NATHAN INDIA | Value Chain Of Electricity

NATHAN INDIA | Value Chain Of Electricity

Solutions powered by an understanding of the economics of

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IAExecutive Summary

• Current Scenario: How the electricity sector has opened up in line with India’s liberalization process, how certain acts and regulations have helped a wider private participation

• However, competition still seems to be distant hope, thanks to government interventions and regulatory hurdles

• Things that need to be changed include the role of political economy in the sector, political expediency and monopolization by state monoliths

• Ways to facilitate the players include effective implementation of a National Competition Policy, regulatory freedom, competition toolkit

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NATH

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Development of the Electricity Sector in the Developed Economies

• Here we do a literature review of how recent years have seen a decline in the scope of regulatory regime across countries and how major industries have become a par of market discipline and have delivered significant benefits to consumers in terms of choice, competitive rates and satisfaction from their use.

• Review the natural monopoly argument in the electricity sector, suggest that deregulation is desirable

• We study development of the electricity sector in the developed world and its transition to the market economy including that in Europe, France, Germany, North America, Canada, Australia, China, Japan, Russia

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IACompetition in the electricity sector

• Uses of Electricity (Literature review)

• Introducing Competition in the Electricity Sector

– Power Suppliers• Innovation• Investment

– Consumers• Lower Prices• Choice of suppliers

– Others• Government• Environment Protection

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IAGovernment monopoly over coal

• Producing around 80 percent of India’s overall coal production, the monopoly in

coal is led by the state owned Coal India Ltd (CIL), gives preferential treatment

to public generating companies. Coal India under CCI scanner for abuse of

dominance

• Government’s initiative in the last 5-6 years to allocate coal blocks to private

players backfired as competition neutrality was ignored, resulted in a INR1.86

lakh crore scam dubbed ‘Coalgate’

• The federal auditor Comptroller and Auditor General (CAG), has recommended

a competitive bidding process.

• We also study the auction and non auction models of coal supply in US,

Australia, China, South Africa and Indonesia

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IAGovernment monopoly over coal (continues…)

Fallout of Coalgate

• Following the CAG report and its outburst the Government de-allocated 15 coal blocks

• Government periodically monitors and reviews the development of allocated blocks as well as end use plants by the allocatee companies

• An Inter-Ministerial Group (IMG) constituted on 21 June 2012 which would undertake periodic review and monitor the progress of allocated coal/lignite blocks and make recommendations on action to be taken including de-allocation, if required.

• CBI has registered three preliminary cases on allocation of coal blocks to private companies during the period 1993-2004 and 2006-2009

• Supreme Court has questioned the Centre’s power to allocate coal bocks under existing laws

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NATH

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IAElectricity Sector in India

Electric Power Supply Chain Process :

Statutory bodies involved in the electricity supply chain :

• Central Electricity Authority (CEA)• Central Electricity Regulatory Commission (CERC)• State Electricity Regulatory Commission (SERC)• Central Transmission Utility (CTU)• State Transmission Utility (STU)• National Load Despatch Centre (NLDC)• Regional Load Despatch Centres (RLDC)• State Load Despatch Centres (SLDC)

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Generation (Source: Coal , Gas,

Nuclear fuel or Water Storage)

Transmission through high voltage

lines

Distribution to

customers(subsidized sectors

and individual metered customers)

NATH

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Generation Segment

• Central Sector or Public Sector Undertakings (PSUs)

– National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC), etc

• State level corporations

– Maharashtra State Power Generation Company Ltd (MSPGCL), Gujarat State Electricity Corporation Limited (GSEC), etc.

• Private sector enterprises

– Reliance, Tata, Torrent, Adani et

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2006-07 2007-08 2008-09 2009-10 2010-110%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

13 14 15 18 22

34 34 33 3231

53 52 52 50 47

Sector wise ownership pattern of installed generation capacity from 2006-07 to 2010-11

Private Central State

Share

of

Insta

lled C

apaci

ty (

%)

55%

21%

11%

10%2%

1%

Sources of Electricity Generation in India

Coal Hydro Renewable Energy Resources Gas

Nuclear Diesel

Electricity Sector in India (continues..)

