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Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 1
CHAPTER I
INTRODUCTION
1.1 INTRODUCTION:
The research on the topic “Identifying the Role of Policies and Regulatory Framework
for Private Investment in Indian Thermal Power Sector” has been under taken in view of
the criticality of policies and regulations in the growth of Indian Power Sector. As per
Central Electricity Authority (CEA), Generation from Thermal Power Stations constitute
nearly 66% of the total installed capacity and contribute nearly 81% of the total power
generation in the country (Fig.1.30). This is natural for India as it has the world‟s third
largest reserve of coal. The current installed capacity of electricity generation in the
country is 2,29,251.74 MW (CEA, 2013) as on 31st Oct.2013 against only 1362 MW in
1947. But inspite of this, 25% of Indian population lacks basic access to electricity as per
a 2012 report by the International Energy Agency (IEA, 2013). The per capita
consumption of electricity is 917.8 units in 2012-13 compared to global average of 3500
units. The average and peak deficit of electricity is 8.7% and 9.0% during the year 2012-
13 (GOI, 2014). This is due to inefficiencies in generation, transmission & distribution
besides disruptions in fuel supply to power plants. There is a need to overcome these
shortages by increasing the generating capacity as well as other measures.
1.2 INDIAN POWER SECTOR GLIMPSES:
Power Sector in India is dominated by the government. As on 31.03.2013 (CEA, 2013)
total installed capacity is 2,29,251.74 MW. Out of this 1,56,468.99 MW is the thermal
generation capacity. The State and Central Government sectors account for 39.2% and
28.90% of the thermal generation capacity respectively while the private sector accounts
for about 31.81%. The bulk of the transmission and distribution functions are with State
utilities. The private sector has a small but growing presence in distribution and is
making an entry into transmission. Power Sector which had been funded mainly through
budgetary support and external borrowings was opened to private sector in 1991.
Electricity is considered key driver for targeted 8 to 10% economic growth of India. The
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 2
vast Indian power market, today offers one of the highest growth opportunities for private
developers.
All India electricity generation in the country during 2012-13 has been 911.65 BU
representing a growth rate of 3.96 % as compared to the generation of 877 BU during
2011-12. Coal/ Lignite based plants continued to have major contribution towards
electricity generation with a major share of 86.4% of the total thermal generation. Plant
load factor (PLF) of thermal power stations at the national level, during 2011-12, reduced
to 73.32% from 75.08% achieved during previous year. The Lower PLF was due to
increased generation loss due to coal supply problem and transmission constraints and
Reserve Shut down/Low system demand.
Plan wise growth of the generation capacity is shown in the figure 1.1 (CEA, 2012).
Figure 1.1 Plan-Wise growth in generation capacity
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 3
A comparison with the plan targets (Table 1.2) from the first to eleventh plan shows
repeated failures of meeting the targets due to number of factors including shortage of
funds.
Another important point of the Indian Power generation capacity is type of fuel used.
During the year 2011-12 the main fuel used is coal having an overall
66.72% share. Figure 1.2 shows the fuel wise generation (CEA, 2012):
Figure 1.2 Fuel Wise Generation (BU) in Year 2011-12 and their % Share in Overall
Generation
1.3 INDIAN POWER SECTOR REFORM STAGES:
The first instance of commercial generation of electricity in India dates back to 1879 in
Kolkata. In 1897, the government of Bengal granted an exclusive 21-year license to the
Calcutta Electricity Supply Corporation to supply electricity to Calcutta. Mumbai (then
Bombay) was the second city to get electricity and as time progressed, private companies
set up power supply systems in major urban areas under franchisees which allowed them
a reasonable rate of return. The demand for electricity during this phase was driven by
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 4
demand from industries, commercial enterprises including tramways and also domestic
use. Most of the earlier private companies in the power sector cease to exist today as they
were amalgamated into state owned enterprises. However a few of them continue to exist
as private players.
