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POWER

POWER | POWER CABLES | TRANSMISSION LINE TOWERS


POWER

INTRODUCTION | DEMAND - SUPPLY SCENARIO | PLANT LOAD FACTOR (PLF) | FUEL POLICY | INDUSTRY STRUCTURE | PROSPECTS


INTRODUCTION

Power being considered a natural monopoly and public good, is characterised by tight government control in generation, transmission and distribution. "Power" is a concurrent subject under the constitution with each state involved in regulation, under the overall policy norms spelt out by the centre. The power sector is essentially governed by the Indian Electricity Act 1910 and the Electricity (Supply) Act, 1948. Even though the Acts have been amended to offer a new legal, administrative and financial environment for private enterprises, the existing regulatory system has certain shortcomings. For instance, it does not provide for the regulation of tariff nor are there any mandatory provisions for consultation with consumer groups for tariff setting. Regulation also doesn't adequately address issues like the reasonableness of prices, quality of power supply, consumer protection and viability of the State Electricity Boards (SEBs). There is no body to regulate the functions of the SEBs. The entire regulatory system of the regional grid is now managed by administrative arrangements, which are not sanctified by any legal provisions.

Beyond an expression of interest among prospective investors, investment flows have fallen short of expectations. In this light, the government had taken several steps aimed at reform of the power sector to attract private capital. The government evolved a four-pronged strategy in 1996, which is being followed to this date. The measures included:

  • Constitution of an independent regulatory commission at the Centre to regulate the tariffs of the central government owned power undertakings and mega power projects. The Central Electricity Regulatory Commission (CERC) has passed a number of orders like the Indian Electricity Grid Code and the Availability Based Tariff (ABT) to bring discipline in the system.
  • Constitution of similar commissions in the states to rationalise retail tariffs. As many as 14 states have set up their State Electricity Regulatory Commissions (SERCs). However, the SERCs did not make much headway and the progress was more on paper than in practice.
  • Identification of the need for immediate improvement in performance criteria, measures to increase generation capacity, promotion of mega projects among other things.
  • Recognition of the unsustainability of the prevailing financial condition of the SEBs.

The SEBs, in their present form, are being viewed as structural impediments, adversely affecting the very flow of private capital that the States are trying to attract. The Electricity Bill 2000 contains elements for the legitimate and substantive electricity sector reform and will move India towards a competitive market. The rationale of the National Council of Applied Economic Research (NCAER), the main force behind the Electricity Bill 2000 is that there is a need for creating accountability through independent profit centres. It also sees the role of the government being relegated to that of a regulator.

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DEMAND - SUPPLY SCENARIO

The per capita consumption of electrical power in India is far behind that of developed countries. The per capita consumption of electricity in India stood at 347 kWh, while that of Sweden was 14,239 kWh, USA 11,796 kWh, Japan 7,083 kWh and France was placed at 6,091 kWh. In India the highest power consumption was in Dadra Nagar Haveli, which stood at 3566.17 kWh during 1998-99. This was followed by Daman and Diu with 3559.08 kWh, and Pondicherry with 1,010.10 kWh. All the north eastern states, including Sikkim, were among the ten lowest power consuming states in the country with Manipur at the bottom of the list at 74.66 kWh, Nagaland at 81.35 kWh and Arunachal Pradesh at 87.39 kWh during the same period. Overall, the Western region consumes maximum amount of energy followed by the southern and northern regions. Industry and agriculture continue to be the two most important categories of consumers in terms of their relative shares of power consumed. Together they account for over 62% of the total sales with the share of industry being marginally higher than that of agriculture.

Generation (bn units)

Installed capacity

The all India installed capacity of electric power generating stations under utilities was 99560 MW as on September 30, 2000. The size of the distribution and transmission network has also gone up substantially. By the end of July 2000, 86.35% of the total villages in the country had access to electricity. Energy shortages have increased but peak shortages have reduced slightly as compared to 1998-99. The capacity additions as achieved in the past few years have been:

Central

State

Private

Total

1997-98

333

1676

1217.5

3226.5

1998-99

991.6

1675.4

1575

4242

1999-2000

1615.4

2329.1

588

4532


The 'power on demand' target by 2012 seems to be an impossibility. Capacity addition in the Ninth Plan (1997-2002) has been dismal (table below).

 
Hydro
Thermal
Nuclear

Target

Rev. target

Target

Rev. target

Target

Rev. Target

Centre

3455

2955

7574

5894

880

880

States

5814.7

5128

4933

4877

-

-

Private

550

316

17038

8047

-

-

Total

9819

8399

29546

18818

880

880


Capacity addition targets have been drastically reduced to 28,097 MW from a target of 40,245.2 MW. The low level of investment has resulted in low addition of hydel capacity and thus a reduction share of generation. The ideal ratio of 60:40 thermal-hydel mix of power generation is unlikely to be achieved; the ratio in fact has shown a declining trend during the past few years and at present is 75:25.

