INDIAN POWER SECTOR SCENARIO AN ANALYSIS : PRE / POST LIBERALISATION.

Roll No : U211011(PGDM-PT)

1.Power sector at a glance

Electricity has been universally recognized as one of the most important inputs for economic growth and human development. There is a strong two-way relationship between economic development and energy consumption. On one hand, growth of an economy, with its global competitiveness, depends on the availability of cost-effective and environmentally benign energy sources, and on the other hand, the level of economic development has been observed to be reliant on the energy demand. The electricity sector in India supplies the world's 5th largest energy consumer, accounting for 4.0% of global energy consumption. The Energy policy of India is predominantly controlled by the Government of India's , Ministry of Power, Ministry of Coal and Ministry of New Renewable Energy and administered locally by Public Sector Undertakings as well as some private players entry after power sector liberalization. Electricity consumed in India is generated by thermal power plants , hydroelectric power plants , nuclear power plants. Renewable Energy Sources with a share of 65 %, 22 %, 3% , 10 % respectively. Rapid economic growth due to other industrial sectors like metal, cement, textiles, fertilizers, paper mills has created a growing need for dependable and reliable supplies of electricity, gas and petroleum products. Due to the fast-paced growth of India's economy, the country's energy demand has grown an average of 3.6% per annum over the past 30 years. In August 2011, the installed power generation capacity of India stood at 181,558 MW ( refer table -1 / trend -1 in annexure) and per capita energy consumption stood at 704 kWh in 2008-09.( refer table-3) The country's annual energy production increased from about 190 billion kWh in 1986 to more than 837 billion kWh in 2010. The Indian government has set a modest target to add approximately 78,000 MW of installed generation capacity by 2012 which it is likely to miss. The total demand for electricity in India is expected to cross 950,000 MW by 2030.This topic broadly explains about the power sector journey from 1947 to 2010 in different phases with its impact on macroeconomic fundamentals.

2.Preliberalisation era scenario ( Old policy impact on the sector)

Pre-Independence Era ( upto 1947) : The first instance of commercial generation of electricity in India dates back to 1879 in Kolkata (then Calcutta). In 1897, the colonial government of Bengal granted an exclusive 21-year license to the Calcutta Electricity Supply Corporation to supply electricity to Calcutta. Private companies set up power supply systems in major urban areas under franchises, which allowed them a reasonable rate ofturn. The demand for electricity during this phase was driven by demand from industries, commercial enterprises (including tramways) and also domestic use. Most of the earlier private companies in the power sector cease to exist today as they were amalgamated into state-owned enterprises; however, a few of them continue to exist as private players. The 1

Electricity Act 1910 was the first act (one of the earliest regulation) in the power industry, which was introduced before independence. The Act provided the basic framework for supply of electricity in India. Post-Independence Era (1947-1990): At the time of independence, electricity generation and supply was concentrated in the hands of private electricity suppliers, and largely in urban areas. Electricity supply was a must across the country to promote overall growth and development; hence, the Electricity (Supply) Act 1948, which was based on the UK Electricity Supply Act 1926, was introduced. Under this Act the Central Electricity Authority (CEA) was established at the central level and the State Electricity Boards (SEBs) at the state level. The objective of the CEA was to develop a sound, adequate, and uniform national power policy to coordinate development of the power sector in India.SEBs became integrated utilities with presence in generation, transmission, and distribution in their respective states. In the initial period, the SEBs performance was satisfactory and they played a vital role in the development of the sector. According to the Electri city (Supply) Act 1948, the SEBs were required to generate a minimum return of 3% on their net fixed assets in service after meeting the financial charges and depreciation. The SEBs were able to generate the minimum returns for many years, but, later on their performance faltered and they had to seek financial aid from the state in the form of grants, subsidies, soft loans, etc. The early seventies were marked by incidents of power blackouts and grid collapses. Hydropower generation suffered especially, as availability of water resources was heavily dependent on the monsoon season. During this phase, lot of emphasis was laid on setting up hydropower plants, as the government planned to develop the irrigation and power sectors simultaneously Moreover, there were delays in civil works, delays in the supply of power plant equipment, and the infrastructure additions in terms of transmission and distribution were also not adequate. In its attempt to assist the states, the Central government established a few private companies that could cater to more than one state. In 1981, the government decided to integrate operations of the central and state transmission systems to form a national power grid to facilitate transmission of power generated by non-SEB generators; these efforts led to the incorporation of the National Power Transmission Corporation in 1981.Furthermore the government set up the Power Finance Corporation (PFC) in 1986 as a financial institution dedicated to power sector financing to supplement planned expenditure on power plants, specifically new power plants. While the SEBs aided the growth in the Indian electricity sector, by the end of the phase under review, they suffered huge financial and technical losses (poor revenue collection and billing, poor metering and energy accounting, electricity theft, cross subsidies and SEB staffs inefficiencies were the main reasons for their losses); as a result of these losses, they provided poor electricity service to end consumers because the stateowned corporation power plants were running at low plant load factor (PLF) and the SEBs did not have enough funds for renovation and modernization of their plants. The demand-supply gap was increasing and many states were facing electricity crisis. These circumstances forced the government to restructure the sector in a phased manner, and this paved way for meting out electricity reforms in 1991.

