'37'

REFORMS IN THE POWER SECTOR

V.K. Pandit*
The Indian power sector has made giant strides in the past 50 years by increasing the
installed capacity from about 1300 MW at the time of Independence to about 95000 MW today.
While this growth rate looks impressive, it has failed to keep pace with the growth in demand
and peaking power shortage today is about 13 per cent . Another factor, which has adversely
affected the performance of the power sector, is the fall in the share of hydel power. While a
thermal-hydel ration of 60:40 is considered to be ideal, the current ratio is about 75:25.
Electricity falls in the concurrent list and had primarily been the responsibility of the Central
and State Governments till about 1991. In terms of resources, power sector has received a major
share and from the Fifth Plan onwards, more than 18% of the public sector outlay has been
allocated for the power sector. Under the current Plan, however, the share of power sector has
come down to about 14.5%.
Privatisation
The resource requirement for the power sector is much higher and realising this the
Government took a major policy decision of attracting private capital for power projects. For
facilitating this, the Electricity (Supply) Act, 1948 was amended to provide a legal framework
for encouraging private investments. Although the policy announced in 1991 covers generation
and distribution, there has been more progress in the area of generation insofar as the private
sector is concerned. The amendment to the Electricity (Supply) Act, 1948 was followed by a
series of measures to promote private sector investment. The package of incentives in the policy
which compliments the amended provisions under the legislation, comprehensively covers the
legal, administrative and financial environment to make private sector investments attractive. A
two-part tariff for power projects to be put up by independent power promoters, covering the
fixed costs and variable energy costs in electricity pricing, had been formulated and tariff
notification issued in March, 1992 which has been amended from time to time keeping in view
the changing needs of the sector. This, inter-alia, provided for a 16% return on equity at 68.5%
PLF for thermal plants (coal, lignite, gas) and 90% availability for hydroelectric projects.
This procedure has since undergone a change and only the initial batch of projects was
generally awarded on the basis of negotiations between the State Electricity Boards (SEB) and a
single developer. The SEBs and the State governments have been advised to introduce a more
competitive element in the price of developers and award of projects and consider awarding new
projects only on the basis of competitive element in the price of developers and award of projects
and consider awarding new projects only on the basis of competitive bidding. In January 1995, it
was decided that no new private power project proposal would be considered by the Central
Electricity Authority (CEA) if the project was not awarded through competitive bidding. A cut-
off date was prescribed and only those MoUs which were signed after this date were treated to be
awarded. Projects after this date had to be awarded only after following the competitive bidding
route. However, certain categories of projects where the international competitive bidding (ICB)
route may not be feasible have been exempted. Detailed guidelines have also been issued to the
State Governments for adopting competitive bidding. A notification for competitively-bid
projects was issued in May 1997 defining the manner in which tariff would be determined for
such projects. Competitive bidding, however, was not felt necessary for selection of the private
company partner in such joint venture projects where the SEBs/public sector undertakings hold
majority shares of the joint venture company. Further, competitive bidding would also not be
required for setting up generating stations by Independent Power Producers (IPPs) exclusively
for the use of industry or group of industries without involving any sale to the State grid.
Response
The response to the Government of Indias Energy Policy also has been encouraging. Since
1991, both domestic and foreign developers have evinced keen interest in the Indian power
sector. Altogether 96 private projects are presently being monitored by the Central Government
amounting to 54,700 MW of installed generation capacity. In addition, several projects are being
set up by the private sector with the approval of the State Governments themselves and do not
require the techno-economic clearance of the Central Electricity Authority (CEA). Incidentally,
CEA has till date given techno-economic clearances to 52 private sector projects amounting to
around 25,231 MW.
Over the years, the private sector power projects have faced many unforeseen hurdles. To
begin with, projects could not be cleared fast enough because of complex and complicated
requirements of clearances required for the projects. Moreover, as there was no previous
experience in handling private sector proposals, there was a critical lack of relevant experts and
every project had to be considered on a case-by-case basis. The most important factor, however,
had been poor financial credit-worthiness of State utilities due to their financial and commercial
performance. Thus, there have been delays in achieving financial closure of private sector
projects. While in a period of six years the procedure has considerably been streamlined and
simplified for clearances of projects with the delegation of more and more powers to the State
Governments, the issue of improving the financial health of the SEBs is yet to be fully resolved.
