light at the end of the

tunnel. In fact the tunnel seems to get darker and longer each year.

No one can stop anyone from day-dreaming but if the central government starts day-

dreaming and that too in respect of the future of a critical infrastructure sector such as the

power sector, it should be a matter of serious concern. By definition, a dream has no relation to

reality. But national policy on any subject must be rooted in realities. Importance of this is

amply borne out by the provisions of the Electricity Bill, 2001 introduced in parliament which

envisages, among other things, functional disaggregation of generation, transmission and

distribution with a view to creating independent profit centres and accountability; competition,

economy and efficiency to be promoted in the best interests of the consumer and the national

economy; creation of transmission highways that would enable viable public and private

investments in the electricity industry; trading in electricity; choice to the consumers, especially

large consumers, to take power from the cheapest and most reliable source; rational tariff

fixation based on cost of supply; transparent subsidies; steep reduction in transmission and

distribution (T and D) losses and substantial reduction in theft of power; and privatisation of the

sector. Before we turn to the feasibility of the proposed reform programme, even in the

medium to long term, it may be useful to take stock of some of the more worrisome

developments in the power sector. It is necessary to underline that, under the Constitution,

power is in the concurrent list and the primary responsibility for the sector is with the state

governments. In particular, distribution of power is their exclusive responsibility. This fact is

often lost sight of by the central government while announcing national policies on the subject.

25

Keeping this in view, intensive discussions need to be held with the state governments, at the

political level as opposed to merely the administrative level, on the Electricity Bill, 2001, as

otherwise the bill, even after it becomes an Act, will remain on paper as has been the fate of

several other legislations in the country. Unfortunately, no such effort appears to have been

made by the central government, though the bill underwent at least eight revisions.

At the Wrong End

It must be stated at the outset that the reforms in the power sector, which began in

1991, were started at the wrong end of generation instead of distribution of power. Perhaps

this was due to the fact that opening generation for private sector was considered to be simpler

and easier to handle, though this did not stop Enron, Cogentrix and other projects becoming

objects of major controversy. This essay is, therefore, largely confined to the power sector

reforms which are in the purview of the state governments. Comprehensive power sector

reforms, particularly in the transmission and distribution segments, have been under discussion

at least since 1993 when a committee of the National Development Council (NDC) comprising

six chief ministers was set up. Conferences

of chief ministers/power ministers were held in 1996, 1998, 2000 and 2001. Some of the

important recommendations/resolutions of the conferences/committees included:

rationalisation of tariffs through independent regulatory commissions, adoption of transparent

policies on subsidies, acceptance of a minimum all-India agricultural tariff, benchmarking of

tariff at the minimum of 50 per cent of cost of supply and agricultural tariff not to be less than

50 paise per unit, 100 per cent metering and energy audit, reduction of T and D losses through

elimination of theft and strengthening/upgradation of sub-transmission and distribution

system, privatisation of distribution in major / medium sized urban and semi-urban areas, and

decentralised distribution management in rural areas. On the face of it, this reform agenda is

no different from most of the provisions of the Electricity Bill. But the reality is far removed.

There has been practically no worthwhile action on any one of these items except for setting up

of electricity regulatory commissions (ERCs) in some 15 states. Of these 12 have become

26

functional and more than seven have issued their first tariff orders.1 Orissa has gone ahead

with a series of reforms including unbundling of the state electricity board (SEB) and

privatisation of distribution. However, these reforms have run into major roadblocks and have,

in fact, raised questions about their suitability in the Indian context. In spite of the hardy ritual

of holding conferences of chief ministers and power ministers each year and passing

resolutions, without any seriousness of purpose so as to show progress where there is none,

there is no light at the end of the tunnel. In fact, the tunnel seems to get darker and longer

each year.

Agricultural Tariff

Though over four years have elapsed since the time the decision was taken in the chief

ministers’ conference to charge a tariff of at least 50 paise per unit for the agricultural sector,

so far only nine states, namely, Assam, Delhi, Haryana, J and K, Kerala, Orissa, Manipur, Goa

and Tripura, have implemented this decision. In most of these states, except Haryana and

Tripura, agricultural consumption is negligible. None of the larger states have taken any action

in the matter. It was also expected that by 1999, that is within three years of the decision of the

chief ministers’ conference as above, the tariff would be raised to 50 per cent of the average

cost of supply. There has been no progress in this regard. On an all-India basis, the tariff

charged to agricultural consumers has increased marginally from a level of 12 paise per Kwh in

1991-92 to only 28.5 paise per Kwh in 2000-01. The subsidy on account of sales to agricultural

consumers is estimated to have increased from a level of Rs 15,585 crore in 1996-97 to Rs

27,144 crore in 2000-01. It is important to note that the share of domestic and agricultural

consumers in total energy sales has been increasing over the years. This share was about 52 per

cent in 2000-01 as against 49 per cent in 1996-97. The subsidy on account of energy sales to

domestic consumers is likely to increase from a level of Rs 4,386 crore in 1996-97 to Rs 10,062

crore in 2000-01.

