Maintenance of power supply systems

Why Piyush Goyal may be critical to the NDA performance in 2019 elections

As we near the completion of the first year of Modi government at the centre, a pecking order of various ministries and ministers is beginning to take shape. Be it looking ahead, tackling the existing problems or making meaningful changes to the system with a lasting footprint, Mr. Piyush Goyal, the Hon’ble Minister of State with independent charge for Power, Coal and New & Renewable Energy has staked a strong claim at the top of this pecking order.

There are two important reasons why Modi government has to get Power as a sector right. Firstly, a little more than 250 million Indians, more than 20% of the total population, do not have access to electricity.

Secondly, no other infrastructure sector can realize its full potential without having access to dependable, predictable and reasonable cost power supply. Ensuring electricity access, even if it is not 24×7, to all Indians has a huge perception upside – real difference to be made to quality of life.

Source: AFP PHOTO / CHANDAN KHANNA Source: AFP PHOTO / CHANDAN KHANNA

Taking a key item off from the industry’s worry – already grappling with shortage of capital, labor, land, skills and confidence -has a hugely positive cascading effect. Significant and sustained improvements on these counts can translate to big electoral gains in the future. And early signs are that Mr. Piyush Goyal is steadily marching towards making a big contribution.

Value Chain Complexity

The power sector in India has a complex value chain, with each part of the chain riddled with regulatory excesses, capital shortages and counterproductive center-state dichotomies. The first National Democratic Alliance (NDA) government attempted a simplification introducing the Electricity Act of 2003. This act allowed disintermediation of the value chain allowing private players as well as unbundling of various power related functions, but the reforms since then have been either incomplete or have been limited to each unbundled silo.

The supply linkages (coal, gas, hydrocarbons, water, and natural sources), power generation, transmission and distribution have all moved out of step with each other since 2003, some more reformed than the other, but the sum of parts is still not making up the whole.

The current NDA government has started with a focus on the first two parts of the problem – supply linkages and power generation.

Supply Linkages

As of December 2014, 60% of India’s power generation – 154K MW out of 256K MW – was still dependent on coal. Overall, thermal power continues to be the mainstay for Indian power sector by a long distance – 178K MW out of 256K MW installed capacity or 69% of the total capacity – is thermal power.

This reliance on thermal power makes the role of coal – the main raw material – and Coal India, the virtual monopoly controlling the coal extraction and supply process – the first area of supply-side reforms.

Coal block allocations have been a subject of political and judicial battles for the last few years. When Supreme Court cancelled the discretionary allocations made by the UPA government, the Power ministry had to device a transparent as well as a quick mechanism to ensure the coal linkages were reliably established. With power tariffs effectively capped for privately owned power plants which operate on a fixed return of equity model, the incentive to import expensive coal to optimize peak load factors (PLF) was limited. As per various research analyst estimates, 16% return on equity needs the plan to run at 65% peak load factor, while domestic coal linkages were falling short of even that figure.

The coal ordinance allows the government to auction 204 coal blocks to private players for power as well as other commercial usage. The e-auction process adopted has raised about ₹150,000 crores so far in proceeds (as of March 8th 2015), which will go to the states where the respective mines are located.

The speed at which the power ministry acted after the Supreme Court verdict of September 2014 demonstrated the commitment to address the root causes of the power generation problems. The ministry also dealt deftly with Coal India strike in early January, using the right messaging around the fact that Coal India itself was not being privatized. The coal ordinance is yet to be cleared by Rajya Sabha, but once that hurdle is crossed, the most important supply side constraint would be firmly addressed.

Renewable Energy

In parallel, the power ministry is stressing the use of renewable sources of energy in a big way. There has been some skepticism on the government investments for solar and wind power based on experiences of USA and Germany. But given India’s exposure to sunlight, falling prices of the solar panels over the last decade, the derived job bump and the positive impact on our fragile current account deficit, it looks like a less risky bet than made by the western countries.

The ministry is targeting 100,000 MW of solar power and 60,000 MW of wind power by 2022. In the recently concluded Re-Invest summit in January, market participants committed to 266,000 MW of renewable generation commitments and banks committed to financing 80,000 MW of this commitment. Trade show promises usually don’t fully realize themselves, but prima facie there seems to be a good response by private players to the government call for action.

