The Currednt Power Policies — the Need for a National Debate

The power policies proposed by the Central Government have serious implications for the country in terms of very large tariff increases  and huge foreign exchange outflows. The Department of Power has been advocating the “Orissa Model” for restructuring of the State Electricity Boards (SEBs) and sanctioning projects based on naphtha and other hydrocarbons. The restructuring of SEBs the Orissa way will lead to tariff increases of the order of 300% — these are the recommendations of various consultants. This may be contrasted  with the Planning Commission’s calculations that the tariffs  need to be raised by only 20% for the SEBs to earn adequate returns on capital.[i] The Electricity Act of 1948 is sought to be changed with a new Draft Bill.[ii]  None of these measures have been discussed adequately in the country.  Unless the policy options are debated openly, there is every possibility of repeating the earlier fiasco while trying to induct Independent Power Producers (IPPs). The current policies of the Government seem to be based on the following assumptions:[iii]

a)      The total installed capacity in the country needs to stepped up in the next five years from 83,000 MW  to 133,000 MW — an increase of 50,000 MW. The requirement in the next decade is projected to be about 100,000 MW of additional capacity.

b)      As the neither the centre nor the states have the necessary resources — Rs.400,000 crore for generation and matching funds for transmission and distribution — this program can be implemented only through large foreign and Indian private capital  participation.

c)      As the State Electricity Boards are financially in trouble, they  should be dismantled and handed over to the private sector — this appears to be the view of the Department of Power. The states will then be left with the residual responsibility of Regulations — ensuring fair play for all the parties including the consumer.  As the current Act places the primary responsibility of supplying electricity on the State, therefore the Department of Power feels the need to recast the Act.

We shall examine briefly the above propositions and suggest that the data does not substantiate the conclusions being put forward by the Department of Power.

Power Needs of the Ninth and Tenth Plans

For a healthy development of the power sector, the following objectives have to be met.[iv]

•         Minimise investment costs to enable better utilisation of available financial resources.
•         Minimise net outflow of resources, especially foreign exchange.
•         Minimise  costs of energy production to bring about economics in power supply and keep power tariff at affordable levels without having to resort to heavy and unsustainable subsidisation.
•         Maximise security of power supply and insulate them from external and international events and catastrophies.

The last 40 years of power development in the country focused on reduction of the unit cost of power. With the current basket of reforms, this has ceased to be an important criterion for the development of the power sector.

The Union Ministry of Power has inflated the installed capacity required and the capital costs and then projected that we have no matching resources. The Ministry of Power has estimated that the requirement of power in the country is 52,463 MW for the Ninth Plan and 44,614 MW for the Tenth Plan — a total of 97,077 MW.[v] The basis of these figures has not been furnished anywhere. The 15th Electric Power Survey (EPS) has been prepared by the Central Electricity Authority (CEA) though not officially released. The draft 15th EPS, is guilty of gross overestimation of power demand. Without a thorough examination of the power needs, such high figures will create a panic response with adverse impact on our economy.

The Draft 15th EPS has furnished estimated figures for peak demand of 1995-96 and 1996-97 as 63,490 MW and 68,373 MW respectively. The actual figures are 60,981 MW and 61,029 MW (up to September 1996) — an over estimation of more than 50% in demand growth.  The 15th EPS, even though was prepared in July 1995 shows all figures from 1993 onwards as estimated. With such erroneous estimations even for the first few years, no serious planning exercise for the Ninth Plan can be carried out on the basis of 15th EPS. The 15th EPS has projected a peak demand of 95,757 MW at the end of the Ninth Plan. Instead, the peaking requirement can at best reach 82,000 MW.

The other flaw in the current planning approach is the expected system performance. The key parameter for planning in the past has been the total energy demand and the Plant Load Factor (PLF). The EPS also primarily surveys the energy demand. While this was appropriate under conditions of a constrained power situation, this has to change if power availability increases and there are sharp peaks in demand. With increasing domestic consumption, today we can see sharp daily variations. As domestic and agricultural load varies with seasons, there are large seasonal fluctuations in power demands. In such a scenario, the key planning parameter is the system margin — the margin of installed capacity over and above the peak demand or alternatively, peak demand met as a proportion of total installed capacity. The Plant Load Factor (PLF) has little meaning if there are large daily and seasonal fluctuations as the load can not be controlled by the power system; only the supply can be increased or decreased to meet the demand.

