Focus on India capacity Development

Reforming India seeks private power boom

1 November 2005

A series of reforms aims to encourage huge investment in the Indian power sector to support industrial growth, but even after capacity is built, questions remain over fuel.

Power starved India is in the midst of one of the most remarkable and sustained growth periods in history with economic growth estimated at more than 6% for more than a decade. Together with China, India is expected to be the site of major investment in the energy sector over the coming years as the booming economy pushes power demand through the roof. However, while India is blessed with the world’s fourth largest reserves of coal and considerable hydroelectric potential, energy diversity demands investment in other resources too. Certainly, India has the world’s fifth largest installed capacity of wind generation, but a move towards modern and efficient gas-fired capacity has left a number of projects all but stranded as the gas infrastructure struggles to keep up.

Indian origins

India’s electricity supply began in the 1880s with the commissioning of a small, 130 kW, hydroelectric plant at Darjeeling, now West Bengal. A coal-fired plant followed in Calcutta, now Kolkata, in 1897 and over the next half century, until independence, the supply of electricity was confined mainly in and around urban centres, chiefly for lighting purposes. Most of these early ventures were private sector initiatives.

Nowadays, the energy sector is dominated by the state. Barring five private sector licensees providing power to the cities of Mumbai, Ahmedabad, Surat and Kolkata, and one state, Orissa, where the distribution of power has been privatised, generation and distribution throughout the country is largely controlled by state-owned bodies.

Legal provisions to support and regulate the sector were put in place through the Indian Electricity Act, 1910. Shortly after independence, a second Act – The Electricity (Supply) Act, 1948 – was passed, paving the way for establishing State Electricity Boards (SEBs) in the Union. The SEBs have played a vital role in the rapid expansion of the country's electricity network and in most cases, the SEB is a classic vertically integrated utility concerned with the generation, transmission and distribution of power. The production of power was made exclusively a public sector domain in the Industrial Policy Resolution of 1956 and most of the then existing private entities were taken over by SEBs. Since then, almost all new investment in the sector has been made by public sector entities.

The Ministry of Power, headed by the Union Minister of Power, is the main policy making body, while the Central Electricity Authority (CEA) is responsible for planning regulation. This is done by regulating the entry of new bulk generating units and central clearance to all major projects of SEBs, licensees and generating companies. Setting of safety standards and overall technical regulation is also done by the CEA.

A few states have incorporated their SEB and some have also unbundled their transmission assets and incorporated the entity.

In addition to central utilities such as the National Thermal Power Corp (NTPC), the National Hydro Power Corp (NHPC), the Nuclear Power Corp, Damodar Valley Corporation and the North Eastern Electric Power Corp (NEEPCO), independent power producers (IPPs) have gradually begun to make their presence felt in the Indian power sector. Since the nationalisation of the 1950s, though, private enterprise has only contributed since 1996 when the first IPP, GVK's 216 MW power plant at Jegurupadu in Andhra Pradesh, was commissioned.

Capacity shortfall

India's installed capacity stands at around 120 GW, of which the majority was set up by SEBs, followed by centrally controlled plants which account for about one-third.

However, even after 50-odd years of post-independence planning and the development of more than 100 GW of generation and associated transmission and distribution systems, power shortages result from low capital investment and inefficient operations by the state-controlled enterprises. The country is notorious for high losses, which run at more than 20% of all power transmitted, both physical T & D and so-called ‘non-technical’ losses, easily explained by widespread theft from the grid. Furthermore, poor investment in operations and maintenance result in low plant utilisation, which currently delivers an average plant load in India of something less than 60%.

The net result is that across India overall, average energy demand runs almost 6% above total installed capacity, peaking at closer to 14%. Nonetheless, while the energy deficit has reduced over the last few years, peak shortfalls continue to rise and with massive industrial growth, energy shortages are likely to become even more of an issue for the government.

According to the latest CEA estimates, India needs an additional 100 GW at an anticipated cost of nearly $100 billion to meet its power requirements through to 2012, making participation of private, and most likely foreign, investment inevitable. Electricity consumption over the past five years has grown at an annual average growth rate of around 7%. This implies an annual addition of some 5 GW, even assuming that a National Grid would be in place by then – smoothing out some pockets of deficit and surplus – T&D losses would be minimised and renovation and modernisation of existing generation plants would be carried out to improve performance. Collectively, these measures are expected to deliver some 25 GW of new capacity over the period outlined. However, at the present rate of capacity addition, even a notional annual national target of 5 GW looks highly unlikely.

Power reforms

To address the growing energy shortage, the government has sought to encourage private and foreign participation in the power sector. Policies permit 100% foreign-owned companies to set up power projects of any capacity and type (coal, gas, hydroelectric, wind or solar). It also allows them to repatriate profits and provide for liberal capital restructuring with an attractive rate of return. Furthermore, an amendment to the Electricity Act dispenses with the requirement for a licence to generate power.