The Electricity Act 1910 was the first act in the power industry, which was introduced
before independence in 1910. The Act provided the basic framework for supply of
electricity in India. The sector was at a nascent stage during this time and there was a
huge investment requirement for laying down basic infrastructure. The Act encouraged
the growth of the industry by issuing licenses to private companies. During this phase,
electricity generation was mainly in the private sector and power generation was largely
based on coal and hydropower.
1.4 HIGHLIGHTS OF ELECTRICITY ACT 1910:
Electricity supply structure was set up.
Electricity industry growth through private licensees was permitted
Licenses were issued by state governments for supply of electricity in a specified
area.
Fair relationship between licensee and consumers was ensured.
1.5 POST-INDEPENDENCE ERA (1947-1990):
At the time of independence, electricity generation and supply was concentrated in the
hands of private electricity supplier and largely in urban areas. Electricity supply was a
must across the country to promote overall growth and development and therefore the
Electricity (Supply) Act 1948 which was based on the UK Electricity Supply Act 1926
was introduced. Under this Act, the Central Electricity Authority (CEA) was established
at the central level and the State Electricity Boards (SEBs) at the state level. The
objective of the CEA was to develop a sound adequate and uniform national power policy
to coordinate development of the power sector in India.
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 5
SEBs became integrated utilities with presence in generation, transmission, and
distribution in their respective states. During this period, the development and planning
was done by the SEBs at the state level while the CEA was responsible for planning at
the national level and it provided the SEBs with broad guidance, planning, and
development. The Act also elaborated the financing norms and institutional framework
for the electricity industry in India.
1.6 HIGHLIGHTS OF ELECTRICITY ACT 1948:
1. Creation of State Electricity Boards was made mandatory for arranging supply of
electricity supply in the states.
2. Electrification of cities was planned to be extended through SEBs.
The SEBs took over the private companies in their respective states and the newly created
State Electricity Boards were interconnected to enhance system reliability and to ensure
wider geographical coverage. The electricity sector moved into the public sector domain
from the private hands and over the years, the public sector gained prominence in the
power sector.
In the initial period, the SEBs‟ performance was satisfactory and they played a vital role
in the development of the sector. According to the Electricity (Supply) Act 1948, the
SEBs were required to generate a minimum return of 3% on their net fixed assets in
service after meeting the financial charges and depreciation. The SEBs were able to
generate the minimum returns for many years, but, later on their performance faltered and
they had to seek financial aid from the state in the form of grants, subsidies, soft loans,
etc. The early seventies were marked by incidents of power blackouts and grid collapses.
Hydropower generation suffered especially, as availability of water resources was heavily
dependent on the monsoon season. Moreover, there were delays in civil works, supply of
power plant equipment and the infrastructure additions in terms of transmission and
distribution were also not adequate. In its attempt to assist the states, the Central
Government established a few companies that could cater to more than one state.
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 6
The Central Government amended the Electricity (Supply) Act 1948 and established the
National Hydropower Corporation (NHPC) in 1975 to build hydropower plants and the
National Thermal Power Corporation (NTPC) to set up coal-based power plants to
supplement the generation capacities of the SEBs and private companies.
NTPC built its own transmission network to transmit electricity to different SEBs. In
1981, the government decided to integrate operations of the central and state transmission
systems to form a national power grid to facilitate transmission of power generated by
non-SEB generators; these efforts led to the incorporation of the National Power
Transmission Corporation in 1981. Initially the company was engaged in managing the
transmission assets of the central generating companies i.e. NTPC, NHPC and North-
Eastern Electric Power Corporation; but in 1992, this entity was renamed as
POWERGRID Corporation of India Ltd and all the transmission assets of the three above
mentioned generating companies were transferred to it under an ordinance. Furthermore
the government set up the Power Finance Corporation (PFC) in 1986 as a financial
institution dedicated to power sector financing to supplement planned expenditure on
power plants, specifically new power plants.
