Overview of Indian Power Industry

Demand Supply Scenario

The power industry in India has historically been characterized by energy shortages which have been increasing over the years. The gap between demand and supply has been increasing, leading to increased power shortages.The peak deficit for the period between April – September 2007 was 12,409MW. The peak deficit varies across India, ranging from 5.8% of peak demand requirements in the Southern Region to 26.5% of peak demand requirements in the Western Region. According to the 17th EPS, India's peak demand will reach 152,746 MW with an energy requirement of 968 billion units (“BUs”) by fiscal year 2011-12. By the fiscal year 2016-17, peak demand will reach 218,209 MW with an energy requirement of 1,392 BUs.

Based on the snapshot daily schedule data (drawn on a trail basis) available with the Maharashtra State Load Dispatch Center (http://mahasldc.in), the peak demand schedule for Mumbai was around 2,273 MW as on Dec 31, 2007.Consumption Levels
The per capita consumption of energy in India is extremely low in comparison to most other parts of the world, in part due to unreliable supply and inadequate distribution networks.
According to World Energy Outlook, 2006, over 400 million of the population in India did not have access to electricity. The following chart prepared by the UNDP compares per capita electricity consumption of energy in various developed and developing countries.

Installed Generation Capacity
According to the Ministry of Power, as of September 30, 2007, India has an installed generation capacity of approximately 135,782 MW. Despite the fact that the economic liberalization policies of the government, which began in 1992, were designed to fuel growth across all sectors, the power industry has not grown sufficiently to meet demand. The economy still faces an acute shortage of power.

In the year 2006, China added a capacity of 105 GW while India added a mere 6 GW in the same period. Currently, India pursues all available fuel options and conventional, non-conventional and emerging power generation technologies. Thermal power plants powered by coal, gas, naphtha or oil accounted for approximately 64.42%, hydroelectric stations accounted for approximately 25.2%, nuclear stations accounted for approximately 3.0% and renewable energy sources accounted for approximately 7.5% of total power capacity.

Installed Generation Capacity by Sector
Public entities such as the National Thermal Power Corporation and state generation companies have been prominent players in capacity addition in the power sector. The participation of private sector, however, has increased over time owing to power sector reform. As of September 30, 2007, the state government sector led installed capacity levels with 70,947 MW, or 52.3% of the total installed capacity in India, followed by the central sector at 46,166 MW, or 34.0% of the total installed capacity in India, and by the private sector at 18,669 MW, or 13.7% of total installed capacity in India. (Source:Ministry of Power)

Fuel Resources
In order to meet the growing demand for power, India is expected to continue to exploit all available energy sources. There is a priority for developing cleaner sources of energy like hydro electric power and other renewable and nonconventional sources, but coal based thermal generation is likely to continue to dominate power generation in India.

Thermal Thermal plants can be based on coal, lignite, gas, LNG or liquid fuel. Based on the installed power generation capacity as of September 30, 2007, coal based thermal plants comprised 82.8% of the total available thermal capacity. The Geological Survey of India estimates that coal reserves stood at 253 billion tonnes as of January 2006, with more than 87% of these being of non-coking grade, which is primarily used for power generation. In addition, the geological reserves of lignite are approximately 35.6 billion tonnes, according to the 17th EPS.

Natural gas is increasingly used in Combined Cycle Gas Turbine power stations in view of the very high efficiencies resulting from the use of advanced technology gas turbines. CEA expects natural gas to gain significance in power generation also because it is more environmentally friendly and is easier to use than oil. Under its New Exploration Licensing Policy, the Government of India allocated blocks for the exploration of gas which has resulted in the discovery of gas reserves.

Hydro
According to National Electricity Plan (April, 2007), it is estimated that the total theoretical potential of hydroelectric power generation is about 300,000 MW and economic power potential as about 50,000 MW.

Nuclear
Nuclear power is a clean, environment friendly and economically viable source of power generation. It will have an increasingly important role in power generation and providing energy security given the finite resources of fossil fuel. Future programmes have been laid out in the 17th EPS for the development of 20,000 MW of nuclear power by 2020.

