Reform measures like the Electricity Act inspire hope, but the key to the power sector’s revamp lies in their quick implementation.
CRISIL Research expects India’s GDP to grow at around 5.7-6.2 per cent in 2009-10, vis-à-vis 6.7 per cent in 2008-09 (2007-08 - 9 per cent). The decline in growth is mainly due to the global economic contraction and deterioration in the global financial markets. Post 2009-10, with the global recovery, India is expected to attain and sustain its pre-2008-09 growth rates (8-9 per cent). However, infrastructure inadequacies could prove to be a major constraint in sustaining this high growth rate.
To overcome this, an ambitious programme of infrastructure investment, involving both the public and private sectors, has been developed for the 11th Plan (2007-08 to 2011-12) period by Government of India. Power (electricity) is an important infrastructure sector. Adequate and affordable electric power is essential for economic development and higher standards of living. India’s ailing infrastructure network for power needs massive reinforcement and expansion, and remains one of the largest obstacles to growth.
Progress in the power sector, with electricity shortages of around 12 per cent (peak load) and 11 per cent (base load), will be one of the key determinants of future growth. This has been recognised by the government. As per the government’s estimate, the power sector is expected to attract around Rs 7.25 trillion in investment during the 11th Plan period (around 30 per cent of the total $581.68 billion projected investments in infrastructure by the Planning Commission in the 11th Plan period).
Over the last decade-and-a-half, the government has been steadily working towards initiating reforms and liberalising the sector, which culminated in the unveiling of the Electricity Act 2003. The Act brought about several structural and regulatory reforms designed to foster competitive markets, encourage private participation and transform the state’s role to that of a regulator. It directed the unbundling of vertically integrated utilities and creation of autonomous state electricity regulatory commissions which were to develop rules on open access, rationalise tariffs to progressively reflect cost of supply, reduce cross subsidies, institute strong anti-theft provisions and protect consumer interest. Electricity trading was to be recognised as a separate line of business.
In addition, the government also unveiled several programmes, ranging from bringing about efficiency in the generation segment through introduction of super-critical technology to upgrading the existing Transmission and Distribution (T&D) network and penetration of commercial energy in rural areas- to improve the performance and reach of the power sector.
These initiatives have gradually galvanised the sector and heightened interest due to the enormous investment opportunity.
Although these changes initiated by the government have sparked renewed interest in the power sector among private investors, including foreign investors (100 per cent foreign direct investment is allowed in each segment of the sector [excluding atomic energy] through the automatic route), there are certain apprehensions. Some of these, which could prove to be an impediment to the continuing high flow of investments into the sector, are:
Slow pace of reforms
Though various reform measures like the Electricity Act 2003, the National Tariff Policy, etc, have been put forth by the government to provide an impetus for growth in this sector, progress in implementing these measures has been slow. For instance, in the six years since the Electricity Act was enacted, only 16 of the 29 states have unbundled (as of August 2009). Also, open access in T&D is yet to pick up significantly. This leads to a high level of uncertainty for investors in the sector.
Financially weak state entities dominate the power sector
The power sector is dominated by state-owned entities. These vertically integrated state utilities or State Electricity Boards (SEBs), many of which have been unbundled as required by the Electricity Act, account for around half of the country’s existing generation capacity, around 60 per cent of its transmission network and around 95 per cent of its distribution network. These entities have been plagued by bureaucratic inefficiency and political interference for decades, which have led them into huge, almost insurmountable losses amounting to Rs 610 billion, as of 2007-08.
These losses have accumulated over time on account of the subsidies provided to agricultural and household consumers, and coupled with very high T&D losses (almost 26 per cent, as of 2007-08), have long kept tariffs out of sync with costs. This causes uneasiness amongst investors about payment for the electricity they produce, whether it will be timely, if ever.
Most distribution companies are still under state control, either directly through the SEBs or their unbundled successors, and are financially distressed. Much of this distress is a result of the underlying tariff structure and low revenue collection rates. The tariff structure is defined by the consumer class and a cross-subsidy structure is used to subsidise domestic and agricultural users. The higher rates paid by industrial consumers are insufficient to cover the subsidies provided. This, together with collection inefficiencies, further augments their losses. Though investments in power projects are backed by long-term power purchase agreements by the SEBs, the SEBs’ ability to make timely payment, if any, for their purchases still remains an area of concern.
Land availability and procedural delays in project implementation
Every power plant requires a large amount of land. Companies sometimes face agitation from local residents. Typically, delays are common in hydropower projects, where land is identified based on the availability of water, and dam construction and evacuation of local residents become critical. Further, investors also have to go through all the relevant clearances from government agencies, such as environment, forests, etc. These are dealt with by different ministries in the central government, whereas land acquisition and related matters are a state concern, which prolongs the process.
Shortage of fuel availability and infrastructural bottlenecks
While reform-based challenges are gradually being addressed, a more immediate concern for investors is fuel shortage and fuel-related infrastructure (port and rail) bottlenecks which threaten delay in the implementation or operation of power generation plants. In mid-November 2009, of the 78 coal-based power plants in the country, around 26 power plants (33 per cent of the total) had critical stock levels (less than seven days) with 14 of them (18 per cent of the total) with super-critical stock levels (less than four days). In addition, related infrastructure bottlenecks, whether at the port or in the railways, further delay the timely availability of coal. This failure to arrange and transport the requisite fuel supplies has threatened the smooth functioning of coal-based power plants and postponed the building of several others.
These issues are expected to prove a hindrance in driving investments in line with the government’s expectations for the power sector.
The author is Head, CRISIL Research
