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India's Electricity Sector in Transition: Can Its Giant Goals Be Met?
India’s Electricity Sector in Transition: Can Its Giant Goals Be Met? With the lack of new foreign infrastructure investments forthcoming and to meet the challenges of the 21st Century, the Indian government has made significant legal and institutional changes. The most important piece of legislation to become law, symbolizing the policy shifts toward the energy sector, is the Electricity Act of 2003. Hubert H. Reineberg is a Senior Consultant at Ekonocom International who gained his experiences in the electricity sector while at the Salt River Project, a company that provides water and power to more than 800,000 households and businesses in the Phoenix area. Prior to joining Salt River he was a full-time lecturer in the Department of Economics at Arizona State University in Tempe. As a consultant, he has worked with the Institute of International Education in Washington, DC, and provided energy training in Moscow, Kaliningrad and Sochi, Russia; Kumasi, Ghana, and Hyderabad and Mumbai, India.
Hubert H. Reineberg
I. Background India is the world’s largest democracy and with 1.1 billion inhabitants it is the second most populous nation on the planet. The country is administratively divided into 28 states and seven union territories. While India has some of the most impoverished people on earth, it also has a highly educated, culturally sophisticated, English-speaking workforce numbering in the hundreds of millions. The country is well endowed with natural resources and controls the fourthlargest coal reserves in the world.1
Clearly, India has enormous economic potential and offers great investment opportunities in many sectors of the economy, including in the areas of water treatment plants and electricity projects. However, investing in foreign countries implies additional risks, usually not found when investing in the domestic economy. Prior to deciding where to put their money, global investors typically examine a nation’s track record as to how well it has been meeting its international obligations. n the days of the Cold War, India was politically closer to the Soviet Union than to the West.
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After attaining independence from Great Britain in 1947, the Nehru government pursued policies akin to autarky and state controls rather than policies consistent with a decentralized market economy. The business climate was unfriendly to foreign investors and the nation paid a heavy price in economic development. However, with the collapse of the Berlin Wall and the Soviet Bloc, the government changed course.2 Today India, like many Asian economies, has achieved impressive rates of economic growth. Real economic growth has averaged 6.0 percent during the 11-year period from 1992–93 to 2003–04.3 By contrast, American economic growth has averaged a mere 3.5 percent per year for the past several decades4 and growth within the European Union has been even lower. he relatively high rates of growth are partly attributable to the country’s ability to adapt to globalization by specializing in the areas it is most competitive. Cities like Bangalore and Hyderabad are well known around the world as computer technology hubs where the cost of sophisticated software development is a mere fraction of the costs encountered in the U.S. or Europe. U.S companies have outsourced many activities to India including publishing, billing services, medical diagnostics, customer service call centers, and others activities to serve their global clientele at reduced costs.
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II. The Current State of India’s Electricity Sector In the modern world, growth of real gross domestic product is the driving force behind the demand for electricity. The increasing demand for electric energy leads to new construction and upgrades of generating stations, transmission lines, and distribution systems. Thus, a nation’s capacity to generate and distribute electricity
An analysis of the current ownership of India’s power sector shows that only 10.5 percent of generation is in private hands. is an important indicator of its level of economic development and future prospects for economic growth. Currently, India’s capacity to generate electricity from all sources is about 123,000 MW, which is the total installed capacity since that nation’s independence from Great Britain in 1947.5 India expects to connect about 5,600 MW of new capacity to the grid this year. Based on fuel sources, the existing generation portfolio consists of the following units: coal 55.6 percent, natural gas 9.9 percent, oil 0.9 percent, hydro 25.5 percent, nuclear 2.7 percent and renewable power 5.0 percent.6 For economic progress
to continue, the country must invest several hundred billion dollars over the next five to 10 years to maintain its vibrant economy, create new employment opportunities for its growing rural and urban populations, and alleviate poverty. By comparison, China’s installed generating capacity, as reported by the People’s Daily in February 2005, was in excess of 400,000 MW. However, over the past three years, China has added about 100,000 MW of new generation. U.S. generating capacity is about 993,500 MW.7 In terms of actual generating capacity, China is expected to catch up with the U.S. by 2010. China’s total population is over 1.3 billion, whereas that of the U.S. is 295.6 million.8 n analysis of the current ownership of India’s power sector shows that only about 10.5 percent of generation is in private hands. The remaining 89.5 percent is owned by the State Electricity Boards (SEBs).9 The SEBs also run much of the nation’s distribution and transmission system. Due to their poor financial conditions, however, SEBs depend almost totally on capital infusions from the central government in New Delhi or from the individual states. In recent years, increased social spending on the part of the central government, to provide for its burgeoning population, has left the electricity sector with insufficient funds for the capital expenditures needed for the modernization and expansion of the nation’s electric system.