The question naturally arises what should be reasonable capacity norms for planning purposes. A study of 24 countries conducted by CIGRE regarding adequacy standards in generation planning shows that the plant margins (excess capacity as a proportion of peak demand) are of the order of 20 to 25 % for almost all the countries studied.[vi] The plant margins in India have been pegged  higher for a number of reasons, many of which do not hold good today. For instance, if the load curve is relatively flat, it is difficult to schedule normal preventive maintenance without increasing the probability of a loss of load. Today, the load curve shows considerable seasonal variations, which would be actually even higher if the peak demand is not constrained by a lack of installed capacity. The energy shortage is now more a peak demand shortfall rather than an absolute shortfall of energy.

Currently, the availability in the plants is of the order of 78.3 % (for the year 1993). The availability of the new 210/500 MW units is even better. It may also be noted that the majority of the 83,000 MW today is from newer plants that have much better availability. The system performance has improved from 49.9% in 1985 to 60.6% today with better performance of the units and a larger grid capacity. We have an installed capacity of 83,000 MW against a current peaking requirement of 61,000 MW. Therefor, we should be able to meet a peak demand of 73% of our installed capacity without undue difficulty. It is only due to poor system performance that we have peak power shortages. An addition of installed capacity of 50,000 MW — a total of 133,000 MW — for meeting a peak demand of 82,000 MW is arguing that the current poor system performance should continue. With a total of  113,000 MW — an additional capacity of 30,000 MW — we should be able to meet  a peaking  requirement of 82,000 MW. It will still be only 72% of our installed capacity, a figure that countries such as Pakistan, Malaysia and Thailand have surpassed. [vii] If an additional capacity of 50,000 MW is added to the current installed capacity, the system performance is expected to be only about 61%, a very low figure indeed.

It may be seen from the figures given below, the system performance has improved  in recent years with the improved availability of the newer units. If we  concentrate on improved system performance as the focus for the Ninth Plan, it will not be difficult to improve system performance.
Table I Power Supply, Shortfall and System Performance 1985-1996

* Up to September, 1996
Note: Data compiled from various sources.

The Department of Power is not only arguing for an addition of 50,000 MW, it appears to believe that these additions should be largely as base load stations. If 50,000 MW is inducted into the existing system as base load stations and the SEBs have to guarantee off-take for a PLF of 80%, the existing capacity of 83,000 MW will have to be backed down routinely and operated for largely peaking duty. This will make the power economics completely lop-sided, as the cheapest generation will be used for producing small amounts of power, while bulk power is taken from the costliest generation. Unless the load profile and demands are appropriately matched, the economics of power generation can be seriously impaired.
The main constraints in the power supply situation are as follows:

•         Shortage of peaking capacity due to slowing down of hydel power program

•         Inability to transfer power from surplus to deficit areas due to lack of adequate tie lines.
•         Low availability of the older plants.

All of the above have contributed to Indian system performance being poor. If we continue to follow the current practice, we will have a situation of extremely high power tariffs to compensate for such poor system performance. The first step in improving system efficiencies is a unified grid management. However, the course being recommended — dismantling the State Electricity Boards — is to fragment the existing power structure even further. The example of South Korea may be relevant here. South Korea was forced to nationalise its private utilities as it was unable to impose any grid discipline otherwise.

The lack of peaking capacity in the Indian grid is due to hydel power coming down as a proportion of the total. The Eighth Plan is likely to see very little hydel power being added — the major shortfall in the target of the Eighth Plan is the lack of addition of hydel power. In these circumstances, the hydel program needs to be speeded up. As we are taking the liquid fuel route for some part of our power program, this should be reserved for exclusively peaking duty where the main shortfall lies today.

A larger grid can work with lower margins as it can transfer power from one area to another. One of India’s problems has been that the grids are very weak, and that the transfers from deficit to surplus systems do not take place due to a lack of grid co-ordination. Integrating the grid and better maintenance of existing capacity can bring down the system margins considerably, lowering additional capacity requirements. The entire western Europe has a unified grid even though they are independent countries. However, the Indian system continues to find it difficult to regulate the grid and effect exchange of electricity between systems.
Currently, only the CEA and Regional Electricity Boards (REBs) have regulatory functions. There are five Regional Grids and corresponding REBs. The REBs function under the CEA with representation from the concerned Sate Electricity Boards. The weakness of the Regional Electricity Boards has resulted in a lack of power transfers from surplus to deficit states. The REBs have failed to impose grid discipline on the generating companies and utilities leading to high frequency and voltages in off-peak periods and anarchic withdrawals during peak periods. This has led to a lack of grid stability and wastage of power.