Although the SEBs aided the growth in Indian electricity sector yet by the end of the
phase under review, they themselves suffered huge financial and technical losses due to
poor revenue collection and billing, poor metering & energy accounting, electricity theft,
cross subsidies and staff‟s inefficiencies. As a result of these losses, they provided poor
electricity service to end consumers because the state-owned corporation power plants
were running at low Plant Load Factor (PLF) and the SEBs did not have enough funds for
renovation and modernisation of their plants (Table 1.3).The demand-supply gap was
increasing and many states were facing electricity crisis. These circumstances forced the
government to restructure the sector in a phased manner and this paved way for
electricity reforms in 1991.
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 7
1.7 POST–REFORM PHASE (AFTER 1991):
The deteriorating health of the SEBs made it impossible for them to infuse fresh
investments into the sector. Moreover, the country was facing a macroeconomic financial
crisis that made it difficult for the governments, both the Central and State, to fund power
projects through budgetary support. Due to these events, the government decided to
restructure the power sector in a phased manner in 1991. Consequently it opened up the
power sector and invited foreign private companies to provide fund and technology into
Indian power sector. The post-reform phase can be divided into following phases:
1991: Independent Power Plant Process wherein the Electricity Act 1948 was amended
and the power generation was opened for the private sector.
1995: Mega Power Policy was announced. Capacity addition in power generation through
setting up Mega Power Plants and Competitive Bidding was announced.
1998: Electricity Regulatory Commission Act was implemented. State Electricity
Regulatory Commissions and Central Electricity Commission were set up.
2003: Electricity Act 2003 was enacted by replacing existing Acts. This Act contained
law relating to generation, transmission, distribution, trading and use of electricity.
Liberal framework for development of power sector was created.
1.8 INDEPENDENT POWER PRODUCERS (IPP):
Investment was a must in the power sector to enable it to produce electricity in line with
the expected economic growth. The government liberalized the sector and opened it for
foreign and private investments to increase the availability of funds for the power sector.
For allowing independent power producers to operate in the sector, the government made
an amendment to the Electricity Act 1910 and the Electricity (Supply) Act 1948 through
the Electricity Laws (Amendment) Act of 1991. The amendment allowed private
participation in thermal, hydro, wind, solar power projects and also allowed them to
operate as IPPs. Foreign ownership up to 100% was allowed. IPPs were to operate on the
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 8
costs plus model wherein the tariff was determined by the Central Government and the
IPPs were guaranteed a 16% post-tax return on equity besides full repatriation of profits.
The operators and the SEBs entered into power purchase agreements (PPAs) as the SEBs
were responsible for transmission and distribution of power generated by private players.
Around 189 projects with an expected capacity of 75 GW were proposed. However only
a few of these projects cleared the approval process and had Memoranda of
Understanding (MoUs) and Letters of Intent. The rest were either stalled in the approval
process or did not reach financial closure. The Government also put on fast track 8
projects with offers of counter guarantees.
1.9 INTRODUCTION OF MEGA POWER POLICY 1995:
In 1995, the Government introduced the Mega Power Policy to increase private
investments in over 1,000 MW capacity generation projects that would supply electricity
to more than one state and hence the name Mega Power Projects. The projects were to be
awarded on the basis of competitive bidding and the CEA, POWERGRID and NTPC
were to provide support to these projects. The CEA was to provide assistance in
identifying potential sites for setting up the plants while POWERGRID and NTPC were
to provide assistance for transmission of power and preparation of feasibility report
respectively.
The main objective of reforms was to ensure reliable and quality power supply at an
economic cost. It was essential to ensure that the sector was financially viable and
attractive enough for private investors to put in their money. The SEBs were integrated
utilities with presence in generation, transmission and distribution in their respective
states. The SEBs were under huge losses and it was perceived that unbundling the SEBs
and segregating generation, transmission and distribution into different corporations
could make it possible to monitor efficiency levels in each of the areas. Many states
initiated the restructuring process. Orissa was the first state to undertake restructuring of
the power sector in 1996. The results were, however, not significant as the losses (theft,
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 9
technological and financial) did not come down. The SEB was unbundled and new
entities were privatized. Orissa State Regulatory Commission was set up and tariff got
rationalized to get benefit for suppliers.