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1040-6190/$–see front matter # 2005 Elsevier Inc. All rights reserved., doi:/10.1016/j.tej.2005.12.001
The Electricity Journal
Consequently, electric service is unreliable and blackouts are common, to the point that they impede economic progress. Another major problem plaguing the power sector are so called line losses, which in the U.S. usually run between 5 and 7 percent. In India, such losses are much larger. The Ministry of Power reports that ‘‘due to lack of adequate investments on T&D works, the T&D losses have been consistently on the higher side, and are presently in the range of 18 percent to 62 percent in various states. Reduction of these losses by undertaking distribution system improvement works has not been possible for want of adequate funds. The aggregate technical & commercial (AT&C) losses are in the range of 50 percent.’’10 Whether these figures accurately reflect actual losses, or whether they reflect improper metering or even theft, is unknown. The huge technical losses are another indication that the power sector is beset with systemic inefficiencies. The typical economic incentives that make western-style, regulated electric utilities work more efficiently are conspicuously absent. Historically, market economists have viewed extensive government subsidies, poor pricing or tariff policies, and public ownership as a recipe for economic waste. These conditions represent major barriers for infrastructure investments from outside the country. Loan guarantees from international lending
institutions, such as the Asian Development Bank, are simply insufficient to meet India’s enormous capital requirements. n India, as in many developing countries, the power sector is plagued by untenable tariff structures, based on favoritism and subsidies rather than return on rate base and cost-of-service concepts. Consequently, cost recovery is almost nonexistent. The notion of charging users of
I
The typical economic incentives that make western-style, regulated electric utilities work more efficiently are conspicuously absent. resources the full cost is not yet a widely accepted practice. The implementation of electric tariffs based on the cost of service would go along way in resolving the SEBs’ financial woes. The improved financial strength would enable the SEBs to pay for part of the expansion of the electric system. Moreover, financial solvency would also make the sector attractive to external capital and perhaps alleviate some of the current shortfalls of infrastructure investments. Irrational tariffs are not the only problem plaguing the power sector. After independence from Great Britain, it was recognized
that increasing India’s food production was vital to feed the skyrocketing population. Thus, the government provided the agricultural sector, primarily farmers, with electricity free of charge. At the time, paying subsidies to agriculture may have seemed to be a rather progressive idea. However, more than 50 years later, when the economic problems are quite different, subsidizing the agricultural sector has become more than just an impediment to economic growth. In the past, efforts to charge farmers for the energy they use have often failed. Farmers have destroyed the meters that were forcefully installed and found other ways to avoid paying for services they received. Though recent reports indicate that some progress has been made in installing meters, only time will tell whether more rigorous enforcement eventually gets the upper hand and the utilities receive payment for the services they render.
III. Current Electricity Usage Patterns As an outcome of supplying farmers with electricity free of charge, electricity usage has been skewed heavily in favor of the agricultural sector. Between 1990 and 2002, on average, agriculture consumed about 28 percent of electrical output. However, during my several visits to India, utility executives argued that the government’s statistics were too low for several reasons, with the actual
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figure being closer to 40 percent, for electricity metering of individual users in rural areas of the country was virtually nonexistent because of the lack of meters. The metering of electricity at the substation level may be flawed as well. Government statistics show that the industrial sector’s share of electricity usage for the same period averages about 38 percent. It might be noted that this sector’s electric tariffs in many cases tend to be higher than those in the U.S. Thus, many industrial companies attempt to generate their own electric power because of lower costs and greater reliability. As a result, the share of electricity consumption of the industrial sector, as reported by the government for the 1975–2002 period, fell from roughly 62.4 percent to 33.3 percent. The share of electricity used by households during the same period increased from 9.7 percent to 24.7 percent.11
IV. India’s Economic Growth: Present and Future Given the dismal physical and financial conditions of the electricity sector, huge infrastructure investments will be required in order that economic growth can continue at current levels. India’s Ministry of Finance states that: ‘‘The rapid economic growth of the last few years has put heavy stress on India’s infrastructure facilities. The projections for further expansion in key areas could snap the already strained 80
lines of transportation unless massive programs of expansion and modernization are put in place. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country’s roads are surfaced), and low telephone penetration.’’ Government officials estimate that to support a 7 percent annual rate of economic growth, the rate of growth of power supply needs to
India’s new openness toward foreign investments did not achieve the objectives the government had sought and led to many disappointments. be over 10 percent annually. At the current level of generating capacity of about 123,000 MW, that would require a minimum annual addition of 12,300 MW. To date, that goal has never been reached.
V. The Ghost of Dabhol: India’s Hopes and Disappointments In the 1990s, India’s new openness toward foreign investments was met with strong interest by global investors. The goal was to set up independent power projects (IPPs) in support of the nation’s economic
development strategy. Though dozens of projects were approved, most of the largest projects never became reality thanks to regulatory obstacles and in some cases a simple failure to secure financing. While several projects actually won government approval, in the end they were never built. Projects that did begin construction ran into other difficulties. One of them was the infamous Enron-backed Dabhol Power Project, which was partly owned by Bechtel Enterprises and GE Capital. The Dabhol project consists of two gas-fired units with a generating capacity in excess of 2,000 MW, at an initial cost of roughly $2 billion. Despite chronic power shortages and blackouts in the region, the project has been idle since 2001. In that year, the Maharashtra State Electricity Board (MSEB) began a tariff dispute which has yet to be resolved.12 Recently, the Minister of Power announced that the government wants the Dabhol project up and running by the end of 2006. Whether this date is realistic or not, no one knows. ndia’s new openness toward foreign investments did not achieve the objectives the government had sought and led to many disappointments. The Dabhol Project has to date been India’s largest foreign direct investment project. The dispute surrounding Dabhol signaled to many international investors, rightly or wrongly, that the country may not yet be ready for large infrastructure projects funded with private capital. Thus,
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The Electricity Journal
foreign direct investments in infrastructure projects have been virtually nonexistent. Though India lags behind China, Brazil, and other countries, it has received considerable foreign investments for other types of projects. What is sometimes poorly understood by governments everywhere is that competition for foreign investment remains fierce around the globe. Investors consider virtually all nations for possible investment opportunities, with capital resources flowing into those areas of the world’s economy where they are valued most, based on the criteria of risk and return. Investors may either choose the various financial markets or participate directly in infrastructure and other projects. Infrastructure investments, such as roads, bridges, power plants and water treatment plants differ from other investments such as call centers or software labs in that they have a domestic component. For example, a power project or a transmission system funded with foreign capital must earn sufficient local currency to cover its operating costs, debt service, and dividend payments. Moreover, the sovereign nation must allow for the timely transfer of hard currency funds to outside investors. Any interruption in the debt service or dividend payments tends to increase the country’s perceived investment risk. Foreign investors may then either require higher rates of return on future projects, due to the perceived increased risk, or simply invest their funds elsewhere.
