A return to power

Electricity Act sparks new opportunities, and some companies are flicking on

For most Indians it will sound like an impossible dream. Imagine having a choice of companies from which to buy electricity.

Imagine urban India with fewer power blackouts and no need for equipment like inverters and voltage stabilisers. It's tough to imagine, isn't it?

But a brighter future could be closer than anybody imagines. Take a look at how Mumbai-based power giant BSES (its name will soon be changed to Reliance Energy) sees the future.

Last month, BSES applied for permission to supply power to the NDMC area of Delhi "" the part where the prime minister and all the politicians live.

BSES plans to set up parallel lines in the district and compete with the New Delhi Municipal Council which supplies power in the district currently.

BSES has other high-voltage plans for the future. It has already kicked up a storm by applying for permission to supply power to south Mumbai where it will compete with the Bombay Electric Supply and Transport Undertaking (BEST).

The company isn't stopping with that. It's also making applications and drawing up blueprints to supply electricity to other cities and districts in Maharashtra like Nagpur, Pune, Aurangabad and Nashik. Also, it has put in an application to supply Navi Mumbai.

BSES has been kicked into high-powered action by the Electricity Act 2003. The Act came into force in May but its impact is only slowly being felt across the country.

(box) Power industry analysts confidently predict that the Act could transform the sector much as the New Telecom Policy altered the telecom scenario in 1999.

Says one analyst: "This is the second time the Government has tried to reform the sector. This time it has started with distribution and it may have got it right."

How can the Act transform the blackout-ridden power situation in the country? For a start it has delicensed generation (except in the hydel and nuclear power sectors) which makes it much easier for companies to start generation stations.

Equally importantly, it allows one company to use lines belonging to another. Also companies can now bypass the SEBs and supply power directly to customers. Besides this, it has introduced the concept of competition in the sector.

What does all this mean for customers? At one level, it means that a company like BSES or Tata Power can build their own power stations in, say, Karnataka, and then send the power, using someone else's lines to Mumbai or Nagpur, depending on where it is needed.

At another level, it means that companies like Hindalco or ACC which have their own captive stations, could sell power to a Tata Power or a BSES which could then transmit it to wherever it is needed.

At an entirely different level, a power trading company could buy power from an electricity-surplus region or company and supply it to another company or region that needs it.

Cross the country back to Delhi and take a look at what Tata Power is doing. One year ago Tata Power won a contract to take over distribution in parts of the Capital (other parts of the city get power from BSES Rajdhani and the NDMC).

Till recently, however, Tata Power and BSES Rajdhani had to buy electricity from a state-run company "" Delhi Transco Ltd."" which owns the city's power stations.

In June, Tata Power tied up with a company called Synergies Hydro Asia (SHA) to jointly develop the 330MW Shrinagar Hydel project in Uttaranchal at an estimated cost of around Rs 1,650 crore. When the project is completed in about three years time it will supply power to North Delhi Power Company Ltd. (NDPL), the Tata Power subsidiary in Delhi.

That's not all. The Tatas are also planning a 120MW thermal power plant in Jojobera, Orissa costing around Rs 370 crore. Most of the power from Jojobera "" which will travel over lines owned by different state electricity boards "" will once again be used by NDPL customers in Delhi.

Says Tata Power, Managing Director, Firdose Vandrevala: "A substantial portion of the power from both facilities is proposed to be wheeled to Delhi."

Not to be left behind, the Reliance group is drawing up even more ambitious plans. It aims to build a 3,000MW gas-based plant that will bypass the cash-strapped SEBs.

The beauty of the new Act is that it can build the plant anywhere in the country and transmit the power wherever it's needed "" subject to the availability of transmission lines and infrastructure.

It's currently evaluating several locations and is in discussions with five states "" Maharashtra, Haryana, Gujarat, Karnataka and Andhra Pradesh.

Says a BSES executive: "BSES will avail of open access facilities and power trading to bring down the cost of power in the interest of consumers."

The biggest benefits of the new act will probably accrue to the giants like BSES and Tata Power which can generate power and sell it to customers. That gives them an enviable opportunity to control costs and the final price at which power is sold to customers.

Says a BSES executive: "We propose to access alternative sources of power with the objective of reducing tariffs to our 2.2 million consumers in Mumbai."

Tata Power, too, says it will sell power from its Jojobera plant to NDPL and other customers at Rs 2.30 a unit.

It isn't only the private sector giants that are looking ahead and seeing a brighter future.

Public sector giant NTPC is stepping cautiously but it's one company that could be well poised to grab a big stake of the emerging market. NTPC has created a separate company for its foray into power trading.

NTPC already has several inquiries. There are large numbers of industrial users that are looking at the possibility of buying directly from NTPC, bypassing the state electricity boards.

Says an NTPC executive: "We expect the continuous process industries (ones that need power round the clock) to approach us for taking power, once the bill is passed. No company has approached us so far but there are a number of interested players."

The new Act has also opened doors for a group of smaller players "" some almost unknown "" who have leapt into the fray to carve out a niche as power traders.

