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T&D: Power policy's new mantra - Views on News from Equitymaster
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  • Jan 18, 2003

    T&D: Power policy's new mantra

    Last year, while formulating a new power policy, the government made one very important announcement. It noted that from now on, transmission and distribution (T&D) would be the focus of planned development. Hitherto, power generation was the key focus of the government policy. But why this shift?

    As per estimates, India has to generate an incremental 10,000 MW of electricity every year for the next 10 years to plug the demand-supply gap. In FY02, India managed to add approximately 2,357 MW of capacity, against the 10,000 MW per annum needed. So if there is still a lot to be achieved in power generation, then why shift the policy focus?

    Capacity addition and generation...
    Year Capacity Addition
    % change Generation
    % change
    FY93 3,550 - 301 -
    FY94 4,565 28.6% 324 7.5%
    FY95 4,605 0.9% 351 8.2%
    FY96 2,135 -53.6% 380 8.4%
    FY97 2,624 22.9% 396 4.2%
    FY98 3,283 25.1% 421 6.4%
    FY99 2,747 -16.3% 449 6.5%
    FY00 2,907 5.8% 493 9.8%
    FY01 3,776 29.9% 500 1.4%
    FY02* 2,357 -37.6% 514 2.8%
    Source: CMIE

    Here's why. India's power generating capacity stood at 102,907 MW (mega watts) in October 2001. Out of this, it approximately managed to generate only 58,676 MW (or 57%) of electricity during FY02. A lot of this capacity remained underutilized. On an average, India's transmission and distribution losses (T&D) exceed 20% of total power generation compared to around 10% in developed economies. In fact, T&D losses in some states like Orissa and Karnataka are shockingly very high (49% and 37-40% respectively).

    Experts suggest that the solution could be corporatisation of state electricity boards (SEBs). Consequently, investment could be made in renovation and modernisation/maintenance (R&M) of old power plants as well as distribution and transmission networks. By this, India can unlock almost 40,000 MW additional capacity.

    The ideal investment proportion in generation and T&D should be 1:1. India's T&D to generation ratio stands at a dismal 0.3:1, as compared to the aforesaid international benchmark. Although investments in generation have somewhat kept pace, T&D investments have lagged behind. This has resulted in the present day anomaly in transmission and distribution of electricity. As is known, some states are power surplus, while others face shortages. In short, carrying capacity of electricity has not kept pace with generation for an equitable distribution of power across the country.

    In order to solve this anomaly huge capital investment is needed. On the one hand investments in generation have to continue, on the other, there is an urgent need to step up investments in T&D infrastructure. T&D must get more attention and more funds than generation. That is why the shift in government's focus. This bodes well for the sector as a whole, as it is aimed at stemming the losses arising out of T&D as well as improving the existing utilisation of capacity.

    When India opened its doors to private investment in the power sector, one hoped that in a decade's time, power shortages would become a thing of the past. However, seeing the sad state of SEBs, private participants sought guarantees to save themselves from the financial risk. After all, power is a capital-intensive industry, where the investment structure is 60-70% debt and 30-40% equity. So in the process of guarantees etc., a lot of the projects could not see the light of the day. And some that did (Enron), left a bad taste in the mouth.

    It became apparent that to attract more investments in this sector, SEBs had to be revitalised and made profitable. To bring that about, T&D losses had to be cut, power thefts had to be stopped and subsidies had to be phased out. Otherwise, the financial rot would continue eating into state budgets and consequently, the national exchequer.

    In order to make states more responsible, the centre promulgated new scheme namely the Accelerated Power Development Program (APDP) to provide financial assistance to states for undertaking renovation and modernization programs of power stations and also for strengthening transmission and distribution network. An amount of Rs 15 bn was budgeted for release to states during FY02 under APDP. In simple terms, APDP is an incentive given to the states by the centre wherein the centre is willing to write off the states past electricity losses, and help them develop power infrastructure. But in lieu of this, the states have to give an undertaking that SEB losses will be a thing of the past and T&D losses will be checked in a time bound manner. If the state fails on this objective, then losses incurred will be adjusted against the state's planned outlay.

    So states are already taking their first steps towards corporatisation. Orissa and now New Delhi's distribution circles are already in private hands. Andhra Pradesh, Karnataka and Gujarat are also following suit. India is slowly, but surely taking steps to keep up with its power needs.

    If India has to achieve a consistent 7% GDP growth, then power generation has to clock in 8%-9% per annum. Let there be light!



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