The price of Power

  • 14/09/1995

The price of Power HIGH cost power has many defenders-private investors who are Putting up the plants, equipment manufacturers and those in power who decide the cost the State Electricity, its Boards will have to pay for electricitv they buy from autonomous units - while the case for lowest-cost expansion of the power gridiron has very few takers. "The consumers, who are the ones who actually pay for this expensive power, have no say in the matter.

In the UK, a regulatory structure was set up by former prime minister Margaret that crier in 1989, before restructuring and privatising the electric Supply industrial. Here, instead ofa cornpetitive regime, we have the continuation of the autocratic permit raj with the inclusion nmv of torign power investors in the scherne of things.

The recent Enron fiasco has brought out the bankruptcy of the power policies being followed since 1991. Policyniakers had then decided that the only salvation for the Indian power sector lay in inviting foreign capital, which would provide additional resources and free the state resources for use in the social sector.

Power planning shifted focus from expanding the power sector at the lowest cost to one of constructing a package of concessions to attract energy multinationals. "No power is as costly as no power," was the popular slogan coined by P Rajagopalan, the then power secretary. Uncomfortable questions like whether the people would pay the resulting high power tariffs, and the impact of such policies on the health of the State Electricity Boards (SEBS), remained unanswered.

With annual losses of Rs 8,000 crore, the SFBs are currently deep in the red and are in no position to even maintain their units, let alone make new investments. The policy package introduced by the Centre will erode their standing even further.

The package of concessions in 1994 for foreign private investments included a 16 per cent rate of return on equity at 68.5 per cent Plant Load Factor (PLF) with a further 0.7 per cent bonanza for every percentage point Of PLF over 68.5 per cent. Further concessions were computations of the power tariff in foreign exchange, guaranteed off-take higher than the current load demand, depreciation of 8.24 per cent as against 3.5 per cent prevailing earlier, and the use of imported oil and the gas fuels rather than indigenously available coal.

The World Bank has pointed out that these are perverse incentives to pad project costs and disturb the long-term fuel balance of the country. The 8 projects under current negotiation all have much higher capital and power costs than that prevailing in India today.
Fast track projects N K P Salve, the Union minister for energy, -negotiated the initial basket of projects for. which speciaf concessions were made available. Enron became the benchmark case and a number of guidelines, such as 80-90 per cent off-take guarantees, were fashioned after Enron had already reached these figures. The Central government offered counter guarantees for what it called "kick starting" the reforms. Table 1 shows the salient features of these fast track projects.

Using the 2 part formulae of the Central government, the tariff for the projects works out to be in the range of Rs 2.60 to Rs 2.80 per unit, except for Enron which has a lower starting tariff that increases over time. This is twice as high as the current power cost in the country, which is around Rs 1.30.

It may not be fair to compare the cost of power from new projects to that of old ones. The older plants have virtually written off their capital costs and therefore can supply power at the cost of fuel plus some overheads. A proper comparison would be to match the cost of power from new power stations. Such a comparison shows that a new power station can be constructed for about Rs 3.5-4 crore per mw and the cost of power should not exceed Rs 1.80 to Rs 2 per unit for the new plants.

Why should Enron inflate capital costs?
The chairperson Of BHEL had stated in his submission to the Parliamentary Standing Committee on Energy that BHEL can undertake turnkey projects at about Rs 3.5 crore for similar projects. On-this basis, the cost of the plant should have been about Rs 7,052.5 crore (as against the Enron cost of Rs 9,053 crore) The loss incurred by MSEB for the first 4 years alone would have financed this plant.

Why should Enron have considered a much higher investment cost for its project? The answer really lies in the Centre"s power policies which act as an incentive to inflate capital costs. And to cap it all, there are no risks for the foreign investor as the returns are guaranteed against foreign exchange fluctuations.

This meansithat the cost of power will be calculated based on the above rate of return and depreciation. Since no matter what the investments are, a return of 30-32 per cent on equity is guaranteed - if the capital costs can be inflated in comparison to the actual costs - these rates of return and depreciation will lead to much higher returns on the actual investments. This will automatically lead to a higher cost of power,but as the power tariff is premised on the above basis, it matters little to the investor.

