A Successful Initiative

Transmission sector development through competition

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

Following the Electricity Act, 2003, one of the important statutory pol­icy documents that was being drafted, apart from the National Electricity Policy, was the Tariff Policy. Since power generation had been delicensed, and a number of other enabling provisions wo­­­­­u­ld have supported accelerated deve­lopment of power generation capacity, the task was to see how best, and commensurate with the rising generation ca­pacity, transmission systems should be planned and developed.

There were many who believed that the central transmission utility and the Power Grid Corporation of India at the central level, and the state transmission utilities together with state transmission companies would be able to rise to the occasion and might be adequate to match the needs of the new generation capacity. Many of us, however, believed that just as the generation sector had be­en opened up through delicensing, the­re would be a commensurate need for op­en­ing up the transmission sector to provide adequate evacuation and transmission capability in the system, even thou­gh they continue to be licen­sed. Th­is approach was based on the belief that competition will not only br­ing down the cost of developing the infrastructure, and thus reduce the ov­er­all burden on tariffs, but will also en­able the introduction of innovative me­thods of financial engineering, efficient procurement and efficient project management. Accor­din­gly, the Tariff Policy, announced in January 2006, provided that transmission projects will be developed on the ba­sis of competitive bidding and would be offered to such de­ve­lopers that would offer the lowest competitive transmission charges. A transition period of five years was envisaged for public sector co­m­panies, which wo­u­ld be developing pro­jects on the usual cost-plus basis, whereafter they would also have to participate in the competitive bidding pro­cess for developing projects, except for strategic projects, whi­ch could be assi­gn­ed outside the competition process.

In order that during the transition per­iod of five years, when the public sector will be allowed to continue to develop transmission projects in the usual manner of cost-plus tariff to be determined by the regulatory commission, projects identified to be developed through the private sector mode should be identified in an objective manner. This was with a view to allay the perception that most difficult projects might get identified for the private sector. Hence, a specific me­chanism was put in place with oversight of the regulatory commission, so that the perception of the above bias was ad­e­quately addressed.

An evaluation of what has happened in the past about 15 years indicates that the strategy and the process have led to positive outcomes. Right from the initial stage, the conclusion emerged that competition did bring down the cost of development and, consequently, the tariff. It also enabled new players to come into the sector and assist in the process of ex­pansion of the transmission system to match the rapid pace of growth of po­wer generation projects. While the outcomes achieved do vindicate the rationale of the approach and the objectivity of the process, it is considered important to evaluate whether the proportion of contribution through the competitive pro­cess, more particularly from the private sector group, could have been more than what has been achieved. The country has done much better than expected in changing the power generation capa­city profile of the private sector from 10 per cent to 48 per cent. In the case of transmission projects, transmission lin­es constitute about 10 per cent and substations about 5 per cent of the total profile. Al­though these would appear to be ra­ther on the lower side, considering that an altogether new strategy had been ev­­ol­v­ed, we need to celebrate the success and yet, identify the lessons to be learnt for accelerating the pace in the future.

Over the years, some changes have been made to address the identified constrai­­n­ts. For example, the process of issuing ap­provals has been delegated by the Mi­nis­try of Power to the Central Elec­tricity Au­thority, obviously with the expectation that the procedure adopted would lead to more expeditious decisi­ons. Du­ring the last few years, at various stages, a perception developed that a lar­ger number of transmission projects were being diverted from the tariff-bas­ed competitive bidding (TBCB) mode to the public sector on the ground of projects being strategic in nature. It is gratifying that the authorities have assured that TBCB wo­uld continue to be the preferred mode of developing these projects. It is heartening to note that a large number of projects have now been off­ered, or are in the pipeline, for TBCB, of the order of Rs 50,000 crore, compa­r­ed to projects worth about Rs 80,000 crore that have been done in the last many years under this route. Initially, trans­mi­s­sion infrastructure development throu­gh TBCB in the states was looked upon with some reservation and, hence, most of the projects under this route were taken up at the na­tional level. However, subsequently, state governments have seen the advantages of developing their transmission systems through this route and unburdening themselves from the responsibilities of financing their transmission companies. This has led to intra-state transmission systems also contri­buting to projects coming up on a competitive basis and re­ducing the cost, and private investments supplementing government effor­ts.  Successful case stu­di­es of intra-state tra­nsmission through this route need to be disseminated am­ong ot­her states. A payment security me­ch­anism for such transmission projects would need to be evolved, even th­ou­gh this has not emer­g­ed as an area of concern. Capacity buil­ding at the state level to prepare projects to be offered for competitive bidding will also need support from the Ministry of Power by way of organisations such as the Power Fin­ance Corporation (PFC) and REC Limi­ted, and other organisati­ons assisting in this process.

