R.V. Shahi, Former Power Secretary, Government of India
Following the Electricity Act, 2003, one of the important statutory polÂicy 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 woÂÂÂÂÂuÂld have supported accelerated deveÂlopment of power generation capacity, the task was to see how best, and commensurate with the rising generation caÂpacity, 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 beÂen opened up through delicensing, theÂre would be a commensurate need for opÂenÂing up the transmission sector to provide adequate evacuation and transmission capability in the system, even thouÂgh they continue to be licenÂsed. ThÂis approach was based on the belief that competition will not only brÂing down the cost of developing the infrastructure, and thus reduce the ovÂerÂall burden on tariffs, but will also enÂable the introduction of innovative meÂthods of financial engineering, efficient procurement and efficient project management. AccorÂdinÂgly, the Tariff Policy, announced in January 2006, provided that transmission projects will be developed on the baÂsis of competitive bidding and would be offered to such deÂveÂlopers that would offer the lowest competitive transmission charges. A transition period of five years was envisaged for public sector coÂmÂpanies, which woÂuÂld be developing proÂjects on the usual cost-plus basis, whereafter they would also have to participate in the competitive bidding proÂcess for developing projects, except for strategic projects, whiÂch could be assiÂgnÂed outside the competition process.
In order that during the transition perÂiod 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 meÂchanism was put in place with oversight of the regulatory commission, so that the perception of the above bias was adÂeÂquately 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 exÂpansion of the transmission system to match the rapid pace of growth of poÂwer 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 proÂcess, 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 capaÂcity profile of the private sector from 10 per cent to 48 per cent. In the case of transmission projects, transmission linÂes constitute about 10 per cent and substations about 5 per cent of the total profile. AlÂthough these would appear to be raÂther on the lower side, considering that an altogether new strategy had been evÂÂolÂvÂed, 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 constraiÂÂnÂts. For example, the process of issuing apÂprovals has been delegated by the MiÂnisÂtry of Power to the Central ElecÂtricity AuÂthority, obviously with the expectation that the procedure adopted would lead to more expeditious decisiÂons. DuÂring the last few years, at various stages, a perception developed that a larÂger number of transmission projects were being diverted from the tariff-basÂed 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 woÂuld continue to be the preferred mode of developing these projects. It is heartening to note that a large number of projects have now been offÂered, or are in the pipeline, for TBCB, of the order of Rs 50,000 crore, compaÂrÂed to projects worth about Rs 80,000 crore that have been done in the last many years under this route. Initially, transÂmiÂsÂsion infrastructure development throuÂgh TBCB in the states was looked upon with some reservation and, hence, most of the projects under this route were taken up at the naÂtional 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 contriÂbuting to projects coming up on a competitive basis and reÂducing the cost, and private investments supplementing government efforÂts. Successful case stuÂdiÂes of intra-state traÂnsmission through this route need to be disseminated amÂong otÂher states. A payment security meÂchÂanism for such transmission projects would need to be evolved, even thÂouÂgh this has not emerÂgÂed as an area of concern. Capacity builÂding 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 FinÂance Corporation (PFC) and REC LimiÂted, and other organisatiÂons 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 eqÂuipment and the care taken during opeÂrations and maintenance would be adequate for the system to remain fit enouÂgh 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 whÂoÂle 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 acÂquisition, particularly substations, right of way (RoW), forest clearance and wildÂlife 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 addressÂed. In the case of power generation projects, the competitive bidding process reÂquired initial preparation through a shell company that would carry out the initial actiÂvities of land acquisition, enÂviroÂnÂmenÂtal 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 addressÂed 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 anÂgle 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 couÂld be underground cabling. Since the volume would be very large in the case of India, the high cost of underground caÂbÂling, with proper research and using economies of scale, could be reduced. Perhaps options given in the bidding coÂuld also lead to innovative approaches by different players. In such cases, the isÂsÂue of RoW could be addressed thÂrouÂgh 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 soÂlar 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, howÂever, may emanate from large-scale shifts in the nature of demand, for example, deÂcentralised 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 caÂpacities of solar systems, nature of variability of loads, coupled with backups such as hydropower and pumped storage. These issues do not neÂcessarily beÂlong to TBCB as such. Yet, they are not divorced from the considerations relevant to transmission through competitiÂon. A general perception that has emerged recently, and is growing, relates to the cost of transmission of power. ComÂpetition in the development of power generation projects, including reÂnewables, has had the predicted outcome of highly competitive rates of power. This conclusion has, by and larÂge, been disseminated not only amÂoÂng distribution companies, but also across various segments of consumers. The inÂcÂreasing cost of transmission is being critically evaluated. Obviously, besides proÂviding sufficient cushion in the transmission system with appropriate redundancies to avoid grid disturbanÂces, 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 idÂea was that the amount generated through this meÂchanism would be used for creating grÂeen transmission corridors. Later deÂveÂÂloÂpments saw this component of cess merging with the mainstream GST. CoÂnsidering the fact that renewables will need to be supported and will continue to entail a larger amoÂuÂnt of transmission costs, there is a strÂong case for revisiting the decision of the coal cess merger with the GST. The funds could be deployed for transmission system development. DeveÂlÂoping 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
thÂÂrough this route. The suggestions maÂde in this article for further strengthening this process, when accepted and imÂplemented, would lead to more econoÂmical development of the transmission system in the larger interest of consuÂmers, and also to adequate support for the renewÂabÂle energy expansions that have been planned.