This piece appeared in EPW. Reproduced in full below. The figures and tables have been copied from EPW.
Private Thermal Power in a Liberal Policy Regime
The Electricity Act, 2003 and the National Electricity Policy, 2005 put in place a highly liberal policy regime for private thermal electricity generators.
Licensing was done away with. Techno-economic clearance from the Central Electricity Authority was no longer necessary. Generators were provided open access to the transmission network, owned with but a few exceptions by state and central utilities. They could supply power to any part of India. Generators were also freed from having to enter into long term (12-25 year) power purchase agreements with distribution companies which limited profit margins. They could opt for shorter term contracts as well as sell in the power markets through traders and power exchanges.
The liberal regime resulted in an explosion of interest from private companies. This paper follows the development of private thermal power projects over a decade to determine the major impacts of this policy regime and to critique it.
Sources of data
Comprehensive data on private thermal projects is not available from a single source. With the end of the licensing regime, the Central Electricity Authority (CEA) has stopped monitoring projects except when they are close to becoming operational. Power projects however have to obtain Environmental Clearance (EC) and the Ministry of Environment, Forest, and Climate Change (MoEF) keeps track of projects that have begun the process leading to EC. Even before starting the EC process, companies typically sign a Memorandum of Understanding (MOU) with the government of the state where their project is located. Additionally, companies intending to access the inter-state transmission network register access requests with the central transmission utility. A composite picture of projects in different stages of development can be pieced together from all this disparate data.
It is a painstaking task to obtain clean summary data from the MoEF database. The task can be simplified by limiting it to a subset of all India data. The choice of the subset is explained below.
India is divided into five regions in the context of electricity generation and distribution – the Southern, Northern, Western, Eastern and North Eastern Regions - defined by a transmission infrastructure that allows power generated in any state in a region to be conveyed to any other state in the same region. Electricity generated in any of these regions is largely consumed within the same region.
The highest build up of private thermal capacity in the period from 2008 (about when the earliest thermal plants conceived in the new regime would have become operational) to 2015 has been in the Western Region - composed of the states of Chhattisgarh, Madhya Pradesh, Gujarat, Maharashtra and Goa - accounting for over 57% of the all India addition to private thermal generation capacity (Table 1).This justifies the use of data limited to the Western Region for the analysis in this paper.
The great thermal power rush
The extant of private interest in thermal power projects can be gauged from the number of projects with EC. Companies with EC for a project would have tied up with the state government for public land and water and have a plan for fuel supply. They would also have completed the mandatory “public hearing” in the project area – a gathering that is often an outlet for public opposition to a project. Only serious players would have obtained EC for their projects. (Kasturi, 2011:10)
There are two things noteworthy about private thermal projects that have obtained EC in the Western Region.
One is the sheer magnitude of the capacity planned - 79 private thermal power projects, with a combined generation capacity of 92 GW (Table 2). The latter figure can be better appreciated if it is kept in mind that all India addition of private thermal generation in the 11th plan (2007-2012) was 19 GW and the Planning Commission deemed 64 GW of thermal power addition (private and public included) during the 12th plan period (2012-2017) sufficient to meet the requirements of the country with GDP growing at nine percent (Planning Commission, 2012:1.4.1)! The government of the day appears to have been fully aware that many of these proposals would not fructify.
Second is the bunching of proposals between 2006 and 2010 (Table 2). The interest in projects rapidly peaked and had all but petered out by 2011. There has been no fresh private interest in thermal plants in the Western Region since 2011 (with but one or two exceptions who do not have EC yet). The negative consequences of this bunching are briefly touched upon later. The changing interest in thermal power strongly relates to the rapidly changing economics of thermal power production of this period.
With permission to sell electricity in the market, captive generators made good profits in the prevailing conditions of electricity scarcity, early on under the liberal regime established by the Electricity Act, 2003. Jindal Steel and Power (JSP), a captive generator itself, went on to establish a thermal plant in 2007 operating exclusively as a merchant supplier without any long term power purchase agreements (PPA’s) and made super profits during the period 2007 to 2010 (Joshi, 2009). The success of merchant producers and JSP in particular very likely attracted many entrants into thermal power.
