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India's first-generation power reforms a failure

Priya Ganapati in Mumbai

The Indian power sector has certainly seen better times. Three of the biggest power companies in the world -- the Houston-based now bankrupt energy major Enron Corp, the Atlanta-headquartered Mirant Corp, and the Arlington-based AES Corp - showed a strong desire to withdraw from the Indian power sector during 2001. They have left behind broken contracts, shiny steel power plants and investments of nearly $5 billion.

It was a dramatic step, but the only alternative. After all, their main clients, the state electricity boards, were fast sliding into bankruptcy, rendering them incapable of paying their dues. Commercial losses of the SEBs had increased from Rs 113.05 billion ($2.35 billion) in 1996-97 to Rs 260.13 billion ($5.42 billion) in 2000-01.

And the proverbial last straw was the Indian government reneging on contracts and re-negotiating the existing tariffs to politically palatable prices.

It is only a manifestation of the rot long set into the power sector. For years, power has been heavily subsidized and mostly consumed for free, either due to political patronage as in case of agricultural power or due to blatant pilferage.

Naturally, private power companies have chosen to quit the sector rather than continue to be a part of the decay.

"The power sector is slowly imploding. The service is getting worse because the states don't have the money and the private investors don't have the power to negotiate tariffs. Power can't be subsidized forever. There should be enough earning to pay for new generation. And that is not happening now," says Geoff Hayton, engineering advisor at the Department for International Development.

DFID, a department of the British government, is working with the World Bank to guide power sector reforms in India. A fifth of its over £100-million annual grant to India is spent on the power sector.

While the case of AES and Mirant may not have been as well documented as that of the Enron-backed Dabhol Power Company, the problems are clearly the same.

Mirant broke away from a joint venture to build the $5-billion Hirma power project in Orissa, citing lack of market reforms and institutional support. Mirant's Indian partner, Reliance Power, has now backed out too and is instead pitching for Enron's stake in DPC via Mumbai power utility BSES Ltd.

While Enron's fate in India has been attributed to its abrasive and intractable style of operation, AES had worked closely with the Orissa government. Yet, it decided to exit the venture citing bankruptcy. Central Electricity Supply Company, the AES-backed power distribution company in Orissa told the state transmission firm to stop supplying power to it because it has no money for payment.

In July, the company warned that it would sell its stake in CESCO unless the state allowed it to raise tariffs and gave it a better regulatory environment.

It is a legitimate demand, say experts.

"There is a lack of trust in the system. Today, we have a sector where expenses far outstrip revenues. In certain states, while expenses are around Rs 80 billion ($1.66 billion), income stands at Rs 40 billion ($0.83 billion). Naturally, a hole of that magnitude cannot be filled. The government must understand that private investors are here to fill holes. They come to make profit. And they do not come to take on political battles," says Hayton.

For its part, Enron did try hard to salvage its power project on the Maharashtra coast. In July, Kenneth Lay, Enron's chairman rushed to India to parley with bureaucrats, politicians of all hues and the state electricity board officials and work out acceptable sale terms for the idle plant.

But three days later, a grim-looking Lay flew back with little to show but the oft-repeated promises of a quick resolution to the Dabhol saga.

Finally, on December 6, DPC laid off all its employees, retaining only a small core team on contractual basis to handle its assets and sale. The distress sale has local power companies, the Tata group and the Reliance-backed BSES, descending to bid for the 2,184-megawatt plant.

But India's primary problem of disparity between demand and supply continues to fester. This year peak shortage is at 13 percent, while energy shortage is estimated around 7.8 percent.

A significant portion of the shortfall is due to the poor realization of revenues and heavy pilferage of power. Of the total energy generated, only 55 percent (Rs 620 billion or $12.91 billion) is billed and only 41 percent (Rs 460 billion or $9.58 billion) is generated. Which means that for the power generated, less than half the revenues are realized.

The gap between the average revenue realization for every unit of power and the cost of supply has shot up from 50 paise in 1996-97 to 92 paise in 2000-01.

The SEBs are trying hard to get out of the quagmire. While states like Andhra Pradesh and Orissa are working to unbundle their SEBs and corporatize them; others like Maharashtra are moving to towards aggressive collection of revenues.

But the situation remains grim. In order to bridge the demand-supply gap, India needs another 1,00,000 MW to be added over the next few years. This translates into an investment of Rs 4,500 billion ($93.75 billion). A similar investment would be required in the transmission sector for plug in losses and thefts.

This time around, international funds will be harder to come by.

"India has to understand what the international investor expects and needs. Contracts and agreements have to be honored and the state electricity boards have to work in agreement with them," says Hayton.

There is no doubt that the first generation of power reforms has failed. Analysts say that the lessons to be learnt are clear: the government needs to give a freer hand to the private sector, reign in subsidies, check the rampant pilferage and strike a balance between social responsibilities and commercial interests.

State utilities, which have a monopoly in power distribution in almost every part of India, are likely to report combined losses of $5.1 billion this year because of large-scale theft and free or subsidized supplies to farmers.

The issue of subsidies is fraught with political landmines. Naturally the Indian government has been loath to bring about greater parity in industrial, commercial and agricultural tariff.

"The SEBs have to collect revenue where it is due and the tariffs have to be revised. It is a big political issue but a beginning has to be made somewhere. It has taken 20 years of subsidies to reach the situation we face today. It will take us another 20 years to get out. But we have to start," emphasizes Hayton.

"The work culture of the SEBs has to change. There needs to be a measure of professionalism and commercialization brought about. And the corruption that is endemic in the system has to end. The government can't just talk. It needs to work," says Hayton.

Indian nuclear power sector enters a new era

Signing of an inter-governmental memorandum of understanding for constructing two nuclear power plants of thousand megawatt capacity each in Kudankulam with Russia and procurement of critical components from a private Indian company for the country's first Prototype Fast Breeder Reactor coming up in Kalpakkam have kicked off an era of multiple technologies for the Indian N-power industry.

The Contract Agreement (working document for construction) signed this month for implementation of the same by both Russian and Indian Nuclear industries has further boosted the programme in bringing a new technology (pressurised light water reactor-PWR) to the country and also enhancing nuclear power share substantially.

The Department of Atomic Energy also began the process of looking into ways of making amendments in the Atomic Energy Act 1962 in order to have private participation in the future N-power programmes.

The current year also witnessed Nuclear Power Corporation of India's annual power generation capacity reaching a new high with an impressive average capacity factor of 82 per cent and thus yielding a gross profit of a little more than Rs 10 billion.

New capacity addition has been accelerated with its eight new plants at different locations at various stages of construction.

Thus, against 80-megawatt capacity addition per year in the past, attempts are being made by NPCIL to have 600 to 700 MW capacity addition per year (which amounts to multiplication of power by six to seven times) in 10th and 11th plan in order to reach its goal of 10,000 MW by year 2011.

The industry, which had faced financial crunch in 1990s also initiated this year several cost cutting measures (reduced capital cost of Tarapur Units 3 and 4 by 25 per cent and similarly for Kaiga 3 and 4) to improve the internal resourcs and strengthening their financial position.

The average capacity factor has reached up to 82 per cent during 2000-2001 from 60 per cent in 1995 and the maximum capacity during the month was upto 102 per cent, and further improvement in performance is being worked out.

The year also witnessed a focussed strategy of evolving commercial culture in the government owned NPCIL through which the capital cost of the forthcoming two units of 540 megawatts each in Tarapur has been reduced by 9.9 per cent which is quite a substantial saving to build up the corporation's internal resources, he said.

Additional inputs: PTI

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