HIGH cost power has many defenders-private investors who are
Putting up the plants, equipment manufacturers and those in power who
decide the cost the State Electricity, its
Boards will have to pay for electricitv they
buy from autonomous units - while the case for lowest-cost expansion of the power gridiron has very few takers. "The consumers, who are the ones who actually pay for this expensive power, have no say in the matter.
In the UK, a regulatory structure was set up
by former prime minister Margaret that crier in
1989, before restructuring and privatising the electric Supply industrial. Here, instead ofa cornpetitive regime, we have the continuation of the autocratic permit raj with the inclusion nmv of torign power investors in the scherne of things.
The recent Enron fiasco has brought out the bankruptcy of the power policies being followed since 1991.
Policyniakers had then decided that the only salvation for the Indian power sector lay in inviting foreign capital,
which would provide additional resources and free the
state resources for use in the social sector.
Power planning shifted focus from expanding the power
sector at the lowest cost to one of constructing a package of
concessions to attract energy multinationals. "No power is
as costly as no power," was the popular slogan coined by
P Rajagopalan, the then power secretary. Uncomfortable
questions like whether the people would pay the resulting high
power tariffs, and the impact of such policies on the health of
the State Electricity Boards (SEBS), remained unanswered.
With annual losses of Rs 8,000 crore, the SFBs are
currently deep in the red and are in no position to even maintain their units, let alone make new investments. The policy package introduced by the Centre will erode their standing even further.
The package of concessions in 1994 for foreign private
investments included a 16 per cent rate of return on equity at
68.5 per cent Plant Load Factor (PLF) with a further 0.7 per
cent bonanza for every percentage point Of PLF over 68.5 per
cent. Further concessions were computations of the power tariff in foreign exchange, guaranteed off-take higher than the
current load demand, depreciation of 8.24 per cent as against
3.5 per cent prevailing earlier, and the use of imported oil and
the gas fuels rather than indigenously available coal.
The World Bank has pointed out that these are perverse
incentives to pad project costs and disturb the long-term fuel
balance of the country. The 8 projects under current negotiation all have much higher capital and power costs than that prevailing in India today.
Fast track projects
N K P Salve, the Union minister for energy, -negotiated the initial basket of projects for. which speciaf concessions were made
available. Enron became the benchmark case and a number of
guidelines, such as 80-90 per cent off-take guarantees, were
fashioned after Enron had already reached these figures. The
Central government offered counter guarantees for what it
called 'kick starting' the reforms. Table 1 shows the salient features of these fast track projects.
Using the 2 part formulae of the Central government, the
tariff for the projects works out to be in the range of Rs 2.60 to
Rs 2.80 per unit, except for Enron which has a lower starting
tariff that increases over time. This is twice as high as the current power cost in the country, which is around Rs 1.30.
It may not be fair to compare the cost of power from new
projects to that of old ones. The older plants have virtually
written off their capital costs and therefore can supply power
at the cost of fuel plus some overheads. A proper comparison would be to match the cost of power
from new power stations. Such a comparison shows that a new
power station can be constructed for about Rs 3.5-4 crore per
mw and the cost of power should not exceed Rs 1.80 to Rs 2 per
unit for the new plants.
Why should Enron inflate capital costs?
The chairperson Of BHEL had stated in his submission to the
Parliamentary Standing Committee on Energy that BHEL can
undertake turnkey projects at about Rs 3.5 crore for similar
projects. On-this basis, the cost of the plant should have been
about Rs 7,052.5 crore (as against the Enron cost of Rs 9,053
crore) The loss incurred by MSEB for the first 4 years alone
would have financed this plant.
Why should Enron have considered a much higher
investment cost for its project? The answer really lies in the
Centre's power policies which act as an incentive to inflate
capital costs. And to cap it all, there are no risks for the
foreign investor as the returns are guaranteed against foreign
This meansithat the cost of power will be calculated based
on the above rate of return and depreciation. Since no matter
what the investments are, a return of 30-32 per cent on equity
is guaranteed - if the capital costs can be inflated in comparison to the actual costs - these rates of return and depreciation will lead to much higher returns on the actual investments. This will automatically lead to a higher cost of power,but as the power tariff is premised on the above basis, it matters little to the investor.
