The Opportunity in Power Sector

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The Opportunity in Power Sector An
Overview October 15, 2005
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Roadmap

• Power industry in our rapidly developing nation
• Role of a Power Market
• Benefits derived by participants
• Career Opportunities and expectations

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Peculiarities in an industrializing economy
India

• Demand and supply and their growth rates not
  amenable to prediction
• Constantly evolving load profiles.
• Suppression of true demand on account of
• concerns about quality of grid supply.
• distortion in pricing cues.
• Major business segments of
• Industrial loads
• Agricultural loads
• assume equal importance, concordant with macro-
• economic goals.

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Peculiarities in an industrializing economy
India (contd)

• Industry in the midst of restructuring
• Monolithic organizations spanning generation,
  transmission and distribution operations giving
  way to smaller, differentiated business units.
• Key issue greater autonomy and management
  control
• in business processes
• Both short-term (resolving demand-supply
  mismatches) and long-term (investment in new
  capacity) solutions to power supply and quality
  issues are equally important.
• As new capacity will come on stream with a
  time-lag crying need for optimal utilization of
  existing capacity.

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The Indian Power Sector Overview

• Third Largest Power Industry in Asia
• Installed Capacity of 1,18,000 MW.
• Total energy generation in the region of 550 GWh.
• Development initiatives by both Central and State
  Governments limited role of private investment
  so far.
• Generation capacity distribution by ownership
  pattern
• Central Govt. Utilities 33
• State Govt. Utilities 56
• Private 11
• Captive generation capacity estimated at 50,000
  MW about 20,000 estimated to be capable of grid
  participation.
• Peak Demand shortage of 11.2 and Energy shortage
  of 7
• Distribution issues relating to subsidization
  and free power, rural electrification yet to pick
  up. Per capita consumption low about 420 kWh
  compared to the world average of over 2,200 kWh

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The Indian Power Sector Overview (Contd)

• Paradigm shift expected through Electricity Act
  2003
• Increasing commercial efficiency of utilities
• Increased private participation in the sector
• Development of a power market incl. through
  trading
• However
• Inter-regional transfer of power constrained
  reducing efficiencies.
• Inefficiencies in the Distribution sector remain.
• Non-discriminatory Open Access to systems of
  state government utilities so far a non-starter
  prohibitive levels of countervailing
  surcharges.
• Captive plants unable to penetrate the
  boundaries of state power utilities domains.

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Near-term Regulatory Objectives

• Electricity Act, 2003 and various Regulatory
  orders intent is to develop the market through
• Increasing types (categories) of participants
  generators, Captive Power Plants, Distribution
  Companies, and Consumers (energy intensive)
• Providing Open Access through transparent
  application / bidding procedures and reasonable
  rates.
• Ironing out last-mile issues to get these
  participants on board.

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The National Electricity Policy

• On Power Market
• 5.3.2. and also for development of power
  market, there is need for augmenting transmission
  capacity.
• 5.7.1. To promote market development, a part of
  new generating capacities, say 15 may be sold
  outside long-term PPAs. As the power markets
  develop, it would be feasible to finance projects
  with competitive generation costs outside the
  l.t. PPA framework.
• 5.11. Special attentionfor training
  infrastructure in the field of electricity
  distribution, regulation, trading and power
  markets

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Roadmap

• Power industry in our rapidly developing nation
• Role of a Power Market
• Benefits derived by participants
• Career Opportunities and expectations

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Power Market - central to Energy Management

• Provides a place where
• Entities give their buy or sell requirements.
• Discover the price for meeting them.
• Intrinsic value of the service is accepted and
  paid for.
• Differentiable characteristics of the service
  determine the value (and price)
• Time of availability and consumption.
• Nature of loads met.
• Time to perish.
• Traded power available through the market becomes
  an integral part of a utilitys operational and
  strategic planning.

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Power Market in operational planning

• Identification of inevitable mismatch in demand
  and supply over
• Spatial dimensions - different regions (from a
  distribution circle to a neighboring state, or a
  different region)
• Temporal dimensions - different times within a
  time-epoch (varying from less than 24 hours to
  multi-year periods).
• Diversity in supply and demand occurs due to
  seasonal changes, long-term social and
  development trends (affecting usage and
  consumption patterns), random factors and
  unanticipated situations.
• The market provides cues for demand side
  management as well as supply side actions.

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Power Market in strategic planning

• Utilities have a view about long-term load growth
  and availability of supply options.
• Power market provides alternative business models
  to developers shifting away from 25 to 30 year
  rigid, single-buyer agreements intermediary
  model, merchant capacity.
• Financiers get an alternative model for
  financing no longer look at ring-fencing through
  conventional payment security instruments.
• Growth in size of the market will enhance the
  quantum of merchant capacity financeable.

