India's energy problems are daunting. Former Energy Minister N K P Salve outlines the difficulties ahead

How well does energy production meet the country's needs?

The Indian power sector has grown steadily since the first power generating plant was commissioned 100 years ago. The present installed generating capacity is about 82,000 MW, generating nearly 377 billion kw/h of electricity annually, mostly by coal-fired stations. Although the size of the country and the distribution of its people poses considerable challenges, almost 85% of rural villages now have access to electricity. Independent high-voltage regional and state transmission grids have been developed with inter-state links for optimum flow of power.

Despite the sizeable growth of the power sector, per capita power consumption is about 315 kw/h, and transmission and distribution losses are quite high. This, coupled with low capacity utilisation, means that the country faces energy shortages of about 9 per cent and 18 per cent in peaking power.

Moreover, energy demand is set to grow by an estimated 8 per cent a year, meaning we will need an additional 142,000 MW up to 2007. We originally planned an extra 30,500 MW in the eighth five-year plan (1992-97), but we are likely to achieve only about 19,000 MW during this period. This shortfall will only add to power shortages.

What are you doing to correct this?

For a developing country like India, which has only now started to create a niche for itself in the international market through increased competitiveness and higher productivity, the adequate availability of power is a matter of survival. To this end, we are making efforts to augment the creation of incremental capacity and associated systems to facilitate the delivery of power. Efforts are also afoot to manage demand through improved end-use efficiency, energy conservation and other demand-management measures.

What is the role of foreign investment?

Between 1997 and 2002, an estimated US$150 billion-worth of investment will be needed if we are to meet the growth in energy demand. A further similar investment will be needed to develop transmission and distribution systems and for rural electrification. Obviously, it will be difficult to raise this kind of finance domestically, and we will have to depend upon foreign investment. We are looking for investment not only in conventional coal/gas-based plants, but also in hydro projects and captive/co-generation plants, as well as the refurbishment of old installations, inter-state mega-projects and barge-mounted projects.

How do you explain foreign companies' caution towards investing in India's power sector?

In the early days of the government's private power policy, in 1991 and 1992, a certain degree of caution could be seen. This was understandable given that the power sector was unknown territory. However, private participation in the power sector was, even then, not a novel concept, as private companies have been part of the sector for nearly a century, mostly as licensees of the State Electricity Boards (SEBs). Investors were also initially apprehensive over the security of their investment, given that the financial record of the SEBs was not very encouraging.

What are you doing to attract foreign investment?

The government has formulated a power policy to address the issues related to foreign private investment in the power sector. In order to develop foreign companies' confidence in the security of their investment, the government decided to counter-guarantee defaults by state governments in meeting some of the outstanding dues of the SEBs to the initial batch of eight 'fast-track' projects.

In addition, our power policy permits up to a 16 per cent return on equity and up to 100 per cent foreign equity participation, and also offers protection against foreign exchange fluctuations for returns on equity of up to 16 per cent. Proposals are also in hand to provide legally enforceable fuel supply and fuel transport agreements between investors and Indian Railways and coal companies.

On the bureaucratic side, efforts are under way to streamline project approval procedures, institutionalise the competitive bidding process and develop an efficient infrastructure for processing project proposals. In addition, a detailed policy guideline will be announced shortly on the privatisation of distribution systems, along with the introduction of the necessary regulatory framework. The process to amend existing legislation defining 'transmission companies' and to allow joint ventures in this area has already been set in motion.

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How successful have you been?

Our policy has brought in a vast array of large-scale and fast-track projects. Over 200 expressions of interest have been registered, amounting to an investment of more than US$105 billion, and over 90,000 MW of installed capacity. Of these, there are 52 proposals from foreign developers/investors for a total of nearly 38,000 MW capacity, involving an investment of more than US$42 billion. Several foreign power projects are in an advanced stage of development.

Do the problems faced by Enron indicate that the government's power policy has lost its momentum?

Enron's problems with the Maharashtra state government may have made some foreign investors think twice about committing investment in India. However, there is one aspect of the episode that should give investors strong encouragement. It has been proved beyond doubt that in India the legal system offers swift and effective recourse to foreign investors against arbitrary acts and decisions. This is in stark contrast to the conditions prevailing in other major markets. It is also heartening to note that many foreign companies are making good progress in the power sector.

On the face of it, it may appear that the private power policy of the government has lost some of its momentum. However, this apparent loss of momentum is due neither to lack of interest among developers nor to doubts about the government's privatisation process. Rather, it is probably attributable to the requirement of adoption of competitive bidding for project development in the power sector. As we all know, the bidding process requires a lot of preparatory work by the SEBs. Progress on the projects which are under negotiation has been quite significant: of the 106 projects requiring Central Electricity Authority (CEA) clearance, Detailed Project Reports for nearly 75 power projects have been submitted. Fourteen of these projects have been granted CEA clearance; 36 others have been given 'in principle' clearance, and about 66 are on the bidding route.

The World Bank supports privatisation of the loss-making SEBs as a solution to India's difficulties in the power sector. What is your view?

It is widely accepted that SEBs are the weakest link. The SEBs' poor financial performance is a concern for all of us, and we have therefore initiated several steps to improve their performance and to facilitate their functioning on strict commercial lines. Measures have been undertaken to improve performance parameters in the areas of operations and financial management. With this object in view, efforts are under way to unbundle the operation of the state power sector so that generation and transmission are entrusted to separate entities and distribution is privatised. State-level regulatory bodies are also proposed to reduce government control to boost commercialism and professionalism in the SEBs. Some states have already gone ahead with these restructuring exercises. The government is aware that the development of the private power sector and an improvement in the performances of the SEBs are inter-dependent.

In the area of transmission, the US-based Energy Central Consultants (ECC) has made recommendations for bulk power tariff reforms which have been, in principle, accepted by the government.

How do you see the power sector developing in India in coming years?

The changes taking place should help to promote India's position as one of the highest growth opportunities for private developers. The country needs additional generating capacity at a rate of about 9-10,000 MW a year for the next 15 years. Internationally, the potential of the Indian economy is now widely recognised and investments are being made. We are confident that any serious enterprise looking for opportunities to grow can hardly ignore India. Apart from being a vast market, India has the advantages of a vibrant private sector in the industrial field, a competent electricity generation, distribution and transmission supply industry with state-of-the-art technology, a vast pool of trained, skilled manpower which has the capacity to absorb new management and technological expertise, experience at various levels of state/central government in implementing promotional schemes for industry and a legal system which is conducive to private sector development.

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