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Power Sector - Overview

The history of power generation in the country is over a century old. Merely, fifteen years after the first country in the world, United States started generating power in New York, India’s CESC Ltd pioneered the generation of electricity in the country. In 1899, it commenced power generation and distribution in Kolkata.

Today, with 1.2 billion people in India, where one fifth of the world lives, the task of bringing light to the vast country of over 6 lakh villages is no mean task. However, its rich history in power generation has stood the country well. According to the 2011 census, already over 5 lakh villages have been electrified.


The Indian power sector has been regulated, throughout its history of over a century now. To regulate the generation, supply and use of electricity, the first legislation was the Electricity Act of 1887 which was repealed and replaced by the Indian Electricity Act, 1910. The Act primarily covered the technical and operating standards of the Indian power sector. The Electricity (Supply) Act, 1948 was introduced after the country’s independence and provided an elaborate institutional framework and financing norms for the performance of the electricity industry in the country. The Act envisaged the creation of State Electricity Boards (SEBs) for planning and implementing the power development programmes in their respective states. The Electricity (Supply) Act, 1948 was amended in 1991 to provide for the creation of private generating companies for setting up power generating facilities and selling the power in bulk to the grid or other persons.

In 1998, the government promulgated the Electricity Regulatory Commissions Act, 1998 for setting up of independent regulatory bodies both at the Central and State levels. The Electricity Laws (Amendment) Act, 1998 was passed with an intent to make transmission a separate activity for inviting greater participation in investment from public and private sectors.

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The Electricity Act, 2003 was the turning point in the power sector evolution process. It consolidated all the previous Acts, thereby streamlining the power sector and improving efficiency. The foundation for large scale private investments in power generation was laid out with the de-licensing of generation. Tariff determination was made a transparent process where stakeholder participation, including consumers, was provided for in the tariff determination. Competition was also encouraged through the concept of Open Access in distribution and transmission.

The figure illustrates the key evolutionary developments of the Indian power sector.

 
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Thus over the past two decades, the Indian power sector has moved away from vertically integrated state-owned utilities to a competitive market-oriented framework. This trend has been almost universal among developed nations, but not restricted to them. A large number of developing countries in Latin America, Eastern Europe and Asia have also ushered market reforms. However, a fair distance still needs to be travelled in order to achieve the objectives behind the reforms as brought about by the Electricity Act 2003. While there is full competition in the generation space, the distribution and transmission segments remain dominated by the State and Central utilities, respectively. The figure highlights the value chain in the Indian power sector.


The current installed generation capacity of the country is 206,456 MW as of 31st July 2012. In spite of significant augmentation in generation, transmission and distribution capacity, the growth in demand has always outstripped the capacity additions.

While India’s per capita electricity consumption as of 819 kWh (as per provisional 2010-11 data) is still a fair distance away from the National Electricity Policy target of 1000 kWh per capita by 2012, it is undeniable that huge strides have been made in the power sector during the 11th Plan period. A record generation capacity of 54,964 MW was added during the 11th Plan, which is almost equal to the capacity addition during the 8th, 9th and 10th Plan periods put together. The private sector played a very important role in this feat with over 42% of the capacity being commissioned by private power developers. In fact, the private achieved more than double of its 11th Plan target while both the Centre and State power generation utilities were unable to meet their planned targets.

The boost in the private sector participation in the generation segment was brought about by the Electricity Act 2003. It consolidated all the previous policies, thereby streamlining the power sector and improving efficiency. The foundation for large scale private investments in power generation was laid out with the de-licensing of generation. Tariff determination was made a transparent process and competition was encouraged through the concept of Open Access and competitive bidding for procurement of power. The figure below traces the rise in importance of the private sector with respect to generation capacity addition.

The private sector is expected to play an even more important role in the 12th Plan. Out of the planned generation capacity addition of 78,000 MW, the private sector is expected to contribute around 56%. However, there are several viability issues plaguing the private investments already made in the sector and which threaten to leave precious power generation capacity stranded. Unless these issues are resolved, the power developers and the banking community are likely to remain wary of further investments in the sector, thereby affecting the power needs of the nation in the years to come.


India’s primary energy consumption is one of the lowest in the world. The table below shows the primary energy consumption for different countries in Million Tonnes of Oil Equivalent (MTOE).

  2009 2010
USA 2204.1 2285.7
Brazil 234.1 253.9
Russia 654.7 690.9
India 480 524.2
China 2187.7 2432.2
(Source : BP Energy Report 2011)

Per capita consumption of electricity in any country shows the maturity of its economy. In 2010, per capita power consumption of India was 778 kWh. This is quite low in comparison to other major economies in the world including China and Russia which are part of BRICS along with India.

Source: India Industry Tracker (Click on Image to Zoom)

The figure below shows per capita power consumption (kWh) of various countries in the year 2010. Where the world average is 2782 kWh, China and India occupies the 13th and 14th position.