From 2010, the situation turned unfavourable. With the production of coal stagnating, the government stopped giving long term coal linkages to power plants from 2011. International coal prices increased rapidly all of 2010, peaking in early 2011 and importing fuel was not a good option. The biggest dampener was that merchant electricity rates dropped sharply during the second half of 2010 and thereafter stayed low in the Western Region (Figure 1). Other regions with the sole exception of the Southern Region also showed similar falling prices.
Under these changed circumstances, many thermal projects were put on hold and others abandoned.
The cost of stalled and abandoned projects
Chhattisgarh in the Western Region is a case study of some of the excesses and “externalities” of the new policy regime. The state advertised itself as the upcoming “power hub”, an exporter of electricity to the rest of the country, and signed as many as 61 MOU’s for thermal power.
40 projects, two thirds of the number proposed, have not completed the formalities needed for environment clearance (Table 3). All these projects were announced many years ago and the overriding reason for them not to have progressed appears to be the changed economics of thermal power generation described earlier. Of the 21 projects with EC, 10 are operational, mostly with only partial capacity on stream (Table 3). A few are under construction but extremely delayed. A few others appear to be stalled. In all, only about a quarter of the proposed thermal projects in Chhattisgarh may materialize.
For proponents of competition the failure of some projects may not be of concern. The failed projects however not just cost their investors. They come at great cost to the agricultural communities amidst whom they are located. Almost all stalled projects with EC have acquired all the land they would have needed and the land requirement for thermal plants is substantial – 700 to 900 acres for every 1000 MW plant. At least 17 of the projects that have not even obtained EC have acquired part or all of the land for their proposed plants. The early land acquisition has been encouraged by government itself in the past for providing coal linkages which in turn was necessary for obtaining EC (Kasturi, 2011:11).
Skewed addition of generation capacity
Private thermal generation plants that have proliferated under the new policy regime have aggravated the imbalance between installed generation capacity and energy requirement in the different regions (Figure 2). The Western Region has become relatively capacity surplus while the North and South regions have a capacity deficit. Given that nearly half of the increase in total all India generation capacity came from private thermal plants and that nearly 64% of this was in the Western Region, this region was bound to become relatively over endowed with generation capacity (Table 1).
The surplus capacity in some regions and capacity deficit in others may not be an issue if there is adequate inter-regional transmission capacity. Starting from 2010, the market has existed for export of electricity from Western Region to the Southern Region. The relative electricity surplus in the Western Region (WR) and deficit in the Southern Region (SR) is seen in the different prices registered for the two regions at the IEX (Figure 1). The problems of inter-regional transmission are illustrated by the WR-SR energy exchanges.
Actual imports from WR into SR increased only marginally from 2010 through 2013, limited by the nominal transmission capacity (Table 4). The nominal transmission capacity cannot be entirely utilized in practice as margins need to be kept aside for technical reasons; the table also shows actual imports.
Capacity enhancements happened in 2014 with the opening of the first of two 2100 MW links between Sholapur in Maharashtra and Raichur in Karnataka. However, even with the much higher nominal transmission capacity available, the average power transferred from Western to the Southern region went up only by small amounts.
The reason behind this is that power transfers require end to end transmission capacity between generating centres and load centres. Even if the inter-regional transmission capacity - which is the capacity of links across the region borders – is adequate, there may be bottlenecks elsewhere on the end-to-end corridor. In the present case, the transmission capacity from WR generating clusters (such as those in Chhattisgarh) to Sholapur and from Raichur to the SR load centres is lacking. In 2014-15, only 1172 MW of power, equivalent to a capacity transfer of 1500 MW or about 0.6% of all India generation capacity for the year, could be transferred from WR to SR.  This was far below Southern Regions requirement and Western Regions available surplus (Figure 3).
Idle generators amidst electricity scarcity
The skewed regional addition of generation capacity in the new policy regime has its direct consequences. The plant load factor (PLF) has serially decreased in the Western Region except for Gujarat, and is now at 43% (Table 5).
While coal availability would have been considered the problem some years back, it appears that it is no longer so. In FY15, coal India production increased by 32 MT, more than the cumulative increases in production in the previous four years. Coal stocks in state plants have gone up. International coal prices have come down. The problem appears to be that there are no customers for the power generated by these power producers.