Additionally, India also ironed out the pending issues with the USA on civil nuclear pact during President Obama’s visit to Delhi in January. India addressed the liability clause as well as creation of a reinsurance pool with government support to limit exposure for private foreign suppliers. Preceding this agreement with USA was the deal signed with Russia during President Putin’s short visit in December, where Russia has committed to support the Kudankulam plan running and expansion. Time will tell whether these deals and safeguards are sufficient to attract nuclear suppliers, but the intent has been made clear to pave way for commercial negotiations to start.

The 2015-16 budget doubled the coal cess, which will yield an additional ₹6000 crores, which will be used for financing the renewable energy efforts. This change in cess will depress the coal auction bids to some extent, but it gives the government a cushion to kickstart an initial set of renewable investments with lesser scrutiny on the commercialization potential aspect.

Power Generation

India has been steadily adding power generation capacity over the last decade, though there are several challenges in operationalizing the installed capacity.

As of end of 2014, the following was the generation capacity across the country (in MW):

RegionThermalNuclearHydroOthersTotalCoalGasDieselTotalNorthern39,4315,3311344,7751,62016,6675,93668,998Western60,16910,9151771,1021,8407,44811,27191,661Southern27,9824,96393933,8851,32011,39813,78560,387Eastern26,5271901726,73504,11343331,281North East01,5711421,77501,2422573,273Islands007070001181Total154,17122,9711,200178,3424,78040,86731,693255,682

Source: Central Electricity Authority: http://www.cea.nic.in/reports/monthly/executive_rep/dec14.pdf

Except for hydro power, which is largely under government control, the private participation is allowed in generation across other areas. However, the generation contracts are limited by the factors like duration and fuel supply risk, which impacts tariffs as well as return on equity for the generation company.

In most cases of tariff based bidding or ultra mega power plants (4000 MW+), the generation company was expected to bear the fuel risk. This was not cost effective and would reduce the ROE, which in any case was likely to be between 15% and 25% based on bidding parameters. To top this, the buyers of the power were state electricity boards, which are reeling under debt burden and political expediency across many states. To top it all, the complexities of land acquisition increased manifold during the UPA regime – in terms of costs as well as the time taken to get all clearances.

This multitude of constraints has made it impossible for private players to invest further in this sector. Getting clarity on fuel supplies to contain the main input cost factor will help the players in the generation segment in a big way. Additionally, the central government hopes to clear the land acquisition bill in the Budget Session of Parliament, which will further improve visibility for the private players.

The government has also focused on commissioning near complete power plants in advance of expected fuel availability improvements. Mouda (1,000 MW), Karanpura (1,900 MW), Muzzafarpur (110 MW), Barh (660 MW) and Singaji (2 x 600 MW) are some of the projects commissioned in the last few months. Additionally, the Union Budget 2015-16 approved 4 ultra mega power plants (4000 MW) from a funding standpoint. Bulk of this investment is likely to be in the eastern region, with Bihar being a big beneficiary.

Power Transmission

The 2003 Electricity Act required the states to segregate the transmission and distribution businesses. However, the power transmission business has largely been controlled by central and state governments all along. This is a big area of concern, which needs to be tackled next by the power ministry.

Currently, the transmission and distribution losses are as high as 50% in Bihar, 60% in Jammu & Kashmir and 40% in Uttar Pradesh. These losses are a combination of multiple factors – lack of investment in transmission technology, poor connectivity across the various regional grids and of course theft.

Source: AFP PHOTO / Sam PANTHAKY Source: AFP PHOTO / Sam PANTHAKY

The central government can only control this area partially. The power ministry made a good start in June 2014, approving ₹12,500 crore investment in construction and upgrade of high capacity interstate transmission lines, aimed at reducing the load on Northern Grid. This investment will eventually benefit Haryana, Uttar Pradesh, Madhya Pradesh, Chhatisgarh and Maharashtra.

In August 2014, the government expedited the commissioning of phase 2 of the Raichur – Solapur Power Grid transmission line, augmenting synchronous grid capacity and improving the connectivity of the Southern grid. Similar effort was made to improve the East – West connectivity commissioning the Ranchi – Dharamjaygarh – Sipat transmission line, also in August 2014. The power ministry also secured a ₹5,000 crore project to augment the connectivity in Arunachal Pradesh and Sikkim to the standard 132/220 KV transmission. Currently these states use 33 KV / 66 KV systems which are not optimal.

