The incoming Power Minister has his task cut out, to say the least. Rahul Kamat and Devarajan Mahadevan list the top ten items that should be on his agenda...
Of all the ministerial posts that will be up for grabs after the new political dispensation takes to power after the general elections, you might really not find any takers for the finance minister´s post, thanks to the strong winds that are buffeting the economy. Another hot seat will be that of the power minister.
As we have been constantly pointing out through these pages, the Indian power sector is in crying need for a major overhaul. And there are a few issues that need the immediate attention of the new power minister.
Power Today spoke to leading industry stalwarts and analysts to identify these issues and we narrowed down on a ten-point agenda.
Ensure adequate fuel supply linkages
A recent research report by KPMG indicates that India´s commissioned but stranded power capacity stands at more than 33 GW due to lack of coal and gas. This shortfall is likely to hit the banking industry hard, resulting in non-performing assets of around one lakh crore rupees. What the government can do is to allow quick pass-through of fuel for projects which are stranded due to inadequate fuel supply. Procurement of coal (and other fuel) can be done through a centralised procurement agency (which should have representatives from both the government and private industry), the actual bidding guidelines for fuel should also be made uniform. Such a centralised process will not only bring down the cost of imported fuel, utilities will also be in a position to plan ahead due to confirmed fuel delivery schedules.
Enhance downstream efficiencies (in transmission & distribution)
AT&C losses remain at unsustainable levels. Power thefts, equipment pilferage, faulty meters and ummetered supply are just a few of these problems. Less than 50 per cent of the total electricity generated is not paid for. A thorough systems audit of state-run utilities will throw up the weak links in the transmission and distribution process. For example, utilities should be able to increase their customer base, weed out unauthorised connections and conduct audits at the feeder level to improve quality of electricity supplied. India could float a few global tenders and secure the services of an independent entity which can recommend a robust energy accounting and auditing framework. Currently, there are various Supervisory Control and Data Acquisition (SCADA) models that are being used across the country, there might be a need to revisit a few of these SCADA systems to ensure that utilities deliver power reliably and safely to customers, while lowering costs and strengthening the network.
Ensure local power equipment players get a boost
Over the last five years, imports of equipment for the power sector have been growing at a CAGR of around 30 per cent (imports were pegged at $16 billion in 2011-12). Import duties have also been coming down due to the various Free Trade Agreements that the country has signed. Imports from China have been growing at a rapid clip (at a CAGR of 57.5 per cent and were Rs 33,432 crore in 2012). The domestic power equipment industry also suffers from a cost disadvantage due to the various levies imposed upon it like sales tax, octroi, VAT and entry tax. Further, factors like high financing cost, lack of quality infrastructure and dependence on foreign sources for critical raw material and components are also plaguing the local power equipment sector. The steps that the government can take include framing model procurement guidelines for utilities, ushering in standardisation of product specifications and design parameters, introducing a level playing field for domestic manufacturers by stipulating enhanced localisation requirements, etc.
Setting up of more UMPPs
The government is trying to rope in more players to develop Ultra Mega Power Projects (UMPPs) around the country. Though this segment has seen renewed interest, power players and the government have their differences over the new standard bidding documents (SBDs) for UMPPs. Industry leaders told Power Today that the revised bidding structures now treat large investors in UMPPs as mere contractors, which affects the long term business case (and the very viability) of these projects. The design, build, finance, operate and transfer (DBFOT) model being adopted for these UMPPs is also seen as being more effective for road projects, because power projects have a longer gestation period and different RoI (return on investment) structures.
Finance for projects of this magnitude will also be a key factor in development of UMPPs. For example, in case of supercritical units, it costs roughly Rs 6.5 crore to develop 1 MW of energy. A 4,000 MW plant would then cost around Rs 26,000 crore. Assuming an equity-debt ratio of 30:70, the debt component would balloon to Rs 18,000 crore. The banking industry is also overexposed to the power sector, and generating the huge quantum of funds required for setting up UMPPs would also become a major problem for a new entrant.
