India

1
India

• Eric Agnew
• Neeraj Garg
• Ali Merchant
• Karen Suen

2
Agenda

• Introduction
• Industry Structure and Regulations In Power
• Other Initiatives in Power Industry
• Natural Gas Markets
• Privatization Initiatives and Results

3
Electricity

• Development of the electricity sector has mainly
  been the responsibility of the government
• Private enterprises make up a small portion of
  the electricity sector in the form of licensees
• BSES - Bombay Suburban Electricity Supply Company
• TEC Tata Electricity Company
• CESC Calcutta Electricity Supply Company
• AEC Ahmedabad Electricity Company

4
Electricity

• State electricity boards run the power
  distribution infrastructure own the majority of
  the generating capacity
• SEBs are insolvent are in poor financial shape
• SEBs face subsidized rates that do not cover
  costs
• Other problems include high transmission
  distribution losses widespread power theft

5
Electricity

• Drive to increase Indias generating capacity
  push towards economic liberalization
• Interest towards foreign investment in setting up
  Independent Power Producers (IPPs) in India
• Large IPP projects stalled by delays in
  regulatory approvals failure to secure adequate
  financing
• SEBs would be the main purchasers of power from
  IPP projects
• Critical for SEBs to resolve financial problems
  to attract capital to ensure adequate supply of
  electricity for India

6
Natural Gas

• Natural gas pricing set by the Indian government
• Attempts towards deregulation delayed several
  times
• Natural gas from private suppliers have higher
  prices than state suppliers
• Shortage of natural gas consumer willingness to
  pay more will lead to higher prices if deregulated

7
Industry Structure

• Power Generation
• Largely owned and operated by central and state
  governments
• Captive private power plants allowed
• Central Electricity Authority appraises new
  project proposals
• Transmission
• Wholly owned and managed by govt. entities (REBs
  SEBs)
• Interconnection of regional grids by Power Grid
  Corporation
• Limited trading between regional grids
• Distribution
• Carried out by State Electricity Boards (SEBs)
• Limited private participation in distribution
  (BSES, CESC, AEC)

8
Regulation

• Pre-reform period (before 1991)
• State governments sole price regulators
• Vertically integrated utilities State
  Electricity Boards (SEBs)
• Subsidized free power, cross-subsidies
• Power sector reforms (1991-96)
• Invite private participation in generation
  Fast-track projects
• Failure of fast-track projects low participation
  from private investors
• Legislations in power sector (1998 onwards)
• Electricity Regulatory Commissions Act, 1998
• Electricity Act, 2003

9
Regulation

• Power sector reforms (1991-1996)
• Independent Power Producers (IPPs)
• Build-operate-transfer contracts (BOT)
• Fixed return on investment
• Power Purchase Agreements with SEBs
• Sovereign guarantees
• Enron operated Dabhol Power Corporation failure
• Electricity Regulatory Commissions Act, 1998
• Setup of Central Electricity Regulatory
  Commission (CERC)
• Facilitate State Electricity Regulatory
  Commissions (SERCs)

10
Regulation

• Electricity Act, 2003
• De-licensing of power generation
• Unbundling of SEBs Separate generation,
  transmission and distribution
• Facilitate privatization of unbundled SEBs
• Open access for bulk consumers in specified
  timeframe
• Gradual reduction of cross-subsidies
• ERCs to regulate prices
• Tariff revision requests to ERCs
• Setup Apellate Tribunals for disputes with ERCs

11
Other Initiatives in Distribution

• Distribution Reforms, Upgrades, and Management
  (DRUM)
• Collaboration with The United States Agency for
  International Development (USAID) and the
  Ministry of Power (MoP)
• Focus area
• Improve quality of electricity services
• Focus on rural electrification

12
Other Initiatives

• Improve Power Distribution
• Better Availability and Quality of Electricity
• Enhanced Commercial Orientation and Drive
• Improved Consensus on Distribution Reform Process
• Enhanced Viability of the Sector
• Strengthened Distribution Reform Initiatives of
  the Ministry of Power (MoP)
• Efficient Utilization of APDRP Funds
• Innovative Financing Mechanisms