3.PostReform Phase (after 1991):Post liberalization era scenario:

The deteriorating health of the SEBs made it impossible for them to infuse fresh investments into the sector. Moreover, the country was facing a macroeconomic financial crisis that made it difficult for the governments, both the Central and state governments, to fund power projects through budgetary support. Due to these events, 2

the government decided to restructure the power sector in a phased manner in 1991; consequently, it opened up the power sector (liberalise) and invited foreign private companies to get funds and technology into the Indian power sector. First Phase (Started in 1991):Independent Power Producers (IPP) Investments were a must in the power sector to enable it to produce electricity in line with the expected economic growth. The government liberalized the sector and opened it for foreign and private investments to increase the availability of funds for the power sector. For allowing independent power producers to operate in the sector, the government made an amendment to the Electricity Act 1910 and the Electricity (Supply) Act 1948 through the Electricity Laws (Amendment) Act of 1991. The amendment allowed private participation in thermal, hydro, wind, and solar power projects, and also allowed them to operate as IPPs . Foreign ownership up to 100% was allowed. IPPs were to operate on a costs-plus model wherein the tariff was determined by the Central government and the IPPs were guaranteed a 16% post-tax return on equity, full repatriation of profits, among others. The operators and the SEBs entered into power purchase agreements (PPAs) as the SEBs were responsible for transmission and distribution of power generated by private players. Introduction of Mega Power Policy 1995:In 1995, the government introduced the Mega Power Policy to increase private investments in over 1,000-MW generation projects that would supply electricity to more than one state; hence, the name mega power projects. The projects were to be awarded on the basis of competitive bidding and the CEA, Power Grid, and NTPC were to provide support to these projects. CEA was to provide assistance in identifying potential sites for setting up the plants, while Power Grid and NTPC were to provide assistance for transmission of power and preparation of feasibility report, respectively.The experiences of the first phase were not great and the Enron debacle is a reflection of this statement. In the Enron Dabhol Power Project priority was given to FDI rather than the cost of generating electricity. The Odisha restructuring : The first phase of the reform failed as the objective of attracting private players did not achieve the desired results. Private players did not enter the sector, as the SEBs, who were to transmit and distribute the power generated by the private players, were still running in losses. Private players were uncertain about their returns due to poor financial health of the SEBs. The annual commercial losses of the SEBs increased consistently from Rs 45.60 bn in 1992-93 to Rs 106.84 bn in 1997-98. The power plants continued to work at low PLF. Odisha was the first state in India and South Asia to corporative and unbundled its state-owned electricity industry and privatize the distribution while establishing an independent regulatory body. Odishas experience can provide lessons not only to other Indian states but also to other developing countries that are in the process of reforming their power sector. Second Phase (started in1996): The 1995 Mega Power Policy did not propose any fiscal concession, hence in 1998, the revised Mega Power Policy 1998 included these concessions. The Power Trading Corporation (PTC) was also set up after this revision to purchase power from identified projects and to sell to identified-SEBs. Establishing regulatory commissions and privatising electricity distribution in cities (with population of more than 1 mn) were the pre-conditions included in the revised policy. In December 1996 the Common Minimum National Action Programme (CMNAP) was structured in consultation with the state governments, and guidelines were established to hasten the sectors progress. In addition to envisaging setting up of regulatory commissions, the CMNAP reiterated the need for rationalisation of tariff and that no sector was to pay less than 3

50% of the average cost of supply. Tariff for agriculture sector was to be not less than 50 paise per unit and the tariff was brought to 50% of the average cost of supply within 3 years.