The present model of TBCB does not provide for the model to be on a build-own-operate-transfer (BOOT) basis. Hence, the concern that is often raised, and needs to be answered, is whether the choice of technology, the type of eq­uipment and the care taken during ope­rations and maintenance would be adequate for the system to remain fit enou­gh on the expiry of the contract period. While this apprehension, in the opinion of many, particularly of developers, is misplaced, perhaps there are a couple of options to address these concerns if the BOOT model were to be adopted. First, a system could be introduced for which necessary provisions could be made in the bid document for periodic third-party assessments on the maintenance inputs that are expected from developers from time to time. Second, the wh­o­le idea of BOOT can be revisited to consider a much longer period. This may give the additional benefit of the competitive process bringing down costs.

The challenges associated with land ac­quisition, particularly substations, right of way (RoW), forest clearance and wild­life clearance do continue to be major factors in a number of projects, and the consequences arising out of these delays get associated with uncertainties about regulatory decisions. There is a need to carry out case studies of some difficult projects that faced unpredictable constraints. The outcomes of such studies could indicate the nature of modifications that could be provided in the bidding process, including remedies that could be offered well in advance, so that uncertainties can be properly address­ed. In the case of power generation projects, the competitive bidding process re­quired initial preparation through a shell company that would carry out the initial acti­vities of land acquisition, en­viro­n­men­tal clearance and forest clearance. These could be done by such shell companies housed in organisations such as PFC and REC, or a new company could even be set up for the same. This does provide considerable relief and a number of risk factors could be address­ed in advance more conveniently by such government-supported companies. This results in better evaluation of the project, leading to more competitive advantages in terms of reduced cost of development.

RoW has emerged as a major area of concern. In different states, developers face problems of different nature, with varying expectations from the affected people and also from various political groups. Since the development of transmission would continue to be one of the important areas of investments to keep pace with the fast-rising power generation capacity, this issue does need a proper set of solutions. The power ministry could consider discussing with various state governments and try to evolve a policy framework that could address this challenge. It is also important that the RoW issue is addressed from the an­gle of technology. Some developments in the past have reduced the need for RoW by upgrading the technical capability of the transmission system. This process needs to be continued. Another area of technological interventions cou­ld be underground cabling. Since the volume would be very large in the case of India, the high cost of underground ca­b­ling, with proper research and using economies of scale, could be reduced.  Perhaps options given in the bidding co­uld also lead to innovative approaches by different players.  In such cases, the is­s­ue of RoW could be addressed th­rou­gh a policy framework for right of use (RoU) of land.

During the next few decades, transmission planning will also be faced with a major challenge of aligning requirements with the massive expansion of so­lar power systems with comparatively much shorter gestation periods. A long-term and well-conceived proactive strategy may help reduce the intensity of such challenges. A bigger challenge, how­ever, may emanate from large-scale shifts in the nature of demand, for example, de­centralised rural electricity distribution, including from agriculture shifting to distributed generation and supply, industrial establishments resorting to rooftop solar systems and local captive generation. These developments will have to be properly integrated with ultra-mega ca­pacities of solar systems, nature of variability of loads, coupled with backups such as hydropower and pumped storage. These issues do not ne­cessarily be­long to TBCB as such. Yet, they are not divorced from the considerations relevant to transmission through competiti­on. A general perception that has emerged recently, and is growing, relates to the cost of transmission of power. Com­petition in the development of power generation projects, including re­newables, has had the predicted outcome of highly competitive rates of power. This conclusion has, by and lar­ge, been disseminated not only am­o­ng distribution companies, but also across various segments of consumers. The in­c­reasing cost of transmission is being critically evaluated. Obviously, besides pro­viding sufficient cushion in the transmission system with appropriate redundancies to avoid grid disturban­ces, transmission planners now have the new task of addressing variations in load and supply on account of large-scale solar expansion.  When the government came out with promising plans to promote renewables, one of the steps initiated was to impose a cess on coal. The id­ea was that the amount generated through this me­chanism would be used for creating gr­een transmission corridors.  Later de­ve­­lo­pments saw this component of cess merging with the mainstream GST. Co­nsidering the fact that renewables will need to be supported and will continue to entail a larger amo­u­nt of transmission costs, there is a str­ong case for revisiting the decision of the coal cess merger with the GST. The funds could be deployed for transmission system development. Deve­l­oping transmission through competition is bound to bring down the cost of transmission, but additional costs on account of the factors mentioned above would create a wrong perception and, hence, the need for the coal cess amount to be deployed for the development of green corridors, wherein the funds could be deployed partly through grants and partly with substantially reduced interest.

The idea of TBCB has been more than vindicated through the successful outcomes of this initiative.  It is gratifying to note that this recognition is leading to a larger number of transmission projects now getting covered to be developed

th­­rough this route. The suggestions ma­de in this article for further strengthening this process, when accepted and im­plemented, would lead to more econo­mical development of the transmission system in the larger interest of consu­mers, and also to adequate support for the renew­ab­le energy expansions that have been planned.

 

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