However, instead of strengthening the regulatory set up, moves are afoot to weaken them even further. The Regional Load Despatch Centres (RLDCs) which monitor the Regional Grids have been handed over to the Power Grid Corporation, a Central Government undertaking. The RLDCs are integral to REBs functioning and their removal from the ambit of the REBs severely limits their ability to perform regulatory functions. CEA is progressively being emasculated and this will further weaken grid management.

One of the major problems in strengthening the grid is the Central Government’s attitude towards grid development. In the policy framework earlier, the state to state links were funded by the Central Government. Currently, the Centre is channelling all fresh investments in transmission through Power Grid and is asking the states to bear the expenses of building the state to state ties. This is likely to distort the total grid management. Power Grid has little responsibility with respect to costs and is planning very  expensive and wholly unnecessary equipment for their transmission system. The states will be asked to bear the high wheeling charges that will result from such investments. The respective grids were earlier being strengthened through a co-operative framework and discussions between the concerned states and the centre. However, the Power Grid’s planning is neither in co-ordination with nor in consonance with the needs of the states. An example of such expensive investment that has little relevance for the needs of states is the HVDC back to back links under Power Grid’s aegis to couple each of the regional grids. Such extremely expensive HVDC links have not been installed even for much bigger power systems in the world. The entire European power transmission takes place through AC only even though the participating countries are sovereign entities. The top down approach of Power Grid will not lead to either strengthening of the grid or a better grid management.

Indian power planning also needs to take up an active and aggressive renovation and modernisation program. The Indian renovation and modernisation program has never been taken seriously. The investments in the Eighth Plan for this program have been only 2.5% of the total, a very small sum compared to what was spent on adding new generation. The plant life can be easily extended from the span of 25-30 years to 40-50 years, with performances almost as good as new ones with an appropriate renovation program. The Indian power plants now have a sizeable population of old plants — about 40 % are more than more than 15 years old. These plants are prone to repeated outages and poor performance. A renovation program that identifies these plants can help to add substantial additional effective MWs at far lower capital costs than building new power plants. This is one of the major reasons that the advanced countries are not building new plants. With life extensions, the older plants are able to deliver the same amount of power at far lower costs.
If we take the above approach, the system margins can certainly be improved to the required levels. This where the focus in the Ninth Plan should lie and not chasing elusive private investments for inducting high cost power. The investments then that will be required for the Ninth Plan are well within the capacity of the Central PSUs such as NTPC and the SEBs. The SEBs will, however, need to be put on a firm financial basis as we discuss in the next section.

Restructuring the State Electricity Boards

The key issue in the power sector is making the State Electricity Boards financially viable. The two major areas of concern are the lack of internal resource generation within the power sector and the poor reliability of the plants. The plant availability has risen from about 73% in 1982 to about 78% in 94, and so has the Plant Load Factor (PLF). Clearly, the performance of the SEBs has improved in physical terms. However, the annual losses of the State Electricity Boards have continued to mount and today stand at Rs. 5,436 crore.[viii] An annual loss of this magnitude not only has an impact on future investments, but also the ability of the State Electricity Boards to operate and maintain their units. Consequently, the performances of the Boards are likely to deteriorate further under such losses.

If we look at the losses of the Electricity Boards, we can see that the major losses are due to subsidised power to agriculture, transmission and distribution losses and interest payments. While agricultural subsidy may need to continue, the interest burden of the Boards and the transmission losses can be reduced substantially. The transmission loses are largely due to theft of electricity. Using Planning Commission figures, it can be seen that the loss due to theft of electricity is a massive Rs. 5,000 crore. The Planning Commission’s Annual Report on the Working of the State Electricity Boards and Electricity Departments, 1995, shows that if the average tariff is raised by  27 paise, the SEBs would break even.  With a raise of only another 6 paise, they will generate enough resources. If losses due to theft are reduced and 3% rate of return realised, the SEBs can easily  have a power program of 4,000 to 5,000 MW per year based on their internal resource generation. They would also be commercially more healthy and therefore can attract external financing for a larger power program.
It is absurd to expect that the State Electricity Boards should function as commercial organisations and yet have no equity capital. Instead of equity, the Governments extend loans that have to paid back with interest. The interest charges on loans extended to the State Electricity Boards, mostly by the State Governments, stand at 27% of the costs. Similarly, the repayment figures are over 8%. The first reform of the State Electricity Board that should be done is financial restructuring converting the Government loans to equity. The West Bengal Government is one of the few Boards that has taken this step. This will substantially reduce the interest burden on the Boards and lead to healthy balance sheets for most of them. This will also enable the Boards to look to the commercial market for loans and raising necessary resources for investments.