Capacity Additions
The Government of India adopts a system of successive Five-Year Plans that set out targets for economic development in various sectors, including the power sector. Each successive Five-Year Plan has increased targets for additional capacity based on different fuel sources. The Tenth Five-Year Plan for 2002 to 2007 targeted a capacity addition of 41,110 MW. However, the actual capacity addition in the 10th Five-Year Plan was just 21,180 MW.

The actual capacity additions have significantly lagged the targeted additions since the 7th Five-Year Plan. The failure to meet capacity addition targets has aggravated the demand and supply gap.Proposed Capacity Additions during 11th Five-Year Plan (2007-12):
The 11th Five-Year Plan recommends generation planning based on an estimated 9.5% growth in required energy each year. As a result, a capacity addition of 78,577 MW is recommended in the 11th Five-Year Plan.

Under various growth scenarios, the capacity addition required during 12th Five-Year Plan would be in the range of 70,800 - 107,500 MW, based on normative parameters. The 11th Plan Working Group recommends a capacity addition of 82,200 MW for the 12th Five-Year Plan based on the scenario of 9% GDP growth rate and an elasticity of 0.8%.

Large investments will be required to achieve the target of per capita consumption of 1000 KWh by 2012 as set by the Government of India. (Source: Report of the Eleventh Plan (2007-12), The Working Group on Power Ministry of Power, February 2007)Captive Power Generation in India

Another segment of power in India is the captive power segment. Captive power refers to power generation from a project set up for industrial consumption. According to CEA Report, July 2007, captive power capacity, at 14,636 MW, accounted for 10.8% of total installed capacity in India. The dependence on captive power has been increasing, due to the continuing shortage of power and India’s economic growth.

The Electricity Act 2003 provided additional incentives to captive power generation companies to grow by exempting them from licensing requirements. This has resulted in an increase in captive power capacity. Reliability of power supply and better economics are other factors driving industries to develop captive generation plants.

Power Generation

Thermal Power Generation
Thermal power can be generated in steam-cycle power plants, combined-cycle power plants and integrated gasification combined-cycle power plants.

1) Steam-cycle power plants
In a steam-cycle power plant, pulverized coal or lignite is burnt to boil water in a boiler and generates steam at high temperature and pressure. This steam is used to run a steam turbine, coupled with an electric generator. Some of the heat generated is lost through radiation from pipelines, leakage from equipment and heat carried by the exhaust from the turbine. The ratio of the heat converted into electricity to the total heat generated by burning the fuel is referred to as the thermal efficiency of the plant. Typically, the thermal efficiency of conventional steam-cycle power plants ranges between 33% and 37%.

Recent developments in technology have helped increase the thermal efficiency of steam-cycle power plants to nearly 45%. These developments include the use of fluidised bed combustion boilers, which also reduce the emission of sulphur oxides, the use of supercritical steam boilers (with respect to temperature and pressure parameters), and the use of coal gasification technology in combination with cycle technology.

2) Combined-cycle power plants
In a combined-cycle power plant, high temperature and high-pressure gases, produced by burning natural gas or naphtha, are used to run a gas turbine in the open-cycle mode. The exhaust gases from the gas turbine also carry significant amounts of heat which is utilised to generate steam in a heat-recovery steam generator in the combinedcycle mode. The steam is used to run a steam turbine. Although the thermal efficiency of a gas-based power plant (about 20% to 30%) is lower than that of a coal-based plant, the total thermal efficiency of the plant in the combined-cycle mode is significantly higher (45% or more).

Technological developments have enabled combined-cycle power plants to achieve thermal efficiency of up to 60%. The most important development that has helped increase efficiency is the use of higher temperature gases at the turbine inlet.