The Electricity Act 2003 has played a pivotal role in encouraging a steady increase in the country’s generation capacity addition programme. The installed generation capacity in the country has crossed 186,000 MW as of December 2011.

However, the country is still faced with a scenario of power deficits during peak hours. While India aspires for an 8-9 per cent economic growth rate, it faces many challenges in attaining this goal. The quantity and quality of energy required by the nation for a sustained economic growth are a few of those challenges.

Source: India Industry Tracker (Click on Image to Zoom)
Source: India Industry Tracker (Click on Image to Zoom)
Source: India Industry Tracker (Click on Image to Zoom)

Over the coming decades, one of the bigger challenges appearing over the horizon is securing diversified sources of energy. The rapidly growing economies of the world will result in a sharp increase in energy demand. The consumption of energy in 2010 rebounded strongly, driven by economic recovery. The growth in energy consumption was broad-based, with mature OECD economies joining non-OECD countries in growing at above-average rates.

This high energy demand is going to be a concern looking at the existing world reserves and their robust consumption. The table below shows the world fossil fuel reserves as on 2010 end.

Fuel Quantity Unit
Oil 1383.2 Thousand Million Barrels
Natural gas 187.1 Trillion Cubic Meters
Coal 860938 Million Tonnes
(Source : BP Energy Report 2011)
Source: BP Energy Report 2011 (Click on Image to Zoom)

The figure below shows the of Oil resources in different countries for the previous 3 decades

After falling for two consecutive years, global oil consumption grew by 2.7 million barrels per day (b/d), or 3.1 per cent, to reach a record level of 87.4 million b/d in 2010. This was the largest percentage increase since 2004 but still the weakest global growth rate among fossil fuels.

 

 

 

Source: BP Energy Report 2011 (Click on Image to Zoom)

The figure shows the Natural Gas resources in different countries for the previous three decades - please check the latest data - the report is that US currently has the largest gas reserves in the world.

In 2010, world natural gas consumption grew by 7.4 per cent, the most rapid increase since 1984. Consumption growth was above average in all regions except the Middle East. The US had the world’s largest increase in consumption (in volumetric terms). Russia and China also registered large increases. Consumption in other Asian countries also grew rapidly (+10.7%), led by a 21.5 per cent increase in India.

The figure below shows the coal reserves for different countries in 2010 end.

Source: BP Energy Report 2011 (Click on Image to Zoom)
 

The figure below shows the growth of coal consumption for various countries.

Source: BP Energy Report 2011 (Click on Image to Zoom)

Coal consumption grew by 7.6 per cent in 2010, the fastest global growth since 2003. Coal now accounts for 29.6 per cent of global energy consumption, up from 25.6 per cent 10 years ago. Chinese consumption grew by 10.1 per cent. Chinese consumption grew by 10.1 per cent; China last year consumed 48.2 per cent of the world’s coal and accounted for nearly two-thirds of global consumption growth.

Indeed, countries like India and China are increasing their energy consumption in order to maintain the growth trajectory. The United States has been able to restrict the demand over the years, while Brazil is slowly gaining momentum. The figure below shows the share of world energy consumption for various countries (Historical figures and projections).

Source: IEA (Click on Image to Zoom)

The growth in China has been tremendous and likely to continue in future. India is also catching up and needs to accelerate the per capita consumption.

Most other market reforms elsewhere in the world have first started with the wholesale market followed by a gradual introduction of a competitive retail market. In the UK for example, the distribution companies initially held a monopoly over all consumers under 1 MW demand in their service territories and then moved to full retail competition in three phases spread over eight years. Full retail competition in the UK has ensured availability of choice for the consumers but has also resulted in significant tariff differences between the different suppliers and has created a new business segment of ‘switching companies’ which help consumers select the most appropriate supplier for their needs.

Keeping in view the worldwide shift away from ‘compulsory’ energy markets and also the chronic demand-supply imbalance in the country, India has a ‘voluntary’ market design where utilities can buy power (long, medium or short term) through separate procurement arrangements and also come on to power exchanges for serving their residual needs. Since a huge segment of the population does not yet have access to electricity, legislative and policy framework of the country’s power sector has enabled a long term competitive bidding-based power procurement market to co-exist with the short-term competitive markets, including exchanges.

To summarise, the electricity market in India is still in the stages of opening up the wholesale market to real competition while the retail segment remains under strict regulatory purview. Wholesale competition has not been able to flourish to the extent desired because of the vested interests at stake when it comes to providing open access to the large customers. On the one hand, as per the directives of the Electricity Act and National Electricity Policy, some State Electricity Regulatory Commissions have reduced the cross subsidy surcharge to zero, but on the other, this has resulted in greater resistance from the state distribution utilities towards open access as they will have to ultimately bear the financial brunt. Thus, inspite of a reasonably robust market framework provided for in the law, a truly competitive multi-buyer model at the wholesale level has failed to emerge except for just a few states in the country.

The diagram below captures the present situation of the Indian electricity market vis-à-vis a fully opened up market.

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