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"Ambitious Planning or Ineffective Implementation – The Case of Indian Power Sector"- by Dr. Pramod Deo, Chairman, CERC

This is part of Dr Deo's key note address during the inaugural session of the 'Power Vision Conclave 2011', January 21, 2011 at The Oberoi, New Delhi.

It gives me an immense pleasure to have the opportunity to address this august gathering. Planning, as a matter of policy should be ambitious. But it should not be bereft of realities. On capacity addition front, the target set in successive Plan periods has been highly ambitious. Consequently there has been slippage.

The 11th plan originally had a steep target of achieving 78700 MW of generation capacity which was about 3.5 times that of 10th plan capacity addition. This target was revised to about 62,000 MW. 11th plan period stands out from the earlier plans in that the comprehensive legislation like the Electricity Act, 2003 and policies were promulgated during this period. Removal of entry barriers being the underline theme of the new law and policies, it was obvious that the capacity addition target would be set at such higher levels.

Out of 62,000 MW about 20,000 MW is expected to come from private investment. A total of 22,302 MW has been commissioned till FY 2009-10. During the remaining two years of the 11th plan it is expected that about 40000 MW of capacity addition would be achieved. Transmission augmentation planning has moved away from the earlier generation evacuation system planning to integrated system planning. The currently available inter-regional transfer capacity is 20,800 MW and is targeted to increase to 37,700 MW by 2012.

I will briefly touch upon the achievements against these targets and then dwell on the implementation constraints and bottlenecks which must be removed, to ensure that history does not repeat itself on the capacity addition front in particular and reforms in general. Delicensing of generation together with competitive bidding for power procurement has facilitated investment in generation projects. Four Ultra Mega Power Projects (UMPPs) viz. Mundra in Gujarat, Sasan UMPP Madhya Pradesh, Krishnapatnam in Andhra Pradesh & Tilaiya in Jharkhand have already been awarded. Tariff based International Competitive Bidding has been followed for selection of project developer.

In transmission sector, Central Electricity Regulatory Commission (CERC) continues to play an important role in facilitating private investment in transmission. The Empowered Committee, which is chaired by one of the members of the Commission, succeeded in getting the bidding process completed for four important transmission systems. Two more are in the offing in near future. Realizing the urgent need of revamping the transmission pricing mechanism in India, CERC has issued regulations for a point of connection transmission tariff framework, which would be distance and direction sensitive. The new transmission pricing regime is aimed at removing the distortions being faced in the electricity markets due to the pancaking effect in the present pricing system.

Implementation Issues

Fuel availability

The sector has witnessed a number of irritants in the past year. Fuel shortage has been a major concern. Coal stocks in several power plants were critically low and adversely affected generation. Continued shortage might impact the future capacity addition programme as well. India’s coal imports for power production are likely to rise to 48 million tonnes in the next fiscal, sharply higher than the expected imports of 28 million tonnes for FY09-10. Both private and public power utilities are likely to contribute to this high figure.

At the end of FY 09-10, according to the Central Electricity Authority data, around 22 thermal power stations were in the critical list with less than seven days of coal supply. Coal production was targeted to grow at 9.56 per cent per annum during the Eleventh Plan against an annual growth of 5.6 per cent per annum in the Tenth Plan. The estimated growth in the first three years of the Plan was 7.31 per cent, reaching 7.89 per cent in the total Eleventh Plan period.

The 11th plan envisaged 104 mt of coal production from 93 captive blocks by the year 2011-12. However, the projected production from such captive mines is now expected to be around 81 mt leaving a gap of around 23 mt which will further exert pressure on coal imports. The price of imported coal is much higher than the price of domestic coal. Imported non-coking coal from Indonesia landed price at Chennai port in August 2009 was reported to be Rs. 3,389 per tonne and Rs. 4,288 per tonne for coal imported from South Africa.

Against this, the price of non-coking coal supplied by Mahanadi Coalfields Limited (MCL), Talcher at Chennai is reported to be Rs. 1,560 per tonne for Ennore power station and Rs. 1,492 at North Chennai power plant (based on pre-revised prices). In other words, even though the cost of delivered domestic coal is more than 2.42 times the cost of coal at pit head, it is still cheaper than imported coal. There is a need to bring coal prices into alignment with international prices after adjusting for calorific value.

Power plants fuelled by coal blocks face issues like irregular supply. The main reasons cited for the coal shortage are delay in coal imports or reduced coal supplies from the captive coal blocks for these plants. There are difficulties regarding allotment of gas. The government does not allow gas to be used intermittently. This would have to be enabled or some other method adopted so as to make gas as a feasible fuel for generation.

Environmental Clearances and R&R Issues

Environmental and forest clearances (EC & FC) are critical statutory permissions to be obtained before implementation of the projects. Against the scheduled time frame of 210 days for EC and 150 days for FC, it takes nearly 3-5 years normally to obtain such clearance. State Governments need to play a proactive role in resolving these issues.

Power Export from states and royalty

Another disappointing development for the sector has been the resistance of the states to allow the power generated to be exported outside the state. This could send out wrong investment signals. According to National Tariff Policy notified by Central Government, all future requirements of power should be procured competitively by distribution licensees.