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Voltage levelCircuit Kilometers Targeted

(2007)Circuit Kilometers Achieved up to

March 2011

765 kV 2,773 1,636

± 500 kV HVDC

1,600 1,580

400 kV 40,000 26,856

220 kV 24,300 19,780

Total 68,673 49,852

Transmission Segment - Opened for private investments in 1998

• CTU nodal agency provideso Medium terms ( 3 months to 3 years) o Long terms (12 to 25 years)

• Power Grid Corporation of India Ltd. (PGCIL) plays the role of the CTU.• Sector is a natural monopoly as electricity passes through grids that are

less resistant• Dominated by the public sectorAdani and Lanco have big plans


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Distribution Segment

• SEBs own majority of the distribution segment in the electricity supply chain• 3 private sector companies operating in the distribution sector - distributing

electricity in Delhi only

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71%29%

Public Private

21%

21%

15%

5% 4%3%

2%Power Grid Corpn of India

Bangalore Electricity Supply

Dakshin Gujarat Vij

Maharashtra State Electricity Transmission Rajasthan Rajya Vidyut Prasaran Nigam Karnataka Power Transmission CorpWest Bengal State Electricity Transmission Co

12%

10%

7%B S E S Rajdhani Power

Tata Power Delhi Distribution

B S E S Yamuna Power

Market Share (Sales Revenue) of Top 10 Firms in Electricity Distribution

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Distribution Segment (Cont..)

• State promoted Discoms have been facing huge losses due to selling electricity below costs or giving them free to agriculture and rural sectors. Collectively, state Discoms have an outstanding loans of around INR80,000 crore according to Shunglu Committee.

• According to Mint report of 07 Jan 2013, the state government of Andhra Pradesh has estimated that the state needs INR 49,189 crore to supply around 1 trillion units in 2013-14 financial year. Of this INR 12,725 crore will have to be raised through consumers if tariff rates are not allowed to be raised.

• If the government wants more private players to be in the distribution it will have to allow them to fix their own or, at least, adhere to a more liberalized tariff regime.


Region 2009-10 (%) 2010-11 (%)

Eastern 33.94 38.24

North-Eastern 36.23 37.33

Northern 29.66 28.91

Southern 19.05 19.26

Western 28.02 24.44

National 26.58 26.15

AT&C Losses for 2009-10 and 2010 -11

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Year 2005-06 2006-07 2007-08 2008-09 2009-10

Andhra Pradesh Distribution Utilities 183 -90 57 152 35

Tamil Nadu State Electricity Board -968 -1826 -3693 -7785 -9578

Gujarat Distribution Utilities 58 90 38 32 65

Karnatka Distribution Utilities 198 -23 122 -1717 -258Madhya Pradesh Distribution Utilities

-741 -979 -1786 -2455 -3008

Punjab State Electricity Board 89 -1645 -1501 -933 -1151

Uttar Pradesh Distribution Utilities -2772 -3765 -4207 -4424 -4308

Rajasthan Distribution Utilities -30 -5 -1273 -2383 -4034

Haryana Distribution Utilities -266 -403 -815 -1372 -1663

Bihar State Electricity Board -169 -856 -851 -1102 -1496

Kerala State Electricity Board 183 233 157 -311 192

Jharkhand State Electricity Board -249 -545 -1214 -1000 -559Himachal Pradesh State Electricity Board

56 79 -48 52 -209

Uttrakhand Power Corporation Limited

-215 -209 -220 -355 -391


Profit/Loss before Prior Period Adjustment from 2005-06 to 2009-10

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2006-07 2007-08 2008-09 2009-10 2010-11

-35000

-30000

-25000

-20000

-15000

-10000

-5000

0

-17057 -15990

-24796

-30466 -29701

Aggregate Book Losses – All Utilities (Rs Crore)

INR

Cro

reElectricity Sector in India (continues..)

