Govindraj Ethiraj: Why get scared of over-capacity?

Double Edge

Last week, I got talking to the owner of a company that supplies components to the power transmission sector. Inevitably, the discussion moved to the sorry state of power in the area where we were at that moment, Mumbai.

"It's a crisis, isn't it," I asked, glancing up at the bright lamps and the row of powerful split air-conditioners affixed on the walls. "Depends on how you define one," he said. Then he said, "Because I thought the crisis was three years ago. Actually, I don't even know how to begin to describe this." "And," he added, "I do find it a little bizarre that the state of Maharashtra is in the market today to buy power from other states at prices going up to Rs 10 per unit. Does it not make you wonder what the brouhaha about Dabhol/Enron was?"

Indeed, and what has been done since to anticipate, prepare and battle the power crisis? Precious little, it appears. Let me go specifically and chronologically, using the curious case of Maharashtra before I address what I think is a more fundamental problem.

As is well-documented, around 2000, Tata Power and Reliance Energy (then BSES) applied to the state government to increase generation capacity. This was before the Electricity Act 2003 came into force and the state had the "veto" right on capacity creation and expansion.

The state government turned both the applications down, saying there was no need for more capacity""industry watchers interpret that move purely as an attempt to justify the closure of the Enron power plant. Needless to add, state-owned MSEB did not add capacity, either. In any case it was believed that Dabhol's turbines would begin humming again someday soon and life would be normal once again.

Four years later, it dawned on the state that this would not be the case. Or even if it did, the demand-supply numbers would not add up. So in April 2005, the state signed and loudly proclaimed a series of MoUs (totalling over 10,000 Mw) with several industrial houses including of course Tata Power and Reliance Energy.

The timelines were sharp. A detailed project report (DPR) would have to be submitted within six months of signing. Financial closure would follow in 12 months and power would start flowing, hopefully, in four years' time. The state government promised, on its part, that it would help in the procurement of land (via the Maharashtra Industrial Development Corporation) and that half the power generation would be picked up by the state electricity board. The companies said they preferred a coastal location because that would make the transportation of fuels easier. Trouble began when the state government in its enthusiasm awarded the same plot of land (or large parts) to Tata Power and Reliance Energy. Obviously, the two began to squabble. A solution has now been found with Reliance being asked to move part of its 4,000 Mw project elsewhere. It turns out that resolving the tiff is only a small part of a larger conundrum. The land has still not been tied up (for both parties) and the dreaded environmental clearanc es are still to come. And then the matter of financial closure remains, followed by the raising of funds and finally, if all goes well, the construction at the site.

Yes, that's assuming the state offers generous assistance in evacuating power, signing the power purchase agreement (PPA), and maybe, building some roads. My belief is that any or all these projects could face stiff, local environmental opposition. At that point, all will put their hands up.

Okay, that is the situation thus far. What happens if, let's say, all these plants come up in the miraculous time frame of four years? Well nothing much, because demand will have far outstripped capacity by several thousand megawatts. And what is being done to prepare for that eventuality? As I can see, next to nothing.

So the problem has to be addressed a little differently""which is by planning for projects that potentially address 5 or 10 times the perceived demand four or five years hence. This might sound a little ridiculous but that's the only way it will work. In any case that's the hit rate we are running at; actually it must be worse.

So my point is this. I am not sure we've recovered from our morbid fear of creating more capacity. Before anything else, we need to work on this strange, pre-liberalisation, planning-induced state of mind. We need to think differently and plan extravagantly, whether it's power plants or airports. Sure, we might be surplus for some time, but now we can leave it to the private sector to worry about. Like in cars, scooters or telephone connections. And we will perhaps know the difference between a real infrastructure crisis and not.

govindraj@business-standard.com