The three steps outlined above — reducing transmission losses, generating a Rate of Return of 3% and converting the current loans to equity — ill  lead to an internal resource generation of Rs. 12,000 to 15,000 crore. If standardised and economic plant designs are adopted, we can support a power program of 4,000-5,000 MW per year based on internal resources alone. The shortfall that will have to be met from external resources can be met through loans that the restructured Boards can raise from the market, central investments through NTPC, NLC, etc., and private investments.

We are unable to understand why  dismantling of the SEBs, as proposed by international agencies, should be propagated by the Central Government when the SEBs can be made viable. The SEBs have carried out their charter of providing electricity to the rural sector. Today, we are blaming them for running inefficiently while not ensuring adequate tariffs. However, if the SEBs are dispensed with, we will have to answer the question of who will provide electricity to the rural sector. The United Front Government has made certain commitments to the rural sector regarding development, infrastructure and other social programs. Electricity is a vital input in any such a program. Yet, the program of the Department of Power will see the power tariffs rise to a level that it will become an item of luxury consumption. None of the programs committed for the rural sector can be undertaken if power at a reasonable cost is not supplied to the rural sector.

Today, there are large disparities between states in terms of electricity consumption. Thus, Punjab has a per capita consumption of electricity ten times that of Bihar. Within each state also, there are large regional and urban/rural disparities. The private power program is likely to be market driven. Such proposals, are for the most part, concentrated in states that are already better off in power development. The more backward areas are receiving very few of these proposals. Obviously, the market will drive investments to more developed areas. Given that comparable levels of power availability in different parts of the country and uniform tariff are still distant dreams, transferring the major responsibility to private sector and respective State Governments will only aggravate the present distortions; and the States that have suffered neglect, would suffer further setbacks. Such a course will lead to rising social tensions and endanger national unity. Central Government investments and planned transfers are required to develop economically backward regions of the country in the larger national interest

In all the talk of restructuring of the Boards and commercial operation of the electricity sector, the rural areas and the poor have been totally forgotten. The underlying philosophy of the Electricity Act was that the state had a vital role to play in assuring electricity supply at that reaching electricity to the rural minimal costs to the people. It was always known that rural areas would not be commercially attractive — this would need to be subsidised from selling electricity to industry at slightly higher costs. As electricity was seen as a necessity for development and achieving a minimum quality of life, it was assumed that the state would not make a profit out of this. The private licensee was also put under a profit cap — he could not make exorbitant profits. Clearly, the basis of the new Draft Bill is quite different. All we are discussing is how to give electricity to those who can pay Rs.5 per unit of electricity. The objective of the Draft Electricity Bill therefore is to provide protection to the private producers and distributors of electricity. The reality of the restructured power sector is that those who can not pay such high rates of electricity, are not on the agenda of the policy planners.

If the policies for restructuring the State Electricity Boards as advocated by the World Bank and the Department of Power are followed, the people need to know their impact on the electricity tariff.  Four State Electricity Boards — Orissa, Haryana, UP, and Rajasthan — have taken restructuring loans from the World Bank. Gujarat Electricity Board has taken an ADB loan to the same effect. All the restructuring proposals worked out by international consultants under the aegis of the World Bank, have recommended that the agricultural tariff  be raised to Rs.3.00 or more, and the domestic and industrial tariff  be raised between Rs. 5.00 to 6.00.  Thus the average tariff will have to be raised to more than Rs.4.50  from the current  average level of Rs. 1.41, an increase of more than three times. The agricultural tariffs will see increases of more than six times from their current levels. We do not  believe that such increases of tariffs are possible without large scale social unrest. Nor are such tariff increases reasonable.