There has been no progress regarding payment of subsidies to the SEBs in a transparent

manner. Subvention given by the state governments to partly compensate the subsidised sales

to domestic and agricultural consumers is estimated to have gone down to Rs 5,793 crore in

27

2000-01 as compared to Rs 6,631 crore in 1996-97. Uncovered subsidy, after taking into

account the subvention received from state governments and surplus generated from sales to

other consumers, is estimated at Rs 23,638 crore during 2000-01 as compared to just Rs 5, 800

crore in 1996-97. Gross subsidy (subsidy for domestic consumers, agricultural consumers and

on inter-state sales) has gone up from Rs 20,210 crore in 1996-97 to Rs 37,037 crore in 2000-01.

Gross subsidy per unit of sale has increased from 75.4 paise per Kwh in 1996-97 to 108.4 paise

per Kwh in 2000-01. These are mindboggling figures by any standards but such is the mindset

and profligacy of our rulers that no one is prepared to lose his sleep over the issue.

It is estimated that the surpluses generated by way of cross-subsidisation for the year

2000-01 were Rs 7,606 crore. Cross subsidy as a percentage of subsidy to agriculture and

domestic sectors has come down steeply from 41.7 per cent in 1992-93 to 20.8 per cent in

2000-01. This is due to the fact that the share of domestic and agricultural consumers, who get

power at subsidised rates, has been progressively increasing over the years as compared to the

decline in the share of industrial sector consumption. Cross-subsidisation has become so

unsustainable that the industrial sector is taking recourse to setting up captive generation

capacity. As a result of this as also the slow down of economic activity, industrial demand for

electricity, which is the most paying segment of the SEBs’ consumers, has declined over the last

few years even in the fastest growing states such as Gujarat, Maharashtra and Karnataka. On an

all India basis, the share of industry in the total energy sales has declined from a level of more

than 50 per cent in the past to 33 per cent in 1996-97 and 31 per cent in 2000-01. The tariffs

for industry in most states range between Rs 4 to Rs 5 per unit. In international terms, this is

approximately 10 cents per unit whereas industrial tariffs in most other countries range from 3

to 5 cents. Clearly, such a high tariff will handicap Indian industry in competing internationally

in the globalised environment.

T and D losses, which include technical and commercial losses, of 10-15 per cent are

considered reasonable by the central electricity authority (CEA). According to one estimate, out

of the total energy generated in 2000-01, only 55 per cent was billed (Rs 62,000 crore), while 41

per cent (Rs 46,000 crore) was realised. Of the total energy generated, 20 per cent was

28

accounted for by theft (Rs 22,500 crore) and 4 per cent was commercial losses (Rs 4,500 crore).

The remaining (21 per cent) was technical losses. Since only a small part of the energy sold is

metered (about 40 per cent), over the years part of the T and D losses are being hidden in the

name of agricultural consumption which is mostly unmetered. Several recent studies in various

states show that actual agricultural consumption is much lower than what was estimated

earlier. As a result, it is seen that the actual T and D losses are as high as 55 per cent in Delhi,

51 per cent in Orissa, 47 per cent in Haryana, 45 per cent in Andhra Pradesh, 43 per cent in

Rajasthan and 39 per cent in Maharashtra.

It is necessary to note in this context that most of the losses take place in the sub-transmission

and distribution segment (66 KV and below) which is the most value-added stage in the entire

power sector. This is therefore the most crucial area calling for urgent reforms.

Rural Electrification

Undue emphasis on 100 per cent metering during the last few years has created the

impression that this is the answer to all our problems pertaining to the correct assessment T

and D losses on the one hand and more economical use of energy on the other. It is necessary

to appreciate that in a large and continental size country like India with crores of agricultural

and rural consumers, it is going to be humanly impossible to undertake meter reading and

billing on a regular basis in far-flung rural and tribal areas. For example, in Maharashtra alone,

there are more than 20 lakh agricultural pumps which have been electrified and this number is

expected to go up by at least 1 lakh agricultural consumers each year in the foreseeable future.

