Power generation in India

 

 

   1. What is the total power generated in the country?

   2. What are the laws governing centre-state relations on electricity distribution?

   3. How are the quotas determined given that some states are power deficit?

   4. Is there a formula and is that different from actual implementation?

 

 

 

Requested By- A senior LS BJP MP from Gujarat

 

 

DUE DATE: March 15, 2008

 

Response

 

 

 

BACKGROUND

 

The exploitable energy resources in our country are unevenly distributed, like Coal resources are abundant in Bihar/Jharkhand, Orissa, West Bengal and Hydro Resources are mainly concentrated in Northern and North-Eastern Regions. As a result, some regions do not have adequate natural resources for setting power plants to meet their future requirements whereas others have abundant natural resources. Demand for power continues to grow unabated. This calls for optimal utilization of generating resources for sustainable development. Thus, formation of National Power Grid is an effective tool to achieve this as various countries have adopted the model of interconnecting power grid not only at national level but also at international level.The peculiar features of electricity causes complications in otherwise straight-forward economic theory of natural resources and in drawing up a policy to govern the sector.

 

•         For all practical purposes, electricity ‘cannot’ be stored economically except to a limited extent through pumped storage and compressed air storage.

 

•         Hence, continuous supply-demand matching is required. If supply falls short of demand,the frequency falls below the value for which generating and utilisation equipmentis designed. And, if supply exceeds demand, frequency rises above thefrequency that is healthy for generating and utilisation equipment.

 

•         Demand varies hourly, daily and seasonally with the peaks in demand being well above the ‘average’ demand.

 

•         Electricity has become so essential that demand is relatively price-inelastic.

 

•         Electricity is very easy to control in the sense that a supplier can easily turn the supply on or off.

 

INDIA'S CURRENT ELECTRICITY GENERATION CAPACITY

 

 

Total Installed Capacity:

Sector   MW   %age   State Sector   74,453.76   52.5   Central Sector   47,350.99   34.0   Private Sector   19,275.09   13.5   Total   1,41,079.84

Fuel	MW	%age
Total Thermal	90,895.84	64.6
Coal	75,002.38	53.3
Gas	14,691.71	10.5
Oil	1,201.75	0.9
Hydro	35,208.76	24.7
Nuclear	4,120.00	2.9
Renewable	10,855.24	7.7
Total	1,41,079.84

 

 

 

 

GOVERNANCE ELECTRICITY GENERATION AND TRANSMISSION

The Indian Constitution lists electricity as a concurrent subject, meaning that central and state governments share jurisdiction in the sector. While the central government is principally responsible for laws governing the sector, state governments are the main implementers. Consequently, electricity institutions exist at both state and central levels. Some were created by the Electricity (Supply) Act of 1948, such as the SEBs and the Central Electricity Authority (CEA), while others were added in later years. The SEBs are the main actors in the sector, accounting for the majority of generation and virtually all transmission and distribution. The CEA creates national-level supply and demand forecasts, and evaluates proposed power projects. The central government created the National Thermal Power Corporation (NTPC) and National Hydro Power Corporation (NHPC) in 1975 to provide additional generation, and became involved in transmission by forming Powergrid India in 1989. The ministries of power at both the state and central level formulate policy, and as the history below illustrates, the involvement of state governments has increased greatly over the years. The other significant actors in the electricity industry are the regulatory commissions at the central and state levels, which were formed starting in the late 1990s. The mandate of the state commissions is broadening with time, but their most important duty is setting tariffs for both public utilities and private companies.

Central Power Sector Corporations

The construction and operation of generation and transmission projects in the Central Sector are entrusted to Central Sector Power Corporations,  

 

·         National Thermal Power Corporation (NTPC)

 

·         National Hydro Electric Power Corporation (NHPC),

 

·         North Eastern Electric Power Corporation and the

 

·         Power Grid Corporation of India Limited (PGCIL).

 

The Power Grid is responsible for all the existing and future transmission projects in the Central Sector and also for the formation of the National Power Grid. Two Joint Venture Power Corporations namely, Nathpa Jhakri Power Corporation (NJPC) and Tehri Hydro Development Corporation (THDC) are responsible for the execution of the Nathpa Jhakri Power Project in Himachal Pradesh and projects of the Tehri Hydro Power Complex in Uttaranchal respectively. 

 

Further, the autonomous bodies (societies) i.e. Central Power Research Institute (CPRI), the National Power Training Institute (NPTI) and the Bereau of Energy Efficiency (BEE) are also under the administrative control of the Ministry of Power. A Power Trading Corporation (PTC) has also been set up in April, 1999 to catalyse development of mega power projects and to promote exchange of power with neighbouring countries.