The inflated project capital costs also allow the companies to recycle the funds of the project and bring them back as equity. Thus with virtually no investments but some financial jugglery, these companies can own 100 per cent stocks of the company, and enjoy a rate of return that is in the 30-32 per cent range. As these stocks can b ei sold in the market, companies such as Enron can make a fipancial killing with virtually no investments under the currerit policy, before even a mw is produced. This is why both Enroh and Cogentrix intended to bring in equity only at the starting of commercial operations. Before that, the equity would be brought in as debt and the interest charges on the same would also be charged to the project account.

The major argument advanced by the power ministry and Sharad Pawar to combat public criticism was that as Tata Electric and Bombay Suburban tariffs are already Rs 2.39, with an annual rate of inflation of 10 per cent, they will reach Rs 2.89 in the year 1997. Ergo, Enron"s tariff of Rs 2.40 in 1997 is much lower than that of indigenous power producers. Further, there is a cap on Enron"s capital costs and tariffs and, therefore, these figures are not going to change.

Unfortunately for these arguments, there are 2 factual errors. Enron power is not Rs 2.40 in 1997 but 7.47 cents - the tariff is denominated in us currency! Therefore, if India and the us continue to have a 10 per cent and a 4 per cent rate of inflation respectively, there is a likely devaluation of 6 per cent per annum of the Indian currency. This is much smaller than the 33 per cent devaluation that the commerce ministry is reportedly asking currently. With this rate of inflation, Enron power in 1997 will be Rs 2.69.

Power projection
Salient features of the 7* foreign investor power projects
Jegurupadu Andhra Pradesh GVK Gas 235 1,057.5
Godavari Andhra Pradesh Spectrum Gas 208 936
Vizag Andhra Pradesh Hindujas Coal 10,000 50,000
Dabhol Phase I Maharashtra Enron Imported Diesel 695 2,850.5
Dabhol Phase II Maharashtra Enron Imported LNG 1,320 5,940
Mangalore Karnataka Congentrix Coal 1,000 5,000
Ib Valley State II Orissa AES Coal 420 2,100
Nyevelli "O" Unit Tamil Nadu ST Power Coal 250 1,250
A recent statement by Enron shows that the capital servicing cost of Enron is Rs 1.37 and the fuel cost (at 1993 prices) Rs 1.04. The fuel price in 1997, as per Enron"s own admission to miii, is likely to be $4.63 per million British Thermal Unit. With this, Enron"s tariff in 1997 will be Rs 2.99. The so-called cap on Enron"s tariff is a complete myth.

The second error is even more serious. Unlike the Enron tariff, almost all tariffs in India, including the current 2 part tariff advocated by the power ministry, are front loaded. Therefore the capital servicing cost - the major component of the tariff-decline overtime and is not indexed to inflation. That is why Singrauli power of the NTPC is Still supplied at 0.61 paise even after 10 years of its commissioning and has not gone up even with the current 10 per cent rate of inflation. Enron"s tariff, however, is back loaded and the capital servicing cost increases every year by 4 per cent. But the examples of Tata Electric and Bombay Suburban given by the defenders of the agreement are symptomatic of a wider malaise. The private generators seem to get better terms than they deserve. A figure of Rs 2.39 per unit in today"s plants that have been built and commissioned at costs well below that claimed by Enron is also very high. Though the arguments that Enron power is cheaper are faulty, this nevertheless seems to have brought a few more skeletons out of msLB"s cupboard. Both these agreements were also struck during the Sharad Pawar regime. They are higher than the cost of power based on N"FPC"S tariffs negotiated in the same period, presumably with similar costs. For instance Anta and Auriya are supplying power at Rs 1.05 and Rs 1.07 - less than 50 per cent of Tata Electric and Bombay Suburban"s tariff. Two wrongs do not make a right. Along with the Enron"s PPA, the PPA of Tata Electric and Bombay Suburban also appear to be fit cases for further investigation.