Take, for instance, a fast-moving trading outfit called Global Energy Ltd. It is buying power from the Goa Government which has a power surplus and is selling it in Delhi.

Other companies too are moving swiftly. The Adani Group, for instance, has formed a trading company and has plans to buy electricity in the north-east and sell it in Maharashtra.

Similarly, another company Amalgamated Trans Power has signed a memorandum of understanding with the Sikkim government to sell surplus power from there to rest of the country. Sikkim and some of the other north-eastern states are power surplus.

The arrival of new players is already changing a few rules of the game. In Mumbai, for instance, BSES has, for several years, bought power from the Maharashtra State Electricity Board (MSEB) and Tata Power. Now it has invited bids from utilities for around 600MW of power.

Astonishingly, it has been deluged by expressions of interest (EoIs) from over 50 power utilities across the spectrum. The would-be suppliers include biggies like NTPC and the National Hydel Power Corporation.

Also throwing their hats in the ring are other government bodies like the Power Trading Corporation and the state electricity boards of Himachal Pradesh and Uttaranchal.

The Power Trading Corporation, incidentally, could be a big winner in the new regime as it has a giant headstart in the trading business.

Inevitably, a strong set of rules will be needed to make the new system work. Most importantly, the Act says that utilities must keep their lines open for rivals.

So, for instance, the MSEB must allow companies like BSES or Tata Power to use its lines. Similarly, the SEBs must allow companies to, say, send power from Goa to Delhi or from Orissa to Delhi.

Similarly, if bulk users decide to stop from buying from the SEB and to instead buy from NTPC, they won't need permission from the SEBs. Companies which have built captive power plants can sell their power either to the SEBs or to anyone else.

It's important to realise that the Act won't act like a magic wand that will make power shortages disappear overnight. Many of the biggest changes will take at least two or three years.

Most importantly, the rules and guidelines about using other companies' lines are to be formulated by the respective State Electricity Regulatory Commissions (SERC).

The SERCs have been given a five-year deadline to come out with the rules. Till the time they do, the applications put in by the aspirants might be treated as provisional.

Even in Maharashtra permissions could take time. BSES has applied for permission to supply power to different cities in Maharashtra. Its application is before the Maharashtra Electricity Regulatory Commission (MERC).

The company, which buys power both from MSEB and Tata Power, has put in two applications. One is for fixing transmission charges on MSEB and Tata Power lines. The second is for transportation charges to the new areas it proposes to take over.

But consider the scenario if BSES gets its permissions. Once the regulator clears the application, people residing in the south-Mumbai area, which is presently being serviced by BEST, could soon choose between BEST and BSES as their electricity supplier.

Also, consumers in Vashi and Bhandup circles, and the Nagpur, Pune, Aurangabad and Nashik zones could have a new choice.

BSES is targeting around 2 million customers in these six new areas, which are primarily urban and industrial hubs.

The company presently meets its peak demand of 1,150 MW through its own 500 MW thermal generating station in Dahanu and from power bought from Tata Power. BSES already supplies power to around 2.2 million customers in suburban Mumbai.

With a second distribution licence in the BEST area, BSES will gain access to BEST's consumer base of around 850,000 people in south Mumbai.

BSES would, however, have to set up its own parallel network in the BEST area since the new Electricity Act 2003 does not allow utilities to use lines where a local body (BEST is an independent body under Brihanmumbai Municipal Corporation) is the sole power supplier.

What are the downsides of the Act? It's almost certain that the biggest hits could be taken by the SEBs which have used industry to cross-subsidise domestic and agricultural consumers.

Will the new Act push the SEBs to the wall? That's possible, but it will be tough to whip up sympathy among the public for the SEBs.

Then, there's the issue of cherry-picking. Companies like BSES and Tata Power are already signalling that they will focus on the affluent urban agglomerations. That will leave the SEBs to supply the farmers and other less affluent segments who don't have a paying capacity.

On a more optimistic note, there's every likelihood that new generating capacity will be created quickly. Take the case of one would-be producer whose project was stalled for four years.

His would-be venture capitalist backers feared that he would have to sell to the Tamil Nadu SEB and wouldn't be able to recover cash from it.

A few weeks after the act was passed "" and it became clear that he could sell power to other buyers "" his backers signed on the dotted line.

It could take time before customers begin to feel the effect of all these changes. But here's a pleasant thought for the future: imagine a situation where electricity companies are advertising and wooing customers with offers of better service and cheaper rates.

This dreamworld scenario is still a long distance away but a beginning has been made and the future looks brighter than ever before.

• The Electricity Act 2003 is likely to change the power sector just as the New Telecom Policy transformed the telecom sector
• The new Act makes it possible to buy power in one part of the country and sell it somewhere else
• Companies can now bypass the SEBs and supply power directly to customers
• The Act has delicensed generation, which makes it much easier for companies to start generation stations
• The new Act has also opened doors for a group of smaller players "" some almost unknown "" who have leapt into the fray to carve out a niche as power traders