 

Regional Grid System of Transmission

It is a bulk transfer of power over a long distance at high voltage generally 132 KV and above. The entire country has been divided into five regions for transmission systems, namely 1) Northern Region 2) North eastern region 3) Eastern region 4) Southern region and 5) Western Region. The interconnected transmission system within each region is called regional grid system.

 

 

 

 

HISTORICAL BACKGROUND OF LEGISLATIVE INITIATIVES

 

The Indian Electricity Act, 1910

•         Provided basic framework for electric supply industry in India.

 

•         Growth of the sector through licensees. Licence by State Govt.

 

•         Provision for licence for supply of electricity in a specified area.

 

•         Legal framework for laying down of wires and other works.

 

•         Provisions laying down relationship between licensee and consumer.

 

The Electricity (Supply) Act, 1948

•         Mandated creation of SEBs (State Electricity Boards)

 

•         Need for the State to step in (through SEBs) to extend electrification

 

•         (so far limited to cities) across the country. 

 

 

Main amendments to the Indian Electricity Supply Act

•         Amendment in 1975 to enable generation in Central sector.

 

•         Amendment to bring in commercial viability in the functioning of SEBs – Section 59 amended to make the earning of a minimum return

 

•         of 3% on fixed assets a statutory requirement (w.e.f 1.4.1985) .

 

•         Amendment in 1991 to open generation to private sector andestablishment of RLDCs. (Regional Load Despatch Centre)

 

•         Amendment in 1998 to provide for private sector participation in transmission, and also provision relating to Transmission Utilities.

 

 The Electricity Regulatory Commission Act, 1998

•         Provision for setting up of Central / State Electricity Regulatory Commission with powers to determine tariffs.

 

•         Constitution of SERC optional for States.

 

•         Distancing of Government from tariff determination.

 

ELECTRICITY ACT, 2003

This Act has repealed above three Acts namely (i) The Indian Electricity Act, 1910 (ii) The Electricity (Supply) Act, 1948 and (iii) The Electricity Regulatory Commission Act, 1998. 

 

•         No licence is required for Generation and captive generation has been freely permitted. Hydro projects exceeding the capital cost notified by Central Government however, need concurrence of the Central Electricity Authority.

 

•         No license required for generation and distribution in notified rural areas.

 

•         Transmission Utility at the Central as well as State level, to be a Government company – with responsibility for planned and coordinated development of transmission network. Provision for private licensees in transmission.

 

•         Trading, a distinct activity recognised with the safeguard of the Regulatory Commissions being authorised to fix ceilings on trading margins, if necessary.

 

•         Open access in distribution with provision for surcharge for taking care of current level of cross subsidy with the surcharge being gradually phased out.

 

•         Distribution licensees would be free to undertake generation and trading.

 

•         The State Governments are required to re-organise the SEBs. However, they may continue the SEB as State Transmission Utilities and licensees for such time the State and Central Government agree.

 

•         Setting up of the State Electricity Regulatory Commission made mandatory.

 

•         An Appellate Tribunal to hear appeals against the decision of the CERC and SERCs.

 

•         Metering of all electricity supplied made mandatory.  

 

•         Provisions relating to theft of electricity made more stringent.

 

•         For rural and remote areas stand alone systems for generation and distribution permitted.

 

•         Thrust to complete rural electrification and provide for management of rural distribution by panchayats, cooperative societies, non-government organizations, franchises, etc. 

 

 Critique of the Electricity Act

In the Act, open access is the vehicle to achieve competition, although the Act is fraught with loopholes that can stall, if not, prevent, its implementation. The objective of open access is to create a marketplace where generators (including utilities and IPPs), distribution companies, and even retail customers can trade across the country. These transactions, known as bilateral trade, would pay for use of the intermediate state transmission systems (known as "wheeling''). Today, such wheeling is permitted, but only between SEBs. Further, wheeling charges are not standardised and are often prohibitive, especially for transactions that cross multiple State systems (known as rate `pancaking'). There are two salient aspects of change: the first has to do with changing the rules of the game (the wheeling regime); and the second is to change the players. The Act focuses on the latter. However, the CERC is in the process of developing a new open access and wheeling regime. A more trade-friendly wheeling regime (lower or zero wheeling charges) would have many benefits. The average utilisation of plants in the Eastern region stands at just over 50 per cent. Through regional trading, existing capacity could be better utilised. Grid-connected captive power plants (up to 14,000 MW) could also sell excess capacity to other customers. Both these changes would obviate somewhat the need for new generation. Open access may also spur more IPP development by increasing the number of economically viable locations for setting up power plants. 