Third Phase (2003 onwards): Electricity Act 2003

The Electricity Act 2003, which came into effect from June 10, 2003, replaced the earlier laws, acts governing the Indian power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948 and the Electricity Regulatory Commissions Act 1998. The bill sought to provide a legal framework for enabling reforms and restructuring the power sector.The Electricity Bill was passed by the Parliament in 2003; this Bill sought to provide a legal framework for enabling reforms and restructuring of the power sector. The Bill became an Act with effect from June 10, 2003 and replaced the earlier laws governing the power sector, namely, the Indian Electricity Act 1910, the Electricity (Supply) Act 1948, and the Electricity Regulatory Commission Act 1998. The Act sought to create a liberal framework for development of the power industry, promoting competition, protecting interests of consumers and supply of electricity to all areas, rationalization of electricity tariff and ensuring transparent policies and promotion of efficiency, among others. The Act came out with the National Electricity Policy, mandatory creation of SERCs, emphasis on rural electrification, open access in transmission and distribution and some other provisions. It mandated the regulatory commissions to regulate the tariff and issues of license. This Act focused on laws relating to generation, transmission, distribution, trading, and uses of electricity. The Act was amended on May 28, 2007 and the Electricity Act 2003 was enacted with stronger power and clarity and with greater emphasis on assessment, fines, and legal framework to check the commercial losses due to theft and unauthorized use of electricity.

4.Changing Market Structure after Electricity Act 2003

With the enactment of the Electricity Act 2003 and implementation of open access, the market structure in the power sector changed from the old single buyer structure to a multi-buyer model. The generator could sell power to any buyer using the open access provision in transmission and users had the choice to choose their supplier. Ever since the Electricity Act 2003 was introduced, there was increased competition among generators and suppliers, which improved the sectors performance. Even though SEBs are handling the regulatory operations, the Act has mandated the creation of regulatory commissions in each state; these commissions have played a significant role in passing different regulations and monitoring performances of the state utilities. The market structure, which has taken shape after the Electricity Act 2003, looks promising as it gives the right of choice to the supplier as well as buyer while attempting to ensure quality and regular supply of power. Under the Indian Constitution, power is a concurrent subject and hence its development is the joint responsibility of the central and provincial state governments. The Parliament and state legislature are both empowered to make laws. Energy GDP relationship: Relative to its population size, energy demand in India remains low: Indias population represented onesixth of the word population and 5% of global consumption (including traditional forms of noncommercial energy sources). That is to say there is a tremendous potential for increasing demand in the coming years. From the point of view of energy systems, it is interesting to follow the evolution of energy intensity, which measures the amount of energy needed to produce one unit of GDP. Indias energy 4

intensity, at 0.69 ( refer table 2), is noticeably less than that of China at 0.78, and much higher than that of the European Union at 0.13. This is the result of low energy efficiency, highly subsidized energy prices that do not reflect the external costs of their use and energy intensive .In India, the evolution of the residential sector, which uses a lot of noncommercial energy sources (wood, vegetable and animal waste), will have major effects on energy intensity. Among the factors that will lead to decreases in energy intensity in India, an increase in the price of commercial energy should help improve energy productivity.Energy elasticity is a top-line measure, as the commercial energy sources used by the country in question are normally further itemized as fossil, renewable, etc.

5.Impact on poor community of society. :

Electricity is one of the key inputs for socio-economic development. Efficient provision of electricity contributes to poverty reduction by fuelling economic growth and enabling the fulfillment of the basic human needs of health and education. Provision of electricity is thus crucial for improving living standards, supporting development and job opportunities, and fostering social activities. To meet the challenges of ever-increasing demand for electricity different models for reforming the power sector have been adopted across the developing world. Following a decade of energy sector reforms in many developing countries, it is appropriate to ask the extent to which these reforms have benefited the poor. In particular, their impact on access, quality and reliability of electricity available to the poor. Various options available to distinguish electricity access for the poor and the non-poor along with their merits and demerits are discussed below: Electricity access for BPL (below poverty line) population: The ideal option would be to study electricity access for the poor as defined by the national poverty line or other income definitions of the poor. However, often data on these is not available directly. The Government of India launched the KJ (Kutir Jyoti) Programme in 1998-99 for extending single-point light connections to the households of BPL rural families. Since the KJ programme was designed to target the BPL population, the number of KJ connections has been used for identifying electricity access to the BPL population. This methodology has a limitation that barring a few states, this scheme excludes the urban poor. Nevertheless, under the existing data constraints, linking KJ consumers with the BPL population provides the best approximation for the electrification levels of poor households. Considering lowest tariff band consumers as poor consumers of electricity: The third option is to use the utilitys data and identify the number of customers in the different consumption bands. The consumers in the lowest consumption band, usually 150 kWh, can be taken as a proxy for the poor while consumers in other consumption bands are considered non-poor. However, this proxy for the poor may not prove useful in some cases. The low consumption may be due to low penetration of electrical appliances or less supply of electricity from the utility. The limitation of this approach is that while it covers the affordability dimension of access at the lower end of the consumption, it ignores the population of the poor who do not have connections.

