Indian power sector review 2012

Submitted by VK Gupta on Sat, 29/12/2012 - 6:32am

The ills of India's power sector came under sharper focus in 2012 due to the worst electricity blackouts for hours on end in July-August, which halted train and Metro services, forced temporary closure of factories, disrupted life in 20 out of India's 28 states and affected some 600 million people.

The outage, which made global headlines and became a matter of embarrassment for an emerging economy, focussed attention on issues such as fuel shortage, caused by faulty policies on coal mining, the problems on transmission and distribution and the manner in which some states were overdrawing their quota of electricity with impunity to create extreme overloading on the transmission infrastructure.

The inquiries on the blackout provoked suggestions that Regional Load Despatch Centres (there are five of them in India which carry electricity from producers to the users on what are called grids) be given legal powers to be able to protect their infrastructure.

The outage also drew attention to India's power distribution firms having accumulated losses worth a whopping $40 billion, and needing staggered hikes in tariff to ensure their sustainability. Such large losses arose mainly from what distribution companies term as aggregate technical and commercial losses, which is more of a euphemism for theft. Currently cumulative distribution losses amount to Rs.200,000 crore ($36 billion).

"This was a telling commentary on the situation of the power sector in the country," said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII). "Losses to business have been in thousands of crores, which pale into insignificance when compared to the difficulty that the people of the country have had to face."

As relief to the power sector, the government in September approved the proposal to restructure state electricity companies' (Discoms) debt worth nearly Rs.200,000 crore ($36 billion). As part of a scheme for the financial turnaround of Discoms, state governments were to take over 50 percent of Discoms' short-term liabilities by way of special securities, repayment and interest payments. The balance 50 percent short-term loans were to be restructured with a moratorium on principal at the best possible terms of interest.

India has a total installed capacity of 209,276 megawatt, with states contributing 41 percent, the central power utilities having a share of 30 percent and the remaining 29 percent accounted for by the private sector.

In terms of fuel used, the total thermal capacity is 140,206 megawatt, of which coal accounts for 120,103 megawatt, gas for 18,903 megawatt, and oil for 1,199 megawatt. This apart, hydro power contributes 39,291 megawatt, nuclear around 4,780 megawatt and reneable energy 24,998 megawatt.

The supply shortfall varies across the country, which becomes acute in states like Uttar Pradesh, while some others like Gujarat enjoy a surplus and export to other states. The government estimates the fund requirement of $256.14 billion in the power sector over the next five years to bridge the existing gap and to meet the growing demand.

According to experts, the basic problem for the power sector is acute fuel (read coal) shortage, affecting electricity generation in the country. It was also the year when state miner Coal India came under intense scrutiny for its production and off-take.

"Availability of coal and gas is a pre-requisite for spurring investments in the power sector. Reforms that would help make coal and gas available as per the nation's requirements must no longer be held back," said the Federation of Indian Chambers of Commerce and Industry.

The state-run Coal India declared it cannot meet the complete coal demand from indigenous sources till the 13th Five Year Plan beginning 2017. During the 11th Plan, there was a production gap of 140 mt.

The coal sector provoked major political controversy following the national auditor's report on how allocation of captive coal blocks to private companies had led to the latter making windfall profits.

The Comptroller and Auditor General (CAG) estimated a notional loss of Rs.186,000 crore ($33.67 billion) to the exchequer on account of not auctioning coal blocks allocated to private allottees. Tabled in parliament, the report named 25 companies including Essar Power, Hindalco, Tata Power and Jindal Steel and Power, which got blocks in various states.

In July, the government formed an inter-ministerial group (IMG) to review progress of coal blocks allocated to firms for captive use, but which had failed to develop mines within the stipulated timeframe. The IMG, after its scrutiny, recommended de-allocation of 11 mines to public sector units, 13 blocks to private firms, and deduction of bank guarantees of 14 allottees.

A total of 58 mines were issued show-cause notices for their failure to develop blocks within the stipulated timeline.

Coal India agreed to pay a penalty of 1.5 percent to 40 percent on failing to supply the committed quantity of coal to power utilities, following protests from major companies over its decision to go for a paltry penalty of 0.01 percent. The state miner has to meet 80 percent of contracted supply to avoid triggering off penalty.

The new year awaits a pooling formula on prices by combining rates of imported and domestic coal to offset high import costs. Also awaited are reforms that can improve the supply of coal for thermal power plants, rationalise tariffs and improve the financials of state distribution utilities.