News 24 Desk
New Delhi: Even as the Indian government draws–up ambitious plans envisaging 100 GW capacity addition in the 12th Plan period, the country’s Power sector is facing multidimensional challenges. These issues are constraining growth in the Power sector and may adversely impact economic growth in the long term. The Confederation of Indian Industry (CII) statement says that unless the issues plaguing the Power sector are urgently addressed, the aspiration for 9% growth in the 12th Plan may not be met.
“Critical obstacles including fuel supply bottlenecks, distribution losses and lack of funding need to be urgently addressed to achieve double digit GDP growth. We are hopeful that the upcoming meeting with Industry leaders, chaired by the Hon’ble Prime Minister will indentify solutions to these bottlenecks and chart out a roadmap for the Power sector,” says Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII).
Fuel availability has emerged as the biggest risk faced by thermal Power projects in India. Coal production has not kept pace with Power capacity addition in the current Plan and developers have been forced to import coal at a time when international coal prices have shot up. Lack of clarity on financing this extra cost as well as added transport costs for plants in the interior have led to uncertainty and reduced investments in Power.
“With coal–based capacity addition expected to account for over 50 per cent of total capacity additions in the upcoming 12th plan, the issue of acute shortage of domestic coal in the country and its impact on project economics due to higher prices of imported coal needs to be urgently addressed.
In addition, there would also be financial stress on assets already built or committed by many private sector players,” says Anil Sardana, Chairman, CII National Committee on Power and Managing Director, Tata Power Company Ltd. For instance, for the Krishnapatam and Sasan ultra–mega Power projects awarded by the government to Tata Power and Reliance Power Ltd, the tariffs proposed by the firms while bidding for these projects are no longer viable considering the higher cost of fuel.
There is an urgent need for comprehensive coal sector reforms, including opening it up to competition, to increase investment in the Power sector. More coal bearing areas need to be opened–up by stepping up exploration activity, the CII said in a press release ahead of a key meeting between Prime Minister Dr Manmohan Singh and private players in the Power sector. This would boost productivity, increase scale and introduce competition, stated CII.
The other key issue confronting the Indian Power sector is the dismal financial health of distribution utilities. These have accumulated financial losses estimated at over Rs 70,000 crores in 2010–11 which is projected to grow to ~Rs. 100,000 Crores by 2014, said the CII press release. The practice of cross–subsidising domestic and agricultural consumers by higher tariffs for commercial and industrial customers and railways has distorted balance sheets. In addition, lack of tariff hikes and mounting Aggregate Technical and Commercial (AT&C) losses too have led to under–utilization of generation capacity.
CII has suggested the following key reforms in the Power sector :
Fuel Supply: In addition to entry of private sector in coal, CII recommends mechanisms such as ‘pooled pricing’ to protect developers from price risks for imported coal. In addition, CERC should be entrusted with the additional function of regulating coal prices and transportation charges. Sale of coal through e–auction should only take place after the demands of the Power sector have been fulfilled with minimum quantity obligations for coal companies to be close to 90% of the annual contracted quantity.
Limited Fund Availability to the Sector: Insurance companies and financial institutions should be encouraged to invest in longer dated securities to minimize cost of debt servicing. Banks should be permitted to raise foreign currency loans and long–term funds without statutory reserve norms.
Poor Operational and Financial Efficiencies in Distribution: Competition in the sector can be promoted by adoption of the distribution franchisee route, entry of private players and the public private partnership model. Other suggestions are to implement open access, bring electricity under the purview of the proposed Goods and Services Tax, create consensus on direction of reform (e.g. distribution franchisee v/s private monopoly) and provide uniform guidance to states, and reduce AT&C losses by automation and IT Backbone development.
There is need to simplify tariff structures and move towards cost–reflective tariffs.
Peaking Power: It is necessary to build independent peakers having utilisation of between 30–50 per cent over and above base capacity. Peaking Power tariffs should be structured to enable peaking Power stations to run on expensive fuel like LNG. This entails moving to multiyear (MYT) time of day (ToD) tariffs. Further, the regulator needs to institute a process of procurement of peaking Power and make it mandatory for SEBs to procure peaking Power, rather than resort to load–shedding to manage peak demand.
The CII statement stressed that these solutions need to be urgently considered to help avert the crisis in the Power sector and ensure that the Indian economy continues on its growth path.