The inflated project capital costs also allow the companies
to recycle the funds of the project and bring them back as
equity. Thus with virtually no investments but some financial
jugglery, these companies can own 100 per cent stocks of the
company, and enjoy a rate of return that is in the 30-32 per
cent range. As these stocks can b ei sold in the market, companies such as Enron can make a fipancial killing with virtually no investments under the currerit policy, before even a mw is produced. This is why both Enroh and Cogentrix intended to bring in equity only at the starting of commercial operations.
Before that, the equity would be brought in as debt and the interest charges on the same would also be charged to the project account.
The major argument advanced by the power ministry and
Sharad Pawar to combat public criticism was that as Tata
Electric and Bombay Suburban tariffs are already Rs 2.39, with
an annual rate of inflation of 10 per cent, they will reach
Rs 2.89 in the year 1997. Ergo, Enron's tariff of Rs 2.40 in 1997
is much lower than that of indigenous power producers.
Further, there is a cap on Enron's capital costs and tariffs and,
therefore, these figures are not going to change.
Unfortunately for these arguments, there are 2 factual
errors. Enron power is not Rs 2.40 in 1997 but 7.47 cents -
the tariff is denominated in us currency! Therefore, if India
and the us continue to have a 10 per cent and a 4 per cent rate
of inflation respectively, there is a likely devaluation of 6 per
cent per annum of the Indian currency. This is much smaller
than the 33 per cent devaluation that the commerce ministry
is reportedly asking currently. With this rate of inflation,
Enron power in 1997 will be Rs 2.69.
Salient features of the 7* foreign investor power
|Dabhol Phase I
|Dabhol Phase II
|Ib Valley State
A recent statement by Enron shows that the capital servicing cost of Enron is Rs 1.37 and the fuel cost (at 1993 prices)
Rs 1.04. The fuel price in 1997, as per Enron's own admission
to miii, is likely to be $4.63 per million British Thermal Unit.
With this, Enron's tariff in 1997 will be Rs 2.99. The so-called
cap on Enron's tariff is a complete myth.
The second error is even more serious. Unlike the Enron
tariff, almost all tariffs in India, including the current 2 part
tariff advocated by the power ministry, are front loaded.
Therefore the capital servicing cost - the major component
of the tariff-decline overtime and is not indexed to inflation.
That is why Singrauli power of the NTPC is Still supplied at
0.61 paise even after 10 years of its commissioning and has
not gone up even with the current 10 per cent rate of inflation.
Enron's tariff, however, is back loaded and the capital
servicing cost increases every year by 4 per cent. But the
examples of Tata Electric and Bombay Suburban given by the
defenders of the agreement are symptomatic of a wider
malaise. The private generators seem to get better terms than
they deserve. A figure of Rs 2.39 per unit in
today's plants that have been built and commissioned at costs well below that claimed by Enron is also very high. Though the arguments that Enron power is cheaper are faulty, this nevertheless seems to have brought a few
more skeletons out of msLB's cupboard. Both
these agreements were also struck during the
Sharad Pawar regime. They are higher than
the cost of power based on N'FPC'S tariffs
negotiated in the same period, presumably
with similar costs. For instance Anta and
Auriya are supplying power at Rs 1.05 and Rs
1.07 - less than 50 per cent of Tata Electric
and Bombay Suburban's tariff. Two wrongs
do not make a right. Along with the Enron's
PPA, the PPA of Tata Electric and Bombay
Suburban also appear to be fit cases for
The defenders of the project have also
claimed that at Rs 4.1 crore, the Dabhol project costs are not
high and are comparable to similar projects. The Parliamen-
tary Committee, cutting across all party lines, rejected this
proposition. At the $100 million initially claimed by Rebecca
Mark, it is good riddance to Enron.
The power ministry has joined the power establishment's
chorus that cost per mNv has to increase from Rs 5 to Rs 7 crore.