3) Integrated gasification combined-cycle power plants
Integrated gasification combined cycle (“IGCC”) technology is used to increase the thermal efficiency of coal-based power plants and reduce emissions. In IGCC plants, coal is gasified using a gasifier. The gaseous coal is purified to remove pollutants such as sulphur. The purified coal is subsequently burned to generate hot gases, which are used to run a gas turbine. The exhaust gases, containing waste heat, are used to boil water and generate steam; this steam is used to run a steam turbine. IGCC technology can deliver thermal efficiency of up to 50%. In addition, it can also be used with other heavy fuels such as refinery residues and petroleum coke.

Hydroelectric Power Generation
Hydroelectric energy is a clean, renewable and sustainable energy source. In a hydroelectric power station, energy is harnessed from water by running it from a higher height to a lower height and in the process driving a hydroturbine, which rotates an alternator to produce electricity. Developing hydroelectric power enhances energy security and there is no fuel cost during the life of the project. Its generation is unaffected by issues concerning fuel supply, particularly the volatile prices fluctuations which affect imported fuels. Hydroelectric power stations are capable of instantaneous starting and stopping and are able to accommodate various loading alternatives. They help in improving the reliability of power systems and are ideal for meeting demand during peak times.

The principal classification for the various types of hydroelectric power developments are:
1) Run-of-the-river scheme. In this type of scheme electricity is generated from the water flow of a river or other moving water source. This type of project generally has no reservoir to store water inflow from the catchment area. Storage ponds can be constructed to divert water in a run-of-the river scheme; however, these storage ponds do not have an impact on the flow of the water source. Storage ponds on run-of-theriver schemes (“pondage schemes”) are used to mitigate the impact of short-term variations in the water flow.

2) Storage schemes. These schemes include a reservoir which a seasonal surplus of water in excess of demand is stored for use of generating electricity in seasons of lower flows when demand exceeds inflow. In a storage scheme there is much greater flexibility for modulation of inflows. It can have annual or even carry-over capacity from one year to the next.

3) Tidal plant schemes. In a tidal plant scheme, electric power is generated by virtue of the daily differences in tidal levels. The tidal range, or amplitude, is given by the difference between the high tide level and the subsequent low tide level. The tidal range is not constant but fluctuates to a smaller or larger extent around a local mean value depending on geographical position. 4) Pumped storage schemes. In these schemes water is used to generate power during peak demand, while the same water is pumped back in the reservoir during periods of lean demand. A pumped storage plant operates on the principle that the same machines are used for generation of power during peak hours when power is given to the network and for pumping back water into the reservoir during off-peak hours, utilising power from the system. The provision is based on economics of operation and the availability of enough spare capacity in the grid to operate the machines as pumps in the low load period.

Transmission and Distribution
In India, the transmission and distribution system is a three-tier structure comprising regional grids, state grids and distribution networks. Most interstate transmission links are owned and operated by the PGCIL though some are jointly owned by the SEBs. In addition, PGCIL owns and operates many inter-regional transmission lines (which are a part of the national grid) to facilitate transfer of power from a region of surplus to one with deficit. State grids
and distribution networks are primarily owned and operated by the respective SEBs or state governments (through state electricity departments).

Because peak demand does not occur simultaneously in all states, situations may arise in which there is surplus of power in one state while another state faces a deficit. The regional grids facilitate transfers of power from a power surplus state to a power deficit state. The grids also facilitate the optimal scheduling of maintenance outages and better co-ordination between the power plants. The regional grids are to be gradually integrated to form a national grid, whereby surplus power from a region could be transferred to a region facing power deficits, thereby facilitating a more optimal utilisation of the national generating capacity. In addition, the Electricity Act 2003 provides for open access, whereby any generator has non-discriminatory access to transmission lines or distribution systems, and permits the creation of alternative or parallel distribution networks. Private sector investments have been allowed in the transmission sector and foreign direct investment in this sector is being encouraged by the Government.