But some State Governments have issued policies which are not in line with National Electricity Policy or Tariff Policy. For examples in Chhatisgarh there is a provision that sale of power to other states shall be through CSEB only and after meeting the requirement of the state. In Orissa there is a provision of supplying 7% power at variable cost to the state. Similarly, in Punjab and UP the government has the first right of refusal to purchase 70% and 20% of power produced in state respectively. CERC has advised the Central Government to take necessary corrective actions and evolve suitable policy for resettlement and rehabilitation in resource rich states and may look into adequacy of royalty on coal mining states.

Availability of Manufacturing Equipment

While the availability of plant and equipment is going up with expansion by BHEL from a level of 10,000 MW per annum (December 2007), to around 20,000 MW per annum by the end of 2012, more than 20,000 MW capacity is being executed by foreign suppliers. As per the Planning Commission mid-term appraisal report, orders have already been placed for Chinese equipment in respect of projects for 36,800 MW during the past couple of years. There is need to develop domestic manufacturing capacity and vendors for spare parts of Chinese equipment. Private players like L&T & Mitsubishi JV, Toshiba & JSW JV, ALSTOM & Bharat Forge etc., are also going to set up new capacities, which will help the Twelfth Plan projects.

Discom Financial Viability

The biggest issue threatening reforms of power sector today is the Discom financial viability. The losses are reported to be in the range of 50,000 cr. This is attributable to inefficiencies in operation as also to disallowances of legitimate costs in the regulatory process of tariff fixation. It is the state’s responsibility to actually implement the reforms because the entities are owned by them.

It is not possible to foster competition if we go back to single buyer model. There are no incentives for discoms to improve efficiency if all the contracts (PPAs) are bundled again and allocated to them. There should be incentives for consumers if a discom in one region reduces losses more than the other discom. The other major challenge is to privatize the distribution sector, which has not been taking place at all. The main reason is the apprehension that the private sector may indulge in cherry-picking. So, the franchise model is being recommended. However, much more progress is desirable on this front. Recently, after a long wait, distribution in Agra was handed over to a private player. One needs to see an improvement in the service there, as was demonstrated in Bhiwadi, for the concept’s wider acceptance by other states. FOR has evolved model regulation on distribution franchisee model which should be followed.

Role of CERC in investment promotion for power sector

Central Electricity Regulatory Commission (CERC) being the national level regulator of electricity sector has a special role in shaping up of all electricity markets in India, ensuring timely and adequate expansion of inter-state transmission network, improving grid access to sectoral players and last but not the least of overseeing that market players behave responsively and within the rules of the game. A robust regulatory framework has improved investor confidence in the power sector which is visible in the upcoming projects.

The Commission has also continued to play an important role in facilitating private investment in generation and transmission. CERC’s regulations are alike for public as well as private sector. For instance, the tariff principles – financial and operational norms are applicable equally for public as well as for private sector. Same is the case with the licence conditions, IEGC and other regulations. Recently, Central Electricity Regulatory Commission (CERC) has induced suitable regulatory framework for connectivity and access to the grid and removed the earlier discrimination between the public sector generators and the private sector generators in the matter of connectivity to the grid.

Besides the Ultra Mega Power Plants, about 19000 MW of captive capacity has come on grid mostly through private investment. The CTU has received 225 applications from private developers for Long Term Open Access amounting to 1,70,000 MW. The Empowered Committee, which is chaired by one of the members of the Commission, has succeeded in getting the bidding process completed for three important transmission systems. With power market regulations in place, the market structure in the sector has been codified. The regulations have defined various types of contracts, and the roles and responsibilities of various market players. Market monitoring has been one of the major activities of the Commission. A price cap was imposed by the Commission this year for a period of 45 days. While imposing the price cap, the Commission was conscious of the need for ensuring a reasonable return for the investors and the impact of such an intervention on the investment climate in the power sector.

The Commission took various initiatives to stoke investor confidence in renewable energy generation. The Commission issued generic tariff for all such renewable energy sources. The preferential tariff determined by the Commission ensures reasonable recovery of costs. The Commission also formalized the framework of Renewable Energy Certificate (REC) seeking to address the mismatch of availability of renewable energy resources and requirement of the obligated entity under the Act to fulfill their Renewable Purchase Obligation (RPO). There is an urgent need to push for the implementation of reforms that are already in place. Consumers and civil activists need to play a more proactive role in challenging practices that are outside legal mandate. A good start has been made in generation and transmission sector but a lot more needs to be achieved, especially in distribution sector.

About the Author

Dr Pramod Deo is the Chairman, Central Electricity Regulatory Commission (CERC). Dr. Pramod Deo has served as the Chairman of Maharashtra Electricity Regulatory Commission (MERC). Before joining MERC in 2002, he had acquired 30 years of experience in the Indian Administrative Service of which more than 20 years of experience has been at both policy and project management levels in the energy sector. An alumnus of IIT Delhi, Dr. Pramod Deo has worked in the Ministry of Power, Government of India, Department of Energy, Government of Maharashtra and international institutions like United Nations Environment Programme and Asian Institute of Technology. He is the recipient of the World Wind Energy Award 2005 and was conferred with the CII National Award for Distinguished Personality-Energy Management for the year 2006. He is also co-author of three books on energy planning, energy management and regulatory practice.


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