The defenders of the project have also claimed that at Rs 4.1 crore, the Dabhol project costs are not high and are comparable to similar projects. The Parliamen- tary Committee, cutting across all party lines, rejected this proposition. At the $100 million initially claimed by Rebecca Mark, it is good riddance to Enron.

The power ministry has joined the power establishment"s chorus that cost per mNv has to increase from Rs 5 to Rs 7 crore. However, in their answer to the Standing Committee on Power, the ministry confessed to having no data on international prices of power plant equipment.

The question is: who is going to pay for the expensive power that the ministry is pressing on the country? All the central utilities including NrPc are now demanding "Enron terms" - Rs 2.40 tariff, guaranteed returns and guaranteed off-take. If these terms are accepted, the SEBS will descend in to bankruptcy immediately. At Rs 3 to 1@s 4, Indian power tariffs for industrial and domestic consumers are comparable to the us and UK"s. Largescale social unrest or bankruptcy - this is the Hobson"s choice facing the SEBS a nd the states.

The power ministry is trying to stampede the country in the wrong direction by artificially inflating the installed capacity required and the capital costs and then projecting that India has no matching resources. By their calculations, the country needed a total installed capacity of 104,000 mw in the 8th plan and an additional 94,000 Niw in the 9th plan. These calculations are based on the 14th Electric Power Survey (14th i [,s) which is already dated. No attempts have been made to update the 14th Eps predictions based on actual growth of demand. On this basis, the ministry of power has argued for induction of private power on a massive scale to meet this "shortfall".

The initial calculation within the ministry was that about 10,000 MW would be available from private investments in the 8th Plan itself. Later, it was scaled down to 5,000 mw. For the 9th Plan, there seems to be an unstated policy that almost the entire Plan"s requirements should be through private and foreign investments. If the demand projections are even half way true, advance action needs to be taken up right now. However, no advance action is being taken on the ground. Increasingly, Salve"s power policies are beginning to look like a gambler"s last throw.

Alternative paths to power
A realistic look at demand and required installed capacity will show that other alternatives clearly exist. If we take the figures of current peak demand as 58,000 mw (this is already on the high side), then it is unreasonable to expect that the demand at the end of the 8th Plan can be more than 66,500 mw. Considering that we have seen nearly 80 per cent availability this year, with a reasonable plant margin of about 30 per cent, we can meet the entire peak demand of 66,500 mw with an installed capacity of even 85,000 mw. As the actual installed capacity is likely to be about 89,000 mw at the end of the 8th Plan, we should certainly be able to meet the peak d emand. Most advanced countries operate with plant margins of 20 to 25 per cent and therefore a 30 per cent plant margin is certainly not unrealistic.

A World Bank study conducted in 1990 showed that using the existing tie lines and transferring electricity from surplus to deficit areas could reduce shortages by half. Integrating the grid and better maintenance of existing capacity can bring down the plant margins - considerably reducing maintenance. Adding to generating capacity without investing in the maintenance of existing capital stock and not integrating the grid will not solve the problems of the power sector.

For the 9th Plan, a realistic figure should be around 30,000-3.5,000 mw to be added to meet the peak demand. This is not difficult to achieve by a mix of public and private investments with appropriate safeguards.

It has been shown by S N Roy, a former chairperson of the Central Electricity Authority and one of the most respected power engineers in the country, that other planning options arc available that are not being utilised. The load curve today shows that in future we will be short of peaking power during day and have surplus power at night. This is alreadN so in the Eastern Grid and in much of the north. This is obviously because the demand during day is much higher than at night. The power ministry is planning to add coal fired power plants, nuclear power plants and combined cycle power plants, all of which are base load plants. The coal fired power plants will have to be put either on 2 shift operations or a number of such plants will have to operate well below their capacity for those periods when the demand is low. Hydel power is ideal for peaking power but has come under severe environmental opposition.

Thus, the power ministry is planning on base load stations instead of peak load stations. It will be far more economical to add open cycle gas turbines in place of the combined cycle plants, as these will meet peaking duty at lower capital costs.

