Has liberalisation been beneficial to India’s electricity sector?

Please Early 1991 was a bad year for India. The eighties hadn’t been particularly beneficial. A weak economy and exchange rate had severely depleted its foreign exchange reserves. A post-Independence interventionist development strategy with high public ownership, financial repression certainly did not help either. Facing the prospect of defaulting on its payments, the very unpopular step (at the time) was taken to obtain an emergency loan of $2.2 billion from the International Monetary Fund (IMF) by airlifting (literally) the national gold reserves to England and Switzerland. Since then the economy has seen further modifications and reforms in manufacturing, defence and other sectors like healthcare as well. Most of this reform (as labelled by the Indian press) was actually fulfilling the requirements of the IMF loan and most of it has been woefully slow in coming. That however, is a story for another day. A much-needed reform came along as the Electricity Act in 2003 which ‘transformed the way the power sector conducted its business’.

Pre-liberalisation, the electricity sector in India was based on an archaic framework governed through in-efficient government institutions. The energy industries always shifted between problems in obtaining investments or fuel. The easy availability of domestic coal reserves (Total reserves as of 01.04.2014 amounts to 301.6 billion tonnes) led to the over-dependence on coal-based energy production. Even with a slower economic growth (pre-90s), the aim to provide affordable energy access to a large portion of the nation’s population led to the setup of in-efficient generation stations which led to a technological lock-in. This trend continues into the present days where the electricity sector is primarily dominated by coal-based power accounting for more than 61% of the electricity generated within the country. Further details can be found here.

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As stated earlier, the energy sector have always had to grapple with unavailability of fuel and money. Hence, the liberalisation was primarily aimed at the introduction of newer and more efficient generating systems as well as allowing for the introduction of renewable energy generation with the country. Prior to 2003, the only sources of low-carbon energy within the country was through hydroelectric potential which was again primarily concentrated towards the north of the country and nuclear power. However severe constraints in domestic production of Uranium (U235) effectively limited the performance of the Indian reactors and the presence of a nuclear embargo limited India’s ability to import nuclear fuel.

Unlike privatisation programmes elsewhere in the world as in the UK, the central government did not ‘sell off’ assets, but rather the national power company was divided up within each individual states, each with its separate generating, transmitting and distributing facilities. Independent central and state regulatory agencies were setup. Nuclear assets were still however held by the centre. Private companies were allowed to submit proposals for the setting up of power plants and captive generating stations with a pre-determined tariff structure for selling power to the grid.


 The Electricity Act, 2003 (EA03): This act was the first step to modernisation. It led to the establishment of independent power regulatory commissions across the states which regulated the generation, transmission and distribution within the state. The states along with the centre were required to unbundle their energy industries into separate entities. The states were allowed open access to the transmission grid and an energy market was established that allowed the national trading of electricity and Renewable Energy Certificates (RECs). Captive generators could produce and sell power to the grid and license holders could now trade power on the energy markets. It also led to the foundation of ‘Open Access’ consumers or consumers of electricity demand of more than 1 MW.

The National Electricity Policy, 2006: As a result of the Electricity Act, this policy was published by the Central Power Ministry. This policy aims to address the issues in the domestic electricity sector relating to rural electrification, generation, transmission, distribution, distribution of targeted subsidies, energy and environmental issues along with financing and increasing the involvement of private sector participation. It aimed to increase renewable generation while increasing the efficiencies of the current generators through implementing newer technologies and reducing transmission and distribution losses.


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The liberalisation of the power and energy sector has seen fresh infusion of capital, divestment of energy sources, and increase in plant efficiency with strong growth in a renewables sector fostered by the growth of a healthy and competitive marketplace. However, not everything has gone as per plan. Unavailability of coal linkages due to inefficiencies in obtaining linkages as well as scams have reduced the availability of domestic fuel, forcing energy generators to depend on fuel imports. A financially weak transmission and distribution sector is also throwing up its own list of challenges. The following study will aim to identify the key stakeholders and the major benefits and challenges that they are facing/will face in the coming years with possible mitigation options that maybe initiated before it’s too late.

 The growth of the private energy industry through Independent Power Producers (IPPs), Merchant Power Producers (MPPs) and Captive Power Producers (CPPs)

Even though the economic reforms of 1991 allowed private investment in the power sector, a complex framework of laws and policies saw a very small number of proposals actually cross the planning stage. Also the Enron fiasco saw massive mismanagement leading to the cancellation of un-economic project proposals. The EA03, cleared this up by providing specific guidelines that the IPP had to adhere by along with Special Purpose Vehicles and de-licensing of private proposals to promote a speedier investment environment leading to considerable growth of the industry. The following proposals secured the investment –

  • Dedicated Coal linkages: An investment by the private investors for electricity generation needs assurance of a stable fuel supply. This led to the system of ‘Coal Linkages’ and the Ultra Mega Power Projects (UMPPs) (projects above 1000 MW) which through a bidding process was assured of a definite coal block allocation.
  • Access to the Grid: A private/public energy producer has free access to the grid and is able to sell to the grid without a license. The grid operator (POWERGRID) cannot refuse access except in cases of capacity limitations.
  • Open Access: Consumers with a demand greater than 1 MW are termed as ‘open access consumers’ and are free to negotiate the terms with suppliers or directly buy the power from an energy exchange.
  • De-licensing of CPPs: No license is necessary to set up self-generation facilities and captive generators are free to sell the power to the grid or open access consumers through an energy exchange.

