Indian Power Sector –
Emerging Challenges to Growth
With a critical mass of progress in regulatory reforms and soaring economic growth, the Indian power sector is now primed for take
off. Over the next ten years, the sector will need US$200 bn in new investments. How India deals with the remaining challenges of the
restructuring process and emerging fuel shortages will dictate what happens in the years to come.
By SANDEEP KUMAR, ANURAG KHETAN & BISHAL THAPA .
I
ndia received the perfect Valentine’s Day
present this year. The Sensex, India’s key stock
market index, which had been on a bull run
since November last year, finally peaked at 6,700,
up almost 50% from the low of May last year. If
the news was received with subdued euphoria, it
was only because announcements about growth
have become just too commonplace. Of the 650
companies that had announced quarterly profits
by December, over 150 had posted profit growth of
over 200%. Fuelled by foreign inflows and
expectations of yet another miracle budget, the
run up to the Valentine’s Day Sensex was
indication that the love affair between foreign
investors and India Inc. may be over the first date
jitters. But the courtship isn’t quite ready to turn
into a full fledged wedding proposal yet.
The key worry for investors is whether India can
sustain the 6-7% economic growth rate. An ailing
infrastructure network that needs massive
reinforcement and expansion remains one of the
largest obstacles to such growth. Progress in the
Indian power sector, with current electricity
shortages of over 11% of peak and 7% of energy,
will be one of the key determinants to future
growth. All this is not breaking news; the Indian
government has long been aware of the need to
transform the power sector. Throughout the
nineties it worked steadily to liberalise the sector
and initiated reforms that culminated in the
Electricity Act 2003. And thus far, the momentum
on power sector reforms has survived
Governments of both left and right.
India has set itself an ambitious target of more
than doubling per-capita electricity consumption
by FY 2011 and the Ministry of Power projects an
TABLE 1. INDIA’S POWER SECTOR PLANS – THE US$ 200 BILLION PACKAGE
Planned Enhancements
FY 2004
Generation Capacity (thousand MW) 115
Transmission
Interstate Transmission Capacity (MW) 9,000
Transmission (‘000 ctk Kms) 326
Distribution & Rural Electrification
Households with access (%) 60%
Peak Deficit (%) 11%
Energy Deficit (%) 7%
Renovation & Modernisation
Electricity consumption per capita (kwh) 326
Source: Planning Commission (Xth Plan) and Ministry of Power
1
Reprinted from WorldPPower 2005
investment need of 9,000 bn Indian Rupees (INR),
or US$ 200 billion to make it possible 1. The
investment plan aims to expand the power
infrastructure base for economic growth while
making electricity accessible to all. Nobody is
quite betting on its success just yet but it is clear
that Government and policymakers are taking the
problems of the sector seriously.
Transforming the state-led bureaucratic Indian
power sector into a competitive market attractive
to private investors was never going to be easy.
But economic liberalisation of the nineties along
with the pressures from the country’s economic
India has set itself an
ambitious target of more
than doubling per-capita
electricity consumption
by 2011
growth has forced open the sector. Previous
reform efforts etched slowly into industry’s
regulatory structure, ownership, investment, and
management practices. Political will has gradually
coalesced through the reform process of the
nineties and the Electricity Act 2003 is now
galvanising change. With the implementation of
the Electricity Act, progress on structural and
regulatory reforms has achieved enough critical
mass to become irreversible. The change has
sparked renewed interest in private investment
opportunities. What happens next in the sector
will now depend critically on two things:
Estimated Cost FY 04 - FY 11 (bn)
FY 2011 INR USD
207 5,532 123
1,265 28
30,000
386
1,949 43
100%
0%
0%
250 6 29 states have established electricity regulatory
819
(1) How India overcomes the remaining elements
of restructuring that seek to sever the last few
vestiges of political influence.
(2) How India deals with the emerging challenges
of fuel shortages that threaten to derail power
capacity expansion plans.
The remainder of this article discusses the two
identified challenges to growth in the Indian
power sector.
REFORM CHALLENGES
The Indian power sector, long considered a
symbol of the nation’s state led economic
development, has been plagued by bureaucratic
inefficiency and political interference for
decades. Vertically integrated state utilities
(State Electricity Boards (SEB)) are practically
insolvent with commercial losses estimated at
INR 225 bn (US$ 5 bn) for FY 2004 alone 2. The
tariff structure is differentiated by consumer
category with a cross subsidy charge that
penalises commercial and industrial users at the
expense of the more politically influential
agricultural sector. Transmission and distribution
losses remain high – almost 40% – and power
theft is endemic and tolerated.
The Electricity Act 2003 struck at the core of
these issues. Replacing the disparate reforms of
the 1990s, the Electricity Act 2003 brought
together structural and regulatory reforms
designed to foster competitive markets,
encourage private participation and transform the
state’s role from service provider to regulator. The
Act directs the unbundling of vertically integrated
utilities and creates autonomous state electricity
regulatory commissions. Electricity trading has
been recognised as a separate line of business and
regulatory commissions have been directed to
develop rules on open access, rationalise tariffs to
progressively reflect cost of supply, reduce cross
subsidies, institute strong anti-theft provisions
and protect consumer interest.
In India’s constitution, electricity is a shared
responsibility between the centre and states.
Though overall progress at the state level is
mixed, almost all the states have initiated some
structural and regulatory reforms. About 22 of the
commissions empowered to regulate tariffs and
establish performance codes. About half the
 India