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• We have studied changes suggested through various electricity laws including Indian Electricity Act, 1910, Electricity Supply Act, 1948, Amendments to Electricity Supply Act, 1948, The Electricity Regulatory Commission Act, 1998, Electricity Act, 2003 (Act)

• The objective of the path breaking electricity Act was to promote competition, ensuring supply of electricity in all areas, rationalization of tariff, having transparent policies and creation of CERC

• The Act was supplemented by the National Electricity Policy (NEP) and National Tariff Policy (NTP).

• While all these moves aimed at removing regulatory hurdles and creating a smooth transition to a more competitive electricity sector much still require to be achieved. 15

History of regulation in the electricity sector

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The Toolkit Approach: We use CUTS Toolkit to analyze distortions

• Distorts level playing fields between competitors, eg in the name of creating public goods, pronounced through subsidies, procurement policies. Our analysis suggests that tariff rates between 2007-08 to 2011-12 have always been higher than the WPI

• Creates entry barrier, eg Coal sector a virtual monopoly of CIL. Then FDI in nuclear power not allowed, target of getting 20 GW of nuclear energy by 2020 remains a distant hope

• Limits free and fair market process such as auctioning, eg auctioning of natural resources, merchant power plants still not prevalent. In transmission private investments allowed through CERC

• Promotes monopolies and their abuse, eg CCI issued notices to CIL and subsidiaries for non transparent contract conditions

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Distortion effects of regulation on competition

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• How the electricity sector can benefit from NCP? The NCP will ensure transparency, accountability and take care of information asymmetry which currently persists

• NCP will help achieve level playing field in generation and transmission: An example of how this can be done is the case of Ispat Industries which was demanding open access in transmission from MSEDCL as allowed by Electricity Act 2003. MERC ruled in favour of Ispat in 2012

• Functional autonomy for independent operators: The functionaries having membership on the board of independent regulatory organizations CTUs and STUs will not be allowed having a say in generation and retail supply

• Restructuring of Electricity Boards: Unbundling in some states have not been effective due to lack of regulation, the NCP will ensure that

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Economic benefits of the national competition policy

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Data Analysis

Impact on Private Sectora) Unbundling of SEB’sb) Share of Private Sectorc) Entry of New Players

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Impact of regulation on competition in the electricity sector

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

5

10

15

20

25

30

35

40

45

46 6

15

32

18 18

11

3

9 86

11

5

25

9

33

41

1410

2 1

Number of Private Companies in Electricity Generation from 1991- 2012

Year

Num

ber

of

pri

vate

com

panie

s

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Data Analysis (Cont..)

Impact on Consumersa) Increase in generation capacities

• Open Access Implementation


2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2010-11*

2011-12*#

0.01.02.03.04.05.06.07.08.09.0

10.0

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

5.5 5.6 5.9 6.3 6.9 7.4 7.8 8.3 8.6 5.7 6.1

5.0 5.2 5.55.8 6.2 6.6 6.9 7.5

7.9

5.25.7

8.8%7.1% 7.3%

8.4%9.6% 9.8%

11.1%10.1%8.5%

8.8%7.3%

Power Supply Position from 2002-03 to 2011-12

Energy Shortage Energy Requirement Energy Availability Energy Shortage (%)

'100,0

00 M

illion

Unit

s

Energ

y S

hort

age (

%)

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StateApplication

sReceived

Capacity (MW)

ApprovedCapacity (MW)

