Dark is POWER

The Union power ministry has failed to achieve its power generation capacity targets over successive Five Year plans

The Electricity Act, 2003 was supposed to herald a new era in the Indian power sector. However, there is hardly any improvement in power supply even after the act was implemented in July 2004. If anything, the electricity demand-supply gap has widened as the country is unable to add generation capacity at a required pace. All the big plans of the Union power ministry to improve power supply scenario in the country have proved a damp squib. Meanwhile, most of the state electricity boards (SEBs) remain in a financial mess due to their unacceptably high commercial losses. This has fuelled the fear that maintaining the robust growth rate of the national economy might not be feasible over the long term.

The  Union power ministry has miserably failed to achieve its power generation capacity targets over successive Five Year plans. For example, only half of the capacity envisaged by the ministry for the Tenth Plan could be added. The progress in the capacity addition under the current plan programme also remains tardy.

The ministry launched the ultra mega power project (UMPP) scheme in 2006 amid high expectations. The scheme was meant to attract foreign investment in power generation. However, foreign investors kept away from bidding for four projects - Sasan, Mundra, Krishnapatnam and Tilaiya. The result was that three out of the four projects went to Reliance Power.

 The government has allocated captive coal blocks to help these UMPPs meet their fuel requirement on an assured basis. This was a key attraction for domestic players to submit aggressive bids for these projects. Initially, coal supply from allocated captive blocks was meant for exclusive use at the respective UMPPs. But subsequently, the government tweaked this policy to allow developers the flexibility to divert coal supply to their other power plants in case of surplus availability. According to power sector watchers, this is like changing the terms of contract in favour of the developer.

 Tata Power, which had lost the bidding race for the Sasan UMPP, challenged in court the government's decision to allow Reliance Power the flexibility to divert coal supply from the associated captive block. Tata Power argued that it could have quoted a lower price if it had known that this flexibility would be allowed. In that case, it might well have won the contract.

The bidding controversy apart, these projects are facing delays like any other power project. The government had assured to secure statutory approval and regulatory clearances before handing over these projects to select bidders so that their implementation is not delayed. However, out of the four projects auctioned so far, only the Mundra UMPP - which is allocated to Tata Power - is running as per schedule. The other three projects are still languishing due to hurdles like environmental clearance and land acquisition. Clearly, the government's strategy has not worked.

 Overseas investors stayed away from UMPPs because they were not sure if SEBs would be able to make timely payment for power purchased for these projects. Bidding criteria set for these projects allow developers to cut off power supply to SEBs in case they default on payment. However, the catch is in where the surplus power would be diverted. Domestic players have their distribution companies and can easily divert surplus power. But overseas investors have no such option.

 Earlier, SEBs were given the target to bring down their commercial losses to the level of 15 per cent by the end of the Tenth Plan. The central government was offering fiscal and financial incentives to SEBs under its various schemes. However, the level of average commercial losses of the SEBs at the end of the Tenth Plan was pegged at well above 30 per cent.