Powerless In Summer

The Story Of The Power Sector Reforms

Prabir Purkayastha

INDIA’S power policies are in a quite a bit of mess.
It is now clear that we are likely to see large power cuts this year, the impact
of which is already visible. After more than 15 years of so-called market based
power sector reforms, we now have huge shortages along with high cost of power.
If we look at what the Chinese have done in the same period, the contrast could
not be clearer. They are installing the equivalent of two Indian grids every
five years – they add India’s total installed capacity every two and a half
years and have also emerged as the biggest global manufacturers of power plant
equipment. Their equipment costs are lower by a whopping 20-40 per cent from
that of other manufacturers. No wonder that China, with low cost and abundant
power, is emerging as the world’s favourite location for setting up
manufacturing facilities, with even Indian companies making a beeline for China.

Let us look at simple figures between India and
China’s developments. In the late half of 80s, India was adding about 4,500 MW
per year. Starting with an installed capacity of 42,585 MW, we added about
21,400 MW in the Seventh Five Year Plan. In the same period, the Chinese, whose
grid was approximately twice ours, were adding about twice what we were – around
9000 MW per year. So the rate of growth of both India and China were quite
similar – they had a larger base but both were adding capacity at the same rate.
However, the story changes radically if we look at the comparative figures
today.

In the last 17 years we have barely reached the
capacity addition levels we had in the Seventh Plan. In the Eighth, Ninth Five
Year Plans we have added 16,422 MW and 19,095 MW respectively. In the Tenth
Plan, we have added another 23,514.5 MW. In the same period, China has increased
its installed capacity massively: starting from around capacity additions of
9,000 MW per annum, they are now adding a whopping 50,000 MW per year against
our annual additions of around 4,000 MW. While they have accelerated their
addition of installed capacity, we have slowed down ours! No wonder today we
look only to be a service hub, relying on a good telecommunications network and
our human skills. We have given up trying to match China in manufacturing.

Indian Power Scenario: 1985-2007

China Power Scenario: 1990-2005

THE DIFFERENCE IS IN POLICIES

How did China manage to accelerate its power program
while we were slowing down ours? This is directly the result of the kind of
policies followed. They decided that if they had a certain amount of money
available for investments in the power sector, they had to make that money do
more. This meant that cost per MW had to come down if they had to increase
installed capacity more rapidly. They settled on two elements for reaching lower
cost per MW for their new plants. One was that they ordered their equipment in
bulk and therefore could take advantages of economies of scale. If any company
places an order for 20 turbines instead of say 2, the price is not 10 times but
possibly only 5-7 times. This brought down the costs per every MW added. The
second was that they indigenised their power manufacturing rapidly: detailed
transfer of technology and manufacturing agreement with Chinese accompanied
every bulk order placed on any international company. As a result, not only did
they secure equipment at lower costs than any other country, they built the base
for their next level of development: they successfully built an equipment
manufacturing sector, which produces lowest cost equipment in the world.

If we take the situation in 1980s, India had a
stronger equipment manufacturing sector than the Chinese. BHEL had the ability
to produce 4,000-5,000 MW power equipment annually. There were no Chinese
companies, which could match BHEL in either the range or in the capacity of its
manufacture. While BHEL has remained where it was, today, there are three
Chinese companies that have the ability to produce 20,000 MW annually. Shanghai
Power, Harbin Power and Dongfang are all many times the size of a BHEL.

Not only is China cheaper than India in the
international market, even in our home market, Chinese plants cost less than
BHEL’s. One can argue on the quality of Chinese plants as Indian manufacturers
do. But the fact remains that Chinese plants are working in China with high
reliabilities. They also are installing new plants at a rate much faster than
any other equipment manufacturers. As we all know, quality comes from mass
production: it is the ability to mass produce power plant equipment that is
leading to their lower costs and finally their equipment reaching performance
standards of other manufacturers.

