In July 2012, over 620 million Indians faced a power blackout due to the cascading failure of the northern and eastern grids. With miners trapped underground, metro services shut down in the capital and hundreds of trains stalled across the nation, the country came to a grinding halt. The global media did not mince words.
?How could a superpower run out of power?? wondered The Daily Mail.?
?The widespread power blackouts that hit India?s (Baa3 stable) north, east and northeast regions on Monday and Tuesday have had a credit negative effect on the country?s economic activity,? Moody?s Investors Service said.
The government prepared a recommendation report within two weeks. Power Grid Corporation has swiftly implemented many of the action items. Yet, the national capital has once against faced a power blackout, thus raising some fundamental questions. When will the country have a truly robust transmission network? How will the government ensure that it is able to transport all the energy that India is capable of producing? Will the public sector be able to handle the entire country?s bulk transmission requirements?
It is time to prioritise investments in transmission.
What New Delhi has been facing for the past few days, is a microcosm of what the rest of the country faces every day. While residents of Delhi suffered from peak summer heat, there was surplus power capacity lying idle in the surrounding areas of Delhi. This phenomenon occurs daily on a much larger scale in the rest of the country. On one hand brand-new power plants in Chhattisgarh and Orissa are lying idle due to lack of connectivity. At the same time, industrial consumers in Tamil Nadu and Kerala are paying R9 per unit and are still facing regular load shedding.
Despite having installed power generation capacity of over 225 GW and a power demand of only 135 GW (as of May 2013), the country is still experiencing peak deficits. Yes, a large part of the problem is fuel availability, lack of railway links, delays in environmental clearances. But an equally large problem is the lack of evacuation capacity, which is often overlooked by most, apart from when there is a grid collapse.
The country?s natural resources are skewed towards the East, while the biggest demand will continue to be in the North and the West. In 2015 and 2016 alone, over 30,000 MWs of power generation capacity will be added in coal-rich states of Orissa, Jharkhand and Chattisgarh. Over 25,000 MWs of the power generated was to be exported to Northern and Western states, but are expected to be stranded due to evacuation challenges. Despite the sincere efforts by various public and private developers of transmission systems, forest clearances continue to be a major hurdle in completing these critical transmission links. Bottled power in this region alone could lead to over R1 lakh crore of revenue erosion in the coming years.
One may wonder, what is the total cost of creating a robust grid for India? Broadly speaking, in order to keep pace with demand, the country needs to spend R2 lakh crore in each five-year-plan on intra-state and inter-state transmission networks. PGCIL alone has demonstrated the capability to deliver half of this on its own. The state governments have not been able to sufficiently invest in sub-transmission, primarily due to lack of funds. Private participation has been weak in this sector so far, partially because of the late introduction of the BOOM model but mainly due to the excessive challenges faced by private sector firms in execution of power transmission lines.
If private developers have been responsible for adding 55% of the power capacity in the 12th plan, surely they can be incentivised to make similar investments in power transmission?
Globally, private participation has resulted in a reduction of transmission charges and dramatic increase in power evacuation capacities. Brazil is a great example where the grid planners were able to add more than 51,000 km transmission lines over 10 years, by encouraging private participation. Moreover, they were able to
reduce average transmission tariffs by over 21%.
How can we boost private sector participation? The power ministry has framed tariff-based bidding guidelines for awarding transmission projects, with a clear focus on promoting competitive procurement of transmission services and to encourage private investment with a fair process.
While the initial regulatory framework from the government was very encouraging, participation from the private sector has been dwindling in the last 4 years. The number of contenders for such projects has dropped from ten to two in the last 4 years.
While some of it is due to the deteriorated financial conditions of some over-aggressive bidders, but the major reason is the clear discrepancies in the policies relating to forest-clearances for transmission lines projects. With some cooperation between the power and the environment and forests ministries, these issues can easily be resolved and can provide immediate relief to current and future developers.
Over R1 lakh crore of power-plant investments are at the risk of becoming NPAs due to insufficient evacuation. This will exacerbate the energy deficit of the country and have ripple effects on the entire banking system. Hence, power transmission is expected to be a high-priority subject for the new government. One instant relief can be to exempt power transmission lines from the lengthy process of forest-clearance. Most long-distance power transmission lines pass through reserved forests. While public sector enterprises are exempt from providing compensatory land to forest department, the private sector is expected to source suitable land in the same state, which is an extremely cumbersome and unpredictable process. Many projects are stuck for years only due to this clause. This clause is also discriminatory in nature as both private and public sector companies are bidding for the same projects, yet there is preferential treatment given to government-owned companies.
Another thrust area is finance. Infrastructure projects typically have a 25- to 35-year contract period, but traditional project finance is available only for 14 years. The government needs to create a vibrant ?take-out? market, similar to the business-trusts in Singapore, or YieldCos in the US. Sebi has been pushing for the Infrastructure Investment Trust framework for sometime now, but it has not taken off. This is a great initiative and can provide considerable boost to the infrastructure sector, as it will allow operational projects to be taken out of the banking sector and placed in the public market.
We are hopeful that with the support from the ministries, these transmission corridors can be completed at the earliest and billions of units of power can be delivered to every corner of the country. A robust grid is one that has adequate redundancy so that any single unnatural event cannot affect the nation at large. Ensuing 24X7 power is a stated aim of the Modi government, and having a healthy transmission network is an important prerequisite to achieving this. Steps must be taken to create a level-playing field in order to attract global capital into this sector.
The author is the chairman of FICCI?s taskforce on private transmission and also a whole-time director of Sterlite Grid Limited
