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Mon 8 Sep 2008 04:00 AM

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India's power challenge

A future of big spending awaits India if it is to provide power to a billion people.

A future of big spending awaits India if it is to provide power to a billion people.

Rapid economic expansion is driving up India's overall energy needs, but in particular demand for power generation. High growth in consumption rates has put pressure on the government to ensure there is sufficient capacity to avoid driving up fuel costs and raise import bills from oil, gas and coal. At the same time, the pre-dominance of coal-fired power generation is impacting India's nascent attempts to reduce its greenhouse gas emissions.

The International Energy Agency (IEA) has estimated that Indian power generation capacity will need to triple by 2030 to meet anticipated economic growth. But many issues will need to be addressed first. The sector has substantial structural inefficiency with weak State Electricity Boards (SEBs) and frequent, prolonged transmission failures. There is also a very high level of distribution losses estimated at 20% for technical reasons and 30% for non-technical causes.

India's oil ministry has estimated that demand for diesel grew by an unforeseen 24% last year because of its use in power generation.

A lack of reliable supplies is having another unexpected effect on India's energy import bill. A large part of electricity demand is now being met by private diesel generators, as a growing middle class has become able to afford them to keep their homes air-conditioned and domestic firms have become profitable enough to buy units for fall-back electricity supplies.

India's policy of subsidising diesel and petrol prices to control inflation has made this an economically viable means of bypassing the weaknesses of the electricity system, but with demand for diesel growing, import bills are rising and the government has indicated it may revise the subsidy policy.

India's oil ministry has estimated that demand for diesel grew by an unforeseen 24% last year because of its use in power generation.

India's recent economic growth has placed further strain on this already weak system. Government policies subsidising tariffs for the agricultural sector and some households have undermined producers' margins meaning there has been little spare cash to invest in new generation capacity.

The government has also announced a major rural electrification plan for the next 20 years, which will see more people connected to the grid, thus adding to already high demand levels. But even if the plan does manage to connect 96% of the population by 2030, this will still leave 60 million people in rural areas without access.

India's installed power generating capacity at the start of 2007 was 115 545 MW. Private generation accounts for only about 10% of total capacity, with the remainder owned by the public sector, of which about two-thirds is in central government hands and one-third by the Indian states.

The need for more generation has been anticipated since the mid-1990s when the then government launched various projects. This resulted in installed capacity rising 48% but still short of its target by 50%.

The state has dominated the sector since India's independence. The Electric Supply Act of 1948 integrated the then smaller fragmented utilities into 19 SEBs who remain the dominant institutions within the industry, controlling well over half of the electricity supply and the vast majority of distribution. The SEBs fall under the jurisdiction of individual state governments.

Financial losses at the SEBs are estimated at around US $6 billion a year - equivalent to 1.3% of India's GDP. In an attempt to address this, the government in the 1990s allowed individual states to pursue their own SEB reform plans.Some privatised distribution while others opted for unbundling, but at the same time some opted against any reform, leaving a patchwork of inconsistent bodies around the country.

In 1998 independent regulators were introduced meaning that regulatory commissions at state level had primary responsibility for setting retail tariffs and approving tariffs between Independent Power Producers (IPPs) and the SEBs.  But the Indian Constitution currently lists electricity as a ‘concurrent' responsibility of the state and federal governments, meaning that the state legislature's authority overlaps with the central government.

In the event of a conflict between overlapping state and federal authority, the federal parliament in New Delhi can exercise pre-emptive power. But this has caused delays in the implementation of statutory economic reforms when disagreements occur between the central government and state parliaments.

In March India's largest power producer, state-run NTPC announced it would spend 990 billion rupees (US $22.4 billion) to build 22,000 MW of new capacity over the next five years.

The International Monetary Fund (IMF) said a country report in March this year that the rapid economic growth was worsening India's already seriously weakened power infrastructure citing this as one of the major factors which could - if not addressed - reduce GDP growth by 1% a year over the next decade.

It added: "Power shortages are acute and growing: the average firm reports power outages on 85 days per year, and the peak deficit reached a 10-year high of 14.5% this year."

The IEA has said India will need to invest US $1.25 trillion by 2025 in overall energy infrastructure - three quarters of which will have to be spent directly in the power sector.

The new investment will require foreign financing but this is being hampered by the lack of a transparent regulatory framework, particularly for pricing and payment collections. The IMF has urged India to streamline its Foreign Direct Investment (FDI) regulations, "developing a corporate bond market and tapping global capital markets" to help mobilise the financing needed for the electricity sector.

Government policy centres around the ‘Power For All' scheme launched by the Ministry of Power in 2006. This requires installed capacity should be at least 200,000 MW by 2012 a 50,000 MW increase on current levels with a further doubling to 400 000 MW by 2020.

The current 11th Five-year Economic Plan (2007 to 2012) calls for 16 785 MW to be added in 2007-08, 7 272 MW in 2008-09, 15 198 MW in 2009-10, 16 970 MW in 2010-11 and 22 372 MW in 2011-12. The envisaged capacity addition comprises 58 644 MW (75%) in thermal, 16 553 MW (21%) in hydro and 3 380 MW (4%) in nuclear. Some 44 000 MW of this total is already under construction.

Underlining the crucial importance of electricity to the country's economic health is the government mandate that sufficient power capacity should be installed to achieve GDP growth of 9% by 2020.