However, in their answer to the Standing Committee on
Power, the ministry confessed to having no
data on international prices of power plant
The question is: who is going to pay for
the expensive power that the ministry is
pressing on the country? All the central utilities including NrPc are now demanding "Enron terms" - Rs 2.40 tariff, guaranteed
returns and guaranteed off-take. If these
terms are accepted, the SEBS will descend in to
bankruptcy immediately. At Rs 3 to 1@s 4,
Indian power tariffs for industrial and
domestic consumers are comparable to the
us and UK's. Largescale social unrest or
bankruptcy - this is the Hobson's choice facing the SEBS a nd
The power ministry is trying to stampede the country in
the wrong direction by artificially inflating the installed capacity required and the capital costs and then projecting that
India has no matching resources. By their calculations, the
country needed a total installed capacity of 104,000 mw in the
8th plan and an additional 94,000 Niw in the 9th plan. These
calculations are based on the 14th Electric Power Survey
(14th i [,s) which is already dated. No attempts have been
made to update the 14th Eps predictions based on actual
growth of demand. On this basis, the ministry of power has
argued for induction of private power on a massive scale to
meet this "shortfall".
The initial calculation within the ministry was that about
10,000 MW would be available from private investments in the
8th Plan itself. Later, it was scaled down to 5,000 mw. For the
9th Plan, there seems to be an unstated policy that almost the
entire Plan's requirements should be through private and foreign investments. If the demand projections are even half way true, advance action needs to be taken up right now. However, no advance action is being taken on the ground. Increasingly, Salve's power policies are beginning to look like a gambler's last throw.
Alternative paths to power
A realistic look at demand and required installed capacity will
show that other alternatives clearly exist. If we take the figures
of current peak demand as 58,000 mw (this is already on the
high side), then it is unreasonable to expect that the demand at
the end of the 8th Plan can be more than 66,500 mw.
Considering that we have seen nearly 80 per cent availability
this year, with a reasonable plant margin of about 30 per cent,
we can meet the entire peak demand of 66,500 mw with
an installed capacity of even 85,000 mw. As the actual installed
capacity is likely to be about 89,000 mw at the end of the
8th Plan, we should certainly be able to meet the peak d
emand. Most advanced countries operate with plant margins
of 20 to 25 per cent and therefore a 30 per cent plant margin is
certainly not unrealistic.
A World Bank study conducted in 1990 showed that
using the existing tie lines and transferring electricity from
surplus to deficit areas could reduce shortages by half.
Integrating the grid and better maintenance of existing
capacity can bring down the plant margins - considerably
reducing maintenance. Adding to generating capacity
without investing in the maintenance of existing capital stock
and not integrating the grid will not solve the problems of the
For the 9th Plan, a realistic figure should be around
30,000-3.5,000 mw to be added to meet the peak demand. This
is not difficult to achieve by a mix of public and private investments with appropriate safeguards.
It has been shown by S N Roy, a former chairperson of the
Central Electricity Authority and one of the most respected
power engineers in the country, that other planning
options arc available that are not being utilised. The load
curve today shows that in future we will be short of peaking
power during day and have surplus power at night. This is
alreadN so in the Eastern Grid and in much of the north. This
is obviously because the demand during day is much higher
than at night. The power ministry is planning to add coal fired
power plants, nuclear power plants and combined cycle
power plants, all of which are base load plants. The coal
fired power plants will have to be put either on 2 shift
operations or a number of such plants will have to
operate well below their capacity for those periods when
the demand is low. Hydel power is ideal for peaking power
but has come under severe environmental opposition.
Thus, the power ministry is planning on base load
stations instead of peak load stations. It will be far more
economical to add open cycle gas turbines in place of the combined cycle plants, as these will meet peaking duty at lower capital costs.
Another possibility is to lower the capital costs by stanclardisation and replication of a basic design with only some
modifications. The economics of standardisation can lead to a
substantial reduction of costs, particularly if capital crunch is
recognised and designs are made accordingly. In the power
sector, the tendency has been to build rather expensive plants
in the name of reliability. The plant load factors have not
shown any major improvements due to this, but the plant
costs have gone up considerably. The above course can lead to
reduction of costs by as much as 25 per cent to the cost of
plants and should be the first option to be exercised.