Break up Coal India´s monopoly?
Industry associations have called for the break-up of Coal India (CIL) into several independent units to ensure that the coal sector becomes more competitive. In December 2013, the Competitive Commission of India penalised CIL for abusing its dominant position. CIL was accused of supplying coal inferior in quality to what had been committed, entering into one-sided contracts and not adhering to its commitment in these contracts. CIL is responsible for mining around 80 per cent of the country´s coal and its bureaucratic and inefficient pace of operation has hit the power sector hard. In fact, among all the items that the new Power Minister has to turn his attention to, the divestment of CIL should actually be the simplest issue on the agenda. For how long can the power sector pay for the anomalies that exist in the system because of the government behemoth? And again, it is not that CIL operates free of any encumbrances. For example, merchant sale restrictions means that CIL sells its coal at a discount to global prices for certain grades.
Jawaharlal Nehru National Solar Mission: Does this have to be re-visited?
Many industry observers have been calling for an integrated policy and implementation framework for the Jawaharlal Nehru National Solar Mission (JNNSM). The mission still suffers from policy and regulatory barriers. The subsidy approval process is tedious, and multiple government agencies are involved in the approval process for setting up a solar plant. Further, a few states have developed their own solar policies, and there exists an overlap between the objectives of JNNSM and those of state governments. A single point of contact for finance, installation, operation and maintenance of solar projects is a must for smooth functioning of the JNNSM. Operational issues are bound to come up as the JNNSM gains traction. These issues include grid stability (as more smaller solar projects get linked up to the grid, constant monitoring of grid stability is required due to the erratic nature of solar power) and financial viability (the government estimates that grid-connected solar power will achieve parity will coal-based thermal power only by 2025). Even these estimates assume that technology transfer to Indian solar projects will take place on a real-time basis. Financing smaller off-grid solar projects will also throw up a few problems (though the RBI has deemed such advances as æpriority sector´ loans), because banking channels have yet to be trained on the dynamics of solar project financing. Again, quality control of raw material inputs for solar projects can prove to be a ticklish task. Though the second phase of JNNSM provides for the MNRE to develop ´star-rating´ systems and standards for solar system components, the coordination required beween agencies at the state/district level can prove to be a deal-breaker.
Further, the JNNSM touches upon areas that it should avoid: Solar PV projects and solar thermal technology are to developed on an equal footing (50:50 on MW basis). But by dictating the choice of technology (PV versus Concentrated Solar Power), India stands to lose out. It is the market that should decide the most efficient and cost-effective technology for the country.
Finally, the domestic content policy mandated by JNNSM (the subject of the current row with the US) can severely constrain the growth of the domestic solar industry. Developers should be able to source panels based on the best prices and efficiencies available across the world.
Package to revive discoms
The financial health of state-owned discoms continues to be the biggest factor plaguing the Indian power sector. Mere financial handouts will not be enough to turn around the fortunes of these beleaguered discoms. What is needed is the introduction of performance-based incentives and a complete overhaul of the distribution network. Tough political decisionsùlike the removal of cross-subsidies and agricultural dolesùhave to be taken. Increasing use of IT is also a must in areas like customer database management, net metering and grid management. State-owned discoms also adopt poor managerial and operational practices and their performance is severely impacted by their disability to fix tariffs. The segment should be made more attractive for the entry of private players by introducing various distribution models like multi-licensing model, outsourcing, outright privatisation and the franchisee model. Just how crucial is the need to get discoms back on track can be judged by a recent report which said that annual losses of all state-level distribution companies might reach 1.2 per cent of the country´s GDP.
Recent reports indicate that the government is also working on a ´peaking power´ policy, which will allow short-duration arrangements to help discoms manage demand in a better way. The current trend is to enter into long-term Power Purchase Agreements (PPAs). But when there is a fall in demand, discoms are caught holding the wrong end of the stick, and have to pay fixed costs even if they are not drawing an increased quantum of power from a PPA.