The electricity distribution companies (discoms) in the Western Region cannot absorb more power in their current situation. This of course does not mean that electricity has reached every household in this region or that there is round the clock supply. It only means that the discoms have met their stated requirements – limited by their transmission network, their distribution reach and their financial ability to buy more power. Export to the Southern Region – where Karnataka is facing a severe electricity crisis because of a deficit monsoon crippling its hydropower generation – is not possible because of lack of transmission capacity. These power producers have been stranded.
Issues in developing generation and transmission capacity in step
Before the advent of the new regime, electricity generation in India was planned to keep each region self sufficient. States developed their generation and transmission infrastructure in tandem. The centre, while establishing new generating units in a state also developed the inter-state and inter-regional transmission systems required to deliver the power to the states allocated power from the unit. In addition, a few transmission links were built by the centre across region boundaries specifically to exchange power.
The National Electricity Policy, 2005 declares that network planning and implementation should be based on the transmission needs arising from the open access regime and not contingent on a prior agreement with the users (MoP, 2005:5.3.2). Considering that generating units can target customers anywhere in the country and transmission systems are expensive and have to be built with long term needs in mind, this appears to be wishful thinking under present conditions of India.
Optimal design of transmission systems requires knowledge of the location, capacity and time frame of commissioning of each new generation plant as well as its intended customers. Multiple agencies must work to enhance intra-state, inter-state and inter-regional networks in a coordinated manner to ensure the required transmission capacity end to end (CEA 2012:7.4.2).
Transmission planning has become extremely difficult in the new regime as power plants are no longer required to enter into long term PPA’s with distribution utilities. Many private generation plants staking claims for long term access to the transmission network have not specified end users for their power as they have not (on purpose) or could not (because of lack of tenders) enter into long term PPAs with distribution utilities. Further, they are not accountable for their schedule of commissioning (PGCIL, 2010).
For the transmission utilities, as of now almost entirely owned by the states and the centre, the above uncertainties put at risk the investment in transmission infrastructure and can lead to a situation where there is sub-optimal utilization of the network. Generation plants on the other hand can be denied access because of congestion, as is happening today (Planning Commission 2012:2.2.2).
The extremely liberal regime ushered in by the Electricity Act 2003 allowed the few existing private captive thermal generators to make handsome profits. This attracted a large number of private companies to venture into thermal power generation, particularly in certain regions with perceived advantages in terms of availability of coal and water. The changing economics of thermal power production however quickly lead to this interest petering out.
The majority of proposed projects were abandoned, but not without cost to the communities of the area they were to be located in. Of the rest, only a few are operational with partial capacity while others are under construction with delayed schedules or have gone into limbo.
The location of the functional plants serves to further exacerbate the regional imbalance between demand and generation capacity. Not being able to sell their electricity locally because of lack of immediate demand and in power deficit regions because of the lack of adequate transmission capacity to load centres, these plants idle or run at low PLF’s even as parts of the country reel under severe electricity shortage. The overall development of the private thermal power sector shows a far from optimal utilization of national resources.
There are yet other negative consequences for the electricity sector which are not detailed in this paper. The rush to build thermal plants created a spurt in demand for capital equipment that was taken advantage of by foreign manufactures at the cost of domestic manufacturing. This is apparent in the details of executing agencies and equipment suppliers of private plants captured by CEA (CEA, 2015). State owned banks, the main lenders to dysfunctional power projects are burdened with huge non-performing assets (Acharya, 2012). This also makes it harder for newer entrants into the power sector to obtain financing for their projects.
Each of these problems can be seen as caused by a failure of coordination, adequate due diligence and so on. Taken together, they point to the infirmities in the legal and policy framework. The framework acknowledges the heavily capital intensive nature of the industry and the need for a planned approach to electricity for the optimal utilization of national resources to serve the economy. Yet it allows private generation companies unfettered freedom to set up plants without reference to timing, location or quantity all in the name of efficiency through competition.
The present government meanwhile has shifted its focus to solar energy. It is pushing humungous targets for solar generation capacity addition - reminiscent of the previous governments push for thermal energy - without addressing any of the issues that have severely impacted thermal energy development.
 Average actual utilized capacity (MW) = (Actual transfer in a year (MU)) * (1000/(24*365))
 The equivalent generation capacity has been arrived at by assuming a plant operating at 75% PLF to generate 1172 MW