Another possibility is to lower the capital costs by stanclardisation and replication of a basic design with only some modifications. The economics of standardisation can lead to a substantial reduction of costs, particularly if capital crunch is recognised and designs are made accordingly. In the power sector, the tendency has been to build rather expensive plants in the name of reliability. The plant load factors have not shown any major improvements due to this, but the plant costs have gone up considerably. The above course can lead to reduction of costs by as much as 25 per cent to the cost of plants and should be the first option to be exercised.

However, with import of capital, power planning is moving in the opposite direction - more non-standard plants and consequently higher capital costs. It is noteworthy that in the nuclear energy sector, us capital costs are much higher than European capital costs precisely because of this. The European plants have been standardised while the us ones haven"t been.

The other option is to introduce demand side management for power consumption. It has been computed that it is much cheaper to invest in reducing consumption rather than in investing in new power generating plants. The lowering of consumption in Europe the and the us has been mainly on this account. Thus a utility in the us, gave out to its customers free compact fluorescents that consume only 20 per cent electricity compared to the normal lamps and avoided the installation of new power plants. In India, a study suggests t at even if 20 per cent of all lamps were replaced by come fluorescents, there would be a saving of Rs 1,500 crore per annum.

A regulatory regime for safeguarding consumers
The Central government only owns generating and transmission companies but does not distribute electricity unlike the states and the State Electricity Boards. Therefore, the balance is tilted against the consumers in favour of the generating companies.

One of the first steps that need to be taken is restoring autonomy to the Central Electric Authority (CEA) and the SEBS. A Oe-condition, of course, is removal of political interference in day to day running of the Boards. The Regulatory frame- work must also be expanded to include Central, Regional and State Regulatory Authorities.

Curriently, only cEA and Regional Electricity Boards (REBS) have"regulatory functions. There are 5 Regional Grids and corresponding RFBS. The REBS function under CFA with reprensentation frow the SEBS concerned. The weakness of the has resulted in lack of power transfers from surplus to deficit states. The REBs have failed to impose any kind of grid di- pline on the generating companies and utilities leading to ii i frequency and voltages in off-peak periods and anarc withdrawals during peak periods. This had led to a lack of stability and wastage of power.

However, instead of strengthening of the regulator@ up, moves are afoot to weaken them even further. Regional Load Despatch Centres (RLDC) which monitor Regional Grids have been handed over to the Power G1 Corporation, a Central Government undertaking. The are integral to UBS functioning and their removal from ambit of the REBS severely limits their ability to perform the regulatory functions. At the state level, there is no regulator ensure that the consumers" interests arc protected Electricity Board.

The other issue that needs urgent attention is the term on which private generating companies can be inducted in the power sector. lic key is the Power Purchase Agreement (PPA) that the Board enters into with the private generating company. The 2 types of regulatory regimes that are prevalent for tariff fixation are either based on a fixed return on capital or a tariff cap on the delivered price. The regulators in u K Li,@ the criterion of a cap on the delivered price of power inclexuc to inflation. In India, we have yet to see even a discussion the regulatory regime to be adopted for inducting private power producers. Countries like Thailand and Pakistan are evolving fairly sophisticated regulatory principles for deciding such issues.

The other element of any regulation tory regime must be transparency in decision rre was set making and"a role for the consumers wli Former have finally to pay the price of electricity 71iniSter The Electricity Act calls for public disclosure of project details. This is interpreted tret Thatcher mean the publication of only a skeletal OLI - 1, before line indicating the location and project situring The PPAs reached between the generating companies and the Boards are not mac Vatising the public even though this really concerns to 7 supply consumer. The Enron fiasco has clear brought out the dangers in such scheme.

Unlike any other industry, the electricity supply industry is one in which there has be an instantaneous balance between supply and demand Electricity cannot be stored and therefore the grid must balanced at all times.

The natural state of the industry is one of cooperation not competition. Introduction ofdifferent ownership patt makes the task of maintaining balance even more difficult. those enamoured ofthe South Korean experience, it mig interesting to know that South Korea nationalised their, sector in 1982 because of the problems involved in pri power companies attempting the private sector route with a strong regulatory framework.

An indigenous alternative that solves these problem provides for least cost power is the need of the day. An C PPAs are now subjected to strict scrutiny, the Enron controversy could actually have a positive fallout.

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