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FEATURE STORY

India's Power Sector

April 19, 2010

Overview

To meet the needs of India's growing economy, providing reliable, affordable, secure, and sustainable energy requires exploring a range of options including maximizing domestic production, diversifying the fuel mix and the source of supply, and maintaining sufficient reserves, if necessary. This will ensure price stability as also security of supply in the energy sector. Fluctuations in the delivery price of the energy have cascading effect on the growth process itself. Despite high economic growth, poverty remains high. Hence, expanding economic development opportunities is a key focus of the government.

India is still home to about 350 million people who lack access to electricity, more than 25% of the worldwide total of 1.4 billion people without electricity. The per capita electricity consumption (KWh per capita) is only around 566 compared to world average of 2,782. India aims to achieve universal access and an annual minimum consumption of 1,000 kWh for all its citizens by 2012. India also faces massive demand-supply gap exacerbated by delays in capacity addition, problems in securing fuel linkages and inefficiencies especially in network segments.

Challenges

Lack of reliable power continues to be a major constraint to sustained industrial growth, investment and economic competitiveness for the country. Electricity shortages are estimated to cost the country around 7% of GDP. Electricity generation/supply has grown at only an average of 5.3% per year.

Improved performance of the sector is necessary for ensuring sustained and inclusive growth. India's challenges in the power sector are significant:

Low access to modern energy: With a largely rural population base and low access to modern energy services, there is high dependence on traditional fuels: non-commercial biomass still is a significant energy source, constituting more than 30 percent of the fuel mix in the country. More than 350 million people still lack access to electricity. Low access to modern energy sources in rural areas compromises productivity, particularly opportunities for non-farm employment for the labor force engaged in agriculture. However, there is rapidly rising demand for modern commercial fuels, spurred by rising wealth and steadily improving access.

Heavy dependence on fossil fuel with significant untapped renewable energy potential: India continues to rely heavily upon fossil fuel (coal) for its power sector. While it has a significant hydropower potential in absolute terms (150,000 MW) but this is small compared to the country’s energy needs and also largely untapped (only 25% potential harnessed so far). More than 60% of firms and a large percentage of homes rely on captive or back up generation – Reported peak power deficit is 10.3% and the energy deficit is 8.5%, while actual shortages of electricity experienced on the ground are even higher. Reliability, fuel efficiency, and environmental performance of about 27,000 MW of old coal based generation capacity need to be improved.

Weak sector institutions and utility governance are compromising sector’s financial performance: The accountability, operational efficiency, and customer service orientation of restructured entities remain low. Around 28% of electricity supplied into the state level transmission systems is lost due to technical and non-technical reasons, and cost recovery from tariffs is only approximately 80%. As a result, the financial condition of the sector remains fragile, resulting in slow commercialization and a high degree of budget/ debt dependence. Distribution losses are estimated at approximately $14 billion in 2010-11. This poor financial performance and dependence on the state governments deters private investment and restricts the ability of the sector to invest in new generation capacity and in maintaining and extending the network. To some extent, this creates a vicious circle in which the state electricity utilities lack the funds necessary to improve infrastructure and the performance of the sector in meeting customer needs, with blackouts remaining common. The industrial tariffs continue to cross-subsidize household and farmers, the sector is exposed to a high degree of politicization. With a few exceptions, processes for ensuring regulatory independence, competence, and accountability need significant improvement.

Sustainability and climate change considerations are increasing in importance: The sector development strategy include an increased reliance on coal to meet the energy requirement. Although India has low per capita emissions, it is currently the sixth largest GHG emitter in the world and accounts for 4% of global GHG emissions. Coal fired power plants comprise 65% of total capacity in the country, with the sector responsible for 50% of country’s CO2 emissions. While CO2 emissions are likely to continue to grow until at least 2040, India has significant potential for following a lower or higher carbon path, depending on its policies, institutions and the international support it receives. If the government were to implement the full set of policies identified in its Integrated Energy Policy report (2006), there is scope for reducing emissions to the reference scenario by about 30% by 2030. Key measures include (i) improving the efficiency of supply and consumption of energy; (ii) expanding the proportion of natural gas, and hydropower in the fuel mix; and (iii) reducing energy intensity in the transport sector.

Government Priorities

India's current grid-connected generation capacity is about 177,000 MW (65% coal; 22% hydro; 13% other). Under the 11th 5-Year Plan (2007-2012), the government of India expects to provide all its people with access to electricity by 2012. While the government of India is working to strengthen the public sector's capacity, it is also encouraging a paradigm shift to scale-up public-private partnerships (PPP) in the sector. Currently, the private sector is only handling 21.9% of grid-based generation and 12% of distribution.

To achieve these goals, the government is focusing on:

Increasing Access:
• Electrify all villages, providing access to all rural households and free connections to all below-poverty-line families under the flagship program Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY); with an aim to achieve universal access and annual minimum level of consumption to 1000 kWh by 2012.

