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With the coming of Electricity Act 2003, the power sector, which was highly regulated with lot of licensing requirements, is in the throes of a long awaited change. The licensing requirements have been reduced, as the generation company will be free to enter distribution business and vice-a-versa. Currently private sector accounts for 14% of the total power generation capacity. The remaining is divided between Center and the state owned companies in the ratio of 40:60.
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The generating capacity in India stood at 1,34,717 MW (excluding captive capacities of around 30,000 MW). Out of this, the country utilises a poor 65% due to inefficient transmission and distribution causing a lot of power shortage. As a result, it has become necessary to resort to power cuts and other regulatory measures to ration power supply.
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Currently central institutions like National Thermal Power Corporation (NTPC) and the State Electricity Boards (SEBs) dominate the power scene in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 65% (86,936 MW) of the total power generation, hydro-electricity plants contribute 25% (33,486 MW) and the rest comes from nuclear and wind.
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Average transmission and distribution losses (T&D) exceed 25% of total power generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing, and high pilferage.
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Further, the government plans to add around 80,000 MW of generation capacity over the next five years (XIth five year plan spanning FY07 to FY12) in order to bridge the current demand-supply gap. This is almost 60% of the current generation capacity in the country. Also, if India has to achieve a consistent over 8% GDP growth, then power generation has to grow by around 11% to 12% per annum.
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The poor performance of India's existing generating units has been a principal cause of power storages and unreliable quality of power supply. The primary culprits are the coal-fired thermal power stations, which accounts for over 53% of total installed capacity. The average plant load factor (PLF) of thermal power stations in India is less than 60%, but varies considerably across regions. However, not all of the thermal generating stations have such dismal records. For instance, the performance of 500 MW and 200 MW units has been satisfactory, and their PLFs have been higher than the national average. It is, in fact, the thermal units of 120/140 MW and below that are cause for concern.
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The Electricity Act has proposed significant policy decisions that could reform the Indian power sector over the long term. Licensing norms for entering generation and T&D business of power have been eased. Under APDRP (Accelerated Power Development & Reform Program), as a one-time measure, the state electricity boards’ (SEBs) dues to the central utilities are to be converted into state backed bonds. In exchange, the states have to give an undertaking that SEB losses will not occur and T&D losses will be checked in a time bound manner.
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| Supply |
Many projects have been planned but due to slow regulatory processes, especially in the distribution segment, the supply is far lesser than demand. Currently, India needs to double its generation capacity in the next 7 to 10 years to meet the potential demand.
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| Demand |
The long-term average demand growth rate is 6% to 7% per annum and is expected to grow at faster rate in the future.
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| Barriers to entry |
Barriers to entry are high, especially in the transmission and distribution segments, which are largely state monopolies. Also, entering the power generation business requires heavy investment initially. The other barriers are fuel linkages, payment guarantees from state governments that buy power and retail distribution license.
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| Bargaining power of suppliers |
Not very high as government controls tariff structure. However, this may change in the future.
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| Bargaining power of customers |
Bargaining power of retail customers is low, as power is in short supply. However government is a big buyer and payment by government can be erratic, as has been seen in the past.
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| Competition |
Not high currently. The Electricity Act 2003 aims to encourage investments, thereby increasing competition. |
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In FY07, the total power generation figure for the country stood at 663 bn units as compared to 617 bn units in FY06, thus representing a growth of 7.5% YoY. This was largely on the back of higher capacity addition and improved plant load factor (PLF, or capacity utilisation. However, owing to sustenance in strong demand for electricity, the shortages (excess of demand over supply) remained high, with the month of February 2007 recording a shortage of as high as 13.5%. Also, as a matter of fact, the power shortage position was worse during FY07 when compared to FY06.
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The average (PLF) in the Central Public Sector Undertakings (CPSUs) in FY07 was much higher than that achieved by the State Electricity Boards as a whole. Wide inter-state variations are noticed in the average PLF of thermal power plants with southern and western zones having better performances. The average PLF for eastern and northeastern regions continues to be much lower than the all-India level. If the PLF for Northeast and eastern states is excluded, the PLF of the SEBs is not very different from the central utilities.
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As far as transmission and distribution segments of the sector are concerned, there was little that actually happened in FY07. The country continues to reel under the pressure of higher T&D losses and with the government running very slow with the reforms in these segments, the long-term sustainable growth of the sector seems doubtful.
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Recognising that electricity is one of the key drivers for rapid economic growth and poverty alleviation, the industry has set itself the target of providing access to all households in next seven years. As per Census 2001, about 44% of the households do not have access to electricity. Hence, meeting the target of providing universal access is a daunting task requiring significant addition to generation capacity and expansion of the transmission and distribution network.
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Restoration of the financial health of SEBs and improvement in their operating performance continue to remain a critical issue in the power sector. The Electricity Act of 2003 contains provision for securitisation of accumulated SEB dues. The government of India has signed MOUs with various states reflecting the joint commitment of center and states to undertake reforms in a time bound manner.
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The guaranteed rate of return has been fixed at 14%. This has been done to encourage investments in the sector. This is because government does not yet give any incentive returns to companies, which have efficient performance.
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Inefficiencies in state sector utilities have adversely affected capacity addition and systems improvement. While the SEBs not having enough resources to finance future capacities, they are also unable to raise funds for investment from alternative sources due to their poor financial and commercial performance. Also, the inability of SEBs to pay their dues, in full, to central power utilities (CPSU) adversely affects the finances and investment plans of these CPSUs.
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On overall basis, power distribution has been loss-making business in India. But with the privatization coming in, the investment in transmission and distribution networking is expected to improve. Distribution business has already been privatized in Delhi and a five years target has been set to bring down its T&D losses from 52% to 31%. Following Delhi's example, many states like Uttar Pradesh, Gujarat and Maharashtra are looking at corporatising their distribution circles. However, the slow pace of reforms in this segment is expected to continue going forward.
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Trading in electricity has brought a sea change in the structure of the industry because some parts of country are power surplus and some are deficient. Power trading company buys power from surplus area and sells it in deficit area using and transfers power through transmission lines. While the potential for power trading is huge, the regulator has to play a key role in removing all discrepancies that occur in terms of electricity pricing across trading regions.
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