CasesImplemente

d

Capacity Implemente

dAndhra Pradesh 9 130 2 44 2 44

Chattisgarh 14 333 6 66 5 53

Gujarat 15 871 15 871 15 871

Haryana 2 573 0 0 0 0Himachal Pradesh

3 32 0 0 0 0

Jharkhand 1 40 0 0 0 0

Kerala 1 30 1 30 0 0

Madhya Pradesh 29 56 29 56 29 56

Orissa 1 5 1 5 1 5

Punjab 2 21 2 21 2 21

Rajasthan 29 259 12 165 12 165

Tamil Nadu 12 1,764 0 0 0 0

Uttar Pradesh 5 46 5 46 5 46

West Bengal 4 86 3 36 0 0

Status of Open Access Applications in India

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Data Analysis (Cont..) Impact on Consumers

b) Rural Electrification• Pradhan Mantri Gramodyaya Yojna (PMGY)• Accelerated Rural Electrification Programme (AREP)• Rajiv Gandhi Grameen Vidyutikaran Yojna (RGGVY)• Rural Electrification under Minimum Needs

c) Electricity Tariff Rates

2007-08 2008-09 2009-10 2010-11 RE 2011-12 AP80

90

100

110

120

130

100106 109

117124

100 99 100 102 101

Comparison of (Overall) Average Electricity Tariff with Wholesale Price Index from2007-08 to 2011-12

Overall Average Electricity Tariff WPI-Electricity (industry)

Year

Tari

ff R

ate

s (

Pais

e /

Kw

h)

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Impact of Regulation on Private Players – Case Study

A. Tata Power

B. Reliance

C. Adani Power Ltd

D. Lanco Infratech Ltd

Issues faced by Private Players

i. Insufficient Availability of Coal

ii. Tariff Sustainability affects lumpy investments

iii. Infrastructure and logistical constraints

iv. Regulatory hurdles

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• Government Monopoly over Major Inputs – Coal

• Unbundling of process: Not Successful

• Retail Trade in Electricity: Open Access still a distant target

• Ensuring Financial Health- Poor Performance of State Electricity Boards

• The Problem of Subsidization

• Tariff Setting and Non Revision

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Issues and recommendations

Domestic Commercial Agri./irrig. Industrial Rly.tractn. Outside State Overall av-erage

0

100

200

300

400

500

600

700

24

2

49

4

78

41

6

43

7 48

4

30

6

25

3

51

0

95

43

3 48

1 54

8

32

6

27

6

52

6

10

1

45

0 49

8

39

2

33

3

30

0

56

0

12

3

47

8 52

4

43

8

35

7

32

0

58

1

15

3

49

7 53

9

45

2

38

0

Consumer Category-wise Tariff for Electricity (paise/kWh) from 2007-08 to 2011-12

2007-08 2008-09 2009-10 2010-11 R.E. 2011-12 A.P

Avera

ge T

ari

ff (

pais

e/k

wh

)

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Year

Subsidy to

Agricultural

Consumers

Subsidy to

Domestic Consume

rs

Subsidy on

Inter-state Sales

Gross Subsidy

Subvention

received from State

Net Subsidy

Surplus from Other

Sectors

Uncovered

Subsidy

2007-08 33,363 15,767 -1124 48,005 17032 30,973 8,962 22,011

2008-09 39,391 21,919 -1,529 59,781 23,049 36,731 -3,694 40,426

2009-10 44,738 23,744 1,333 69,815 24,453 45,361 -2,780 48,141

2010-11 R.E.

44,599 24,093 587 69,279 18,210 51,069 39 51,030

2011-12 AP

45,561 25,006 461 71,028 17,684 53,343 4,754 48,590

Subsidy to Agriculture and Domestic Sector & Uncovered Subsidy (INR crore)

Issues and recommendations

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Thank you

Nathan India is an economic consulting firm that specializes in survey design and research, market and business analytics and competition policy.

Nathan Economic Consulting India Private Limited

Chennai Office Delhi OfficeNew No.45, T.T.K. Road, G-C Ground Floor, Level 4,Rectangle 1,George Ponnaiya Building, Commercial Complex D-4,Chennai-600018, Tamil Nadu, India Saket, New Delhi-110017,India T: +91 44 4293 7700; F: +91 44 4293 7773 T: +91 11 4051 4051

E-mail: [email protected]

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NATHAN INDIA | Value Chain Of Electricity