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y contrast the services of software labs and call centers operated by U.S. companies are designed to facilitate the business relations with their clients worldwide. The revenues they generate or costs they save are benefiting the corporations that own them. Due to the cost advantages and worldwide client base enjoyed by these companies, there is little risk to their debt and equity investors.
The Electricity Act of 2003 is in part a response to the poor financial conditions of the SEBs, whose losses make expansion of the electricity sector virtually impossible. VI. The Drive Toward Modernization With the lack of new foreign infrastructure investments forthcoming and to meet the challenges of the 21st Century, the Indian government has made significant legal and institutional changes. The most important piece of legislation to become law, symbolizing the policy shifts toward the energy sector, is the Electricity Act of 2003. The purpose of the Electricity Act is to establish a ‘‘liberal framework for the power sector’’ without the strong hand of gov-
ernment, covering the entire country, except for the state of Jammu and Kashmir. The Act consolidates or replaces existing laws concerning the generation, transmission, and distribution of electric power. It promotes energy trading, competition, free transmission access, competitive bidding, and the protection of consumer interests, including the availability of electricity in all areas of the country. Furthermore, the Act is specifically designed to create a competitive environment which will facilitate and attract private investments to construct stand-alone generation in urban and rural areas. To level the playing field, the law also allows for the de-licensing of generation and distribution, but permits multiple licensing of distribution necessary to promote competition. The de-licensing of power plants essentially implies that existing power plants can become stand-alone facilities. he Electricity Act of 2003 is in part a response to the poor financial conditions of the SEBs, whose annual financial losses make the expansion of the electricity sector virtually impossible. The government asserts that this legislation ‘‘seeks to bring about a qualitative transformation of the electricity sector through a new paradigm.’’ Additional provisions mandate the formation of regulatory commissions at the state and federal levels. At the state level, the commissions are charged with the responsibility to bring order and consistency into the tariff process, to eventually
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make the SEBs financially selfsustaining. Another important requirement is the formulation of a National Electricity Policy and Plan. The Electricity Policy seeks to set guidelines for the entire country to encourage rapid power sector development and to achieve a quick turnaround of the sector’s dismal financial conditions. Among the major objectives are providing access to electricity for all households in the next five years and constructing enough generating and transmission capacity to meet demand by 2012, at increased reliability and reasonable electric tariffs.13 critical program to achieve the goal of electricity for all of India is rural electrification, aimed at enhancing socioeconomic development in rural areas. As such, it is analogous to the rural electrification projects initiated by the Roosevelt administration in the 1930s to bring electric energy to rural America. According to the government, ‘‘Rural electricity involves the supply of energy for two types of programs: (1) production-oriented activities like minor irrigation, rural industries and (2) electrification of villages.’’ Here the emphasis is placed on the exploration and development of clean and safe drinking water, but the purpose is rural electrification. Another government goal, not specifically articulated, is a self-sustaining, healthy, and productive rural workforce to ensure that India remains competitive in the global economy.14
VII. Electricity for All by 2012? To provide electricity for ‘‘all of India’’ by 2012 involves the most ambitious series of investment projects ever undertaken by the government. Currently, about 56 percent of rural households have no access to electricity. In nonrural areas, that figure is about 44
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percent. Under the ‘‘Building India’’ plan, which extends over a four-year period, the government intends to furnish 250 million rural homes with electricity and provide safe drinking water to 74,000 villages. In many of India’s rural villages, it seems that modernity has passed them by and life has stood still for centuries or perhaps even longer.15 The introduction of electricity will have far-reaching consequences for Indian village life with important social implications. Rural life as it is known today will be transformed to a different, likely more modern, way of life. Real incomes of rural villagers will rise, albeit slowly, which is bound to bring
about changes in attitudes and social values. As the International Energy Agency (IEA) notes, ‘‘Electric energy has deep and broad relationships with each of the three pillars of sustainable development: economy, environment and social welfare. Social and economic development can be attained only so long as a secure, reliable, and affordable supply of energy is ensured.’’ To achieve the goal of 200,000 MW of total installed generating capacity by 2012, the actual construction of new generating capacity may well exceed the 100,000 MW currently estimated by the government. The Ministry of Power reports that the average plant load factor (PLF) ranges from a low of 26.8 percent in the Northeastern regions to a high of 65.6 percent in the Southern regions, accounting for frequent power shortages and periods of forced outages or blackouts. Many of the poorly performing and aging existing units, in particular thermal units with a capacity of 120/140 MW, will have to be modernized or replaced if the goal of supplying electricity to the entire country is to be realized.16 The transmission of electric energy over long distances at high voltage occurs usually above 132 kV. For purposes of bulk power transfers, the country is divided into five regions, with interconnected transmission within each region generally referred to as the regional grid. Currently, the transmission system above 132 kV extends more than 265,000 km. The
1040-6190/$–see front matter # 2005 Elsevier Inc. All rights reserved., doi:/10.1016/j.tej.2005.12.001
The Electricity Journal