This problem will be particularly severe if all rural households are to be provided electricity by

the end of the Eleventh Plan (2012). It is necessary to remember that a large number of these

households will be consuming less than even 30 units a month. It will thus be cost-inefficient to

undertake meter reading, maintenance and testing of meters and billing on a monthly or bi-

monthly basis. The seriousness of this problem can be seen from the fact that even in urban

areas, more than 50 per cent of billing is currently done on the basis of average consumption

on grounds such as meter not found or read, faulty meter, etc. It is interesting to note that even

29

in a city as large as Pune, the municipal corporation has given up

meter-based tariff for water supply for the same reasons as above and has instead introduced

a flat rate tariff based on a percentage of the property tax for the premises. It is necessary that

some further thought is given to this matter before the idea of 100 per cent metering of all

consumers is pursued. What is more important than metering is energy audit at all levels on all

feeders and transformers. This will be much more practical and cost-effective and will give

results in the shortest period of time. This is particularly true of the audit of industrial

consumers. It should not be difficult to undertake scientific stratified sample surveys to make

an assessment of the consumption of unmetered consumers from time to time. The other

objective of more efficient use of energy can be achieved by fixing tariffs in a rational manner

and doing away with the large and unwarranted subsidisation of power for certain categories of

consumers. This brings us to the question of rural electrification and its financial implications.

The share of agriculture in total sales of SEBs was 30.9 per cent in 2000-01. In Gujarat, Haryana,

Karnataka and Madhya Pradesh it was more than 40 per cent and in Andhra Pradesh it was

nearly 39 per cent. Looking to the size of the problem and its impact on the viability of SEBs or,

for that matter, any successor private or co-operative sector distributor, it is necessary to

understand what are the best international practices in terms of funding of such programmes,

their subsidy burden, organisational structure, etc. This is important as rural electrification will

have to be subsidised for a long time to come, whether the distribution is with the SEBs or

private sector or cooperatives. Any facile talk of doing away with cross-subsidisation even in the

medium to long term is clearly unrealistic. It is interesting to see that even in a highly developed

country such as the United States, there are around 900 electricity cooperatives and about 60

generation and transmission cooperatives for power supply to 34 million residents. Nearly 45

per cent of power distribution networks are under the control of co-operatives and

cooperatives collectively own over $65 billion in assets. Nearly three-fourths of the co-

operatives serve less than 20,000 consumers each.7 Reportedly, a portion of hydro generation

in the US is reserved for supplying power to the rural areas. It is high time we go into these

issues in some depth. Mere privatisation or co-operativisation of distribution in rural areas is

not an answer to the problem. This is evident from the experience of privatisation of

30

distribution in Orissa and the far from satisfactory performance of the few rural electrification

co-operatives which were started in the country. This is a large and complex subject which

requires closer attention so as to evolve a sustainable national policy.

The Electricity Bill, 2001, which seeks to replace the Indian Electricity Act, 1910, the Electricity

(Supply) Act, 1948, and the Electricity Regulatory Commission Act, 1998, contains a number of

forward-looking features. But, more importantly, it leaves the phasing and sequencing of

reforms to be determined by the respective state governments. States would have the freedom

to retain the SEBs until they decide to restructure the electricity industry. The states are to

determine the extent, nature and pace of privatisation. Public sector entities may continue if

the states find them sustainable. Thus, even after the passage of the Electricity Bill, we may just

be languishing where we are today!

Lessons for the Future

The above discussion brings out some of the complex issues facing the power sector.

The experience so far clearly underlines a few important lessons.

First, it will be best not to rely on replicating the experience of other countries by blindly

imitating them. India is a case apart, sui generis, and must be treated as such. The model of

reforms in the power sector propagated by the World Bank too needs to be examined critically

in the Indian context where the axiom is what is good in economics is bad in politics.

Second, privatisation is not a panacea for all ills. Recent report of the Reserve Bank of

India shows that incremental Non-Performing Assets (NPAs) of private sector banks are even

higher than those of the public sector banks. In the power sector itself, the controversies

surrounding the generation projects of Enron, Congentrix and Spectrum bear a testimony to

this. Privatisation of distribution in Orissa has raised a number of doubts about the

31

practicability, feasibility or even advisability of privatisation of power distribution on an all-India

basis.

Third, what is important is not public or private ownership but the policy framework in

which any institutions in the sector will have to operate. The importance of this is further

underlined by the large-scale exodus of foreign companies.

Fourth, creating and sustaining investor confidence is the key to power sector reforms.

This would imply viable and rational policies implemented in a transparent manner. Guarantees

by state governments, counter-guarantees by the centre and escrow accounts are not

substitutes for

properly designed policies.

Fifth, temporary palliatives such as securitisation of dues of SEBs to central PSUs or

writing off loans given by the state government to SEBs or converting them into equity are not

the answers to the problems on hand as they merely mean postponing the day of reckoning.

Finally, the role of state governments is critical in power sector reforms. Unfortunately,

this is the weakest link in the chain and a chain is only as strong as its weakest link. The critical

factor in the power sector is one of governance. Unless the issues in this regard are addressed,

the forward looking Electricity Bill, 2001,even if it becomes an Act, may prove to be a dead

letter.

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POWER SECTOR REPORT IIPM CHENNAI