The first phase of the reform failed as the objective of attracting private players did not
achieve the desired results. Private players did not enter the sector, as the SEBs, who
were to transmit and distribute the power generated by the private players, were still
running in losses. Private players were uncertain about their returns due to poor financial
health of the SEBs. The power plants continued to work at low PLF. The experiences of
the first phase were not great and the Enron debacle is an example of the same. The
earliest effort on PPP in the Power Sector can be traced down to Dabhol Power Project in
Maharashtra (GOI, 2009). The project did not succeed. The Dabhol Power Plant was
initiated in 1992 and took nine years to commence operation. The total project cost was
$2.9 billion for 2,184 MW of power. Enron along with other American corporations
owned 85% and the Maharashtra State Electricity Board (MSEB) owned remaining 15%.
The Plant closed in June 2001, due to payment and contract dispute between the
Maharashtra state government and the Plant owners. The reasons were:
Viability of the project - as per World Bank letter to Ministry of Finance (MoF), GoI
“proposed plant would produce too much power at too high a price for the State”.
Further, fuel supply was liquid natural gas which was much costlier than coal.
Fuel supply drain on exchequer - As per GoI, the plant‟s annual import of 3 million tons
of gas would drain at least US$ 250 million from India‟s foreign exchange reserves.
Currency risk on MSEB for fuel supply import.
Environmental concerns of the Dabhol project: The key overall issue was that PPP
project risks were not properly assessed, and equitably allocated between MSEB and
Dabhol. Further project feasibility was not done to verify whether the project would
independently run without the necessary Central and State guarantees.
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 10
1.10 SECOND PHASE (STARTED IN 1996):
The 1995 Mega Power Policy did not propose any fiscal concession and hence the
revised Mega Power Policy 1998 was announced. The Power Trading Corporation (PTC)
was also set up after this revision to purchase power from identified projects for selling to
SEBs. Establishing regulatory commissions and privatising electricity distribution in
cities (with population of more than 1 mn) were the pre-conditions included in the revised
policy.
In December 1996, the Common Minimum National Action Programme (CMNAP) was
structured in consultation with the state governments and guidelines were established to
hasten the sector‟s progress. In addition to envisaging setting up of regulatory
commissions, the CMNAP reiterated the need for rationalisation of tariff and that no
sector was to pay less than 50% of the average cost of supply. Tariff for agriculture sector
was to be not less than 50 paise per unit and the tariff was brought to 50% of the average
cost of supply within 3 years.100 % metering and energy auditing was planned.
During this phase the sector‟s performance improved as compared to the first phase as the
PLF reached around 70%. However commercial losses continued to pose a major hurdle
in the sector‟s development. During this period private sector investments were already
being made for capacity addition in generation but the need was felt for private
participation in transmission as well and consequently the Electricity Laws (Amendment)
Act was passed in 1998 to enable private participation in the power transmission sector.
The central transmission utility (CTU) and the state transmission utility (STU) were set
up under this Act. The maintenance and construction activity of transmission network
was supervised by CTU at the inter-state level and by the state transmission utility (STU)
at the intra-state level. These utilities also recommended regulatory commissions on
allotment of licenses to different players.
The CERC issued the first Indian Electricity Grid Code (IEGC) in January 2000 to ensure
grid discipline and to set operation and governance parameters for players in the
transmission and distribution (T&D) sectors.
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 11
1.11 THIRD PHASE (2003 ONWARDS):
The Electricity Act 2003 sought to create a liberal framework which came into effect
from June 10, 2003. This Act replaced the earlier laws and acts governing Indian power
sector, namely, Indian Electricity Act 1910, the Electricity (Supply) Act 1948 and the
Electricity Regulatory Commissions Act 1998. The bill sought to provide a legal
framework enabling reforms and restructuring the power sector.