country’s prospective transmission plan envisions a national grid through greater interregional and intraregional connections.17 The national grid is expected to carry an additional 100,000 MW of generating capacity and 60 percent of the country’s total generation by 2012. Moreover, the existing inter-regional capacity transfer of 9,000 MW is to be enhanced to 30,000 MW through the creation of the ‘‘Transmission Superhighway’’ to be paid for through public and private participation. The distribution system and installation of meters in rural and non-rural areas will also have to be addressed. Due to the lack of funds for capital improvements and upgrades, to date the system has been essentially ignored. he enormous investments in electric generating capacity, combined with an ambitious program to modernize the national grid, will require additional investments in related facilities. At a minimum, a doubling of power plant capacity will dictate an increase in the capacity of seaports, pipelines, refineries, coal mines, rail and other transportation systems. The price tag for the various infrastructure projects seems staggering. Rough cost estimates suggest that it may cost in excess of $200 billion. The cost of expanding power plant capacity by 100 thousand MW will most likely exceed $100 billion. Since in years past government figures showed that the required capacity to supply electricity to all of India
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was closer to 300,000 MW than 200,000 MW, the $100 billion cost estimate may be too low. The modernization of the national grid through the construction of high-voltage transmission lines, while less costly than in the U.S., may still require $20 to $30 billion. The Transmission Superhighway is estimated to cost at least $15 billion. Apart
for all by 2012 will be rather challenging. Severe budget constraints at the central government level virtually rule out any significant funding from this source. In fact, the Delhi government is obligated to cut the budget by 0.3 percent each year through 2009. Clearly, India will have to rely on a variety of sources, including borrowing in international capital markets. While the Standard and Poors credit rating agency recently upgraded India’s foreign currency debt, it remains one notch below investment grade.18 urrently, India’s external debt is about $113.5 billion, which makes it the eighth most indebted nation on earth. However, the external debt and the associated debt service does not pose an immediate problem because $128.4 billion in foreign exchange reserves would cover the country’s external debt.19 India’s balance of trade has been negative for the past 25 years and it was expected to conclude 2005 in the red again because of an unusually high oil import bill. The sources of external funds include additional foreign borrowing, foreign direct investments, and revenues from IT investments which are currently excluded from the foreign trade statistics. However, since private capital for electric projects has been absent in recent years, will global investors embrace the changes initiated by the Electricity Act of 2003 or will the specter of Dahbol continue to keep them on the sidelines? Perhaps even
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from the infrastructure mandated to support the additions to the electric system, the government is also planning to make huge investments in water treatment facilities and telecommunications. Clearly, the government figures tend to be rather preliminary. Typically, due to their long gestation period, planning for infrastructure project tends to be complicated and such projects tend to be plagued by huge cost overruns.
VIII. How Will the Massive Improvements Be Financed? The funding of the rather ambitious projects of electricity
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more importantly, will India’s state and local authorities honor the contracts they negotiate? Recently, one international lending institution showed its confidence in the country’s new approach. In August, World Bank President Paul Wolfowitz announced that, over the next three years, the Bank would lend $9 billion to India. The funds have been earmarked for a variety of infrastructure projects including water, electricity, and transportation. The gesture by the World Bank clearly shows that India’s economic development is important to the world economy. Moreover, the Bank is sending a clear signal to global investors that it has faith in India’s economic future and that whatever problems may have happened in the past are being resolved. As India develops its economy it is becoming an ever more important partner to the U.S. and the West. As the world’s largest democracy and as a mul-
tiethnic society with a strong Islamic minority, India is an important partner in the war on terror. However, it remains an open question whether India can attract sufficient domestic and international capital to realize its dreams. Likely over time India will indeed achieve its goals, but can they be achieved by 2012?& Endnotes: 1. World Fact Book, 2005, India, available at http://www.cia.gov/cia/ publications/factbook/geos/ in.html.October 2005. 2. Id. 3. Ministry of Finance, 2003–04 Economic Survey: Annual Growth Rates of Real Domestic Product, at 1993–94 Prices, available at http://indiabudget.nic.in/ es2003-04/tables.htm.October 2005. 4. U.S. Economic Accounts, Gross Domestic Product, Percentage Change from Preceding Period, XLS; Sept. 29, 2005, available at http:// www.bea.doc.gov. 5. Ministry of Power, Electricity Scenario: Power Sector at a Glance,
Sept. 30, 2005, available at http:// powermin.nic.in/JSP_SERVLETS/ internal.jsp. 6. Id. 7. Energy Information Administration, Name Plate: Existing Electric Generating Units in the United States, 2003, available at http:// www.eia.doe.gov. 8. World Fact Book, supra note 1, USA, available at http://www.cia.gov/ cia/publications/factbook/geos/ in.html. 9. Ministry of Power, supra note 5, Total Installed Capacity, available at http://powermin.nic.in/ index.htm. 10. Ministry of Power, supra note 5, Distribution, Mar. 2004. 11. Pattern of Electricity Consumption, Indian Budget 2003– 2004, available at http:// indiabudget.nic.in. 12. Energy Information Administration, India: Country Analysis Brief, Section: Coal – Dahbol, Oct. 2004, available at http:// www.eia.doe.gov/emeu/cabs/ india.html. 13. Ministry of Power, Electricity Act of 2003, available at http:// powermin.nic.in/index.htm. 14. Id. 15. World Bank Plans to Lend India $9.0 Billion over Three Years, Bloomberg.com, available at http:// www.bloomberg.com/appsnews? pid=71000001refer= home&s. 16. Ministry of Power, supra note 5, Generation, 2004. 17. Ministry of Power,.Transmission Overview, Mar. 2004, at 1–2, available at http://powermin.nic.in/ JSP_SERVLETS/internal.jsp. October. 18. Standard and Poors, Sovereign Credit ratings, Apr. 2005, available at http://www.infosys.com/media/ india-credit-rating.asp.