Power Trading
The Electricity Act 2003 recognized power trading as a distinct activity from generation, transmission and distribution. Power trading involves the exchange of power from suppliers with surpluses to suppliers with deficits. Seasonal diversity in generation and demand, as well as the concentration of power generation facilities in the fuel rich eastern region of India, have created ample opportunities for the trading of power. Recent regulatory developments include the announcement of rules and provisions for open access and licensing related to interstate trading in electricity. Under the rules notified, the regulatory intention is the promotion of competition. Several entities have started trading operations or have applied for trading licenses.

Tariffs
Tariffs for IPPs are governed by agreements between power generation companies and processors known as PPAs. Tariffs for state sector generators are regulated by the SERCs. The Electricity Act 2003 empowers the Central Electricity Regulatory Commission (“CERC”) to set the tariff of generating companies owned or controlled by the Government and other entities with interstate generation or transmission operations. The Government has notified the National Tariff Policy (“NTP”) on January 6, 2006. This NTP has aided the power reforms by outlining guidelines for multi-year tariffs, rate of returns for generation and transmission projects, tariff modalities for utilities, subsidy to consumers and cross subsidy calculations. These guidelines are not applicable however, if the tariff is fixed through a transparent bidding process.

Provisions of Electricity Tariff Policy
One of the main objectives of the tariff policy is to promote competition, efficiency in operations and improvement in quality of supply and ensure availability of electricity to consumers at reasonable and competitive rates. The Tariff Policy reiterates the importance of implementing competition in different segments of the electricity industry as highlighted in the Electricity Act, 2003 and that competition will lead to significant benefits to consumers through reduction in capital costs and also efficiency of operations. It will also facilitate competitive pricing.
The policy stipulates that all future power equipment needs should be procured competitively by distribution licensees except in cases of expansion of existing projects or where there is a state controlled or state-owned developer involved, in which case, regulators will need to resort to tariff determination based on norms. Even PSUs will have to bid for projects to determine tariffs after a certain period of time.

Guidelines for tariff based competitive bidding
The Guidelines for competitive bidding for determining tariffs for the procurement of power by distribution licensees were issued on January 19, 2005 with the main objectives of promoting competitive procurement, facilitating transparency and fairness, reducing information asymmetry, protecting and finally providing flexibility to suppliers on availability of power while ensuring certainty on tariffs for buyers. These initiatives are causing a change in the bidding process from the traditional cost plus-fixed price bidding norms to an international competitive bidding process.

Ultra Mega Power Projects
Recognizing the fact that large power projects bring economies of scale and lead to cheaper power, the Ministry of Power, CEA, and PFC are working together to develop nine UMPPs through tariff-based competitive bidding. In order to meet the growing divide between power demand and supply, these large scale projects are seen as a step to help reduce the power deficit and facilitate competitive involvement of various power generating agencies. In order to ensure the smooth progress of these projects, the Ministry of Power has taken steps to coordinate with various ministries and agencies of both the Central and State governments to assist developers. These projects are awarded to developers on a Build- Own-Operate (BOO) basis and generally have a capacity of 4,000 MW. These projects are expected to add approximately 36,000 MW at nine locations within 7-8 years and help achieve targets for capacity addition. In order to enhance investors’ confidence, reduce risk perception and receive a healthy response to competitive bidding, nine shell companies were set up as subsidiaries of PFC to facilitate the tie-up of inputs, linkages and clearances for these projects. These companies will undertake preliminary studies and obtain necessary clearances and tie-ups, including water, land and off-take arrangements prior to award of these projects by way of selection through a tariff-based International Competitive bidding process. The shell companies also facilitate obtaining environmental clearances. To date, projects have been awarded for three UMPPs, Sasan in Madhya Pradesh, Mundra in Gujarat and Krishnapatnam in Andhra Pradesh. The Sasan and Krishnapatnam projects have been awarded to us while Tata Power was awarded the Mundra project.

National Electricity Plan
The Electricity Act 2003 requires CEA to publish the National Electricity Plan once in every 5 years and revise the same from time to time in accordance with the National Electricity Policy. This plan serves as a roadmap for optimum growth of the power sector. Under this plan, CEA formulates short term and prospective plans for the development of electricity systems and coordinates the activities of the various planning agencies for the optimal utilisation of resources to serve the interests of the national economy.