The prime reason why the power sector has been unable to meet the targets set are that high growth rates achieved in the past aren't sustainable in the future only through public spending. Furthermore, the capacity of the states to set up additional generating facilities has been deteriorating due to growing financial constraints. The major shortfall has been in the area of the private sector projects, which have contributed just 45% of their targets till the end of the Ninth Plan. The performance of the Central and the State sectors has been better since they would achieve approximately 60% and 90% of their targets.

Reforms have been introduced by many States. The process started with Orissa. Since then, Haryana, Andhra Pradesh, Gujarat and Rajasthan have taken up reforms. There has been opposition in some states like Uttar Pradesh and Maharashtra to these SEB reforms. Overall, the more progressive states continued with reforms despite problems while others lacked urgency and the will to change.

Tariff Structure

Large subsidies to certain sectors without matching recoveries from other sectors have resulted in the financial mess in the power sector. The average tariff for the agriculture and domestic sectors works out to 22 paise per kWh and 141 paise per kWh respectively, while the industrial sector on an average paid 339 paise per kWh. The agricultural sector accounts for 3-4 per cent of total sales revenue of the SEBs, as against 30 per cent of their total sales. The domestic sector accounts for 1-4 per cent share in sales revenue as against 16-17 per cent sales of the SEBs.

The amendments to the existing Acts and the Electricity Amendment Act, 1998 targeted the existing tariff structure. The basic tariff structure was drawn on the lines of the COS (cost of service) approach where the tariff was fixed at the level of the cost that the electricity board had to incur to supply electricity. Upper limits on the rates of tariff were placed so as to give relief to farmers and small-scale industry. With the tariff rates fixed for different sectors, SEBs had to reduce their transmission costs and check electricity theft to reap profits. International experience also shows that the COS option is not viable until the government undertakes reforms.

Transmission & Distribution Losses

One of the major reasons of power shortage in the country is the high transmission and distribution (T&D) loss. The average (T&D) loss has been in the vicinity of more than 20% whereas the international standard is 10%.

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PLANT LOAD FACTOR (PLF)

The losses on various fronts have resulted in cash strapped SEBs postponing major replacement works. The Standing Committee on Energy pointed out that there are 77 stations generating power up to 60 MW having age profile of more than 25 years, operating at PLF in the range of 38-45 per cent. Another 337 stations generating power in the range of 60-110 MW are more than 20 years old and operate at a PLF of 40-50. As against this, only 15 thermal stations and 22 units have been identified by the PFC to conduct renovation & modernisation (R&M) and life extension studies. All this resulted in poor generation by the SEBs besides the large T&D losses. The PLF figures during the last five years are as shown below:

Plant Load Factor (%)

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FUEL POLICY

The government has tried to ensure a quick capacity addition in the background of a likely severe power crisis. It has permitted private sector units to set up diesel engine generating (DG) units of reciprocating type and using heavy fuel oils such as Heavy Petroleum Stock (HPS), Low Sulphur Heavy Stock (LSHS), Heavy Furnace Oil (HFO) petroleum coke & vacuum residue and Natural Gas, wherever available, as primary fuel.

However, liquid fuel plants have been few in number given the volatility in prices of crude oil as well as its sporadic supply. Natural gas has more potential. Liquefied Natural gas (LNG) poses some problems on account of storage and transportation problems, irreversible investments involved and the outflow of hard currency. But, India’s neighbouring regions of Bangladesh and Myanmar have an abundance of natural gas supplies, which can be transported through pipelines. Gas supplies through pipelines have more flexible pricing arrangements as compared to petroleum and other liquid fuels. The other advantage is that it is an alternative to coal of which India has vast supplies but of poor quality due to high ash content. The government is in the midst of finalising a Hydrocarbon Policy known as HydroCarbon Vision 2025, which sets out the policy for various liquid fuels.

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INDUSTRY STRUCTURE

Generation - State Electricity Boards (SEBs), Public Sector Undertakings, Licensees, Independent Power Producers and Captive power producers

Transmission - Central sector transmission system --- Power Grid Corporation

State sector transmission systems --- Respective SEBs

Distribution - SEBs, licensees and central utilities (to certain bulk consumers like railways)

Licensees

Private sector licensees, who have been granted licenses by the state government in consultation with the respective SEB, are expected to supply and distribute energy in a specified area. A licensee may or may not have a generating station. They are governed by the Electricity (Supply) Act, 1948 and the Indian Electricity Act, 1910. Returns for private licensees are computed on a capital base after accounting for all costs and specified statutory appropriations. These appropriations augment the licensees' cash flow for debt repayment, meeting contingencies, tax payments and project costs. In FY 99, the government revised the formula for licensee power companies to fix it at 16%.