The gesture by the World Bank clearly shows that India’s economic development is important to the world economy. 84
19. Ministry of Finance, Economic Survey 2004–2005, External Sector, available at http://indiabudget. nic.in/es2004-05/sector.htm.
1040-6190/$–see front matter # 2005 Elsevier Inc. All rights reserved., doi:/10.1016/j.tej.2005.12.001
The Electricity Journal
Hubert H. Reineberg
I. Background India is the world’s largest democracy and with 1.1 billion inhabitants it is the second most populous nation on the planet. The country is administratively divided into 28 states and seven union territories. While India has some of the most impoverished people on earth, it also has a highly educated, culturally sophisticated, English-speaking workforce numbering in the hundreds of millions. The country is well endowed with natural resources and controls the fourthlargest coal reserves in the world.1
Clearly, India has enormous economic potential and offers great investment opportunities in many sectors of the economy, including in the areas of water treatment plants and electricity projects. However, investing in foreign countries implies additional risks, usually not found when investing in the domestic economy. Prior to deciding where to put their money, global investors typically examine a nation’s track record as to how well it has been meeting its international obligations. n the days of the Cold War, India was politically closer to the Soviet Union than to the West.
I
Jan./Feb. 2006, Vol. 19, Issue 1 1040-6190/$–see front matter # 2005 Elsevier Inc. All rights reserved., doi:/10.1016/j.tej.2005.12.001
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After attaining independence from Great Britain in 1947, the Nehru government pursued policies akin to autarky and state controls rather than policies consistent with a decentralized market economy. The business climate was unfriendly to foreign investors and the nation paid a heavy price in economic development. However, with the collapse of the Berlin Wall and the Soviet Bloc, the government changed course.2 Today India, like many Asian economies, has achieved impressive rates of economic growth. Real economic growth has averaged 6.0 percent during the 11-year period from 1992–93 to 2003–04.3 By contrast, American economic growth has averaged a mere 3.5 percent per year for the past several decades4 and growth within the European Union has been even lower. he relatively high rates of growth are partly attributable to the country’s ability to adapt to globalization by specializing in the areas it is most competitive. Cities like Bangalore and Hyderabad are well known around the world as computer technology hubs where the cost of sophisticated software development is a mere fraction of the costs encountered in the U.S. or Europe. U.S companies have outsourced many activities to India including publishing, billing services, medical diagnostics, customer service call centers, and others activities to serve their global clientele at reduced costs.
T
78
II. The Current State of India’s Electricity Sector In the modern world, growth of real gross domestic product is the driving force behind the demand for electricity. The increasing demand for electric energy leads to new construction and upgrades of generating stations, transmission lines, and distribution systems. Thus, a nation’s capacity to generate and distribute electricity
An analysis of the current ownership of India’s power sector shows that only 10.5 percent of generation is in private hands. is an important indicator of its level of economic development and future prospects for economic growth. Currently, India’s capacity to generate electricity from all sources is about 123,000 MW, which is the total installed capacity since that nation’s independence from Great Britain in 1947.5 India expects to connect about 5,600 MW of new capacity to the grid this year. Based on fuel sources, the existing generation portfolio consists of the following units: coal 55.6 percent, natural gas 9.9 percent, oil 0.9 percent, hydro 25.5 percent, nuclear 2.7 percent and renewable power 5.0 percent.6 For economic progress
to continue, the country must invest several hundred billion dollars over the next five to 10 years to maintain its vibrant economy, create new employment opportunities for its growing rural and urban populations, and alleviate poverty. By comparison, China’s installed generating capacity, as reported by the People’s Daily in February 2005, was in excess of 400,000 MW. However, over the past three years, China has added about 100,000 MW of new generation. U.S. generating capacity is about 993,500 MW.7 In terms of actual generating capacity, China is expected to catch up with the U.S. by 2010. China’s total population is over 1.3 billion, whereas that of the U.S. is 295.6 million.8 n analysis of the current ownership of India’s power sector shows that only about 10.5 percent of generation is in private hands. The remaining 89.5 percent is owned by the State Electricity Boards (SEBs).9 The SEBs also run much of the nation’s distribution and transmission system. Due to their poor financial conditions, however, SEBs depend almost totally on capital infusions from the central government in New Delhi or from the individual states. In recent years, increased social spending on the part of the central government, to provide for its burgeoning population, has left the electricity sector with insufficient funds for the capital expenditures needed for the modernization and expansion of the nation’s electric system.