1.12 ELECTRICITY ACT 2003:
Electricity Act 2003 was enacted for development of the power industry, promoting
competition, protecting interests of consumers and supply of electricity to all areas,
rationalisation of electricity tariff and ensuring transparent policies and promotion of
efficiency, among others. The Act came out with the National Electricity Policy,
mandatory creation of SERCs, emphasis on rural electrification, open access in
transmission and distribution and some other provisions. It mandated the regulatory
commissions to regulate the tariff and issues of license. This Act focused on laws relating
to generation, transmission, distribution, trading, and uses of electricity. The Act was
amended on May 28, 2007 and the Electricity Act 2003 was enacted with greater
emphasis on assessment, fines and legal framework to check the commercial losses due
to theft and unauthorized use of electricity.
The Electricity Act, 2003 also provides for mechanisms like “Coordination forum” and
“Advisory Committees” to facilitate consultative process. The Act also requires the
Regulatory Commissions to ensure transparency in exercise of their powers and in
discharge of their functions. This in no way means that the Regulatory Commissions
should follow formal judicial approach. In fact, quick disposal of matters would require
an approach involving consultations with stakeholders.
Under the Act, the Regulatory Commissions are required to perform wide-ranging
responsibilities. The appropriate Governments need to take steps to attract regulatory
personnel with required background. The appropriate Governments should provide
financial autonomy to the Regulatory Commissions. The Act provides that the
appropriate Government shall constitute a Fund under section 99 or section 103 of the
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 12
Act, as the case may be, to be called Regulatory Commission Fund. The State
Governments were advised to establish this Fund expeditiously.
1.13 Generation:
The generation segment was opened for private players in 1991. However, even over the
years, the generation capacity from private players did not reach the desired level. In
2002 only 11% of generation capacity was from private players and the public sector
generator‟s capacity was not enough to meet the growing demand of electricity. The
government introduced certain policy measures in generation in the Electricity Act 2003
to ensure more private participation and to reduce the demand-supply gap. Generation of
power was de-licensed and the requirement of techno-economic clearance for thermal
power generating plants by CEA was dispensed with, which paved the way for entry of
more players in thermal generation. By these interventions the private sector in thermal
power generation had increased to 26.51% as on Jan. 2013.State power sector plants were
having the lowest Plant Load Factor (Table 1.3) compare to Central and private sector.
Growth rate of electricity sector has been better than mining and manufacturing sector.
(Table 1.5)
The Act also removed restrictions on captive power generation and simplified the
procedures. Open access was allowed immediately in transmission, which gave right to
private power producers or any other generating utility to sell its power to any entity
using transmission network (without any discrimination). Due to these changes,
industries could set up captive power generation units and the right to open access
allowed them to sell electricity to any consumer using the transmission network. Captive
units could thus sell their surplus power to the customers of their choice.
1.14 Transmission:
The Electricity Act 2003 introduced a non-discriminatory open access in the transmission
segment, which enabled the generators to sell power to any customer and gave the buyer
the option to choose the generator using the transmission network. The transmission
utility was not allowed to refuse use of its transmission network except in instances of
capacity limitation. At the national level, Power Grid could provide open access and at
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 13
the state level, the state transmission utilities could provide open access. The open access
customers are categorized as short-term customers (up to one year) and long-term
customers (for 5 years). The opening up of the transmission network is likely to induce
competition among generators as well as buyers.
1.15 Distribution:
The distribution segment was not given more consideration in the earlier regulations,
which lay more emphasis on the power generation segment instead. It was considered
that by increasing power generation, the demand for power could be met to some extent,
but the industry suffered huge losses (T&D and financial) on the distribution side. SEBs
involved in power distribution segment were in bad financial shape which made it
difficult for them to pay the generator for the electricity supply. As per report of Power
Finance Corporation on performance of Power Utilities (GOI, 2013), India is having
Transmission & Distribution losses (T & D) of three times than the world average. Figure
1.3 shows the T & D losses of India vs other countries (CEA, 2012).