5.Rajib Gandhi Gramin Vidyutikaran Yojona- XI Plan : A lot of initiative has also been taken
during 11th plan to give electricity to people in no approachable places. Two case study of such electriphication is sited here. Sundarban Electrification Progremme : Sundarban is a virtually undaunted vast area, there is no available grid power supply. Infrastructure development in connection with drawal of power to the remote area of Sundarban has become very difficult as because primarily transportation of pole to the working place has been a task job as these are to be transported through country boats for existence of several rivers at that place. At few places, experimental non-conventional power (Solar Cell) supplies few watts of electricity for a very short time, power is very unreliable also. In Sagar Island, In Sundarbans, entrepreneurs now power is supplied for about 4 hrs. in the evening by generate more income because stores with electric lighting can stay open later diesel generator set. At present 220 nos. domestic and 394 nos. commercial consumers are getting power in Sagar Island. West Bengal electricity Board has formulated scheme for electrification as per proposal of Deptt. of Sundarban affairs. For electrification of 42 villages in Sagar Island, one project is being processed for implementation with the fund assistance (Rs 35 Cr.) of World Bank through Intregated Coastal Zonal Management. Total 69 nos. mouzas are to be electrified in Gosaba Island, Pathar Pratima Block, Hingalgunj Block. Estimated cost of WBSEDCL's scheme is 28 Cr. WBSEDCL has formulated another scheme of 33/11 KV Sub-station at Sagar Island including river crossing and 11 KV feeder. Biju Gram Jyoti program in Odisha: The Rural Electrification Corporation intimated on 16.01.2006 that Ministry of Power, Government of India has decided that only those habitations having population of 300 and above are to be covered under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). Such stipulation will result in exclusion of a large number of habitations and or villages of a State.Due to such restriction in RGGVY the state govt of Odisha has initiated this program. As electricity being a concurrent commodity the State Government has decided to formulate a Scheme for electrification of village habitations which are not scheduled to be covered under RGGVY. Way forward.. In the emerging power scenario context, the study has highlighted some critical success factors for the industry, and effective implementation of present generation reforms. How ever by secure fuel supplies through well defined fuel sourcing plan , realign market & customer strategy, developing Capital and Operational excellence through selection of right technology and suppliers / manufacturers for the units, establishing robust organizational enablers, across people processes and systems India can ensure sustained growth of the sector and enable the dream of REAL Power for All!

ANNEXURE Table1

Trend1 Power generation

Trend 2 Energy intensity

Trend 3 Per capita energy consumption

Bibliography ** Impact of Power Sector Reform on Poor: A Case Study of South and South East Asia Authors: A R Sihag, Neha Misra and Vivek Sharma, TERI, India ** Private Investment in Power Sector in Developing Countries: Lessons from Reforms in Asian and Latin American Countries: Anoop Singh Dept. of Industrial and Management Engg. IIT Kanpur, ** Blueprint for POWER SECTOR DEVELOPMENT: Ministry of power report ** Policy Environment and Regulatory Reforms for Private and Foreign Investment in Developing Countries: A Case of the Indian Power Sector,Anoop Singh ** Energy in India s future insight:Edited by Jacquoes lisson & C ramsay ** An overview of Indian Energy Trends:Low Carbon Growth and Development Challenges Narasimha Rao, Stanford University Girish Sant, Prayas Sudhir Chella Rajan, Indian Institute of Technology Madras

** The Political Economy of Indian Power Sector Reforms report::Rahul Tongia ** Making power sector reforms work for the poor: Gensed report ** Online journal of space communication : Topic Sustaing Indias economic growth. Reference web sites http://www.business-standard.com/india/news/9-growth-target-too-high/446711/ http://www.tradechakra.com/indian-economy/industries/power-industry.html http://www.indiaenergyportal.org/overview_detail.php http://india.gov.in/outerwin.php?id=http://www.orissa.gov.in/energy/index.htm http://spacejournal.ohio.edu/issue16/gopal.html http://india.gov.in/govt/viewscheme.php?schemeid=1062 http://indianpowersector.com/about/

INDIAN POWER SCENARIO AN ANALYSIS (PRE AND POST LIBERALISATION)

TERM PAPER SUBMITTED BY: ARABINDA MAHARANA Roll No :: U211011 PGDM-PT (11 14)
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CONTENTS

SL NO 1. 2. 3. 4. 5. 6.

DESCRIPTIONS Power sector at a glance Pre liberalization era scenario ( Old policy impact on the sector) PostReform Phase (after 1991):Post liberalization era scenario Changing Market Structure after Electricity Act 2003 Impact on poor community of society. Rajib Gandhi Gramin Vidyutikaran Yojona- XI Plan

PAGE NO 1 1 2 4 5 6

Annexure and bibliography are attached.

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