Despite these early investments, transmission remains an area of weakness for India. The inter-regional transmission capacity is only 46,000 MW right now and is expected to grow to 72,000 MW in the next 3 years. If renewable energy targets are actually realized and this capacity is connected to the regional grids, the country will not realize the full benefit of capacity augmentation on the back of this low transmission interoperability.

The central government can only strengthen the Power Grid Corporation financially – the central PSU operating in the transmission business. Most of the state governments are reeling under budget constraints and are unlikely to upgrade state Transco infrastructure in any meaningful manner.

One option for the power ministry here is to create a national Transco controlling the National Grid centrally. Even this will require huge upfront capital investment and the process will be fraught with political challenges.

Power Distribution

Power distribution is the exclusive domain of states through the state electricity boards. In some cities like Mumbai, Delhi and Kolkata, there are private players involved in the business, though they mostly operate in defined geographical regions.

The distribution companies (discoms) are controlled by each state and while they have seen some improvement since the Electricity Act 2003 made them independent companies, their business is impacted by local politics in the worst possible manner.

Free power to farmers, thefts at local levels – sometimes permanent and large scale, unpaid bills, unmetered connections and credit dues wave offs are common – all for political patronage and vote bank politics. This puts great financial burden on discoms, which are already reeling under accumulated losses of ₹300,000 crore. The worst affected states are also the largest with high GDP contribution – Andhra Pradesh, Telangana, Punjab, Haryana, Madhya Pradesh, Uttar Pradesh, Rajasthan and Tamil Nadu.

The discoms are seldom allowed to increase tariffs for the end customer and state governments have been inordinately delaying the payment of the covering subsidies to counter the losses. However, most states allowed these distribution companies to keep borrowing from the banks, without any accountability of cash flow generation to cover rising interest burden.

Resultantly, RBI had to intervene a few years back working on a revival and restructure package where performance linked incentives were provided to state discoms. This is an ongoing process linked to reducing T&D losses and increasing tariffs. The central government has limited control of this process, but given the aggressive view the power ministry has taken on reviving the sector as a whole, at least the NDA state governments must look at complementing those efforts through local discom revival.

Enabling Support

To support the large big picture, the power ministry has been working on important administrative interventions over and above the coal ordinance.

The Deendayal Upadhyay Gram Jyoti Yojana focuses on rural electrification through 2022, specially separating out the agricultural and non agricultural use. The government has promised to invest ₹43,000 crores to separate the feeders for the two types of consumers and creating better feeding and metering for agricultural customers.

The Integrated Power Development Scheme is the urban counterpart with an outlay of ₹32,000 crores. The focus here is on improving urban transmission and metering of urban feeders and consumers. Certain information technology investments are also planned under the scheme to reduce the distribution losses and better energy accounting for the urban consumers.

Other Measures

In addition to addressing the sector bottlenecks, the power ministry has also initiated other measures for reducing energy consumption itself. The foremost of these is the increased usage of LED lamps. Delhi became the first city to pilot the use of LED in January 2015 with the launch of Delhi Efficient Lighting Program (DELP). The aim is to cover 100 cities by March 2016 and change all street and public lighting to LED based devices. This is an ambitious project, but if successful, it will go a long way in cutting energy usage.

The state governments in some cases are supplementing these efforts especially in the area of renewable energy. Madhya Pradesh is expected to commission India’s largest solar project in second half of 2016 – a 750 MW power plant at Rewa, with an expected per unit charge of ₹5 – in line with what the traditional fuel results in. Rajasthan and Gujarat have announced similar commitments, alongside the state level commitment for becoming power surplus and ending the era of planned loadshedding.

The last 10 months have seen simultaneous action on multiple fronts by the power ministry to realize the “power for all” target set for 2022 by the government. The series of policy, legislative and administrative interventions if realized completely can culminate in reliable, affordable and continuous power availability, which can be transformational not just for the individual consumers but also for the industry.

This in turn holds great electoral promise and it is conceivable that the government may want to realize much of these planned benefits by 2019 rather than 2022 to help create the right position statement for the next Lok Sabha elections. Mr. Piyush Goyal and the government will also need explicit support from states and political parties of all hues to complete the work they have started.

Mr. Goyal has made a great start, but much needs to be done by way of taking these steps to logical conclusion. If he succeeds, he will leave a lasting impact on the country’s infrastructure, much bigger than any of his predecessors have done since independence. This is a tall order, but it appears that so far he has been up to the task.

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