A
1040-6190/$–see front matter # 2005 Elsevier Inc. All rights reserved., doi:/10.1016/j.tej.2005.12.001
The Electricity Journal
Consequently, electric service is unreliable and blackouts are common, to the point that they impede economic progress. Another major problem plaguing the power sector are so called line losses, which in the U.S. usually run between 5 and 7 percent. In India, such losses are much larger. The Ministry of Power reports that ‘‘due to lack of adequate investments on T&D works, the T&D losses have been consistently on the higher side, and are presently in the range of 18 percent to 62 percent in various states. Reduction of these losses by undertaking distribution system improvement works has not been possible for want of adequate funds. The aggregate technical & commercial (AT&C) losses are in the range of 50 percent.’’10 Whether these figures accurately reflect actual losses, or whether they reflect improper metering or even theft, is unknown. The huge technical losses are another indication that the power sector is beset with systemic inefficiencies. The typical economic incentives that make western-style, regulated electric utilities work more efficiently are conspicuously absent. Historically, market economists have viewed extensive government subsidies, poor pricing or tariff policies, and public ownership as a recipe for economic waste. These conditions represent major barriers for infrastructure investments from outside the country. Loan guarantees from international lending
institutions, such as the Asian Development Bank, are simply insufficient to meet India’s enormous capital requirements. n India, as in many developing countries, the power sector is plagued by untenable tariff structures, based on favoritism and subsidies rather than return on rate base and cost-of-service concepts. Consequently, cost recovery is almost nonexistent. The notion of charging users of
I
The typical economic incentives that make western-style, regulated electric utilities work more efficiently are conspicuously absent. resources the full cost is not yet a widely accepted practice. The implementation of electric tariffs based on the cost of service would go along way in resolving the SEBs’ financial woes. The improved financial strength would enable the SEBs to pay for part of the expansion of the electric system. Moreover, financial solvency would also make the sector attractive to external capital and perhaps alleviate some of the current shortfalls of infrastructure investments. Irrational tariffs are not the only problem plaguing the power sector. After independence from Great Britain, it was recognized
that increasing India’s food production was vital to feed the skyrocketing population. Thus, the government provided the agricultural sector, primarily farmers, with electricity free of charge. At the time, paying subsidies to agriculture may have seemed to be a rather progressive idea. However, more than 50 years later, when the economic problems are quite different, subsidizing the agricultural sector has become more than just an impediment to economic growth. In the past, efforts to charge farmers for the energy they use have often failed. Farmers have destroyed the meters that were forcefully installed and found other ways to avoid paying for services they received. Though recent reports indicate that some progress has been made in installing meters, only time will tell whether more rigorous enforcement eventually gets the upper hand and the utilities receive payment for the services they render.
III. Current Electricity Usage Patterns As an outcome of supplying farmers with electricity free of charge, electricity usage has been skewed heavily in favor of the agricultural sector. Between 1990 and 2002, on average, agriculture consumed about 28 percent of electrical output. However, during my several visits to India, utility executives argued that the government’s statistics were too low for several reasons, with the actual
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figure being closer to 40 percent, for electricity metering of individual users in rural areas of the country was virtually nonexistent because of the lack of meters. The metering of electricity at the substation level may be flawed as well. Government statistics show that the industrial sector’s share of electricity usage for the same period averages about 38 percent. It might be noted that this sector’s electric tariffs in many cases tend to be higher than those in the U.S. Thus, many industrial companies attempt to generate their own electric power because of lower costs and greater reliability. As a result, the share of electricity consumption of the industrial sector, as reported by the government for the 1975–2002 period, fell from roughly 62.4 percent to 33.3 percent. The share of electricity used by households during the same period increased from 9.7 percent to 24.7 percent.11
IV. India’s Economic Growth: Present and Future Given the dismal physical and financial conditions of the electricity sector, huge infrastructure investments will be required in order that economic growth can continue at current levels. India’s Ministry of Finance states that: ‘‘The rapid economic growth of the last few years has put heavy stress on India’s infrastructure facilities. The projections for further expansion in key areas could snap the already strained 80
lines of transportation unless massive programs of expansion and modernization are put in place. Problems include power demand shortfall, port traffic capacity mismatch, poor road conditions (only half of the country’s roads are surfaced), and low telephone penetration.’’ Government officials estimate that to support a 7 percent annual rate of economic growth, the rate of growth of power supply needs to
India’s new openness toward foreign investments did not achieve the objectives the government had sought and led to many disappointments. be over 10 percent annually. At the current level of generating capacity of about 123,000 MW, that would require a minimum annual addition of 12,300 MW. To date, that goal has never been reached.
V. The Ghost of Dabhol: India’s Hopes and Disappointments In the 1990s, India’s new openness toward foreign investments was met with strong interest by global investors. The goal was to set up independent power projects (IPPs) in support of the nation’s economic
development strategy. Though dozens of projects were approved, most of the largest projects never became reality thanks to regulatory obstacles and in some cases a simple failure to secure financing. While several projects actually won government approval, in the end they were never built. Projects that did begin construction ran into other difficulties. One of them was the infamous Enron-backed Dabhol Power Project, which was partly owned by Bechtel Enterprises and GE Capital. The Dabhol project consists of two gas-fired units with a generating capacity in excess of 2,000 MW, at an initial cost of roughly $2 billion. Despite chronic power shortages and blackouts in the region, the project has been idle since 2001. In that year, the Maharashtra State Electricity Board (MSEB) began a tariff dispute which has yet to be resolved.12 Recently, the Minister of Power announced that the government wants the Dabhol project up and running by the end of 2006. Whether this date is realistic or not, no one knows. ndia’s new openness toward foreign investments did not achieve the objectives the government had sought and led to many disappointments. The Dabhol Project has to date been India’s largest foreign direct investment project. The dispute surrounding Dabhol signaled to many international investors, rightly or wrongly, that the country may not yet be ready for large infrastructure projects funded with private capital. Thus,
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foreign direct investments in infrastructure projects have been virtually nonexistent. Though India lags behind China, Brazil, and other countries, it has received considerable foreign investments for other types of projects. What is sometimes poorly understood by governments everywhere is that competition for foreign investment remains fierce around the globe. Investors consider virtually all nations for possible investment opportunities, with capital resources flowing into those areas of the world’s economy where they are valued most, based on the criteria of risk and return. Investors may either choose the various financial markets or participate directly in infrastructure and other projects. Infrastructure investments, such as roads, bridges, power plants and water treatment plants differ from other investments such as call centers or software labs in that they have a domestic component. For example, a power project or a transmission system funded with foreign capital must earn sufficient local currency to cover its operating costs, debt service, and dividend payments. Moreover, the sovereign nation must allow for the timely transfer of hard currency funds to outside investors. Any interruption in the debt service or dividend payments tends to increase the country’s perceived investment risk. Foreign investors may then either require higher rates of return on future projects, due to the perceived increased risk, or simply invest their funds elsewhere.