The Orissa case is particularly important as it brings out clearly that the people of Orissa are going to be net losers in such a restructuring. Let us take the simple question of the price the consumers will have to pay for electricity after restructuring. Going by reports published in the newspapers, it appears that the consultants, employed by the Orissa Government at a hefty fee of Rs. 50 crore, have suggested an agricultural tariff of Rs. 3.00 and an industrial-cum-domestic tariff of Rs. 5.00 to 6.00. The average tariff of electricity, considering the current consumption of electricity in the various sectors works, out to Rs.4.80. The current average tariff for Orissa is only Rs. 1.02. The Planning Commission’s calculations show that to earn a 3% rate of return on capital in 1994-95, Orissa would have had to raise its average tariff by only 18 paise. [ix] Thus at a tariff  increase of only 18 paise Orissa would have been financially viable and able to borrow commercially to set up additional generating capacity. Orissa State Electricity Board has already raised tariff sufficiently for it not make any losses in 95-96. The increase in tariffs required to achieve financial health of Orissa State Electricity Board is only of the order of twenty percent. After “restructuring” the World Bank way, the price of electricity will have to be increased by more than three times.

That brings us to the other question — who is going to pay for this expensive power? At Rs. 3.00-4.00, Indian power tariffs for industrial and domestic consumers are higher than the US and the UK (see Table II). The upper limit of any tariff regime must be the price of electricity produced by alternate means. At the current cost of diesel and the capital costs of DG sets, the cost of power from such source is of the order of Rs. 3.00. Larger industries can set up their own captive generation at a fraction of the cost of the proposed tariff under the current policy regime. The result would be to drive the most lucrative customers — large industrial units — away, and make it even more difficult to realise the necessary amounts to pay for such expensive power.

Table II World Industrial and Commercial Electricity Prices (1995)

Fuel Policy
Apart from increased power tariff and high cost plants that the current policy entails, the lack of an appropriate fuel policy is also cause for concern. The current thrust towards hydro-carbons — oil and gas — for power generation could prove dangerous for the country. The private power plants will prefer the hydro-carbon route as oil and gas are far easier fuels to burn than coal. Further, the combined cycle plants have lower capital costs and a shorter gestation period than coal fired boiler steam turbine units. We are already short of petroleum — the oil bill is the largest single item on the import list, which is why Indian power efforts were centred on coal, gas being used only where it was available. The switch to imported hydro-carbons has the twin danger of a mounting import bill and of linking the power costs to international fluctuations of oil prices and currency. Once the power tariffs are linked to the international markets in this way, the entire domestic economy would be open to further pressures.

The unfortunate part is that even where coal is being used for private power generation as in the Cogentrix plant, it will be imported from Australia. The benefit of taking the coal route is completely lost. Australian coal has a much lower ash content than Indian coals and equivalent Indian coals are not available. This means that even later, this plant cannot be switched to Indian coal.

For the last three years, the Department of Power has been sanctioning projects that are following the hydro-carbon route. We can see that oil already accounts for more than 60% of our entire import bill. The capacity sanctioned by the Department of Power, using the hydrocarbon  route, is more than 20,000 MW (see Annexure I).The foreign exchange outflow for  these sanctioned projects will be more than Rs.20,000 crore at current prices — an increase of about 50% from the current import bill for oil (see Table III below).  Since India has adequate reserves of  coal,  choosing the hydrocarbon route is not in the best interests of the country.

The Ministry of Petroleum has already cautioned the Department of Power that enough petroleum will not be available for a power program. As transport cannot run on coal, this sector should be the major consumer of imported fuel. The fertiliser program is also likely to be largely dependent on imported fuel. If imported oil becomes the major source of fuel for the power sector as well, not only will the import bill increase drastically, but the country will have neither the port facilities nor railway capacity to meet this additional demand.

It has been argued that we have a shortfall in coal as enough investments have not taken place in expansion of coal mining. Therefore, it is being argued, some projects based on the liquid fuel route should be considered. In this context, it is important to use the liquid fuel based generation for  peaking purposes as we are short primarily of peaking power. Oil can be fired in open cycle or in a combined cycle plant for peaking duty. This will fill a gap in our power program due to slowing down of the hydel program that currently exists. This will also reduce the foreign exchange outflows as peaking duty is not continuos. However, all the liquid fuel based plants are coming up as base load plants that will therefore lose the benefit of using liquid fuel for peaking duty as well increase the outflows of foreign exchange.
Table III: Foreign Exchange Outflow for Sanctioned Hydro-carbon Based Power Projects