Indian Energy Scenario: Challenges & Opportunities

The Indian power sector is one of the most demanding and diversified sector in the world today. Various sources for power generation range from conventional sources like coal, lignite, natural gas, oil, hydro and nuclear power to non-conventional sources like wind, solar,tidal, agriculture and domestic wastes. The demand for the electricity in the country is growing at a faster pace and expected to grow further in the ensuing years. In order to meet the increasing demand of the electricity, a massive addition to the existing capacity is required. Simultaneously, commensurate augmentation in the Transmission and Distribution segments is also required, which require a massive infrastructure with skilled and un-skilled manpower resources.
 
There is no doubt that the Power sector is the most important among all infrastructure sectors in the country. As power is a prerequisite input to all industrial and commercial sectors, the development and maintenance of commensurate power infrastructure is essential for the sustained growth of the economy. Thus, it is imperative that the growth in Power Sector should be broadly at par with the GDP growth rate, say around 9%.
 
The Indian Power sector has grown significantly since independence and the generation capacity has increased from 1,362 MW in 1947 to over 250,257 MW in July, 2014. Despite significant increase in electricity generation, the shortage of Power continues to persist primarily on account of the growth in electrification and demand for Power outsmarting the growth in generation and capacity addition. Even after considerable growth in the Power sector and improvement in the electricity supply, many parts of the country continue to face Power shortages.
 
The Power sector is highly capital intensive with long gestation periods before commencement of revenue streams with a construction period of about 4-5 years in case of the Thermal Projects and 7-8 years for the Hydro Projects. This excludes a considerable time required for seeking statutory clearances like environment and forest clearance, land acquisition and achieving financial closure for the project. Since the projects have a long time-frame, this involves several inherent risks too in both the internal & external environment.
 
The Power sector has made considerable progress over the past few years with several reforms for progressive changes. The erstwhile state electricity boards have been restructured and independent regulatory institutions in the form of central and state regulatory commissions have been established. Setting up of an electricity tribunal, forums for redressal of consumer grievances and ombudsman have proved to be significant milestones for conflict resolution among stakeholders. Government has distanced it with tariff determination and there is greater public participation in Tariff-setting exercise. Tariff distortions are getting minimized over a period of time. Despite all these measures, the sector is facing considerable problems and new challenges cropping up. In a way, the sector is witnessing a turbulent phase and the investors are wary of the challenges that need prompt addressal. Besides, per capita annual consumption of electricity wise, the country with its per capita consumption of about 914 kWh in 2012-13, is still lagging behind in comparison to many other developing and developed countries.

*For the year 2011
 
The major issues and challenges that India is facing in various segments of power development, are briefly indicated in the following paragraphs.
 
Challenges in Generation
 
Of the existing 250,257 MW capacity, about 172,986 MW (69.1%) is under the thermal generation i.e. coal, gas and diesel based, 40,798 MW (16.3%) under the hydro, 31,692 MW (12.7%) under the renewable energy sources and remaining 4,780 MW (1.9%) under the nuclear energy. Despite this huge capacity, there is still severe shortage of power in the country which compels utilities to resort to large scale load shedding in both the urban and rural areas.

In order to meet the ever growing demand of the electricity and to enhance the economic growth of the country, a large scale addition to the installed generation capacity and commensurate development of associated transmission and distribution infrastructure is required. The current 12^th Five Years Plan has an ambitious target of the capacity building of an additional 88,537 MW with another about one hundred thousand MW in the following five years plan with an objective to meet growing power demands with 24×7 supply to consumers.
 
However, the Generation segment is facing certain serious issues including the availability of coal and gas which is a serious challenge for augmentation of generation of electricity. These issues are briefly given in the following paragraphs.
 
(1) Shortage in Coal supply: At present, of the total generation capacity about 60% is coal/lignite based and around 76% of the generation comes from the coal-fired power stations making it back-bone of the power sector. The PLF of the thermal power stations remained about 65.5% during the year 2013-14 and one of the major factors has been the widening gap between the demand and supply of coal. Coal India Limited (CIL), a public sector company of the Government of India, and its subsidiaries are main source of production and supply of coal besides some captive coal mines and coal imports. The coal supply to the thermal power plants is assured through the coal linkage and signing of fuel supply agreements (FSAs) between the CIL and power plants.