Rationalise electricity pricing across various regions so that trading in electricity gets a fillip
The integration of the southern grid with the national grid is expected to give a major boost to power trading. However, power trading has been subdued in the country due to transmission constraints, uncertainty over future course of reforms and competition in the power market. The margins in this trade have also been dropping. A few major power consuming states have also not implemented the Open Access policy which will give bulk consumers more flexibility to decide their power input mix and also allow them to purchase power from the open market.
Despite these bottlenecks, more captive power companies are also buying power through exchanges, due to stalled gas-based plants and paucity of coal. A few companies have found that power sourced from exchanges to be lesser in cost as compared to captive generation, even after the addition of transmission cost and levies. But, as explained, the spread and automation of Open Access is needed to boost power trading. Power should be delivered on demand and the procedure should not be cumbersome. Further, frequency stabilisation in India (which fluctuates due to demand and supply) still falls short of global standards. The CERC is trying to mandate a tighter frequency fluctuation band (49.7-50.2 Hz) to boost power trading. Power bourses, which currently have a tiny market share of 2.5 per cent of the 800 billion units of power trading volumes, are looking at increasing their share of the pie... if all goes well.
Policy initiatives: Revisit compensation clauses so that the dormant Indo-US nuclear deal can finally see some action on the ground
The ongoing India-US Energy Dialogue has not helped in kick-starting the stalled Indo-US nuclear deal. The biggest stumbling block has been the Civil Nuclear Liability Act, which India insists is in line with the IAEA´s Convention on Supplementary Compensation for Nuclear Damage. Under current Indian law, the plant operator (NPCIL) has legal recourse against a supplier. But legal ambiguities exist in the current scenario. For example, there´s a cap of Rs 1,500 crore on NPCIL´s liability in case of a nuclear mishap. What is not clear if NPCIL´s liability is only under the Civil Nuclear Liability Act, and whether it can be sued under any other law in the Indian statute. That´s because the liability of the foreign supplier will also go up in such a case. And nuclear plants are normally serviced by more than one supplier. In case of a nuclear accident, how will the liability be distributed between suppliers? Some answers are definitely needed before US suppliers start taking interest in the deal.
The success in pushing through the fuel pacts has largely been possible with the power ministry continuously hammering for an easy go-through with the coal ministry and CIL. Rajesh Samson, Partner, Ernst & Young´s Infrastructure and Government Group
Issues linked to clearances and permissions will require continuous coordination with the various Ministries, Departments and Regulators to resolve them. Umesh Agrawal, Associate Director, Energy, Utilities & Mining, PwC
As the world is moving from super critical technology to ultra critical, India must adopt it. At this point, the new government, should emphasis on use of high quality equipment coupled with performance.
A K Dixit, CEO-Energy India, South Asia, Siemens Ltd
The design, build, finance, operate and transfer (DBFOT) model for UMPPs could be more suitable for road projects, but it would not be more conducive for power projects, which have longer life and the viability depends on return on investment through tariff. Seshan Balakrishnan, Director, Transaction Advisory Services, Infrastructure, Ernst & Young
The improvement in the finances of the discoms will breathe new life into the power sector and recharge it. It will also provide them the financial capability to invest in revamping the distribution system. Transco finances will also be improved leading to more investment in intra-state systems. What is needed is effective and strict adherence to the terms of the financial package.
P Umashankar, Former Secretary, Ministry of Power
The industry is quite optimistic that the targeted solar capacity would be met by the end of this year. The prospective growth in the sector is going to be enabled through collective renewable purchase obligations (RPOs) by each of the states.
Rajaram Pai, Business Leader, DuPont Electronics & Communications and Photovoltaic (PV) Solutions, South Asia
The success in pushing through the fuel pacts has largely been possible with the power ministry continuously hammering for an easy go-through with the coal ministry and CIL. Arvind Gujral, VP, BSES Rajdhani Power Ltd
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