FIGURE 1. INDIA’S POWER SYSTEM AT A GLANCE – INSTALLED CAPACITY (115,476 MW)

INSTALLED CAPACITY, JANUARY 2005 (MW)

2% 3%
10%
Coal 59%
Hydro 26%
59% Gas 10%
Nuclear 2%
26% Others 3%

INSTALLED CAPACITY BY OWNERSHIP

11%
33%

56%

Central 33% State 56% Private 11%

Source: Ministry of Power & ICF Consulting Research

states have unbundled the vertically integrated PAYMENT RISK liabilities and re-establish the financial credibility of
state electricity boards. Some form of unbundling One of the biggest worries for private generators electricity purchasing entities.
across all the states is expected by the target is that they may never get paid for the electricity
date of June 2005. Despite the variation on they produce. Most distribution companies are still TARIFF RATIONALISATION
progress, it is clear that the basic thrust of the under state control, either directly through the SEB Subsidies to agricultural and household
Electricity Act has percolated down to the states. or their unbundled successors, and are financially consumers coupled with very high levels of T&D
A critical mass of reform initiatives has developed distressed. Commercial losses at SEB in 2004-05 losses have long kept tariffs out of sync with costs.
and implementation hurdles now relate mainly to alone are estimated to be INR 225 bn (US$ 5 bn)5. Seeking to bring revenues in line with the cost of
difficulties of the restructuring process. Average sales revenue to cost ratio remains well supply, the Electricity Act required the
While the centre-led Electricity Act laid out the under 70%. Much of these losses result from the independent regulatory commissions to rationalise
vision for a deregulated power sector, states have underlying tariff structure and low revenue tariffs. Most states have followed the guideline
the charge of implementing the restructuring collection rates. The tariff structure is defined by with vigour. Through the tariff orders, a number of
process. There is as yet no clear road map for the consumer class and a cross subsidy structure is
restructuring process and the Electricity Act used to subsidise domestic and agricultural users. Most distribution
leaves it to the states to decide. Delhi and Orissa, The higher rates paid by industrial consumers are
the states at the most advanced stages of insufficient to cover the subsidies provided. In companies are still under
restructuring, pursued two different models and addition, revenue arrears, or collection state control ... and are
provide the only real life experiences. inefficiencies, on average are about 25 – 30%. In
The road to competitive power markets in India, some states like Bihar and Jammu and Kashmir, financially distressed
particularly one with active private participation, revenue arrears are astoundingly high – as much as
will depend on how the restructuring process 155% and 227% respectively. In a recent rating of commissions have instituted measures to allocate
deals with three key issues: SEBs conducted by the Ministry of Power, the revenue requirement in an economically efficient
1) Payment risk from sale of electricity median score for financing risk was well short of 10 manner by reducing the extent of cross subsidies.
2) Tariff rationalisation against a maximum of 23. Only ten states achieved Though these new tariff orders are steps in the
3) Open access a score greater than 10. While investors may be right direction, bringing them in line with supply
lured into power costs will ultimately involve raising prices for the
Key Features of the Electricity Act projects with promises vast majority of consumers, particularly in the
* Unbundled vertically integrated state utilities of long-term agricultural sector, that have been used to decades
* Established independent electricity regulatory commission
agreements, the ability of subsidised power. The planning commission
Generation No license required for establishing of SEBs to pay for the estimated that for SEBs to post a rate of return of
non-hydel plants purchase of electricity 3% in FY 2001, average tariffs would have to be
Distributed generation and generation from renewables encouraged
still remains increased by approximately 50% (or INR 1.17
Transmission Non-discriminatory open access to transmission system questionable. Simple /kWh)6 that year. Such increases challenge the
Introduction of power trading as a separate line of business unbundling followed by fundamental nexus between politicians and
Independent power transmission companies allowed privatisation or consumers. Tariff rationalisation will be more than
Unbundling of transmission and trading
corporatisation may not an exercise in bringing revenues at par with cost
Distribution Right to choose supplier be sufficient. The and will require significant political capital to be
Rationalisation of tariff restructuring process spent in convincing agricultural users to accept
Progressive reduction of cross subsidies must determine who higher prices. Thus far, the politicians have yet to
Metered supply of electricity and strong anti-theft provisions
absorbs the existing wager their bets.

