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When the state of Maharashtra, India's economic powerhouse, was groping in
darkness recently, it was time for a reality check. It was a clear pointer that India has failed to put needed basic
infrastructure in place, despite all the tall talk on economic reforms and 8% growth.
During the 2004-2005 fiscal year, the power shortage across India was 11.7%, with the southern states
logging the least shortage (3.1%) and the western states the most (22.4%). Maharashtra is one of the western states. In fact,
every region in India showed a power deficit. At a time when India is trying to showcase its manufacturing prowess to the
world, this is not good news. The fact that 60% of Indian manufacturing entities need to have captive power generating units
actually says it all. The equivalent number in China is 16%; in Brazil 17%; and in Pakistan 42%.
And what is India doing about this? Work on at least four independent power plants with an installed
capacity of 1,500 MW in the southern state of Andhra Pradesh is on the verge of collapse. The Ispat group, GVK Industries,
the GMR Group and EPS Oakwell Power, which have already sunk Rs50 billion (US$1.1 billion) in the gas-based power plants,
have now been left high and dry.
The state-owned Gas Authority of India Limited (GAIL), which had promised fuel supplies, has reneged on its
commitments because the management says it has no gas to offer. There's a huge shortage in the supply of coal, the primary
fuel for thermal power plants. Power generating companies such as National Thermal Power Corporation (NTPC) are already
importing coal to meet their short-term requirements. NTPC has approached the Minerals & Metals Trading Corporation (MMTC) to
import 125,000 tons for its plants on the east coast and another 50,000 tons for Dadri, near Delhi. The company's own pithead
plants (ie, generators located adjacent to the coal mines that supply them) have been facing shortages, as local coal mines
have not yet been given formal clearances for commercial production. This is bad news for NTPC, which is on a major expansion
drive, with 2,000 MW of fresh capacity planned by 2006.
There is an apprehension that the mismatch may rise to over 40 million tons by the end of the five-year plan
period if mines linked with power projects are not developed on a war footing. But while fuel shortages are taking the blame
for the crisis, it is only one among several factors leading to the mismatch between demand and supply. The time required for
finalizing financial arrangements and ensuring payment security for IPPs (independent power producers), which in turn would
require healthy state electricity boards, has also delayed capacity addition.
Examining the difficulties that have plagued project financing is illuminating. Though the time required has
in fact fallen, there are several factors beyond funds that must be taken into consideration - land acquisition, local
government support, addressing labor issues, tariff certification, etc. These are issues that continue to dog potential power
participants in India, whether local or foreign. Many global power-generating companies have walked away from India,
frustrated with the innumerable delays and roadblocks. Even the ones that set up plants in India have exited - Tractabel,
Powergen and Enron, to name a few. US energy major AES Corporation pulled out of its distribution business in Orissa in 2001,
unable to recover its dues.
The failure of the government to attract private players to India's electricity sector is a reflection of a
classic case of divergence between theory and practice. The government has been at great pains to explain that private sector
investment from independent power producers is no longer a problem. But contrary to claims, capacity addition slowed during
the nineties. The government decided to allow private sector participation in power generation in 1991, but the private
sector hasn't taken the bait.
In fact, the current power situation remains an embarrassment, despite the avowed goal of the 2003
Electricity Act to salvage the situation. There are various reasons for this. While the Act does talk of open access, markets
and competition, these conditions do not exist in practice. If an IPP can't sell its power, why would it set up a plant? Open
access in distribution, that is to supply power directly to the consumer, has been implemented in 18 states but only on
paper. The reason why it hasn't found currency is the fear that the customers will move away from existing utilities.
Even the issue of cross-subsidy (wherein industrial users pay the highest, followed by domestic users while
agricultural users pay the least - often nothing at all) is inadequately addressed. With most of the state electricity boards
in a financial mess, there's enough payment insecurity as well, scaring off private players.
One of Maharashtra's banes was providing free power to farmers, a key poll plank of the newly elected state
government. Sure enough, the ghost of such populism came back to haunt the state. So much so that the government was left
with no option but to go back on its promise and discontinue the supply of free power in a last-ditch effort to extricate
itself from the mess it had dug itself into.
The likely revival of the $2.9 billion, 2,184 MW Dahbol Power project, which was mired in controversy since
its inception and has remained shut since May 2001, might now rescue Maharashtra. While the Dabhol agreement was loaded
against consumers, the unilateral nullification of the agreement caused a lot of consternation among foreign investors. A
revival of the project now seems likely, with renewed interest from GE and Bechtel. While this is good news, the ground
reality, however, has not changed much. Maharashtra, for example, is still dithering in its efforts to reform the state
electricity board.
At present, India has no national grid as such. It is estimated that, for Rs700 billion, a national grid
would allow for an additional 30,000 MW of inter-regional power, alleviating local shortages in some areas. This will be
possible only with the participation of government and private players. However, the power ministry has yet to issue
guidelines for the entry of private firms in transmission. Clearly, a lot needs to be done before the 2003 Electricity Act is
able to translate its potential into reality.