 

What is the catch?

There may be losers. The wheeling charges typically consist of two components. The first recovers the direct costs imposed by the transaction on the transmission system - mainly energy losses. The second component recovers sunk capital costs — by far the larger component. According to pricing theory, the economically `efficient' wheeling rate should include only the incremental cost. The fixed costs make the trade appear artificially expensive, and prevent transactions that could lead to savings in generation costs. However, if these are reduced or eliminated, consumers in these regions would pay a disproportionate share of these sunk costs. This is of concern in States with spare transmission or generation capacity, where the system would be used for regional trade more than to serve their customers. Therein lies the inherent conflict between efficiency and equity. The pricing design is essentially an exercise in balancing conflict interests, and must apportion these costs among beneficiaries (including generators) of trade. Consumers in these regions should not subsidise the rest of the country's use of their transmission system. 

 

 

 

 

 

CURRENT SYSTEM IN INDIA

 

In the post-1991 phase, independent power producers were allowed to operate in India. However, more often than not, demand outstrips supply at the state level. This is where the federal power utilities like National Thermal Power Corporation and National Hydroelectric Power Corporation acquire significance. They have power generation plants all over India. The public sector units, with a certain installed capacity, sell power to states. The government stipulates quotas for states, after ascertaining variables like demand, real necessity, etc. This is to ensure that no state gains at the expense of other states. The Power Grid Corporation of India Limited is the transmission agent that evacuates power from national utilities to the states. It has interconnected regional grids which are linked to the state grids. In theory, power generated in one part of India can be supplied to any other part on the supergrid (comprising national and provincial grids). Generally, power is generated and distributed region-wise. At any given moment, the load on PowerGrid's transmission apparatus is a function of the power generated at plants. Power generation is itself a function of variables like fuel availability, etc, and so may vary from day to day. Although states are entitled to the stipulated quotas, in reality they have to draw electricity as per PowerGrid's day-to-day directives. 

 

 For example, if the total capacity of national utilities is 100 megawatts, and a state is entitled to 5 per cent, it can draw 5 MW from PowerGrid. But if generation falls, for whatever reason, to, say, 75 MW, then the state is expected to draw 5 per cent of 75 MW or 3.75 MW. Accordingly, the state is expected to cut down consumption to that extent. This would mean the state may have to either ask its power consumers to lower their consumption, or enforce it by way of power-cuts and other measures. This is called load-shedding. The adherence to stipulations is called grid discipline. 

 

Why states indulge in grid indiscipline

At the state level are electricity boards and private companies that have their own generating plants, and at some places even transmission and distribution apparatus. In the post-1991 phase, independent power producers were allowed to operate in India. However, more often than not, demand outstrips supply at the state level. This is where the federal power utilities like National Thermal Power Corporation and National Hydroelectric Power Corporation acquire significance. They have power generation plants all over India. The public sector units, with a certain installed capacity, sell power to states. The government stipulates quotas for states, after ascertaining variables like demand, real necessity, etc. This is to ensure that no state gains at the expense of other states. The Power Grid Corporation of India Limited is the transmission agent that evacuates power from national utilities to the states. It has interconnected regional grids which are linked to the state grids. 

 

In theory, power generated in one part of India can be supplied to any other part on the supergrid (comprising national and provincial grids). Generally, power is generated and distributed region-wise. At any given moment, the load on PowerGrid's transmission apparatus is a function of the power generated at plants. Power generation is itself a function of variables like fuel availability, etc, and so may vary from day to day. Although states are entitled to the stipulated quotas, in reality they have to draw electricity as per PowerGrid's day-to-day directives. For example, if the total capacity of national utilities is 100 megawatts, and a state is entitled to 5 per cent, it can draw 5 MW from PowerGrid. But if generation falls, for whatever reason, to, say, 75 MW, then the state is expected to draw 5 per cent of 75 MW or 3.75 MW. Accordingly, the state is expected to cut down consumption to that extent. This would mean the state may have to either ask its power consumers to lower their consumption, or enforce it by way of power-cuts and other measures. This is called load-shedding. The adherence to stipulations is called grid discipline.