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 14
Figure 1.3 T & D loss – world scenario
25.39%
16.44%
13.47%
7.65%
7.37%
6.68%
5.58%
9.17%
0% 5% 10% 15% 20% 25% 30%
India
Brazil
Russia
UK
Australia
USA
China
World Avg
*Source: CEA Report - Growth of Electricity sector in India from 1947-
2012
The risk of defaults from the SEBs worried generators and hindered new players from
entering the industry. The Electricity Act 2003 came up with measures that could
improve the performance of the distribution sector on almost all fronts.
The concept of distribution franchisees was introduced under the Electricity Act 2003,
under which a distribution licensee could distribute electricity through another player
within the distribution area. The Bhiwandi circle (near Mumbai) reported the first
instance of distribution franchise that was granted to Torrent Power by Mahavitaran
(distribution license in Maharashtra).
The anti-theft provisions under the Act lowered the commercial losses of some utilities as
electricity losses arising from theft were decreased. But average losses were still higher
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 15
than the world average (Fig. 1.4). As per Power Finance Corporation report, the losses of
different states for the year 2010-11 is given below showing thereby the range of losses
from 15.725 to 72.86 % (CEA, 2012).
Figure 1.4 AT & C loss % - indian states
72.86%
61.45%
47.44%
40.29%
37.28%
28.48%
28.02%
27.40%
23.30%
19.90%
17.50%
17.47%
16.89%
15.76%
15.72%
26.15%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Jammu & Kashmir
Arunachal Pradesh
Bihar
Uttar Pradesh
Madhya Pradesh
Uttarakhand
Haryana
West Bengal
Maharashtra
Tamilnadu
Andhra Pradesh
Punjab
Gujarat
Delhi
Himachal Pradesh
All India
Sta
te
*Source: PFC Report - Performance of State Power Utilities for
FY2008-09 to FY2010-11
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 16
There is a loss of Rs 0.77 per KWH due to difference between average cost of supply
and revenue realised as shown in figure 1.5 (CEA, 2012). Against the cost of supply of
Rs 3.54, the revenue realised is Rs 2.68.
Figure 1.5 Cost of supply vs revenue realised
2.542.60
2.76
2.93
3.41
3.54
2.09 2.212.27
2.39
2.622.68
2.00
2.20
2.40
2.60
2.80
3.00
3.20
3.40
3.60
3.80
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Rs/k
Wh
Year
Average Cost of Supply(Rs/kWh)
Average Revenue Realised(Rs/kWh)
*Source: CEA
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 17
In the distribution segment, open access was introduced, which opened up a new era of
choice for consumers to choose their supplier. Many SERCs like Jharkhand, Madhya
Pradesh, and Punjab have issued guidelines for open access and allowed it up to 1 MW
capacity and above.
In order to overcome the problem of the very low level of investment in distribution
sector resulting into ageing assets, National Electricity Fund (Interest Subsidy Scheme)
was set up on 5th
July 2012 to provide interest subsidy aggregating to Rs 8,466 Crores for
a period of 14 years on loans disbursed to the Distribution Companies (DISCOMS) –
both in public and private sector for improving the distribution network. Rural
Electrification Corporation (REC), is the Nodal Agency for implementing the same with
following features:
The amount of interest subsidy is linked to the progress achieved in reforms linked
parameters which are operationalisation of State Electricity Regulatory Commission
(SERC), formulation of business plan for turnaround of utilities in a time bound manner,
reorganization of State Electricity Boards (SEB), release of subsidy, submission of
audited annual accounts and timely filing of tariff petition.
Each power utility eligible for subsidy on interest would be assigned marks based on
reforms measures i.e. reduction in AT&C losses; reduction in gap (Average Cost of
Supply (ACS) - Average revenue on subsidy received basis); return on equity and
multiyear tariff (MYT).
