A Sea Change

Transformation of the power sector over the last 20 years

R.V. Shahi, Former Power Secretary, Government of India

The Indian power sector has, in the last 20 years, undergone major changes, in fact, a transformation. When the economic policy of the country saw significant reforms in 1991, leading to the liberalisation of economy – de-licensing of several segments of industrial and economic activities – a few accompanying changes were made in the power sector as well.  Though the policy for the sector did provide for private sector participation in power generation in a significant way, practically the entire 1990s remained a decade of lost opportunities, inasmuch as no visible outcome could be achieved – the addition of not even 5,000 MW through the private sector route. None of the “fast-track” projects – over half a dozen of them – could be brought on track, let alone these being brought to the generation profile. This exercise aimed at reform did, however, generate a number of messages and lessons, which paved the way not only for the recognition of a few important ground realities, but also ultimately culminated in several structural changes and reforms.

It was realised by the policymakers – in the government as also amongst the legislative groups – that with just cosmetic changes in the policy framework it will be virtually impossible to achieve any visible results, but the sector needed a drastic overhaul and a structural transformation. I had the privilege of attending a high-level meeting organised by the then Power Minister, Shri Rangarajan Kumaramanglam, and chaired by the then Deputy Chairman of the Planning Commission, Shri K.C. Pant, and attended by about a dozen individuals from different sectors of the economy, for a strategic deliberation on what to do for the sector. The unanimous conclusions were: (i) the Electricity Act, 1910 and the Electricity Supply Act, 1948 have outlived their utility, (ii) a few amendments here and there in these legislations would be totally inadequate to make any significant dent in moving the sector forward, (iii) what is needed is a new comprehensive legislation for the power sector. This consensus sowed the seed for what finally emerged, in a period of about four years, as the Electricity Act, 2003. Shri Suresh Prabhu, Power Minister till September 2002, played a major role in pushing forward this legislation. This is the most important development that happened in the last 20 years – as a matter of fact, in the last about 100 years – in the power sector. I had the privilege, as Power Secretary, to take to the Cabinet the Bill in the final shape in early 2003, and then to Parliament, which passed it in May 2003.

A comprehensive legislation was, no doubt, necessary, but this alone was not sufficient to take this sector out of the serious crisis – a crisis of a huge deficit between the demand for power and the capacity to meet the demand, a crisis of financial bankruptcy of the sector, a crisis in which consumer services were the biggest casualty and, above all, a crisis which remained the most important cause of the tardy economic growth. The Act enabled several things to be done, but these needed to be done.  Reorganisation of the electricity boards into commercially viable entities, a robust National Electricity Policy, a transparent Tariff Policy that would balance the interests of consumers as well as investors, policy instruments and institutions which will usher in development of a competitive electricity market, initiatives which will electrify more than 56 per cent of rural households – in many states more than 80 per cent of rural households – which had no access to electricity, and initiatives which will harness the energy resources of the country in an optimal and cost-effective manner to deliver electricity at affordable costs – all these were needed, and they were formulated, to activate the Act. It needs to be appreciated that any legislation enables policy instruments. Catalysing and facilitating actions which will lead to projects and activities to deliver services, are equally important. The formulation of the Ultra Mega Power Project scheme and, more importantly, facilitating actions to deliver these projects emerged as another set of important developments in the last 20 years. In March 1996, the total installed capacity of the country was about 83,000 MW.  As in March 2016, it is over 300,000 MW.  The private sector’s share in generation was negligible, now it is more than 40 per cent of the installed capacity. These are indeed highly satisfying outcomes relating to the availability of power.

Another major development during the last 20 years has been the evolution and formation of a robust National Grid. We had five regional grids in the country, each operating at its own frequency. Mismatches between the availability of power and the supply of power were rampant – huge excesses in certain regions and simultaneously huge deficits in many other regions. We cannot claim that this problem has been completely overcome, but we have come a long way with the Power Grid playing the leading role in integrating the transmission systems through a hybrid of HVDC and AC technologies. This mission continues as the country is accumulating additional power generation capacities. Interregional grid connectivity has also helped short-term power trade through very effective and successful operation of the power exchanges, an instrument which most people did not believe, in 2005 when it was being conceived, will happen.

The launch of the 50,000 MW Hydro Initiative in 2003 was another major landmark, which paved the way for taking up a number of medium and large hydroelectric projects – both by public and private sector companies. Besides new starts, out of projects aggregating 50,000 MW, feasibility reports for which were prepared by government companies under the initiative of the power ministry, a number of important hydro projects that had been under construction for several years, in some cases languishing for several decades, were commissioned during the period 2002-07.  Important among them are the Sardar Sarovar Project in Gujarat, the Nathpa Jhakri Project (the largest hydro project of the country – 1,500 MW), the Tehri Hydro Electric Project, the Dulhasti Hydro Project, and the Tala Hydro Project in Bhutan. Unfortunately, the required momentum and thrust needed to make new starts on the projects identified, and accelerate those already started, has been missing, resulting in a substantial dilution in the proportion of installed hydro power capacity in the total power sector profile. It does need a renewed emphasis and focused attention to substantially enhance the declining ratio of hydro capacity (down from 26 per cent in 2006 to 15 per cent now).