The ministry's plan is divided into several key strategies, looking at generation, transmission, distribution, regulation, financing and demand management. Plans for power generation focus on low cost generation, optimisation of capacity utilisation, controlling costs, optimising the fuel mix, technology upgrading and using non-conventional energy sources.

In transmission the ministry will be working on the development of a national grid including inter-state connections, upgrading technology and optimising costs.Upgrades are also require in the distribution system, where the ministry also aims to reduce losses, implement theft controls and decentralise distributed generation and supply for rural areas.

Through regulation, the ministry will look to protect consumer interests and make the sector commercially viable. Financing will generate the resources for required growth of the sector and demand side management will be aimed at technology upgrades to improve energy efficiency.

Coal is expected to remain the dominant fuel of choice for generators (it currently accounts for around 56% of installed capacity) meaning import bills will rise and this at a time when international coal prices have reached record highs. This factor and the emissions issue have meant the government is looking at further diversification of the generation mix to include more nuclear, gas, hydro and even renewables.

Notwithstanding these efforts, the IEA has estimated that India's coal imports will still have to rise sevenfold by 2025 to meet existing and planned generation demand. More gas-fired generation (currently around 10%) is also not without its problems with a large part of India's overall demand for the fuel (including that for power generation) already met by imports, particularly LNG.

While the country has embarked on a series of projects to create new import terminals and even taken equity stakes in foreign LNG production, it will find itself increasingly having to compete for cargoes from other booming Asian economies, as well as traditional gas importers around the rest of the world.

One of the best ways India could reduce its dependence on coal-fired power, reduce emissions, and boost security of supply, would be through a greater focus on nuclear energy. But this is now a political issue beyond the government's control.

The administration wants a new 30-strong nuclear reactor fleet. Nuclear currently accounts for just 3% of power supply from 16 existing reactors but could be in excess of 25% by 2050 under this plan. India's Nuclear Power Corporation (NPC) has a goal of augmenting this capacity by as much as 30,000 MW to 60,000 MW over the next 20 years - requiring investments in excess of US$100 billion.

If realised, this new capacity would make India one of the largest nuclear energy markets in the world. But the country is currently engaged in a dispute regarding the nuclear Non-Proliferation Treaty (NPT).

The US has supported an Indian government request for an exemption as a non-NPT member to permit the importing of civil nuclear technology (presumably with one eye on the major orders that may come the way of American reactor suppliers). But this move has been being opposed by the Nuclear Suppliers Group (NSG) which stated in August that: "India's commitments under the current terms of the proposed arrangement do not justify making far-reaching exceptions to international non-proliferation rules and norms."

Meanwhile, the US-India Business Council launched in August an advocacy campaign on Capitol Hill to secure US Congressional approval for the deal. An implementing agreement finalised last year will come up for approval this autumn if the NSG approves it by changing its guidelines for trade with a state that has not signed the NPT.

The head of India's Academy of Science was quoted as saying in July that without expanding its nuclear programme, the country would have to import an additional 1.6 billion tonnes of coal a year by 2050 to keep up with energy demand while the IEA has said that the deal would "make a significant contribution to energy and climate security, as well as development and economic objectives."The political developments over the next few months will be crucial for the future generation mix.

Renewables is another growth area, particularly wind. India is now the world's fifth-largest wind energy producer producing 6,000 MW of power but accounting for only 1% of total generation capacity.

Over the next five years, wind generation is expected to more than double, with the addition of 8,000 MW but this is way short of the estimated ultimate wind potential for the country of 45,000 MW.

Despite problems that could threaten the ambitious plan for new generation capacity, there are encouraging signs. In March India's largest power producer, state-run NTPC announced it would spend 990 billion rupees (US $22.4 billion) to build 22,000 MW of new capacity over the next five years.

The company, which produces 27% of India's total electricity generation, plans to spend nearly US $3 billion in the current fiscal year to March 2009 with 70% of this to be funded through debt. The company is also looking at nuclear, hydro and wind power generation by 2017 with 1,000 MW of renewables capacity by that date.

Opportunities for foreign investment in the country's power sector will also grow, with the government having announced plans to create ‘running companies' for foreign investors in the five main state-owned generators.

These companies already have regulatory approval for new generation and guaranteed transmission and distribution access. New joint venture plants under the scheme will each have a capacity of around 4,000 MW and are expected to be commissioned within the next five years.

While the government has earmarked substantial state funds for new generation capacity, IPPS will also have a crucial role to play if more power is to become available.

As well as the FDI problems (referred to by the IMF above), the government has struggled recently in face of communist party opposition to selling off state assets, including power companies. But this year has seen the government announce plans to sell a stake in NTPC.

Crucial to the future success will be market reform, including the creation of a spot market for power. This year has seen three exchanges formed. In July NTPC and Power Finance Corporation announced plans to create a third exchange following another formed by Financial Technologies (India), which began offering day-ahead trades in June. The same month, the National Commodity and Derivatives Exchange was awarded approval to set up a competing platform.

The challenge facing India is large, with the massive investment required in power to support economic growth. But the government also finds itself facing many problems beyond its control.

These include soaring international coal prices, supply security issues for gas, the political aspect to its civil nuclear campaign, a lack of access to renewables technology and pressure to ensure the future energy mix contributes to a reduction in greenhouse gas emissions.

For now, despite some promising noises, the fact remains the country's electricity sector is vulnerable. Over one third of the power currently generated fails to reach the consumer and US $60 billion alone will have to be spent on the transmission network. This may be a very tall order indeed.

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