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Investments will propel India’s future… - Views on News from Equitymaster
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  • Dec 9, 2000

    Investments will propel India’s future…

    India’s power generating capacity stands at 96,682 MW (mega watts). Out of this, it managed to generate only 54,795 MW (or 57 percent) of electricity during FY00 (fiscal year 2000). India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. The power generation statistics have shown a consistent improvement over the past few years. In FY00, power generation increased by 6.9 percent, with thermal and nuclear power generation growth clocking 9.2 percent.

    On the surface this seems like a healthy situation for a developing country like India, but hidden behind those numbers are alarm bells for the whole country. On an average, transmission and distribution losses (T&D) exceed 20 percent total power generation compared to less than 15 percent for developing economies. In fact, T&D losses in some states like Orissa and Karnataka are shockingly very high (51 percent and 37-42 percent respectively).

    This is however, only a part of the problem. India has to generate an incremental 10,000 MW of electricity every year for the next 10 years to plug the demand-supply gap. More importantly it has to bring transmission and distribution (T&D) at par with power generation. India’s T&D to generation ratio stands at a dismal 0.3:1, as compared to an international benchmark of 1:1.

    In order to encourage private investment in the sector, the government promulgated the Independent Power Projects policy in 1991. But this policy created more confusion than solve them. Although a lot of foreign investors evinced interest in power generation, the policy makers could not develop a firm policy that was acceptable to both the state electricity boards (SEBs) and the private investors. As a result, even today the policy itself is in a development stage. Frequent changes in the government in the last five years have also contributed to this delay.

    The main problem for all parties concerned is to mitigate risk. The poor financial health of the SEBs became a bone of contention between the investors and the respective state government’s. The shifting stand regarding the security package offered by the government of India in its policy has led to uncertainty in the minds of the institutions (foreign as well as domestic). Conflicting demands also came from these institutions, as they keep on adjusting their demands depending on the nature of the project, the state in which it is being set up and the changing stance of the government.

    All this has taken a toll on the power generation growth in India. In FY00, India managed to add only 3,884 MW of capacity, against the 10,000 MW per annum needed. Most of the capacity addition took place in the public sector. The private sector added only 515 MW of thermal capacity.

    But it will be wrong to say that India remains ignorant of its needs. Reforms are gradually picking up momentum. During the year many state governments recognized the need to privatize the distribution systems. For example, Orissa divided its state electricity board (SEB) into four separate entities to give a fillip to its privatisation drive. In FY00, the IPP segment not only clocked a whopping 50 percent growth in absolute terms, but its actual contribution to the total power generated also improved.

    IPPs showing signs of life
    (MU) FY99 FY00 % increase
    Total SEBs/EDs 244,177 260,294 6.6
    Total Central Sector 172,777 181,033 4.8
    Total Private Utilities 20,401 21,488 5.3
    Total Private IPPs 11,304 16,993 50.3
    All India 448,367 480,011 7.1
    Source: Central Electricity Authority

    Increased investments in the power sector will help improve overall production (currently there are no quantitative estimates of loss of production due to non availability of power or bad quality of power but losses will tend to be very large). But on second thoughts, our past record in power generation dampens India’s soaring spirits.



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