Reprinted from WorldPPower 2005
2

 India
Competing Models for Restructuring
The Orissa Model
Orissa was the first state to embark on the reform
programme after the state Electricity Reform Act became
effective in April 1996.
Almost immediately, the Orissa State Electricity Board is
partially unbundled into three separate entities: Orissa
Hydro Power Corporation (OHPC – for hydro generation),
Orissa Power Generation Corporation (OPGC – for thermal
generation) and Grid Corporation of Orissa (GRIDCO – for
transmission and distribution).
Generation is first privatised. In June 1998, AES purchases
49% stake in OPGC. In the second phase, the distribution
assets, properties and personnel of GRIDCO is broken into
four distribution companies. BSES purchases three of them
(NESCO, WESCO and SOUTHCO) in April 1999 and one (CESCO)
is transferred to AES Transpower (joint venture of AES and
Jyothi Structures Ltd) in September 1999.
GRIDCO retains most of the past liabilities of distribution
companies in order to conclude sale. Its cash deficit soars
almost 40% between 1998-1999 and 1999-20003, and the
company has difficulty covering operating expenses.
Private investors bid for distribution companies based on
assumptions contained in the information memorandum.
Assets of distribution companies may have been over-valued
because of underestimated losses (estimated at 35%,
actually more than 50%; the 100% collection efficiency
estimated is actually 83%) 4. Bidders assumed that future
tariff adjustments would balance any initial over-valuation.
No transitional support to private distribution companies
planned and turn-around expected in 2/3 years.
OPEN ACCESS
The Electricity Act recognised open access as
one of the most important instruments for
transforming the power sector. The Act afforded
consumers the ability to directly source their
electricity from suppliers using existing
networks and recognised trading as a separate
line of business. A number of central and state
level regulatory initiatives have sought to
develop and strengthen open access rules7.
These rules could well be the panacea for much
of India’s electricity woes. By challenging the
sole-purchasing power of the state electricity
board (or their successors), generators have an
opportunity to reduce the payment risk, avoid
the hazards of commercial losses from theft and
provide industrial users the incentive to seek
out more cost-efficient supply sources. Despite
the obvious progress on open access rules, the
benefits of it are yet to be realised. The
effectiveness of open access has been stymied
by provision of a ‘surcharge’ that is currently
levied on open-access customers belonging to
any category contributing towards the cross
3
Reprinted from WorldPPower 2005
The Delhi Model
The Delhi Electricity Reform Act comes into force in March
2001.
Two months later, Delhi Vidyut Board (DVB, the state’s
electricity board) establishes six shell companies (holding
company, generating company, transmission company,
three distribution companies) to be operationalised on
transfer.
Distribution is first privatised. 51% of the equity in three
distribution companies are sold to two privately owned
Indian power companies, BSES and Tata Power. DVB ceases
to exist and is replaced by the holding company, the
generation company and transmission company. Delhi
government retains ownership of the holding, generation
and transmission company.
Holding company retains all unserviceable liabilities. Asset
values of successor companies are pegged to serviceable
liabilities. Existing serviceable DVB liabilities will be paid by
successor agency after a four year grace period.
Introduced concept of aggregate technical and commercial
(AT&C) losses, rather than transmission and distribution
(T&D) losses. Private investors bid for distribution
companies on the basis of a five year AT&C targets,
indicative multi-year tariff profile and projected
Government assistance. A five year transitional period with
some Government support over the period.
subsidy. Though the Electricity Act may have
given SERCs the authority to levy a surcharge to
support subsidy financing, its implementation
has merely helped protect incumbency rights
and reduce the pace of restructuring. The vision
of competitive markets with open access is
India’s coal demand
is expected to grow
7% annually over the
next decade
unlikely to be fully realised without further
clarity on ‘surcharge’.
Though India’s power sector reforms are not yet
free of difficulty, the ongoing restructuring efforts
illustrates that a critical mass of reforms have
been achieved. The process now appears
irreversible. The pace and eventual outcome of
reforms, however, will be dictated by the
willingness of politicians and policymakers to
sever the remaining political ties with the sector.
THE RACE FOR FUELS
While India’s reforms have attained enough
critical mass and are slowly winding their way
through the states, a more immediate concern
on fuel shortages threatens to derail short-term
growth prospects in the power sector. At the
end of February, 24 plants (23,000 MW, 35% of
total coal capacity) had coal stock of less than
7 days out of which about 8,000 MW had stock
of less than 4 days8. The failure to activate fuel
supplies has threatened the operation of some
plants and postponed the building of several
others. In January, NTPC had to begin seeking
alternate fuel supply options because the mines
supporting its new pit head plants (Talcher –II
and Rihand-II, total 2,000 MW) had yet to
receive clearance9. Of the 4,300 MW planned
capacity additions off-track in the Xth Plan,
almost 65% had slipped for fuel supply
reasons10. The 100,000 MW of capacity additions
needed through FY 2011 is unlikely to
materialise unless India can find the fuel supply
sources and distribution networks to support
the projected growth.
COAL MARKETS
India’s coal demand is expected to grow 7%
annually over the next decade11. Much of this
increased demand will come from power
generation, which currently accounts for about
80% of total coal consumption. For a country
that has relied heavily on domestic coal, the
stresses of such a demand growth are already
apparent. Over the last decade, coal imports have
steadily risen at an annual rate of 12%12. Coal
consumers, both in the power and industrial
sectors, have increasingly begun to look for
sourcing options from abroad. Jindal Stainless
and Tata Steel were reported to be looking to
acquire coal mines in Indonesia, Australia and
New Zealand to support the expansion of their
power and steel ventures in India 13.
Proven coal reserves in India are estimated to
be 94 billion tonnes and at current production
levels, enough for the next 230 years. But current
production levels are simply not enough to meet
the growing demand. Imported coal, though an
option, does not provide the same cost benefits of
domestic coal (especially for pit-head plants
where most new coal plants are likely to be
located) but could fundamentally alter the
 India