The National Electricity Policy aims to achieve the following objectives:
• Availability of electricity for all households in the next five years;
• Power demand to be fully met by 2012. Energy and peaking shortages to be overcome and adequate reserves to be available;
• Supply of reliable and quality power of specified standards in an efficient manner and at reasonable rates;
• Per capita availability of electricity to be increased to over 1000 kWh by 2012;
• Minimum lifeline consumption of 1 unit/household/day as a merit good by year 2012;
• Financial Turnaround and Commercial Viability of Electricity Sector; and
• Protection of consumers’ interests.

Clean Development Mechanism
The concept of reduced carbon emissions came into existence as a result of increasing awareness about global warming and the need to control the greenhouse gas (“GHG”) emissions. The Kyoto Protocol is an international agreement under United Nations Framework Convention on Climatic Change, adopted to reduce GHG omissions. 156 countries which emit 61.6% of global GHG have ratified the Kyoto Protocol.

Clean Development Mechanism (“CDM”) is a mechanism under the Kyoto Protocol aimed at reducing GHG emissions. Certified Emission Reductions (“CERs”) are issued for projects, which reduce emission of six identified GHG, in the developing nations. Each CER is equivalent to one ton of Carbon dioxide equivalent reduction that has been achieved. Developed countries that have exceeded their permitted GHG levels can reduce emissions either through domestic actions within their national boundaries or through purchase of CERs. Trading of CERs is similar to other financial instruments such as stocks in certain designated exchanges. The most prominent of these exchanges are Chicago Climate Exchange and European Climate Exchange. All renewable energy generation projects, gas-based generation facilities and coal-based generation facilities with eneration efficiency meeting certain criteria are eligible for CERs.

Future Outlook
The Ministry of Power has set a goal⎯Mission 2012: Power for All. Based on the 17th EPS, the total energy requirement in India will increase to 968,659 GWh by fiscal year 2012, 1,392,066 GWh by fiscal year 2017 and to 1,914,508 GWh by fiscal year 2022. This would lead to an annual electric peak load of 152,746 MW in fiscal year 2012, 218,209 MW in fiscal year 2017 and 298,253 MW in fiscal year 2022. The northern region is expected to contribute 30.1% and the western region is expected to contribute 28.4% of the overall annual electric peak load in fiscal year 2022. The Government has estimated the total investment potential of the sector at Rs. 9,000 billion for a specified period up to fiscal year 2011. This represents a significant opportunity for capacity expansion and growth for power generation companies, both in the public and the private sector.

In line with the aggressive targets set by the government, a comprehensive Blueprint for Power Sector development has been prepared encompassing an integrated strategy with the following objectives:-

• Sufficient power to achieve a GDP growth rate of 8%;
• Reliability of power;
• Improved quality of power;
• Optimal power cost to ensure availability at affordable prices; and
• Commercial viability of power industry to make it attractive for private sector participation.The Government, through the Ministry of Power, has laid out the following broad strategies to achieve these objectives:
• Power Generation Strategy⎯focusing on low cost generation, optimization of capacity utilization, controlling input costs, optimisation of fuel mix, technology upgrades and utilization of non conventional energy sources;
• Transmission Strategy⎯focusing on developing the National Grid, including interstate connections, technology upgrades and optimization of transmission cost;• Distribution Strategy⎯achieving distribution reforms by focusing on system upgrades, loss reduction, theft control, consumer service orientation, quality power supply commercialization, decentralized distribution and supply for rural areas;
• Regulation Strategy⎯protecting consumer interests and making the sector commercially viable;
• Financing Strategy⎯to generate resources for required growth of the power sector;
• Conservation Strategy⎯to optimise the utilization of electricity with a focus on demand-side management, load management and technology upgrades to provide energy efficient equipment; and
• Communication Strategy⎯forming political consensus with media support to enhance public awareness.

(Source: RHP of Reliance Power Limited)