Based on the consolidated score achieved on these parameters, the utilities would be
categorized and eligible for interest subsidy ranging from 3% to 5% in states other than
special category and focused states and 5% to 7% in special category and focused states.
1.16 ENERGY CONSERVATION ACT 2001:
The Act was formed by Indian government to facilitate stringent steps to ensure the
efficient use of energy and its conservation. Even the Bureau of Energy Efficiency has
been set up to monitor and regulate the Power Industry according to the provisions of the
act.
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 18
1.17 FDI POLICY AND PROMOTION:
Foreign Direct Investment (FDI) up to 100% is permitted under the automatic route for
Generation and Transmission of electric energy produced in hydro electric, coal/lignite-
based thermal, oil & gas based thermal power plants, non-conventional energy generation
and distribution. The power sector received FDI worth USD 6,545 million between April
2000 and July 2011, which was 5% of the total FDI inflows achieved, according to the
Department of Industrial Policy and Promotion, which formulates the country‟s FDI
policy and is part of the Ministry of Commerce and Industry. An income tax holiday for
10 years in the first 15 years of operation and waiver of capital goods‟ import duties on
mega power projects above 1,000 MW generation capacity, is provided as incentive for
investing in the sector.
Power procurement is permitted through a transparent bidding process. There is no
customs duty on the import of capital goods for mega power projects. The state electricity
boards (SEBs) generate, transmit and distribute electricity in coordination with
private/Centrally-owned generating companies or other relevant agencies.
Under the Power Sector‟s investment policy, 49 % FDI & FII is permissible for Power
Exchanges (GOI, 2013). FDI investment will be subject to the government approval.
Other conditions:
(i) Such foreign investment would be subject to an FDI limit of 26% and an FII limit of 23%
of the paid-up capital.
(ii) FII investments would be permitted under the automatic route and FDI would be
permitted under the government approval route.
(iii) FII purchases shall be restricted to secondary market only.
(iv) Non-resident investor/entity, including persons acting in concert, will not bold more than
5% of the equity in these companies.
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 19
(v) The foreign investment would be in compliance with SEBI Regulations, other applicable
laws/regulations; security and other conditions.
As per World Bank report the financing requirement for the power sector globally for the
period 1990-2020 is of US $ 2300 in case of high investment demand scenario and US $
1900 in case of low investment demand scenario (figure 1.6) (IEA, 2004).
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
$2,300 Bn
$1,900 Bn
High Investment Demand
Scenario (3%)
Low Investment
Demand Scenario (2%)
Historic Future
Private Capital Mobilized in Power Sector
Gap covered by public financing,
self -financing, donor funding,
and rationing.
Tota
l P
ow
er I
nvestm
en
t ($
Bil
lion
)
Cumulative
Sum ($Bn)
Source: : World Bank, IEA, Deloitte Touche
Tohmatsu Emerging Markets Group
Financing required for the Power Sector in Emerging Markets 1990 - 2020
Figure 1.6 Global investment requirements - a large Growing Gap between demand and supply
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 20
1.18 STRUCTURE OF INDIAN POWER SECTOR:
The institutional structure of the Indian Power Sector Figure 1.7 (iea, 2012) shows the
various institutions for policy formulation, regulatory affairs, generation, transmission and
distribution of electricity.
Figure 1.7 Structural framework of Indian Power Sector
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 21
Electricity is a concurrent subject at Entry 38 in List III of the seventh Schedule of the
Constitution of India. The Ministry of Power is primarily responsible for the development of
electrical energy in the country. The Ministry is concerned with perspective planning, policy
formulation, processing of projects for investment decision, monitoring of the
implementation of power projects, training and manpower development (GOI, 2002). It is
also responsible for administration and enactment of legislation in regard to thermal, hydro
power generation, transmission and distribution. The Ministry of Power is responsible for
the Administration of the Electricity Act 2003 and to undertake such amendments to Acts as
may be necessary from time to time, in conformity with the Government's policy objectives.