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Indian Power Market Environment in Summary

• Existing participants
• State Power Utilities (more than 25 participants
  in 2003-04)
• Independent Generators
• Transactions mostly on minimal risk basis.
• Trades for time-epochs varying from 1 day to 3
  years
• Selling about 75 accounted by North East.
• Buying about 80 accounted by North West.
• Increasing interest in the Day-Ahead Market.
• Move towards signing long-term (10-35 years)
  agreements for buying capacity through
  intermediation models.

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Conventional View of the Industry Structure
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The Emerging View - anchored in competition
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An Illustration the Market for traded power

• Long Term Project capacity tie-up for base load
  requirements
• From 10 Years to 35 years.
• Short Medium Term transactions for
  peak/off-peak load balancing
• Duration of Transactions (1 day - 3 years)
• Hours of Supply
• Round the Clock
• Evening Peak / Morning Peak
• Night Off Peak / After Noon Off Peak
• Night Hours Morning Supply
• 18 Hrs. / 8 Hrs. / 6 Hrs. supply
• As and When Power
• Weekend Power
• The Future - very short-term (Spot)
  physical delivery and paper trades (Financial)
  Contracts for short and long-term for hedging.

Differential Pricing for different Time Bands
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PTCs Roles

• Intermediary Role
• Develop a market for short term surpluses in
  power.
• Promote development of long-term capacity for
  participation in the market.
• Advisory Role
• Market structures, financing and risk management
  options.
• Project developers ancillary requirements.

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PTC Vision/ Mission/ Values
Vision
Values

• To be a front runner in Power Trading by
  developing a vibrant Power Market and striving to
  correct market distortions

• Transparency
• The Customer is always right
• Encouraging Individual initiative
• Continuous Learning
• Teamwork

Mission

• Develop power market for optimal utilization of
  energy.
• Promote Power Trading to optimally utilize the
  existing resources.
• Catalyze development of Power Projects
  particularly environment friendly Hydro Projects.
• Promote exchange of power with neighbouring
  countries.

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Roadmap

• Power industry in our rapidly developing nation
• Role of a Power Market
• Benefits derived by participants
• Career Opportunities and expectations

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Power Market offering benefits to participants

• Cost related benefits
• Buyers able to substitute costlier sources of
  power generation / purchase.
• Traded power priced at sellers marginal cost
  plus.
• Efficiency related benefits
• Seller generates incremental energy at better
  utilization of existing capacities machine
  characteristics and scale benefits.
• Improved efficiency translates to top and
  bottomline results.

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Power Market offering benefits to participants

• Reliability related benefits
• Trading enables a smaller power system to become
  part of a large, diversified system.
• Obviates the need for reserve capacity and
  affords increased reliability.
• Financing (new capacity) related
• Provides comfort to lenders about financing new
  capacity on merchant / intermediation models
  (i.e. on the strength of long term agreements for
  buying capacity through a trader)

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Power Market offering benefits to participants
(contd)

• Turnaround in Financial Performance
• Eastern coast utilities (West Bengal, Orissa,
  Andhra Pradesh) have acquired a seller
  character with their sustained surplus position.
• Round-the-year surpluses have translated into
  financial performance, wiping out substantial
  losses / negative cash-flows.
• Meeting agricultural loads with cheaper supply
  options
• North Indian states of Punjab, Haryana have
  substantial agriculture loads subsidized / free
  power a legacy.
• Utilities able to meet supply obligations through
  sourcing of cheaper Off-peak power during night
  hours.
• Meeting critical loads of the national capital
• Substantial commercial loads convert to a
  Morning Peak and an Evening Peak.
• Market provides cheaper options to own
  generation and affords increased reliability.

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Roadmap

• Power industry in our rapidly developing nation
• Role of a Power Market
• Benefits derived by participants
• Career Opportunities and expectations

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Long-Term View of the Industry

• Recognize the pervasiveness of market forces in
  altering the shape of the sector.
• However, transition management itself would be a
  major challenge
• the conventional cost-plus models will co-exist
  with market models
• will be phased out over a period of time
• The market will develop further
• Market today is only for physical delivery of
  power
• Financial Products (to hedge and manage energy
  costs) will evolve in India as the market grows.

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Long-Term and Short-Term View Career
Oppotunities

• Long Term
• Accounting professionals will be required to take
  on diverse roles centering on risk
  identification and management.
• Market will need new structures
• Risks will need to be repackaged and
  redistributed
• Roles like the Chief Risk Officer will become
  commonplace.
• Short-term
• Accounting and audit roles will dominate in
  industry segments like generation where
  cost-plus will co-exist for some time.
• Within the accounting and audit functions also,
  newer challenges like accounting as per US GAAP
  will take centerstage as more and more entities
  go public and are listed on SEs.
• However, the control functions will increasingly
  require less mindshare and the treasury functions
  will become central to the finance professionals
  roles.
• Interesting time to enter the industry, as older
  skills are becoming redundant and newer skills
  are being demanded.

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