FIGURE 3. COSTS OF SUPPLIES & TARIFFS

400

300

Paise (kwh)
200

imported coal-gas choice dynamics for new plants.

Against this backdrop, some reforms have been 100
initiated in the coal industry but hardly with the
Average Cost of supplies Average Tariff
zeal of a sector so urgently in need of change.
Between 1996 and 2000, after several decades 0
FY 96 FY 97 FY 98 FY 99 FY 00 FY 01
of control, coal prices were deregulated along
Source: Annual report on the working of State Electricity Boards & Electricity Departments, Planning Commission 2002
with the distribution to industries other than
power and steel. Captive mining by private sector
engaged in iron and steel and power generation FIGURE 4. COAL DEMAND & SUPPLY
800
have also been allowed. Although FDI limits for
captive mining for power plants have been Projection
removed and those for iron and steel have been Coal Demand
600
Millions of Tonnes

increased to 74%, private companies are still Domestic Production

restricted only to captive coal mining. It is unlikely

that the state-owned coal companies that have 400
long held a monopoly over coal markets in India
can alone bring the investment and efficiency
improvements in the sector14. Without some major 200
reforms or restructuring that unlocks the
constraints in coal supply, India’s vast potential
for growth in coal capacity additions may remain 0
FY 92

FY 00
FY 90

FY 94

FY 96

FY 98

FY 04

FY 10
FY 06

just that – a great potential.
GAS MARKETS
Gas has emerged as the new frontier for energy
supply in India and as a new industry relatively
free of bureaucratic red tape, holds the hopes for
supporting the expansion in the power sector. Gas
demand in India is expected to increase sharply at
an annual average growth rate of about 8.5%
through FY 2011. Increased demand comes not
only from the power sector, which currently
accounts for about 40% of gas consumption, but
also from the industrial and fertiliser sectors.
Current supply options, however, are extremely
limited. Baseline projections, including LNG
imports and Reliance Gas from the KG basin,
indicate a supply shortage of about 15-20 billion
cubic metres (bcm) annually by FY 2011.
Gas markets in India have matured considerably
since the sector was first opened in the mid
nineties. The New Exploration and Licensing Policy
Source: International Energy Association, 2002 and Planning Commission (Xth Plan)
and the National Commodity and Derivatives
Exchange Limited. A petroleum and natural gas
regulatory board has been proposed along with a
draft pipeline policy seeking to unbundle gas
transportation from supply and establish ‘contract
carrier’ norms for access.
Expanding gas supply sources and distribution
infrastructure is now the key to further evolution
of gas markets in India, and visible signs of
progress in tackling the infrastructure bottlenecks
FIGURE 5. GAS SUPPLY & DEMAND
100
80
Supply
60
BCM
FY 08
FY 02
are already evident. Imports of natural gas started
in 2004 after the commissioning of Petronet’s
Dahej LNG terminal. At least 2 more LNG terminals
are expected to come online by 2009 and the
Dabhol LNG terminal is also gearing up for
operations. Proposed plans for LNG terminals could
add over 80 million standard cubic metres per day
(MMSCMD) of gas capacity. Gas-import pipelines
from Iran and Myanmar are also under serious