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y contrast the services of software labs and call centers operated by U.S. companies are designed to facilitate the business relations with their clients worldwide. The revenues they generate or costs they save are benefiting the corporations that own them. Due to the cost advantages and worldwide client base enjoyed by these companies, there is little risk to their debt and equity investors.
The Electricity Act of 2003 is in part a response to the poor financial conditions of the SEBs, whose losses make expansion of the electricity sector virtually impossible. VI. The Drive Toward Modernization With the lack of new foreign infrastructure investments forthcoming and to meet the challenges of the 21st Century, the Indian government has made significant legal and institutional changes. The most important piece of legislation to become law, symbolizing the policy shifts toward the energy sector, is the Electricity Act of 2003. The purpose of the Electricity Act is to establish a ‘‘liberal framework for the power sector’’ without the strong hand of gov-
ernment, covering the entire country, except for the state of Jammu and Kashmir. The Act consolidates or replaces existing laws concerning the generation, transmission, and distribution of electric power. It promotes energy trading, competition, free transmission access, competitive bidding, and the protection of consumer interests, including the availability of electricity in all areas of the country. Furthermore, the Act is specifically designed to create a competitive environment which will facilitate and attract private investments to construct stand-alone generation in urban and rural areas. To level the playing field, the law also allows for the de-licensing of generation and distribution, but permits multiple licensing of distribution necessary to promote competition. The de-licensing of power plants essentially implies that existing power plants can become stand-alone facilities. he Electricity Act of 2003 is in part a response to the poor financial conditions of the SEBs, whose annual financial losses make the expansion of the electricity sector virtually impossible. The government asserts that this legislation ‘‘seeks to bring about a qualitative transformation of the electricity sector through a new paradigm.’’ Additional provisions mandate the formation of regulatory commissions at the state and federal levels. At the state level, the commissions are charged with the responsibility to bring order and consistency into the tariff process, to eventually
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make the SEBs financially selfsustaining. Another important requirement is the formulation of a National Electricity Policy and Plan. The Electricity Policy seeks to set guidelines for the entire country to encourage rapid power sector development and to achieve a quick turnaround of the sector’s dismal financial conditions. Among the major objectives are providing access to electricity for all households in the next five years and constructing enough generating and transmission capacity to meet demand by 2012, at increased reliability and reasonable electric tariffs.13 critical program to achieve the goal of electricity for all of India is rural electrification, aimed at enhancing socioeconomic development in rural areas. As such, it is analogous to the rural electrification projects initiated by the Roosevelt administration in the 1930s to bring electric energy to rural America. According to the government, ‘‘Rural electricity involves the supply of energy for two types of programs: (1) production-oriented activities like minor irrigation, rural industries and (2) electrification of villages.’’ Here the emphasis is placed on the exploration and development of clean and safe drinking water, but the purpose is rural electrification. Another government goal, not specifically articulated, is a self-sustaining, healthy, and productive rural workforce to ensure that India remains competitive in the global economy.14
VII. Electricity for All by 2012? To provide electricity for ‘‘all of India’’ by 2012 involves the most ambitious series of investment projects ever undertaken by the government. Currently, about 56 percent of rural households have no access to electricity. In nonrural areas, that figure is about 44
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percent. Under the ‘‘Building India’’ plan, which extends over a four-year period, the government intends to furnish 250 million rural homes with electricity and provide safe drinking water to 74,000 villages. In many of India’s rural villages, it seems that modernity has passed them by and life has stood still for centuries or perhaps even longer.15 The introduction of electricity will have far-reaching consequences for Indian village life with important social implications. Rural life as it is known today will be transformed to a different, likely more modern, way of life. Real incomes of rural villagers will rise, albeit slowly, which is bound to bring
about changes in attitudes and social values. As the International Energy Agency (IEA) notes, ‘‘Electric energy has deep and broad relationships with each of the three pillars of sustainable development: economy, environment and social welfare. Social and economic development can be attained only so long as a secure, reliable, and affordable supply of energy is ensured.’’ To achieve the goal of 200,000 MW of total installed generating capacity by 2012, the actual construction of new generating capacity may well exceed the 100,000 MW currently estimated by the government. The Ministry of Power reports that the average plant load factor (PLF) ranges from a low of 26.8 percent in the Northeastern regions to a high of 65.6 percent in the Southern regions, accounting for frequent power shortages and periods of forced outages or blackouts. Many of the poorly performing and aging existing units, in particular thermal units with a capacity of 120/140 MW, will have to be modernized or replaced if the goal of supplying electricity to the entire country is to be realized.16 The transmission of electric energy over long distances at high voltage occurs usually above 132 kV. For purposes of bulk power transfers, the country is divided into five regions, with interconnected transmission within each region generally referred to as the regional grid. Currently, the transmission system above 132 kV extends more than 265,000 km. The