 

CERC: The Monitor

The CERC is the agency entrusted to enforce the discipline by way of a grid code. However, in reality, states seldom maintain grid discipline. Problems arise when, in the above example, a state draws up to 5 MW (the official quota) instead of 3.75 MW. When several states turn errant, the apparatus is strained to the limit, leading to systems breakdown. The 'limit' is 47.5Hz frequency (47.5 cycles per second) whereas the desirable figure is 50Hz. If the frequency hovers between these figures, it would mean poor quality of power, a common problem in India. The CERC first sought to implement the grid code in January 2000 but a court stay order put paid to the plan. The grid code will become operational only when the availability-based tariff is introduced in different regions, starting with south. The rest of India will see a staggered implementation in 2001. 

 

Why states turn 'errant'

The reasons range from political expediency (appeasement of 'power'-hungry farming community or industry lobbies who double up as vote banks and financiers, respectively) to mismanagement of state electricity boards to pilferage to sudden rise in demand due to cold weather conditions. That they can get away with grid indiscipline further emboldened the states. Even if they overdrew, they paid normal rates. There was no deterrent. But under the availability-based tariff structure, power utilities will have to pay at a higher rate if they overdraw. 

 

PowerGrid's countrywide supply points (load dispatch centres) determine demand and load factors and advise plants (some of which are owned by states) to generate power accordingly. However, if such instructions are not heeded to, grids may break down. The system trips when load is in excess and power generation. Since hydroelectric power is a substantial chunk (30 per cent) of overall electricity generated in India, generation may dip due to low levels of water in reservoirs, again a common problem in India where rainfall is a function of erratic monsoons. Adverse weather (lightning) can also spark a crisis. When grids fail, plants connected to them stop power generation. It is a vicious cycle. Grids may fail due to purely technical reasons (faulty equipment) or when transmission lines are disrupted. SEBs do not function as purely business entities. Often, they offer power at subsidised rates for political reasons. Thus cash-strapped, SEBs are unable to expand their own capacities. Economist and power industry observer Dr Kirit Parikh, director, Indira Gandhi Institute of Development Research, Bombay, says SEBs are driven merely by the desire to meet the demand and buy public peace, without being profit-oriented. So they turn to national utilities to meet the growing power demand. The selfsame states that frequently overstep their limits, seldom pay their power bills promptly. Consequently, the national utilities face financial crunch; this affects their maintenance, upgradation and modernisation plans. This would mean an economy powered by vulnerable power stations.

 

Industry people who have frequent interactions with PowerGrid and SEBs say there is too much of political interference in the day-to-day operations. Further, there are fundamental problems in the way power is generated and used in India. The southern grid, he says, is unduly dependent on hydropower whereas Maharashtra is more suited to use it. States do not generally trust each other and wish to maximise their own profit, little caring for the grid's profit.

 

 

 

 

 

 ECONOMICS VERSUS POLITICS

 

Interstate-Trading Requires Unbundled Contracts

Transmission must be unbundled from generation and supply if power is to be traded across state lines. Few, if any, power purchasers from an ultra-mega power project will have any direct physical connection to the transmission system on which the power station is located, and many of them will be in a different state. Yet the power purchase agreements (PPAs) for Sasan and Mundra still make the off-takers responsible for the timely construction of the transmission and interconnection facilities required to connect the power station to the transmission system, and for any failure or delay by the project's host government to make good on promises to provide land or other facilities required for the power station's construction or operation. Customers have no control over these aspects of the project and are not concerned with the details of how they are managed. They are buying a fungible commodity – namely power – not an interest in a particular power station. In a competitive market, a generating company cannot expect its customers to accept responsibility for how it builds and operates its power plants.  

 

Trading makes it Easier to Deal with Contract Default

Under the old power program, if an SEB did not pay for the power it contracted to buy from a power plant connected to its transmission system, the generating company's options were very limited. It could threaten to shut down the plant or curtail its power output unless the SEB paid what it owed, but this would shut off the generating company's own revenues, or it could terminate the PPA and require the SEB to purchase the power plant. Neither option was very attractive or very effective. If it was the generating company that defaulted, its project lenders would exercise step-in rights and be given a lengthy period to cure the outstanding defaults before the SEB would be allowed to terminate the PPA.

 

The new trading environment offers the generating company and its customers much better options for dealing with contract default. The generating company can suspend or terminate the defaulter's rights under its PPA and resell its power to someone else, while holding the defaulter liable for damages if the market value of the power has fallen below the price agreed in PPA. The customer too can look to the interstate power market to replace power that the generating company failed to deliver in breach of its PPA and use the market price as a benchmark for calculating the damages to which it is entitled. The parties are no longer constrained to think in terms of a default terminating the project and forcing the generating company's customers to buy the power station.