However, with import of capital, power planning is
moving in the opposite direction - more non-standard
plants and consequently higher capital costs. It is noteworthy
that in the nuclear energy sector, us capital costs are much
higher than European capital costs precisely because of this.
The European plants have been standardised while the us ones
The other option is to introduce demand side management for power consumption. It has been computed that it is much cheaper to invest in reducing consumption rather than in investing in new power generating plants.
The lowering of consumption in Europe the and the us has
been mainly on this account. Thus a utility in the us, gave out
to its customers free compact fluorescents that consume only
20 per cent electricity compared to the normal lamps and avoided the installation of new power plants. In India, a study suggests t at even if 20 per cent of all lamps were replaced by come fluorescents, there would be a saving of Rs 1,500 crore per annum.
A regulatory regime for safeguarding consumers
The Central government only owns generating and transmission companies but does not distribute electricity unlike the states and the State Electricity Boards. Therefore, the balance is tilted against the consumers in favour of the generating companies.
One of the first steps that need to be taken is restoring
autonomy to the Central Electric Authority (CEA) and the SEBS.
A Oe-condition, of course, is removal of political interference
in day to day running of the Boards. The Regulatory frame-
work must also be expanded to include Central, Regional and
State Regulatory Authorities.
Curriently, only cEA and Regional Electricity Boards (REBS)
have'regulatory functions. There are 5 Regional Grids and
corresponding RFBS. The REBS function under CFA with reprensentation frow the SEBS concerned. The weakness of the has resulted in lack of power transfers from surplus to deficit states. The REBs have failed to impose any kind of grid di-
pline on the generating companies and utilities leading to ii i
frequency and voltages in off-peak periods and anarc withdrawals during peak periods. This had led to a lack of
stability and wastage of power.
However, instead of strengthening of the regulator@
up, moves are afoot to weaken them even further.
Regional Load Despatch Centres (RLDC) which monitor
Regional Grids have been handed over to the Power G1
Corporation, a Central Government undertaking. The
are integral to UBS functioning and their removal from ambit of the REBS severely limits their ability to perform the regulatory functions. At the state level, there is no regulator
ensure that the consumers' interests arc protected Electricity Board.
The other issue that needs urgent attention is the term
on which private generating companies can be inducted in
the power sector. lic key is the Power Purchase Agreement (PPA) that the Board enters into with the private generating
company. The 2 types of regulatory regimes that are prevalent
for tariff fixation are either based on a fixed return on capital
or a tariff cap on the delivered price. The regulators in u K Li,@
the criterion of a cap on the delivered price of power inclexuc
to inflation. In India, we have yet to see even a discussion
the regulatory regime to be adopted for inducting private
power producers. Countries like Thailand and Pakistan are
evolving fairly sophisticated regulatory principles for deciding such issues.
The other element of any regulation
tory regime must be transparency in decision
rre was set making and'a role for the consumers wli
Former have finally to pay the price of electricity
71iniSter The Electricity Act calls for public disclosure of project details. This is interpreted tret Thatcher mean the publication of only a skeletal OLI -
1, before line indicating the location and project situring The PPAs reached between the generating companies and the Boards are not mac Vatising the public even though this really concerns to
7 supply consumer. The Enron fiasco has clear
brought out the dangers in such scheme.
Unlike any other industry, the electricity
supply industry is one in which there has
be an instantaneous balance between supply and demand
Electricity cannot be stored and therefore the grid must
balanced at all times.
The natural state of the industry is one of cooperation
not competition. Introduction ofdifferent ownership patt
makes the task of maintaining balance even more difficult.
those enamoured ofthe South Korean experience, it mig interesting to know that South Korea nationalised their,
sector in 1982 because of the problems involved in pri
power companies attempting the private sector route with a strong regulatory framework.
An indigenous alternative that solves these problem
provides for least cost power is the need of the day. An C
PPAs are now subjected to strict scrutiny, the Enron controversy could actually have a positive fallout.