 Increased generation capacities and the possibility of domestic industrial growth

Private investments have been beneficial in the introduction of efficient methods of energy generation. Ultra-supercritical and supercritical boiler technologies have been readily accepted by IPPs. Of the 16 UMPPs envisaged, all 4 that have currently been awarded are to private suppliers (list here). The addition of private investments into the energy generating mix also ensures government revenue through ‘transmission surcharges’ or the price paid by open access consumers (both short and long-term) for the usage of the state electricity grid.

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Private investment also helps promote the growth of domestic manufacturing of components for thermal and renewable energy generation for the domestic market and possible future exports. This is aligned to the ‘Make In India’ initiative of the government.

 Establishment of the Power Exchange and energy trading

The first Indian power exchanges (PIXL, IEX) were setup in 2008 to trade energy on the daily spot market, set day-ahead deals for open-access consumers and trade Renewable Energy Generation Certificates (RECs). The EA03, allows a trading license-holder to freely trade with the market. This has allowed open access consumers, IPPs and MPPs to move from selling power through PPAs and bilateral agreements (which take a long time due to the slow administrative process in India) to selling power directly to the customers through the spot market. This has coincided with the gradual setup of the single national grid and tightening of the frequency band which enables the trading of power all over the country and reducing the energy deficit. Graphs sourced/adapted from here.

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Environmental benefits

The inclusion of private investment has been particularly beneficial for the environment. Private investors have spearheaded the investment into fuel-efficient methods of energy generation and clean, affordable energy. Private firms control a staggering 96% of the installed renewable generation capacity in the country and healthy competition have led to a lowering of renewable tariffs to the point of being competitive with conventional generation methods. Uttar Pradesh Net-metering regulations for rooftop solar PV entered into force on 20th of March 2015. The tariff for rooftop PV installations under net-metering scheme is set to INR 7.06/kWh. The support runs for 25 years. Link here.

 It is however too early to celebrate. Lack of private financial support to discoms, lack of enforcement of RPOs by the concerned SEBs, inefficiency in the handling of the domestic coal and inability to increase demand through transmission access along with administrative loopholes are a few of the bottlenecks that threaten the domestic energy industry.

 Inefficiency of the domestic coal industry

The Indian coal sector has failed to embody the change that has been seen in the other energy sectors in the country. Inefficient handling of the coal blocks and low mining productivity have led to the failure of the domestic sector to keep-up with the rapidly increasing demand for coal by the thermal power plants. Thus, the energy companies have had to import coal while effectively sitting on enormous coal reserves. The Indian coal is also inferior in quality to imported coal which often makes private UMPPs contract imported coal for their power plants (or a mixture of domestic and imported coal). The slump in the global coal prices have also coincided with the slump in the valuation of the Rupee against the Dollar which has made importing coal costlier, in turn making producing power un-economical at pre-determined tariff levels.

 Fall in the number of PPAs contracted

The easy availability of investment and supporting government schemes have had a positive effect in the generation sector which has not quite been reflected on the transmission and distribution sectors. Bottlenecks in its energy grid along with high T&D losses arising due to faulty metering, weak technical components and rampant electricity theft prevent an efficient electricity distribution between regions. While a capacity of 124,905 MW was added between 2010 and 2016, only 44,454 MW demand was added in the same period (link, link). While this should essentially convert India from an energy deficit region to an energy surplus one, the lack in the growth of consumers tend to oversupply the system. This means while some sections of the country remain energy surplus, others experience blackouts.

Lack of capital and demand make discoms increasingly unwilling to enter into long-term energy contract with the power producers which might bind them to a greater capacity than they require. This has seen a decrease in the number of private producers without PPAs in the recent years and this trend continues to increase to a point where CRISIL estimates there to be almost 15% IPPs without long-term contracts. This exposes the generating companies to the highly volatile spot market prices. The dumping of excess generating capacity into the market has reduced spot market prices to about INR 2.28/KWh (November, 2016) which is lower than the stated tariff rate of INR 2.92/KWh (source: CRISIL).

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The lack of secure availability of cheap coal and unavailability of long-term PPAs have extremely adverse effects on the private (and public) power suppliers. The fall in electricity demand sees the Plant Load Factors (PLFs) of coal and Lignite based thermal power generators steadily decreasing to 64.5% in 2014-15 while the dwindling gas supply from the Krishna-Godavari basin has seen PLFs of gas-fired stations fall to 21% in 2015. The reduced PLFs affect the economics of running coal/lignite or gas based thermal power facilities by IPPs or MPPs by making it increasingly uneconomical to recoup the fixed capital costs. This puts an investment at risk and increases actual deficits in the electricity market as well. The deficits can be somewhat hedged through supplying power to open access consumers through long-tern deals. However, low energy prices make it increasingly impossible to agree on long-term deals when short-term prices can allow for a larger dividend for the open access consumer or industry.