Electricity Act 2003 has brought sweeping changes in terms of governance of the power
sector in India. Electricity Act 2003 provides an enabling framework for accelerated and
more efficient development of the power sector but the same needs to be implemented in
letter and spirit. (GOI, 2004). CEA is responsible for National Electricity plan, monitoring
of projects, maintaining data and statistics, demand forecast, advising MoP on various issues
of Power Sector, etc.
Northern regional Load Despatch Centre (NRLDC), Regional Load Despatch Center
(RLDC) and State Load Despatch Centers (SLDC) are responsible for operation of power
system, monitoring of system parameters and system security. Central Electricity Regulatory
Commission (CERC) and State Regulatory Commissions (SERCs) have been set up to
implement the various regulations and fixing of tariff on annual basis. Central Transmission
Utility (CTU) i.e. Power Grid Corporation of India and State Transmission Utilities function
is to facilitate transfer of Power intra state and within the state respectively. Power
Exchanges have been set up to facilitate trading in electricity. Appellate tribunals have also
been set up to resolve the disputes among generators, discoms, regulatory authorities and
consumers CEA is responsible for National Electricity plan, monitoring of projects,
maintaining data and statistics, demand forecast, advising MoP on various issues of Power
Sector, etc.
1.19 PER CAPITA CONSUMPTION OF ELECTRICITY
Per Capita consumption of electricity indicates the prosperity of the people. In this
regard figure 1.8 shows the state wise per capita consumption of electricity (GOI, 2014).This
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 22
figure shows the least per capita consumption for the state of Bihar followed by Manipur,
Assam, Tripura and Uttar Pardesh.
Figure 1.8 Per Capita Consumption (kWh) across states / U.T. for 2011-12
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 23
Figure 1.9 shows that the highest per capita consumption is in Western Region. It is 36 % higher
that the All India average. (GOI, 2014)
Figure 1.9 Per Capita Consumption of Electricity (kWh) across Regions for 2011-12
1.20 OVERVIEW OF THE THESIS:
The thesis titled “Identifying the Role of Policies and Regulatory Framework for Private
Investment in Indian Thermal Power Sector” concerns with the identification of the enabling
factors for attracting private investment in the development of the thermal power generation
capacity so as to mitigate the shortage of electricity in the country. As per 12th Five Year
Plan documents prepared by the Planning Commission, an amount of Rs.
15,01,666 crore (at current price level) has been projected for Electricity Generation from
conventional sources. In view of this, there is a need to attract private investors by
implementing the spirit of the Electricity Act 2003. There are provisions in the Act for open
access, power trading, multiyear tariff, stringent anti theft measures, etc. but the same could
not be implemented effectively. All this is adversely affecting the investor confidence. This
Identifying the Role of Policies and Regulatory Framework for Private Investment in Thermal Power Sector 24
requires plugging of the policy and regulatory gaps.
As per National Electricity Plan, role of private participation in generation, transmission
and distribution would become increasingly critical in view of the rapidly growing
investment needs of the sector. The Central Government and the State Governments need
to develop workable and successful models for public private partnership. This would also
enable leveraging private investment with the public sector finances. Mechanisms for
continuous dialogue with industry for streamlining procedures for encouraging private
participation in power sector need to be put in place. A study of the five years plans (Table
1.2) starting from the first to eleven shows that there has been repeated failures of the
targets achieved due to various factors including non availability of funds. The existing
regulations are derivative of what is being practiced in the developed countries whereas
our challenges are different due to socio economic factors. Therefore, there is a need to
fine tune these regulations from time to time based upon experiences and learning. The
changing aspirations of public as well as industry needs to be taken into consideration
while designing policies and regulations with focus on results achieved in a time bound
manner.
In view of above, this research is need of the hour so as to remove policy and regulatory
bottlenecks for the accelerated growth of thermal power generating capacity.