While there has been a rapid growth in the generation capacity, mostly coal based, with large scale private sector participation in the recent years but coal production has not increased with commensurate pace. Developers are not so keen for the imported coal, though of superior quality, due to its high cost fearing this may lead to high tariff making it unviable for sale to already cash deficient distribution utilities. Available options to remedy this situation are a) steps to be taken by CIL to augment its coal mining capacity to match the growing demand of coal; b) government may consider opening the coal mining sector for private players; c) of late international coal prices are showing fall in prices, opportunity may be availed by developers to make use of the imported coal.

Another dimension has been added to the already deteriorating coal supply position. In the recent Supreme Court landmark decision, the majority of coal blocks allotted by the government to public and private companies since 1993 have been cancelled. These cancellation would have several repercussions in the days ahead and the government is required to promptly act to minimize its adverse impact on several ongoing projects. Similarly, several gas based projects are also stuck up with the problem of inadequate or non-supply of gas.

(2) Statutory Clearances: Though delicensing of generation and transmission was a significant step in power development, there are still many delay prone government approval and statutory clearances at various levels making the process lengthy and cumbersome. Securing land and environment & forest clearances continue to be difficult and time-consuming processes. Land is first and foremost necessity for setting-up a Power project. A lot of projects get either cancelled or delayed due to non-availability of land or difficulties in transfer of land. Sometimes, environment and forest clearance takes three to five years or even more leading to considerable time and cost overruns. Securing fuel linkage or captive mines too is a rather long-drawn process and has led to a scam like Coalgate. It is understood the present government is working on how to make streamline processes and expedite clearances in a fair and transparent manner.

(3) Investor Friendly Climate: Private investment has steadily grown in the country since the liberalization of the Power sector by allowing hundred percent foreign direct investment. However, many major international companies are still apprehensive and reluctant to invest in India’s energy sector due to several restrictive policies and cumbersome procedures. Moreover, the coal mining sector continues to remain monopoly of one government owned company almost closed for the private participation. In terms of the general investment environment, the doing business index (DBI) by the World Bank in 2012 ranked India at 132^nd out of 183 countries. Clearly, the country needs to go a long way to create investment friendly business climate to attract greater investment.

(4) High Ash Content Coal : About 80% of Indian Coal reserves have ash content between 25-45%. The absence of adequate numbers and location of Coal washeries in the Country makes it necessary to import low-ash Coal. Low ash Coal is largely imported as high ash content in Indian Coal makes washing necessary before it is supplied to Power plants. Besides, the disposal of ash also pose several problems.
 
(5) Dipping Power Load Factor (PLF): Availability of Coal and Gas for Power generation has been a major cause of concern. The Gas supply to gas based Power plants has been quite uncertain and erratic. Due to reduced availability coal and of gas, many existing Power plants in the country are operating at low PLF and some have even been closed.

(6) Uncertainty of Imported Coal : The recent change in international markets, most notably among which being the enactment of the new mining laws in Indonesia, has significantly impacted the cost of imported coal for Indian companies, many of which were relying on supply of coal from this south-east Asian nation. Securing fuel from the import Coal market is turning out to be increasingly costly and uncertain. Krishnapatnam UMPP (4,000 MW) has remained a non-starter while Mundra UMPP (4,000 MW) and Adani MTPP (4620 MW) are facing litigation over rising cost of imported coal. Recently, coal prices in the international market are showing a down trend but due to price uncertainties and high transportation cost, it has so far failed to create a favourable impact on Indian importers.

Challenges in Transmission
 
At the time of Independence with meager overall generation capacity, Power systems in the country were essentially isolated systems developed in and around urban and industrial areas with the highest transmission voltage of 132 kV. The state-sector network grew at voltage level up to 132 kV during the Fifties and Sixties and then to 220 kV during the Sixties and Seventies. Subsequently, in many states substantial 400 kV network was also added as large quantum of power was to be transmitted over long distances.
 
While generating power, the evacuation of this power with proper transmission and distribution is also equally important which again require a massive infrastructure with skilled and un-skilled manpower resources. For smooth and efficient transportation of electricity from one part to another part of the country, a national grid is in place. The country is divided into five electrical regions, namely northern, southern, western, eastern and north-Eastern regions for the purpose of grid operation. In the past, they were operating in asynchronous mode but now all these regions are synchronously connected which means power can now smoothly flow from one part of the country to another.
 
In addition to the national grid, the respective states have their own state grid for transmission of electricity. Inter-State (and Inter-regional) transmission system is mainly owned by Power Grid Corporation Limited, a Government of India Undertaking. Planning and developing Inter-state transmission system for many private projects is a challenging task because of the uncertainty about their actual materialization, commissioning schedule and their beneficiaries are most often not known at the time of transmission planning. The process of transmission planning and development is becoming increasingly dynamic in the market driven environment.
 