Reforms
In this context it was felt that the power sector needed urgent restructuring. Power being an
item in the concurrent list, any plan of overhauling the sector needs to be approved by both the
Central and State Governments. While the man aim to provide private capital was to enhance
additional capacity installation, it was increasingly realised that unless structural weaknesses of
the power sector were addressed first, there would be little hope of a turnaround.
Due to their tight resource position the State Governments have not been able to provide
requisite funding to the SEBs for undertaking new investments. The major reason for the
deteriorating financial position of the SEBs is due to the growing burden of subsidised electricity
to the agricultural and domestic sectors. The tariff fixed by the SEBs with the concurrence of the
State Governments is much lower than the cost of supply of electricity. The average cost per
kWh of sales by the SEBs during 1998-99 was 242.9 paise. As against this, the average tariff was
only 197.9 paise per kWh.
Tariff
The net losses of SEBs on account of subsidised electricity was of the order of Rs. 5,385 crore
in 1992-93 and it increased to over Rs. 10,500 crore by 1997-98. The immediate need, therefore,
was to bring about tariff rationalisation. This would have to be initiated by the Central and State
governments. Tariff rationalisation is the most important element to revitalise the power sector
and can be undertaken if institutional reforms are undertaken. It is in this context that the
Government established the Central Electricity Regulatory Commission (CERC) and State
Electricity Regulatory Commission (SWRC). The independent character of these commissions
would enable the State Governments to revise and rationalise retail tariffs and generate adequate
resources for meeting the investment requirements. The next important issue along with the
question of setting up of an independent commission is that of institutional reforms. Significant
progress is being noticed among the State Governments to carry out reforms and restructuring of
the SEBs. Orissa has already enacted the Electricity Reforms Act with effect from 1996. The
other States which have set up their own commissions include Haryana, Uttar Pradesh,
Rajasthan, Madhya Pradesh, Delhi, West Bengal. Tamil Nadu, Gujarat, Andhra Pradesh, Punjab,
Maharashtra and Karnataka. The others which have taken in principle decision to set up
commissions include Assam, Kerala, Nagaland and Himachal Pradesh. While the Government
has proposed no specific model for reforms and restructuring, each State is free to evolve any
model appropriate to its needs. The key features of reforms and restructuring include unbundling
of generation, transmission and distribution activities of SEBs, setting up of regulatory
commissions; tariff rationalisation, private sector participation in distribution network in a
phased manner and autonomy to State Electricity Boards.
Mega Projects
The Government had also issued revised guidelines in November, 1998 for setting up mega
power projects, i.e., projects of 1000 MW capacity or more to supply power to more than one
State. After considering the gains of the policy on mega projects, which had existed since 1995,
the latest policy envisages setting up of inter-State and inter-regional mega power projects in
both the public and private sectors. The projects set up under this scheme would have the benefit
of import of capital equipment free of customs duty and in order to ensure that domestic bidders
are not adversely affected, price preference of 15% would be given for the projects in the public
sector while deemed export benefits as per EXIM Policy would be given to domestic bidders for
projects both in the public and private sectors. The domestic bidders would be allowed to quote
in US $ or any other foreign currency of their choice. In addition, the income tax holiday regime
would be continued with the provision that the tax holiday period of 10 years can be claimed by
a promoter in any block of 10 years within the first 15 years. The State Governments have been
requested to exempt supplies made to mega power plants from sales tax and local levies. All
such measures and the economies of scale in mega projects would substantially bring down
tariffs from such identifiable mega projects to provide the much-needed relief to the State
Electricity Boards. This would also enable implementation of a policy where projects are set up
at viable pithead sites, coastal locations and hydel sources, thus eliminating the unnecessary
movement of fuel by rail and encouraging the setting up of a National Transmission Grid. A
Power Trading Corporationof India may also be on the anvil to purchase power from the private
projects and sell it to the identified State Electricity Boards. The precondition would be that the
beneficiary States should have constituted their regulatory commissions with full powers to fix
tariffs as envisaged in the Central Act. They would also have to privatise distribution in cities
with population of more than one million. (PIB Features)
*Secretary, Ministry of Power, Government of India.