Captive Power Producers

Captive power plants (CPP) are a significant source of power for the Indian economy. As much as 35% of the electricity consumed by Indian industry comes from CPPs. Further, the central government has made it easier to set up CPPs. Most captive power projects now need approvals only from the state authorities. The central government has also recommended to the states to encourage CPPs by allowing sale to third parties, devising transparent norms for wheeling and banking and exempting independent generating entities, which are set up for captive use, from competitive bidding procedures.

State Electricity Boards

The power sector- generation and distribution in the states is still dominated by the States barring the cities of Surat, Calcutta, Mumbai, Ahmedabad and the state of Orissa. They control over 95% of distribution and over 55% of generation. 18 out of 20 SEBs are suffering from negative rates of return to the tune of 17% of their gross revenues. Privatisation is the only way ahead given the sorry state of finances of the SEBs and governments.

Under Section 59 of the Electricity (Supply Act), 1948, SEBs are required to earn a minimum ROR of 3% on their net fixed assets in service, after providing for depreciation and interest charge. The state governments could prescribe a higher return if considered necessary. This provision was to become operative from the accounting year of 1985. However, SEBs are yet to comply with this statutory stipulation. Revenue realisation from the sale of electricity in most cases does not even cover their revenue expenditure requirements. Part of the losses is recovered by cross subsidisation, from sale to industrial and commercial sectors.

Restructuring of SEBs

Failure to improve the financial health of the SEBs in the early years of the privatisation resulted in State and the Centre giving guarantees indiscriminately to tide over the problem of SEBs defaulting on payments. However, this was watered down after the fiscal consequences of providing guarantees and its potentially large destabilising effects were realised.

The escrow cover mode of payment was then sought. Under this, SEBs had to enter into an agreement whereby a part of the revenues of the SEBs would go into a special account that earmarked for payments to the power producers. Lenders soon realised that the escrow commitments were worthless as they far exceeded the revenues of the SEBs.

There have been problems with the agreements that have been inked as well. The prime example in this case would be ongoing spat between the Dabhol Power Company (DPC) and the Maharashtra government. The state government is looking into the possibility of scrapping the revised power purchase agreement signed by the previous Shiv Sena-BJP government in 1998, with the Dabhol Power Company (DPC). The project, which was envisaged to tackle the power shortage of the state, seemed to have defeated its purpose because of its prohibitive costs, which the consumers may have to bear. An increased financial burden on the ailing MSEB and ultimately on the state government, which is also reeling under severe financial crunch, is expected.

The Power Finance Corporation (PFC) has decided to provide financial assistance to states reforming their power sector. Under the scheme, the corporation will provide 80 per cent of the funding requirements of the state governments while the balance would have to be provided either by the state governments or other sources. States have to establish and operationalise the SERC for availing the funding facility.

However, the prevalent state of affairs is set to change. The current think on the SEBs is that they have to be unbundled themselves - into separate generation, transmission and distribution activities- in order to make them viable besides attracting investment.

Mega Power Policy

This power policy was announced in 1998. The government planned to set up big power projects - a capacity of 1,000 MW for thermal plants and over 400 MW for hydel plants. The power ministry planned to add 15,000-20,000 MW of power in a short span of time. About 14 thermal projects and 4 hydel projects have been chosen as mega power projects. Many of them are yet to get requisite clearances and attain financial closure.

However, there has been a lack of interest in these projects due to absence of structured payment guarantees for the power produced by these projects besides certain legal issues in implementing the security mechanism. Problems in obtaining the requisite clearances from the respective government departments have delayed the financial closure and commissioning of projects leading to foreign partners or companies walking out. A prime example is that of the Mangalore Power Project where Cogentrix, the prime promoter walked out due to ‘inordinate delays in government clearances’. Tate Electric Company (TEC) then took the stake of Cogentrix in the project.

Independent Power Producers

Legislation governing the electricity sector was amended in October 1991 allowing private investors to set up generating stations that would supply power in bulk to the grid. These companies were also allowed to provide power directly to consumers with the consent of the state governments. Such power projects can be based on any type of fuel such as coal, lignite, gas, hydel, liquid fuels, wind or solar. The policy allows for higher debt capital, higher allowance of depreciation charges and recovery of fixed cost including post tax return on equity of 16% at 68.5% PLF. In subsequent reforms the central government asked state governments to follow competitive bidding route for future projects instead of the MoU / Letter of Intent (LoI) route.

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PROSPECTS

The cabinet late in December 2000 approved an ambitious Accelerated Power Development Programme (APDP), which will run until 2012. Besides toning up old stations and cutting transmission losses, the programme aims for structural changes in SEBs. The new power transmission project initiative by the government and PowerGrid will radically change power project finalisation in the country. A new concept of special purpose vehicles (SPV) would undertake all clearances for a designated project before transferring it to the developer. The new route will be available for all power transmission projects being considered for private participation. It is easier for government bodies to get all the necessary clearances as compared to private companies that have to struggle for many years. PowerGrid has taken up two test cases through this SPV route. In the first case, independent power transmission companies would be allowed to take up 100 per cent equity in projects while in the other it would take up a 26 per cent stake.