Political instability in various states regarding to land acquisition and possible transfer of the ownership of the power facility after a pre-set period of time has also hampered the entire bidding process for large UMPPs by making it harder to obtain loans or investments for power projects. The recent fiasco regarding mis-allocation of coal blocks in the domestic sector have only added to the mess making investors wary of longer-term investments.

 Weak financial health of discoms

Even as the generation sector has seen massive investments, the distribution and transmission sector has been largely devoid of major private investments. High transmission losses, coupled with faulty metering in households and significant electricity thefts have increased losses. to the point of bankruptcy. Low subsidy collections from state governments add to their burden. This makes them unable to enter into long-term PPAs which in turn affect the generation sector. The accumulated losses of all state discoms stood at INR 2,500 billion on 31.03.2013 (link here).

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Low renewable tariffs

Even as the renewable sector has been benefiting from renewed investments and competition, not all is well. In an effort to obtain massive renewable projects to boost portfolios, firms have been quoting extremely low tariffs that experts predict will not be viable in the longer-term (link), necessitating a move towards feed-in tariffs (link). Bids have gone as low as INR 4.63/KWh against a regulator specified limit of INR 6.06/KWh.

However, there is yet no reason to despair. The Indian energy sector remains in a dynamic state of growth and policies and supporting frameworks are being implemented to ensure a stable and sustainable energy future. Government schemes such as the RECs and Renewable Purchase Obligations (RPOs) have proven quite effective in promoting the growth of the renewable sector. Accelerated Depreciation (AD) have been particularly successful in the case of wind power projects by allowing for a sort of training wheels for the firm to recoup capital investments done in the early days of the project. Viability Gap Funding (VGF) is a similar financial support structure that is helpful for renewable energy generators. The Ministry of New and Renewable Energy (MNRE) have also led to the creation of large-scale Solar Parks under the National Solar Mission where the government provides a basic infrastructural support in the form of road, water and transmission to solar-energy generators as a means of sharing the initial costs.

The transmission sector have emerged in the recent years as a weak link to the national energy structure. To mitigate this, a financial restructuring package scheme named ‘UDAY’ was launched by the government. Under the scheme, a complete restructuring and sharing of costs of short and long-term loans and liability is brought about with an equal sharing of the costs by the central and the state governments.

In an effort to reduce its import dependence, India has taken the bold decision of cutting its coal imports. India have managed to boost production by 9.1% in FY16 which has seen a 34% decline in India’s thermal coal imports.

The major concerns that remain for India are –

  1. Low prices in the National Grid system make it increasingly harder for generators to recoup their variable costs.
  2. Their remain surplus unsold power on the grid due to the slow creation of demand by bringing in the quarter billion yet to receive any forms of clean and affordable energy.
  3. Creation of Term-Ahead Market deals remains very low.

The Indian Energy Exchange in its market research report states that a method of investing in a capacity market needs to be done to build a stable and secure energy system. Grid prices in India remain extremely close to marginal prices. While this enhances social welfare, such low prices restrict the creation of peaking power plants. A Capacity Market kind of ‘hedges’ reserve peaking capacities against capacity payments so as not to create peak deficits. Perhaps I will come back to this point later.

A major concern for India remains in the political unwillingness in increasing power tariffs even at the face of massive energy shortages and price gaps. An increase or a cutback in subsidies will expose consumers to real-world prices by cutting down on cross-subsidising. Not only does this allow for greater revenue, it allows for the consumers to promote misuse of cheap energy as a method of demand-side management. However, care must be taken to protect vulnerable households and consumers from price fluctuations. Targeted subsidies should rather be used instead of standard subsidies to help those in need of it. This will not only help foster the economic growth of the country but also help in the betterment of its citizens. Thus the liberalisation of the Indian electricity sector does have its share of pros and cons. But with proper government support and intervention, lessons can be learned and used in the development of a clean, affordable and sustainable energy system for its citizens.

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This has been adapted from an essay that I had written as a part of my coursework. A complete list of references and analysis can be found on my LinkedIn profile.

Please leave comments and your opinions.

Written by Sagnik Ghoshal


Further Reading:

Indian Power Market: Journey so far and way ahead by Indian Energy Exchange [June, 2014]

http://www.iexindia.com/Uploads/Reports/14_01_2015IEX_India_IPM_Report.pdf

CRISIL Insight: Current Worries by CRISIL Ratings [July, 2015]

http://www.crisil.com/pdf/ratings/crisil-insight-power-sector-compendium.pdf

Growth of Electricity Sector in India from 1947 to 2015 by Central Electricity Authority (Govt. of India) [April, 2015]

http://www.npti.in/Download/Misc/CEA%20Growth%20of%20Electricity.pdf

India’s Electricity-Sector Transformation by Institute for Energy Economics and Financial Analysis [August, 2015]

http://ieefa.org/wp-content/uploads/2015/08/IEEFA-Indian-Electricity-Sector-Transformation-11-August-2015.pdf

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