 

Trading Allows for More Efficient Market Pricing

In a market, the price of power varies by time of day and season, according to the changes in supply and demand. Power that can be supplied when demand is high is more valuable – and should be able to command a higher price – than power that is available when demand is low. Power sold under long-term PPAs, however, has traditionally been sold at prices reflecting the cost of producing it rather than its value to the offtaker. Under these long-term contracts, power supplied in the middle of night when demand is low is priced the same as power supplied at times of peak demand.  

 

When a generating station has only a single SEB as a customer, the PPA under which it supplies power addresses the mismatch between the cost of generating the power and its value to the SEB. The PPA gives the generating company a financial incentive to achieve the highest possible availability while also allowing the SEB to despatch the generating station so that it generates as little power as possible when its cost exceeds its value to the SEB. This strategy does not work when the offtaker cannot control how the power station is operated because the generating company is selling power to multiple buyers. When the generating company controls the operation of its own power station, it may be tempted to divert power that it has contracted to sell under a PPA to another buyer who is prepared to pay more if the contractual penalties for non-delivery are insufficient.

 

The Sasan and Mundra PPAs attempt to limit this threat bureaucratically by prohibiting the generating company from selling power to anyone other than the offtakers and giving the offtakers the right to audit the generating company to verify that it is not diverting power in breach of its contract. This seems a clumsy and intrusive way of dealing with the problem. Its inefficiency could prevent the generating company from taking advantage of arbitrage opportunities that are beneficial to all parties to the PPA. Generating companies should be allowed to divert contracted power to provide reserve or other ancillary services if those services command a higher price, provided that the customer whose power is being diverted is made whole. The way to facilitate economically-efficient arbitrage is through the tariff; if a generating company wishes use of an offtaker's contracted capacity for some other purpose, it must buy that capacity back from the offtaker at its market value to the offtaker, which will normally be the cost to the offtaker of acquiring replacement capacity from another source.

 

 

 

 

 

INTERNATIONAL COMPARISONS

The National Australian Power Pool

The planned national electricity market is designed around a power generation pool (or spot market). The pool ensures that the demand and supply of electricity are balanced at all times every day is divided into half hour segments. Prices are effective for these half-hour periods and this price is paid to any generator supplying electricity during that period and is the same price charged to any customer who consumes it during that period. All generators with a generating capacity of greater than 30 megawatts are required to participate in the national market. Customers with an annual usage of at least 10 megawatts will be eligible to participant in the market, along with retail electricity suppliers. Generators and customers must submit their bids 24 hours in advance to specify the amount of power and the price they will supply and purchase generation, respectively. 

 

 

 

CONCLUSION

An integrated system of generation-transmission-distribution can handle the unique characteristics of electricity for example by load dispatch centres that keep the supply and demand in balance. The government stipulates quotas for states, after ascertaining variables like demand, real necessity, etc. This is to ensure that no state gains at the expense of other states.

 

Unbundling of the system into separate generation, transmission and distribution entities raises the problem of the integrated operation of the whole system. If all the units resulting from unbundling are driven by profit maximisation (all players pursuing their selfinterest), there must be an authority that will coordinate their operation for supply-demand matching. The absence of such an authority aggravates the problem of grid discipline and management. In principle, however, it is possible for an unbundled system to establish the agencies and the regulatory practices to tackle the problem of the integrated operation of the whole system. But, the challenge requires special attention.

 

It is not enough to point to specific shortcomings of the regulated electricity system, and therefore assume that a market-driven system will be ipso facto more successful and advantageous to society. The establishment of a market-driven system is associated with transaction costs and gestation times. Hence, a careful comparison of the costs and benefits of the old regulated system and the new deregulated system is essential before dismantling the old and ushering in the new.

 

 

 

 

 

 

REFERENCES

1.       http://powermin.nic.in/indian_electricity_scenario/power_sector_at_a_glance.htm.

 

2.       Amulya K N Reddy "California Energy Crisis and Its Lessons for Power Sector Reform In India"; EPW May 5-11, 2001

 

3.       http://www.bakerbotts.com/file_upload/PurchasingPowerinIndia.htm

 

4.       Govt keen to fix power problem permanently http://www.rediff.com/money/2001/jan/04power1.htm

 

5.       Why states indulge in grid indiscipline

 

6.        http://www.rediff.com/money/2001/jan/04power2.htm

 

7.       How to overcome power breakdowns in India; http://www.rediff.com/money/2001/jan/04power3.htm

 

 

 

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