August 06, 2007	Monday	Rajab 21, 1428

WHILE economic reforms have helped sectors like telecommunications and banking and financial services to grow at double-digit rates, the power sector in India appears resistant to change. Power shortages are rampant, even in cities like Mumbai, Delhi and Bangalore — the top three urban centres in the country — while in the rest of the country electricity supply is erratic, of abysmal quality, and unreliable.

Most of the large industries depend on expensive captive power generation units — using diesel, which also causes a lot of pollution. In cities like Pune, for instance, which is emerging as an automobile hub, the top companies have stopped accessing power from the inefficient, state-owned utility, and generate their own power.

So successful has been their efforts at producing power that even the state utility is now dependent on these companies — which are primarily into manufacturing cars, auto parts, forgings, and other engineering goods – for a significant chunk of supplies to the city.

The central government has been pushing the state governments to accelerate reforms in the power sector, but to no avail. The central government controls several undertakings in the power sector, companies that are efficiently run and generate profits. But even these public sector units face difficulties in recovering dues from inefficient, often corrupt, state electricity boards.

But after much prodding, many state governments have finally gone in for ‘unbundling’ their utilities, spinning off the boards into holding companies, power generating units, transmission firms and distribution companies. Many state governments are pushing for reforms, insisting that each of these unbundled units emerge as profit centres and function like commercial entities.

The central government is also eager that private companies get into all three sectors — generation, transmission and distribution. But thanks to the reluctance on the part of state governments to reform, both domestic and international companies are hesitant to enter the sector.

The delay in reforming the sector has led to severe losses for the Indian economy, and this was brought to light recently in the Economic Outlook for 2007-08 report, which was released by former Reserve Bank of India governor, C. Rangarajan, who is the chairman of the Economic Advisory Council (EAC) of the Prime Minister.

In his report, Rangarajan hoped that the problem of chronic power shortage, would hopefully be resolved over the next decade. The report saw a lesser role for the public sector in the power industry, and a more significant one for efficient private players. Referring to the acute power shortage, the EAC warned that it would have an adverse effect on the global competitiveness of Indian industry because of soaring operating costs.

India has failed to meet its planned increase in generation targets; as against a planned capacity expansion of over 40,000 MW during the 10th five year plan (2002-07), it managed to achieve less than 50 per cent of the goal. For the current five year plan, the government raised the ante further, hoping to add 80,000 MW of new capacity.

LAST week saw some movement in the federal government’s ambitious ultra mega power project (UMPP) scheme, a plan that aims to add about 36,000 MW to the existing power generation capacity.

After getting stuck in unnecessary delays, the Sasan UMPP in Madhya Pradesh was bagged by the Anil Dhirubhai Ambani group-controlled Reliance Power Ltd. The project was earlier contracted to a consortium led by Lanco and Globeleq, but an ‘empowered group of ministers’ recently disqualified it because of wrong information provided by the latter.

Reliance Energy put in a bid of Rs1.19 per unit for the project, emerging as the lowest bidder and got the contract. Each of the nine UMPPs will have a capacity of 4,000 MW and cost about Rs200 billion. Of the nine UMPPs, the government has decided to fast-track five. The Sasan UMPP was the second one that has virtually cleared all the hurdles; the first UMPP to be cleared was the one in Mundra in Gujarat, which was bagged by the Tata Power Company.

The other three fast-tracked projects are also likely to be cleared soon. Two of them – Tadri in Karnataka and Girye in Maharashtra – faced problems, and the government has replaced the sites – instead of Tadri, the UMPP will come up in Bhavnagar in Gujarat, and instead of Girye, it will come up at Dighe in Maharashtra.

The Power Grid Corporation of India, a public sector unit, will be building the transmission network for the five fast-track projects. The transmission network for each UMPP itself is expected to cost around Rs40 billion. The Indian government wants to build a national power grid, which would help transmitting electricity from power-surplus states to those that are desperately in need of it.

According to Anil Ambani, chairman, Reliance Energy, the company plans to invest Rs600 billion over the next five years to add 15,000 MW of capacity. Reliance will be bidding for all nine UMPPs. It lost the Mundra bid, but is hoping to win yet another contract.

TATA Power and Reliance Energy are the two largest private sector power players; both are into power generation and distribution. The two firms are now planning to get into the power trading business, by joining hands with the two leading commodity exchanges in India.

MCX, the Multi Commodity Exchange of India Ltd, and the NCDEX, the National Commodity and Derivatives Exchange Ltd, are planning to promote two separate power exchanges. And both the leading private power companies plan to pick up equity stake in the new exchanges.

According to industry sources, Tata Power Company might pick a stake in the MCX, which is being promoted by the exchange and the Power Trading Corporation (PTC). Reliance could take a stake in the NCDEX promoted exchange, which will also have as promoters, public sector giants including National Thermal Power Corporation, National Hydro Power Corporation, Power Grid Corporation and Power Finance Corporation.

India’s power sector regulator, the Central Electricity Regulatory Commission, wants to develop a transparent market for power trading. MCX has got an in-principle clearance from the regulator for its exchange.

The NCDEX too has applied to the regulator and hopes to get the clearance next month. According to P.H. Ravikumar, managing director, NCDEX, it has got formal approval for setting up the exchange. Ravikumar says that all its joint venture partners will have an equal stake in the company.

The new exchanges will work on the lines of the commodity exchanges, providing a platform for buyers, sellers and traders of electricity. They can enter into spot and forward contracts. The market-based institution will ensure price discovery and price risk, and help generators, traders and consumers in opting for the best price for electricity.

PTC is the largest power trading firm in India, and has power purchase agreements (PPA) with power producers for trading 7,000 MW of electricity. But its agreements with existing partners will not be affected once the new exchange with MCX is set up.

Private equity firms including Blackstone, Salomon Brothers and Goldman Sachs are also discussing with PTC — which is a listed firm — for a 49 per cent stake in its financial subsidiary, PTC Financial Services.

While commodities trading is now well-entrenched in India, energy trading is also shaping up well. Crude oil, furnace oil, natural gas and coal are already being traded on the exchanges. NCDEX, which plans to go in for spot market trading in natural gas, petroleum products and coal, is also tying up with the Gas Authority of India Ltd (GAIL), for spot trading in natural gas.