The major issues and challenges in development of the Transmission segment in the country are as under:

(1) Inter-State Transmission Capacity Building: The current cumulative Inter-regional Power transfer capacity of National Grid stands to about 28,000 MW and frequent congestion in Inder-State Transmission of electricity have been noticed. Commissioning of Inter-regional links has strengthened the Inter-regional grid capacity of Eastern Region with Western Region and Northern Region. To further strengthen the National Grid, various high capacity HVDC and EHVAC Inter-regional links with total capacity of 38,400 MW have been planned to take care of Inter-regional Power transfer requirement of various planned generation projects including Independent Power Producers (IPPs) scheduled for commissioning in XII Plan. The Inter-regional power transfer capacity of National Grid is thus envisaged to be enhanced to about 66,400 MW by the end of XII Plan.
 
The augmentation of inter-regional capacity shall also facilitate the integration of a large renewable Power generation in the southern region with the rest of the country,
 
(2) Grid Failure: With the ever expanding transmission network in the Country, complexities of Grid operation have also increased. Currently there are five Regional Load Dispatch Centers (RLDCs) under the National Load Dispatch Centre (NLDC) which are being upgraded continuously through deployment of latest technology. However, the Grid experienced two major disturbances consecutively on 30th July & 31st July, 2012. While the first disturbance affected only Northern Region, the second one affected Northern, Eastern and North Eastern Regions. However, the essential loads were restored quickly within few hours of the incidents and power supply was restored progressively. Other than this, there has not been any other major failure during the last ten years.
 
Ever since several measures have been taken at national level to ensure uninterrupted supply and reliability of the Power system in the country which inter alia include heavy penalties for violation of grid code by any utility.
 
(3) Islanding Scheme: In any power system, the transmission network is designed to be adequate for normal load flows and also for certain reasonable contingencies. However, in the event of a major disturbance with considerable loss of network/generating capacity; the remaining network may not be in a position to cater to the load and such overloading may have cascading effect in tripping of the remaining network following the disturbance.
 
In order to provide another layer of system protection and prevent collapse of the entire system leading to total black out consequent to a major system disturbance, a scheme called islanding scheme was conceptualized in 2013 and is being developed for the major cities and pockets. This protection is a system protection of the last resort. This scheme pre-supposes that the integrity of the system cannot be maintained in spite of the automatic load shedding. Instead of allowing the system to disintegrate by the tripping of generators and transmission lines as the disturbance develops, the islanding scheme itself sectionalizes the whole system into sustainable small systems each consisting of a group of generating stations and a group of load centres that can be sustained by these generating stations. In effect each group becomes a sustainable island and hence the name islanding scheme. Initially, such scheme is being implemented for cities like Delhi and Mumbai.
 
(4) Smart-Grid: Smart Grid is confluence of Information, Communications & Electrical/Digital technologies. Smart Grid, apart from facilitating real time monitoring and control of power system will also help in reduction of AT&C losses, peak load management/demand response, integration of renewable energy, power quality management, outage management etc. In this way Smart Grid technology shall bring efficiency and sustainability in meeting the growing electricity demand with reliability and quality of the Power system.
 
In India, it is still in a nascent stage yet the PGCIL has taken pioneering steps in bringing Smart Grid technology to various facets of power supply value chain. It has undertaken a smart grid pilot project at Puducherry through open collaboration covering all attributes of smart grid in distribution.
 
Challenges in Distribution Segment
 
Distribution of the electricity is largely a state subject in India. The responsibility for the distribution of electricity to the end consumer is undertaken by the state owned Distribution companies. The private sector has limited presence in distribution segment in certain parts of country including Delhi, Mumbai, and Odisha etc. Incidentally, this happens to be weakest link among various segments associated with the power industry. Distribution infrastructure largely consists of sub-stations, low voltage lines, transformers and associated paraphernalia. A large number of the distribution utilities are running into losses due to issues like obsolete and outdated infrastructure, energy losses in transmission, distribution and theft, inefficient metering, billing and collection, subsidy and cross-subsidy, non-implementation of cost reflective tariff, and so on so forth.
 
There is no doubt that any service sector cannot deliver on its social responsibilities unless it is financially and commercially viable. The Distribution segment plays a crucial role in the overall functioning of the Power Sector as it provides the last mile connectivity of Power to the consumer. The recent years have been a witness to growing concerns over the financial health of Distribution Utilities. The low collection efficiencies and cash deficit scenario of the Distribution utilities, in a way, are impacting the financial viability of Generation and Transmission segments as well.
 