The government has begun a liberalisation programme and under current legislation an IPP, after getting government approvals for its specified plant size, can generate and sell its output to the respective SEB under a Power Purchase Agreement (PPA), but a number of high profile cases, such as the infamous Dabhol IPP project begun by the now defunct Enron Corp, have left investment significantly lagging demand. One of the key stumbling blocks is the fact that, ultimately, the power purchaser is the local SEB, most of which are all but financially bankrupt, fundamentally as a result of the existing tariff structure in the country.

The liberalisation process announced by the government redrew the contours of power industry in the country, with the participation of the private sector in the hitherto exclusive domain of the state-owned sector. In 1998, the government announced the mega projects policy whereby designated projects in the private and government sector exceeding 1000 MW could sell power to more than one state through the Power Trading Corporation. The NTPC-backed Kayamkulam project in Kerala (pictured on previous page) is one such development.

These mega projects were extended a host of tax concessions and zero duty import on equipment that have cut projected development costs.

Subsequently, the Electricity Act 2003 came into force on 10 June, 2003, designed to provide for the restructuring and rationalisation of the electricity industry, and, except in exceptional cases, the transition of the State Electricity Boards into individual companies.

Power plays and growth in gas

Natural gas consumption in India has grown significantly during the past two decades and currently accounts for about 9% of the total primary commercial energy consumption. Demand for gas far outstripped the domestic gas production in the 1990s and consequently the Gas Authority of India Ltd (GAIL) began gas import initiatives and commissioned detailed studies for LNG import. The Indian gas market is expected to grow by some 66% by 2010 with imported LNG increasing from 22% to 38% of the total.

In July 1997 – backed by GAIL, Oil and Natural Gas Corp, Indian Oil Corp, Bharat Petroleum Corp and Gaz de France – Petronet was formed in order to pursue LNG and for the development of regasification facilities at Dahej in Gujarat and Kochi in Kerala.

Ras Laffan Liquefied Natural Gas Co is contracted to supply the LNG terminals for 25 years and the first terminal, Dahej, is in the latter stages of development. The Kochi LNG terminal is due to be completed by September 2009. Meanwhile, GAIL, the sole transporter and the principal marketer of the re-gasified LNG from the Dahej terminal, is in the process of constructing hundreds of km of new gas lines.

Much of this gas is destined for NTPC. India’s largest power producer has drawn up a detailed plan through to 2012 during which the company plans to add some 17 GW to its installed capacity. In addition, the company plans to refurbish a number of existing plants. As part of this programme, NTPC managed to add some 2000 MW of new capacity over 2004 – 2005, a significant contribution to the nation-wide capacity growth of more than 5%.

However, the company warns that emerging competition from Independent Power Producers (IPPs), stringent environmental regulations, financial constraints, restructuring and reforms are having major impact on its business. Crucially, uncertainties in fuel linkages have prompted the company to declare its intention to invest in an LNG terminal. Recently, NTPC invited expressions of interest from consulting companies for 'advisory services' to take equity stakes in the upstream LNG chain in India and abroad to ensure long-term availability and price competitiveness of gas or LNG, but with some 10 GW of existing gas-fired capacity across India, close to 4 GW of which is owned by NTPC, gas constraints have already begun to bite. Some of the seven gas-fired NTPC generation developments have been reportedly cutting output over recent months as gas supplies tighten.

Questions hanging over the future volume of gas supply have thrown into doubt the fate of a number of forthcoming power developments too, and uncertainties are such that the Minister of Power has suggested that widespread development of gas-fired developments will not materialise without considerable reassurances over both gas supplies and prices.

The much troubled Dabhol project, which is now known as Ratnagiri Gas and Power Ltd, is one gas-fired project that is to be operated by NTPC when it comes on stream, due in mid-2006. GAIL has responded to potential gas shortages by calling in some of the original subcontractors to facilitate the completion of the Dabhol LNG terminal, including Norway's Kvaerner, with Engineers India Ltd (EIL) serving as the overall project manager.

Petronet may also be involved in completing the associated LNG terminal and negotiations are reportedly underway with 4-5 potential suppliers of LNG for the project. However, according to sources close to the project, LNG supplies are very tight and long-term gas contracts will not be available for at least three years, requiring resources to be sourced on the more volatile spot market.

NTPC is also in talks with GAIL to buy more natural gas for upcoming power projects after a previously scheduled agreement with Reliance Industries to supply gas to power stations in Gujarat became bogged down over pricing. Although GAIL has no plans to set up a LNG import terminal at Kayamkulam in Kerala, despite the fact that the naptha-fired 360 MW plant has been running at reduced capacity as a result of high prices, it is expected to supply gas to the project as part of the wider gas supply agreement.

Powering industrial growth

Massive economic growth in India is prompting a root and branch wave of reforms aimed at boosting capacity by some 100 GW nationwide by 2012 or more than 5 GW per year of newly installed capacity, a signifacnt chunk of which is to come from the NTPC.

Such a huge development programme is impressive enough, but coupled with the associated expansion of both the fuel and power distribution networks, such a feat appears almost titanic in its scope. Nonetheless, while some issues remain to be resolved, notably securing sufficient gas supplies through the development of LNG import facilities and encouraging further private sector investment in the energy sector, with issues such as the tortuous Dabhol affair behind it and significant sector reforms in place, India looks set, ultimately, to meet its objectives.

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