The other interesting development in the power sector front has been that of the convergence concept. Integration of telecommunication activities with electricity transmission and distribution is emerging as a global phenomenon. The transmission system covers the entire country and depending on the extent of electrification, electricity wires reach every house. The coverage of transmission and distribution systems throughout the country in terms of the kilometers accounted for by different transmission voltages is:

Voltage

Network (in Kms)

HVDC

2636

800kV

20

400kV

37,703

220kV

31,988

132/110kV

1,05,000

78/66/44 kV

39,000

33/22 kV

2,70,000

15/11/6.6/3.3/2.2 kV

16,32,236

L.T distribution

31,37,307


This provides an enormous right of way for linking the country with optic fibre to create a backbone network for the telecommunication sector and for other multimedia services to be offered to consumers. A number of companies have jumped into the fray. The notable ones are POWERGRID, Enron and BSES. POWERGRID has plans to enter into the National Long Distance (NLD) telephony business as well as international telephony when that sector is finally opened up. BSES has become an ISP provider in Mumbai and Enron plans to link the country with a fibre optic network for transferring data by companies. However, issues relating to conformity of the entity/company with the National Telecom Policy (NTP) 1999 while meeting the existing laws prevalent in the power sector have raised the need to have clear policies governing such companies.

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POWER CABLES

INTRODUCTION | MARKET DYNAMICS


INTRODUCTION

The cable industry is an important segment of the infrastructure industry. Three basic types of power cables are manufactured in the country - poly vinyl chloride (PVC), paper insulated lead-covered cables (PILC) and cross-linked polyethylene cables (XLPE). PILC cable manufacture has almost been discontinued on account of lack of demand. PVC cables account for around 68% of the total demand. The units in the small-scale sector have a dominant presence in the low voltage segment of the industry.

Demand for cables is dependent upon the growth of the user industry. The major problems being faced by the cable industry are low entry barriers, high bargaining power of buyers and excess capacity in the industry. The fortunes of the power equipment sector depend on power sector. With SEBs facing a cash crunch and T&D sector also unable to expand, the power equipment sector has taken a hit in its fortunes.

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MARKET DYNAMICS

In FY 00, the production of power cables was 36177 Kms a reduction by 2.4 % over FY 99. With the opening up of the transmission sector to the private sector, there is a lot of potential for growth in demand for power cables. Also, long-term demand will be high given the new investments in power, high T&D losses and replacement needs.

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TRANSMISSION LINE TOWERS

INTRODUCTION | INDUSTRY STRUCTURE | MARKET DYNAMICS | PROSPECTS


INTRODUCTION

Transmission line towers (TLT) are steel structures for supporting conductors and cables for transmission and distribution of electrical power. For the period Apr-Sep 2000, the total production of TLTs dropped to 72681 MT from 84899 for the similar period in 1999. Ideally, the investment in transmission should be equal to that in generation but in India the ratio is not 1:1, rather 1:3. This has resulted in the tardy growth of the TLT industry as generation projects account for more than 65% of total investment in the power sector. This leaves very little for investment in T&D. The domestic consumption of towers has come down in recent year; exports have shown an upward trend.

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INDUSTRY STRUCTURE

Due to high entry barriers, the number of players in this sector is limited. They are well placed with good order book position for the next few years. There has been a thrust to export towers to developing countries in South East Asia, Middle East and Africa. Besides developing international competitive skills, the Indian TLT industry also enjoys an advantage on the cost front. India can emerge as a production centre because of low labor cost.

KEC International, an RPG group company is the leading power transmission line company in Asia. In FY97, the company was merged with RPG Transmission, a group company. The other major manufacturers are Jyoti Structures and Kalpatru Power Transmission. In addition, there are around 15 small/marginal players.

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MARKET DYNAMICS

Government undertakings such as PGCIL and SEBs are the major buyers of transmission towers. The orders are awarded based on tenders submitted by the suppliers. The major criteria for selection by the clients include economical designs and cost factors. So, price quotation plays a major role in the market because of very low product differentiation. The players in the industry are working with low capacity utilisation because of the slip in demand.

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PROSPECTS

With the imminent passage of the Electricity Bill 2000 in the coming year, there is bound to be an increased demand for the transmission towers as the unbundling of transmission and distribution segments is bound to see new players entering the field. The plan to link regional grids into an integrated National Grid too throws opportunities for this segment of industry. The SEBs given their precarious financial position have a sporadic demand so players will continue to increase their exports in the coming years given India's production cost advantage in this field.

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