Distribution segment has major bottlenecks in terms of inadequate investment, metering of consumers, aggregate technical and commercial (AT&C) losses, rising gap between the cost of supply and revenue realized, LT-HT line ratio and overloading of transformers, skewed tariff structure, accountability, management structure and practices. The major challenges before the Distribution segment are highlighted in the following paragraphs.
 
(1) High Aggregate Technical & Commercial Losses: Existing high AT&C losses are one of the biggest problems in the Distribution segment. At present, national average annual AT&C loss is estimated to be around 25.38% for the financial year 2012-13. However, there is a wide variation in the loss levels for different states. In states like Jammu & Kashmir and Bihar, it is as high as 60.87% and 54.63% respectively, while some others like Himachal Pradesh (9.53%) and Andhra Pradesh (13.63%) and have been able to bring down these losses significantly. High levels of AT&C losses pose a major challenge as a significant portion of the generated power is lost or goes unaccounted. This has largely been on account of old and outdated sub-transmission, poor distribution leakages, theft etc.

The scale of losses in the Distribution segment of Power sector is simply unsustainable to maintain the financial viability of the sector. A number of technical and non-technical factors contribute to the high Transmission and Distribution losses. These include populist measures of granting free or subsidized power supply to agricultural users, lack of consumer education, theft and inefficient use of electricity. Inadequate investments in the sector over the years have also resulted in overloading the distribution system elements. Apart from above problems, the Distribution segment is affected by poor billing and collection efficiency in most of the States.
 
The Transmission and Distribution (T&D) losses in the developed countries vary in the range of 4 to 8%. Countries in Europe and United States of America have T&D losses of about 6 to 8 %. Developed countries have far lower loss levels compared to India. China with a T&D loss level of approximately 6% is ahead of many developing countries.

Main reasons for AT&C Losses are both technical and commercial. Technical losses are on account of the overloading of existing lines and substation equipment, lack of up-gradation of old lines and equipment, low high tension – low tension lines ratio, poor repair and maintenance of equipment and inadequate or non-installation of capacitors/reactive power equipment. On the other hand, commercial losses include low metering, billing and collection efficiency, theft, pilferage of electricity, tampering of meters, lack of energy accounting and auditing further compounded with low accountability of concerned employees.

The responsibility of reduction of AT&C losses in the distribution network primarily rests with the State Governments and the Power Departments/Utilities. However, to address the issues related to the high AT&C losses and reforms in the distribution sector of the States, the Government of India had launched the Accelerated Power Development and Reforms Programme (APDRP) during 10^th Plan and it was restructured (R-APDRP) during the 11^th Plan. The scheme has been continued in the 12^th plan (2012 – 2017) with emphasis on actual demonstrable performance in terms of sustained loss reduction, establishment of a reliable and automated system for collection of accurate base line data and adoption of Information Technology (IT) for energy accounting.

(2) Financial Health of Distribution Utilities: The financial health of Distribution utilities in the country is a matter of serious concern. The total Aggregate losses of utilities under various states were estimated to be about 190,000 crore as by end of March, 2012. Factor responsible for this condition are continuing high AT&C losses, unrealistic tariff structure, poor revenue collection, non-payment of subsidy, poor infrastructure, planning and implementation.

To bail out state owned Distribution utilities, the Central Government has formulated and approved a scheme for financial restructuring in October, 2012 to enable the turnaround of the state distribution companies and ensure their long term viability. Under the scheme, 50% of the outstanding short term liabilities corresponding to accumulated losses as on 31^st March, 2012 shall be taken by the state government. The balance 50% liability will be rescheduled by lenders on best possible terms with initial moratorium on principal. The Central government will, in turn, incentivize States by giving capital reimbursement support @ 25% on the liability taken over by the state government and grant equal to the value of energy saved by way of accelerated AT&C loss reduction, subject to fulfillment of certain reform measures. These steps are likely to improve financial health of participating utilities in due course.
 
(3) Tariff Rationalization: The main reason for the poor financials of Distribution utilities is the continuing revenue gap between the cost of supply of electricity and tariff fixed. Such a gap is left by the regulators mostly under influence of state governments as populist measure in an endeavor to keep tariff low for certain categories of consumers including agriculture and domestic consumers. This compromises the sustainability of Distribution companies. It is necessary that the tariff structure is commensurate with the cost of supply and, in case, any State governments desires to give relief to any category of consumers, they should do so by upfront payment of subsidy as provided under the Act.
 
