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. [2] 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).
Concluding
remarks
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.
References
Acharya, Namrata (2012): "Banks Review Power Sector Exposure,” Business Standard, 15 September
— (2015): “Monthly Report on Broad Status of Thermal Projects in the Country, April 2015,” Central Electricity Authority, Ministry of Power, 29 May.
Kasturi, Kannan (2011): “New Thermal Power Clusters,” Economic & Political Weekly, 1 October.
MoP (2005): “National Electricity Policy 2005,” Ministry of Power, 12 February, available in http://pib.nic.in/archieve/others/2005/nep20050209.pdf.
PGCIL, (2010): “Agenda for Long-term Open Access of IPP Generation Projects in the Western Region,” PGCIL, 29 April
Planning Commission (2012): “Report of the Working Group on Power for the Twelfth Plan (2012–17),” Ministry of Power, January, New Delhi
Joshi, Rishi (2009): “Merchant of Power,” Business Today, 4th October
Notes:
[1] Average actual utilized capacity (MW) = (Actual transfer in a year (MU)) *
(1000/(24*365))
[2] The equivalent generation capacity has been arrived at
by assuming a plant operating at 75% PLF to generate 1172 MW
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