The above trajectory is not surprising. Before the
90s, India had adopted the same path. We indigenised manufacturing capacity and
had standardised our equipment. The result was that BHEL was able to beat all
global competition in the Indian market for its equipment. All of NTPC’s global
tenders bar one were won by BHEL. With standard unit sizes and an indigenous
manufacturing base, all we had to do was to expand the market to lower our
costs. This would have meant more plants being installed with the same amount of
money and finally cheaper power as one important component of cost of power is
obviously the capital cost per MW.

ALBATROSS OF MARKET REFORMS

Instead, the Indian power policy decided to embark on
“ambitious” market reforms. There were essentially three elements to this
strategy. The first was to invite private capital to invest in new power plants.
The second was to reduce public investments in power generation. The third was
to use the liquid fuel or hydrocarbon route for power generation, particularly
in the west coast. Projects such as Enron bear the hallmark of all these
policies.

It is instructive that all the private investors then
were asking for power purchase agreements based on capital costs, which were Rs
5 to 6 crore per MW. Even 15 years later, the costs per MW with Chinese
technology is not more than Rs 2.5 to 3 crore per MW. Even BHEL plants have
capital costs way below figures for such private power plants. BHEL at that time
had made an offer to the government that if they are given sufficient orders
they could supply plants at Rs 2.5 to 3 crore per MW, an offer that was
summarily rejected as not reflecting the market reforms that the government
wanted to bring in. And projects such as Enron had naphtha as the fuel as this
would mean they could go on-stream quickly. At that time, oil was $10 a barrel.
Today, with oil prices at $50-60 a barrel, it has proven preferable for state
boards to pay the fixed costs of naphtha-based plants and not draw any power
from them.

If we look at how the Indian power sector has treated
the indigenous equipment manufacturing sector in terms of policies, the
situation is even worse. Not only has the Indian government tried to introduce
polices by which BHEL was not helped to acquire technology and also not
encouraged to increase its manufacturing capacity, it has actually suffered
reverse discrimination in its own domestic market. In the recent open tenders,
for Sipat, Barh and Yamunanagar, BHEL has either been disqualified for not
having technology for supercritical boilers or has been priced out by cheaper
Chinese or Korean equipment. Here, not having a plan for importing or developing
technology of supercritical boilers before opening out the market, as well as no
import duties on finished equipment are responsible for BHEL losing out.

PENALISING BHEL

The current duty structure is a completely inverted
one as semi-finished or raw materials are taxed but finished goods are not. Thus
there are no import duties for power plants above a certain size –– in the name
of super thermal power stations, all duties are waived for plants of 1000 MW and
above size. This obviously penalises BHEL as they have to pay high duties for
intermediate or primary raw materials while the finished goods comes without any
duties. Instead of helping indigenous manufacture, we are now entering a phase
where it is the foreign companies that the government wants to help. The
long-term threat to the power sector is once indigenous manufacturers such as
BHEL are priced out in the domestic market, the prices can then go up without
hindrance.

We have written earlier that all countries help their
domestic industry, while preaching the virtues of “free market”. It requires a
particular kind of stupidity to believe these self serving slogans to open out
the Indian market and not use it as the Chinese have done to improve its market
position. The irony is that while Indian equipment manufacturing industry has
missed a golden opportunity to upgrade their technology leveraging on the size
of the Indian market, those countries preaching the virtues have not gained
either. The market is clearly now with Chinese, Koreans and the Russians, with
BHEL playing second fiddle. Companies such as Alstom, ABB, Siemens and other
such companies seem to be on the way out. They may still be around for some more
time. But with no domestic market after 2012 in Europe and the US, their days
seem to be numbered. Unfortunately, with the policies being followed currently,
BHEL may not be far behind.

Indian power sector reforms need a critical
re-examination. However, the government is unwilling to do this exercise, mired
as it is in its chase for market driven reforms. With such faith in the market,
there is no short-term hope for the power sector. The only hope is that sooner
rather than later, the government will wake up to the simple fact that the power
reforms are not working. That is the time we can try and salvage what remains of
the sector.