(4) 100% Metering of Consumers: Metered supply to consumers leads to correct estimates of losses, subsidies, incentives, and effective planning and implementation. There is an urgent need to identify an action plan for 100% metering of consumers and implementation by all Distribution utilities. The existing provision is to have pre-paid meters for all government consumers and high end consumers of one MW and above. In many states, a large number of domestic and agriculture consumers are un-metered. It is necessary to have a time bound metering plan for all consumers in the following manner.

• Identifying all unmetered consumers
• Metering of consumers should be completed in phases depending on prioritization such as Urban, Rural etc.
• Implementation of prepaid metering for the designated category of consumers.

(5) Lack of credible database: Majority of the Distribution utilities do not have IT enabled information system and thus struggle to maintain a comprehensive database of all consumers and related information. Lack of accurate information hinders decision making especially in curtailing theft, making investments and estimating losses. IT based information system can be a key enabler in electricity distribution business to set baseline and measure performance. For this, initiative taken by the Central Government in the form of R-APDRP should be utilized in full by the respective state utilitiesin a time bound manner.
 
(6) Energy accounting & auditing covering all feeders and Distribution Transformers (DTs): Despite the focus given to proper energy accounting and auditing, metering especially for rural, domestic and agriculture consumers is still to be completed. This in turn puts a question mark on the veracity of the Distribution loss figures in itself as reported by the utilities based on estimated consumption taken for unmetered consumers. Again R-APDRP would be of tremendous help in addressing these issues.
 
(7) Other Measures for Distribution segment: Multipronged approach has been adopted for swift recovery and overall improvement of the Distribution segment. Some of the important measures are briefly indicated here:

1. Privatization of distribution by out-rightly giving it to private companies and Franchisees is being attempted. Odisha and Delhi are example of privatization while franchisee model was successfully implemented in Bhiwandi, Maharashtra. Franchisee model is being experimented in certain other major towns like Nagpur, Aurangabad and Jalgaon in Maharashtra, and Agra and Kanpur in Uttar Pradesh.
2. A National Electricity Fund has been created which is basically an interest subsidy scheme for the states interested in improving their High Voltage Distribution System (HVDS) in the towns not covered under the R-APDRP.
3. Supervisory Control and Data Acquisition System (SCADA) is being implemented at large scale for the real time communication, information storage and energy loss calculations.
4. Smart metering i.e. the use of remote meters for automatic meter reading is at cards. This will be very useful for effective energy management, energy accounting and problems of manual reading.
5. There is need for segregation of agriculture and rural feeders. By separation of agriculture and rural feeders, agricultural load can be given supply during off peak hours while eventually a continuous supply could be given to rural homes. In 2014-15 Central Budget, Deen Dayal Upadhyaya Gram Jyoti Yojana has been announced for feeder separation and strengthening of sub-transmission and distribution infrastructure in rural areas.
6. There is a need for promoting energy efficient equipment and appliances. Regulatory Commissions can play meaningful role by introducing components in the tariff structure for incentivizing energy efficiency.

Road Ahead
 
The Indian Power sector has achieved a lot over the last decade in the areas of Policy reforms, Private sector participation in Generation and Transmission, new manufacturing technology and capabilities, but the sector still has many challenges to cope with to achieve intended goal. The country needs to overhaul Coal and gas sector to ensure long-term energy security and maintain economic growth momentum.
 
Private participation in Distribution sector needs to be encouraged and promoted. The opportunities in the Distribution segment are very large and it could easily provide enough space and scope for say 50-60 Distribution Private / Franchisee companies, which may attract more investment and innovation. The Distribution Utilities should be allowed to function on commercial lines and Tariff structure should be gradually made realistic.
 
The opportunities for the foreign and domestic investment in India’s power sector are huge. All the segments namely Generation, Transmission, Distribution, electricity trading and equipment manufacturing, are open to Private participation. The policy and regulatory framework are well defined. Several path-breaking regulations such as standard bidding guidelines, Open Access, Multi-year tariff regime and etc., are in place. These are further being reviewed and refined as per needs. The sector further needs to emphasize on competition and transparency besides charting out a clear Regulatory framework and Tariff reforms to facilitate Private participation to make the sector attractive to capital flow. A holistic reform of the sector is bound to accelerate the all-round development of the country.

Continued to Indian Energy Scenario: Sector Reforms 

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Dr. Jaipal Singh

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