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country’s prospective transmission plan envisions a national grid through greater interregional and intraregional connections.17 The national grid is expected to carry an additional 100,000 MW of generating capacity and 60 percent of the country’s total generation by 2012. Moreover, the existing inter-regional capacity transfer of 9,000 MW is to be enhanced to 30,000 MW through the creation of the ‘‘Transmission Superhighway’’ to be paid for through public and private participation. The distribution system and installation of meters in rural and non-rural areas will also have to be addressed. Due to the lack of funds for capital improvements and upgrades, to date the system has been essentially ignored. he enormous investments in electric generating capacity, combined with an ambitious program to modernize the national grid, will require additional investments in related facilities. At a minimum, a doubling of power plant capacity will dictate an increase in the capacity of seaports, pipelines, refineries, coal mines, rail and other transportation systems. The price tag for the various infrastructure projects seems staggering. Rough cost estimates suggest that it may cost in excess of $200 billion. The cost of expanding power plant capacity by 100 thousand MW will most likely exceed $100 billion. Since in years past government figures showed that the required capacity to supply electricity to all of India
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was closer to 300,000 MW than 200,000 MW, the $100 billion cost estimate may be too low. The modernization of the national grid through the construction of high-voltage transmission lines, while less costly than in the U.S., may still require $20 to $30 billion. The Transmission Superhighway is estimated to cost at least $15 billion. Apart
for all by 2012 will be rather challenging. Severe budget constraints at the central government level virtually rule out any significant funding from this source. In fact, the Delhi government is obligated to cut the budget by 0.3 percent each year through 2009. Clearly, India will have to rely on a variety of sources, including borrowing in international capital markets. While the Standard and Poors credit rating agency recently upgraded India’s foreign currency debt, it remains one notch below investment grade.18 urrently, India’s external debt is about $113.5 billion, which makes it the eighth most indebted nation on earth. However, the external debt and the associated debt service does not pose an immediate problem because $128.4 billion in foreign exchange reserves would cover the country’s external debt.19 India’s balance of trade has been negative for the past 25 years and it was expected to conclude 2005 in the red again because of an unusually high oil import bill. The sources of external funds include additional foreign borrowing, foreign direct investments, and revenues from IT investments which are currently excluded from the foreign trade statistics. However, since private capital for electric projects has been absent in recent years, will global investors embrace the changes initiated by the Electricity Act of 2003 or will the specter of Dahbol continue to keep them on the sidelines? Perhaps even
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from the infrastructure mandated to support the additions to the electric system, the government is also planning to make huge investments in water treatment facilities and telecommunications. Clearly, the government figures tend to be rather preliminary. Typically, due to their long gestation period, planning for infrastructure project tends to be complicated and such projects tend to be plagued by huge cost overruns.
VIII. How Will the Massive Improvements Be Financed? The funding of the rather ambitious projects of electricity
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more importantly, will India’s state and local authorities honor the contracts they negotiate? Recently, one international lending institution showed its confidence in the country’s new approach. In August, World Bank President Paul Wolfowitz announced that, over the next three years, the Bank would lend $9 billion to India. The funds have been earmarked for a variety of infrastructure projects including water, electricity, and transportation. The gesture by the World Bank clearly shows that India’s economic development is important to the world economy. Moreover, the Bank is sending a clear signal to global investors that it has faith in India’s economic future and that whatever problems may have happened in the past are being resolved. As India develops its economy it is becoming an ever more important partner to the U.S. and the West. As the world’s largest democracy and as a mul-
tiethnic society with a strong Islamic minority, India is an important partner in the war on terror. However, it remains an open question whether India can attract sufficient domestic and international capital to realize its dreams. Likely over time India will indeed achieve its goals, but can they be achieved by 2012?& Endnotes: 1. World Fact Book, 2005, India, available at http://www.cia.gov/cia/ publications/factbook/geos/ in.html.October 2005. 2. Id. 3. Ministry of Finance, 2003–04 Economic Survey: Annual Growth Rates of Real Domestic Product, at 1993–94 Prices, available at http://indiabudget.nic.in/ es2003-04/tables.htm.October 2005. 4. U.S. Economic Accounts, Gross Domestic Product, Percentage Change from Preceding Period, XLS; Sept. 29, 2005, available at http:// www.bea.doc.gov. 5. Ministry of Power, Electricity Scenario: Power Sector at a Glance,
Sept. 30, 2005, available at http:// powermin.nic.in/JSP_SERVLETS/ internal.jsp. 6. Id. 7. Energy Information Administration, Name Plate: Existing Electric Generating Units in the United States, 2003, available at http:// www.eia.doe.gov. 8. World Fact Book, supra note 1, USA, available at http://www.cia.gov/ cia/publications/factbook/geos/ in.html. 9. Ministry of Power, supra note 5, Total Installed Capacity, available at http://powermin.nic.in/ index.htm. 10. Ministry of Power, supra note 5, Distribution, Mar. 2004. 11. Pattern of Electricity Consumption, Indian Budget 2003– 2004, available at http:// indiabudget.nic.in. 12. Energy Information Administration, India: Country Analysis Brief, Section: Coal – Dahbol, Oct. 2004, available at http:// www.eia.doe.gov/emeu/cabs/ india.html. 13. Ministry of Power, Electricity Act of 2003, available at http:// powermin.nic.in/index.htm. 14. Id. 15. World Bank Plans to Lend India $9.0 Billion over Three Years, Bloomberg.com, available at http:// www.bloomberg.com/appsnews? pid=71000001refer= home&s. 16. Ministry of Power, supra note 5, Generation, 2004. 17. Ministry of Power,.Transmission Overview, Mar. 2004, at 1–2, available at http://powermin.nic.in/ JSP_SERVLETS/internal.jsp. October. 18. Standard and Poors, Sovereign Credit ratings, Apr. 2005, available at http://www.infosys.com/media/ india-credit-rating.asp.
The gesture by the World Bank clearly shows that India’s economic development is important to the world economy. 84
19. Ministry of Finance, Economic Survey 2004–2005, External Sector, available at http://indiabudget. nic.in/es2004-05/sector.htm.
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