Climate Change:
• National Action Plan on Climate Change (NAPCC) emphasizes the overriding priority of maintaining high economic growth rates to raise living standards, the plan “identifies measures that promote our development objectives while also yielding co-benefits for addressing climate change effectively.” The plan identifies eight core “national missions” running through 2017. One key pillar is National Solar Mission which aims to establish India as a global leader in solar energy, by creating an enabling policy framework for deployment of 1000 MW by 2013 leading upto 20 GW of solar power by 2022. The other key pillar is National Mission for Enhanced Energy Efficiency (NMEEE) which seeks to strengthen the market for energy efficiency by creating conducive regulatory and policy regime. NMEEE has been envisaged to foster innovative and sustainable business models to the energy efficiency sector, including focus on (i) standards and labeling, (ii) industrial end use efficiency in large consumers, (iii) accelerated shift to energy efficiency appliances, and (iv) energy efficiency financing platform.

Expanding Generation:
• Adding generation capacity of about 80,000 MW over next five year period (four times of historical five year average), including 16,000 MW of hydropower.
• Increasing renewable energy from 4% of installed capacity to 10% by 2012, by expanding small and medium hydro, wind, and biomass.
• Increasing share of solar energy ,under the National Solar Mission of the GoI, to 20,000 MW by 2020

Improving Energy Efficiency:
• Rehabilitating and modernizing about 27,000 MW of old coal-fired power plants.
• Increasing the share of supercritical power plants to 20% of new installations.

Managing Demand:
• Including in irrigated agriculture which accounts for 20-25% of total electricity consumed.
• Adopting stringent and enforceable energy-efficiency standards.

Improving quality of energy supply and service:
• Expanding inter-regional transmission from 10,000 MW to 37,000 MW by 2012
• Upgrading and expanding distribution networks and setting up management information systems as the network is overloaded and suffers from poor performance with excessively large technical losses of electricity. Non-technical commercial losses, which capture widespread theft and deficiencies in billing and collection, are also extremely high. In 2008-09, aggregate technical and commercial (AT&C) losses ranged between 13 and 81% of electricity generated at the state level, and averaged 28% at the national level (Power Finance Corp. Ltd., 2010). In an ongoing attempt to reduce AT&C losses to 15%, a Restructured Accelerated Power Development and Reform Programme was introduced by GoI . This programme provides for the conversion of central-government loans into grants contingent on sustained reductions in AT&C losses at the state level.

World Bank Support

Through its lending and non-lending support, the World Bank's program addresses both the first generation issues in the sector (access, asset creation and maintenance, sector and corporate governance, efficiency) and the second generation issues (competition, private sector participation, securing reliable energy supplies, climate change, and regional energy trade). While Policy frameworks for reform and investment have come a long way, implementation and institution/capacity building remain a major challenge. The Bank's lending to India's power sector is modest $4 billion portfolio, compared to its requirements of $30 billion per annum on average.

The World Bank’s support is following the strategy of selective, in-depth, long-term engagements with key sector institutions, with a focus on improving technical, commercial, safeguard, and fiduciary practices. For instance, the program has introduced ideas such as resource corridors and the use of tools like river basin analyses and cumulative impact assessments in its environmental analysis of hydro projects. The support is bringing new technologies to the attention of counterparts, working to improve the transparency and objectivity of procurement practices, and making efforts to increase the effectiveness of dispute resolution mechanisms.

With core objectives of supporting the development of a low-carbon growth path for the sector and improving service delivery across the supply chain and to the last mile, the support reflects the view that institution-building, business process re-engineering, and improvement of business fundamentals are more likely to yield sustained results and better outcomes than one-off project-level interactions. As exemplars of good practice, strengthened institutions can themselves build implementation capacity in other institutions and have broader “knock-on” system-wide effects (as is the case with Power Grid, which now provides technical assistance to state transmission utilities across the country).

The World Bank’s program is also aimed to initiate debate on challenges of access and agriculture consumption, through analytical work at national and state level. The agenda is to move to a Middle Income Country program of selective lending with deep analytical inputs and technical assistance programs. The technical assistance programs, often wedded within project designs, are aimed at creating and/or strengthening institutions for effective service delivery and regulation, facilitating the effective functioning of domestic and regional electricity markets, and promoting clean energy options to meet country demand.

The Bank support is centered on three core areas:

• Energy distribution services- This set of engagements focuses on improvement of quality and efficiency of service delivery through support for distribution utilities, including for organizational transformation, corporate governance, and business practices. It also includes attention to improving rural supply and moving towards universal access.

• Regional and domestic energy markets- This set of engagement focuses on the expansion of transmission capacity at both regional and national levels, to facilitate the development of efficient electricity markets and inter-regional power transfer. It provides technical support on load dispatch functions and energy trading within the broader objective of enhancing sector governance through assistance to regulatory and competition authorities.

• Clean energy development- This set of engagement covers clean power generation through support for hydropower projects, renewable energy development (including distributed generation for improved rural access and services), and solar power. The engagement in Solar power includes policy support and implementation support for addressing the barriers faced for solar power development in India and institutional capacity building of the nodal agency and solar centre of excellence. The clean energy development also includes a focus on energy efficiency through (i) support for the rehabilitation of thermal power plants, for (ii) enhancing the efficiency of power transmission and distribution through loss reduction and smarter grids, and for (iii) increasing demand for energy efficiency investments in micro, small and medium enterprise (MSMEs) clusters and to build their capacity to access commercial finance.