13
Natural Gas Industry

• Production
• 90 production done by state-owned company, Oil
  Natural Gas Commission (ONGC)
• Entire production sold to state owned gas
  transmission company, Gas Authority of India
  Limited (GAIL)
• Sale price to GAIL determined by Central
  Government
• GAIL responsible for 90 of sales to end-users
• End-user prices determined by Central Government
• Deregulation
• Prices for private gas distributors deregulated
• Major changes will take more time (5 years)

14
Privatization

• 1991 - Independent Power Producer (IPP) projects
• Set up to solve the generation capacity storage
  problem
• 1994-2000
• In North America, IPP average cost was 573/kWh
• In India, IPP average cost was 875/kWh
• Global average was 450-600/kWh
• 2002 IPPs make up
• only 3 of national
• generation

Utility Worker
http//news.bbc.co.uk
15
Privatization

• 1996 Orissa began privatizing State Electrical
  Boards (SEBs)
• Orissa Reform Act
• regulatory committee to impose tariffs and
  regulate the electricity sector
• 1998 Electricity Regulatory Commissions Act
• Allowed other states to be able to establish
  similar regulatory committees without separate
  state act
• Led to Central Electricity Regulatory Commission
  (CERC) and State Electricity Regulatory
  Commissions (SERCs)
• Currently Many states have tried but have been
  unsuccessful
• Orissa and Delhi are the only two states to have
  privatized their electrical distribution markets
  in 1999 and 2002, respectively

16
Privatization

• 2003- Electricity Act (E-Act)
• called for competition in the sector by creating
  open access in transmission, distribution, and
  power trading
• unbundling of all State Utility Boards (SEBs)
  into separate entities
• overruled all other
• previous acts regarding
• the power sector and
• state reform acts

Andhra Pradesh SEB Sub-Station
http//www.tsptbdam.com/transmission_line.htm
17
E-Act

• The Electricity Act of 2003 was drafted with the
  idea that separate utilities would operate more
  efficiently
• There have been several critics

Protestors
http//news.bbc.co.uk
18
Critics of the E-Act

• Price-Waterhouse-Coopers
• Movers and Shapers 2003 Utilities - Europe and
  US
• the strength of global utilities in the future
  will be built upon vertically integrated
  strategies, rather than the pursuit of
  multi-utility and specialized portfolios.
• More simply put, vertical integration is the
  most sustainable business strategy
• Another critic
• stated that vertically integrated
  utilitiesremain better financial performers and
  are better able to meet customer needs

19
Failure to Meet Deadlines

• December 2003 (6 month deadline) seven states
  and four territories failed to submit a plan to
  CERC to reorganize their respective SEB into
  separate companies
• June 2004 the deadline for open access to the
  SEBs transmission lines was delayed

20
Need for Improvement

• In many parts of India, anyone not living in a
  major city is lucky if they have electricity
• A conference in September 2004 stated that 56
  of the rural households in India do not have an
  electrical connection
• Five states (Orissa, Bihar, Jharkand, West
  Bengal, and Uttar Pradesh) account for 90 of
  Indias 72,000 un-electrified villages
• An electrical village is one in which at least
  one household has electricity

21
Indian Electrical Shortages in 1999
http//www.power-technology.com
22
Governments Role

• Over the past decade, the government was able to
  connect about one million households per year
• Central government has stated plans to provide
  connections to allremaining unelectrified
  households in the next five to eight years.
• Funding for improvements is largely possible by
  the World Bank

23
World Bank Lending
Lending for Indias Energy and Mining amounted to
almost 1.4 billion as of June 2003
http//lnweb18.worldbank.org/SAR/sa.nsf/Countries/
India
24
The Future

• In the future, electrical connections are
  expected to be paid for by tariffs collected by
  each state government
• Now, the entire market is heavily subsidized and
  will continue to be until the majority of the
  population is connected

25
Questions ?