Even after over 50 years of independence, when we entered the 21st century, in the country as a whole, more than 56 per cent of the rural population did not have access to electricity, and, in as many as six large states (Assam, Bihar, Jharkhand, Odisha, Uttar Pradesh and West Bengal), more than 80 per cent of rural households did not have access to electricity. It also needs to be underscored that the problem of rural supply was not limited only to the total absence of distribution infrastructure, but even in villages where infrastructure existed, supply remained totally erratic and unreliable – load shedding extending to 16 to 20 hours a day, in many cases, for days together. The formulation and implementation of a very powerful programme for rural electrification with 100 per cent funding from the Central Government (90 per cent grant and only 10 per cent loan by REC to the state) was one of the other landmark policy initiatives in the last 20 years, in fact, in the last 50 years.

The Indian power sector has remained, over the last 20 years, characterised – and continues to be so – by reasonably satisfactory generation and transmission segments, but hugely deficient, both technically and commercially, in its distribution segment.  During the Tenth Five Year Plan (2002-07), two important schemes were put into place, viz. the Accelerated Power Development and Reforms Programme aimed at strengthening, modernising and making distribution commercially efficient in towns and cities, and another programme on rural electrification aimed at providing access to those areas that did not have, and strengthening the systems that were weak. Considering the need and also gradually improving outcomes, these programmes have continued during the Eleventh and Twelfth Five Year Plans. The new NDA Government has further improved these schemes with required modifications as the Integrated Power Development Scheme and the Deen Dayal Upadhyaya Gram Jyoti Yojana. Rural electricity access is now nearing completion and equally important has been the outcome in respect of strengthening the urban distribution infrastructure, though the results on the financial front in the distribution segment have not been satisfactory.

This period has also seen the emergence of substantial work on energy conservation and demand-side management. The Energy Conservation Act and the establishment of the Bureau of Energy Efficiency (BEE) in 2002-03 laid a very solid foundation for evolving a National Agenda in 2003. These have been responsible for creating overall awareness about the need for efficient consumption of energy, including the adoption of energy efficient equipment and gadgets not only in the industrial sector but also among the large section of electricity consumers. Several important positive outcomes of various initiatives of the BEE including star rating of important gadgets, the Perform Achieve Trade Scheme, conventional lighting to LED lighting, solar pumps, award schemes for industry, and painting competition among children have led to demonstrable outcomes and results.

The objective of the Electricity Act was to distance the process of tariff determination and other related issues from the political domain.  Regulatory institutions including the Appellate Tribunal have come of age. To a great extent, political interference in the matter of tariff determination has reduced, though it has not been fully eliminated. The process has become transparent and it aims at balancing the interests of different stakeholders. Debates have started on how to further improve the working of the regulatory institutions so that the growth of the sector and the overall interest of consumers converge in a harmonious manner.  Issues like the selection of regulators and the accountability of regulatory institutions have emerged as issues of debate.

With the new NDA government coming to power, in 2014, a strong thrust has been given to renewable energy, particularly solar power, to occupy centre stage of the power sector policy. A target of 175,000 MW in the next five years is being monitored. This will considerably transform the power sector profile in the country. This ambitious programme has been greatly responsible for bringing down the price of solar power in a span of just four years, from Rs 15 per kWh to less than Rs 5 per kWh. The required transmission infrastructure to handle the quantitative and technical aspects of solar power, a great challenge indeed, is being put in place by Power Grid and other institutions. Integrated Schemes of Hybrid of Wind and Solar Power are also being planned. For a medium- to long-term perspective, storage of solar power would be needed to make this important source of energy more acceptable and commercially less burdensome. These programmes, it is expected, will address climate change concerns in a significant way.

The development of a regional power market in South Asia is another important development, which, though at a nascent stage, has good potential to grow, providing benefits to all the countries. Bhutan-India bilateral agreements have been a model of excellent relations and have led to the development of hydro projects in Bhutan and a cross-border transmission system between Tala (Bhutan) and Delhi. In the last six years, the establishment of the cross-border transmission system between India and Bangladesh and power trade, further expansion of connectivity between the two countries, and the 400 kV transmission link between India and Nepal are a few important and very powerful initiatives with positive outcomes that will in the years to come see the South Asia power market growing. I have had the privilege of close association with these developments in the last few years through the World Bank platform.

The important challenges facing the sector include poor financial performance affecting the commercial viability of the distribution business, coping with the technical complexities to address the varying loads of power generation through solar systems which is going to witness exponential growth in a short span of time, political intervention in the functioning of the regulatory institutions and, above all, large-scale load shedding by several state-owned distribution utilities in spite of power generation capacities remaining underutilised to the extent of almost 40 per cent. Necessary political consensus is required to address most of these issues. Distribution continues to be in the jurisdiction of the state governments.  Institutional changes in this segment of the power sector have remained few and far between.  The approach of the state governments as also of the regulatory institutions has been such that the private sector is reluctant to get into distribution. State-owned utilities, in most cases, keep making promises to reform and improve. The usual cycle of extreme crisis, followed by some new scheme associated with promises for action but without any visible results, repeats every 10 years. This challenge requires a major overhaul of the distribution business.

Copyright: R.V. Shahi

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