Wednesday, August 1, 2012

India's blackouts shine light on broken power sector


India has installed power capacity of 205,000 megawatts (MW), about 35 per cent more than it had five years ago, thanks to an aggressive drive by the government to add more.

However, that is still only about a fifth of China's capacity, and so - even though one third of Indians are not even connected to a power grid - there is a gap between supply and demand, with the peak-hour deficit reaching about 10 per cent.

Efforts to accelerate the pace of capacity addition have been thwarted by hurdles standing in the way of land acquisition and clearances for power projects, including regulatory delays and environmental concerns.

Government data shows that the average delay for construction of thermal power projects is running at 15 months, but some have been on the drawing board for years.

Take the case of billionaire Anil Ambani's plan to set up a 7,480 MW plant at Dadri in Uttar Pradesh. A decade after the project was announced it is still not operational after protests by farmers over land acquisition and a legal challenge that is still pending in the Supreme Court.

Coal and natural gas shortages have crimped the rollout of new plants and left many existing units running below potential, where in all some 15,000 MW of capacity are lying idle.

Ambani's Reliance Power has built the first phase of a $1.8 billion plant in Andhra Pradesh, sourcing state-of-the-art equipment from General Electric Co but it doesn't have the gas to start it up.

The fuel shortage is acute when it comes to coal, which accounts for two-thirds of the country's power generation.

India has about 10 per cent of the world's coal reserves but output by the near-monopoly Coal India has stagnated, importing coal is far more costly and a lack of rail capacity from ports has held up supplies. Many power plants have less than seven days' of coal stocks, a level seen as critical to continuous operation.

"Coal India has enough reserves. But evacuation (transportation) is the main problem," said a senior coal ministry official. He said Coal India had set aside $900 million to lay train tracks in the next five years but the railway ministry had not responded to the plan.


While generation capacity has increased, renovation of the transmission network has not kept pace, which means that about one-third of production is lost at this stage.

"A lot of the transmission network is not old," said Kameswara Rao, leader for power and mining at Price Waterhouse Coopers India. "We are running but the treadmill is even faster."

Perhaps the biggest challenge, though, is the health of decrepit distribution companies that depend on subsidies and face huge losses from low tariffs and rampant power theft. Together, they are now saddled with debt worth some $35 billion and are increasingly unable to pay for new supplies.

"Generation capacity will only get financed if the financiers feel that the generators are selling power to distributors who are financially capable of paying for it," Planning Commission deputy chairman Montek Singh Ahluwalia said recently in defence of a government plan to bail out the mostly state-owned distribution companies.

Populist-inclined state governments have made it difficult for distributors to set cost-reflective tariffs. However, with bank loans drying up, many distributors have been forced to raise tariffs sharply over the past six months.

To be fair, there have been many steps to reform the power sector over the past decade.

The generation, transmission and distribution segments of the industry have been separated to allow each to work on its own, and private investors have been drawn into generation in particular, now accounting for about one quarter of capacity.

However, more sector reform is unlikely to come quickly from a government that appears to feel it has much to be proud of.

Sushilkumar Shinde, who was promoted from power minister to home minister even as the country reeled from Tuesday's blackout, told a news channel the next day: "I rate myself as an excellent power minister."