consideration. Domestic gas exploration has
Projection
Reliance Gas
Demand

(NELP) was launched to attract private capital in

exploration activity and has been successful in 40
drawing both domestic and international
participants. Several key discoveries have been 20
made under the NELP, though much of the LNG Imports Begin
sedimentary basins of the country remains 0
FY 92

FY 00
FY 90

FY 94

FY 96

FY 98

FY 04

FY 06

FY 08

FY 10
FY 02

untested. Downstream gas marketing has also

been liberalised. An online spot trading facility for
gas contracts is jointly being developed by Gail Ltd Source: Prime Minister’s Office (Hydrocarbon Vision, 2025) and Planning Commission (Xth Plan)

Reprinted from WorldPPower 2005
4

 India

and expanding capacity at its plant in the state;

Reliance Energy announced plans for additions of
3,000 MW of gas-fired capacity in UP. The US$ 200
billion investment bill may not be the primary
constraint in transforming the Indian power
sector. Instead the emerging challenges to growth
relate to the remaining issues of regulatory
reform and fuel supplies. While progress on
reforms now appear irreversible, political will on
resolving the remaining regulatory issues still
remain unclear. Furthermore, fuel shortage
resulting from limited supply options and
transportation infrastructure threaten to derail
power capacity expansion plans. How India tackles
these obstacles remains to be seen. But if the
aggressive vision of Indian planners is to be
believed, it may not be long before the courtship
TABLE 2. LNG TERMINALS
of foreign investors and India Inc. does indeed
Capacity Supply Partners blossom into a full fledged wedding proposal 
LNG Terminals MMSCMD Source Indian Foreign
Footnotes
Dahej * 20 Ras Gas (Qatar) GAIL, ONGC 1. Planning Commission (Xth Plan) and Ministry of Power.
IOC, BPCL GDF, ADB 2. Indian Budget 2005-06.
Hazira ** 10 Various Royal Dutch Shell,Total 3. “Orissa Power Sector Reform: A Brief Overview of the Process,”
Kochi 10 Ras Gas (Qatar) GAIL, ONGC Infrastructure Development Finance Company Ltd. (IDFC Ltd.),
February 2000.
IOC, BPCL GDF, ADB
4. Ibid, IDFC Ltd.
Dabhol *** 20 Oman MSEB GE, Bechel 5. Indian Budget 2005-06.
Enmore 10 Qatar Grasim Unocal, CMS Energy, 6. “Annual Report on the Workings of State Electricity Boards and
Woodside Energy, Electricity Departments,” Planning Commission, May 2002.
Siemens Project Ventures 7. Open access regulations rules relating to transmission customer
class definition and pricing, were approved by CERC in January
Kakinada (Krishnapatnam) 10 Various IOC, Coconada Port BP, Petronas, ISP 2004 and amended in September 2004 and January 2005. CERC
Gopalpur 20 Australia Orissa State, VOGL AMIG, Australia LNG also approved trading related regulations in January 2004.
Several states, including Rajasthan, Maharastra, Tamil Nadu, Andra
Pipavav LNG 10 Yemen BG Pradesh, Gujrat, Karnataka, Madhya Pradesh, Orissa and
Trimbay 12 ME/SEA TPC, GAIL TGPI Uttrananchal have approved or developed draft open access rules
with time-bound implementation guidelines.
Notes: * Operational ** Under Construction ** Undergoing a revival 8. Central Electricity Authority, MoP, GoI.
http://www.cea.nic.in/data/opt2_daily_coal.htm.
expanded considerably with NELP. 164 blocks have on the opportunities. Just last month Brakel 9. “NTPC coal imports may give consumers a power shock,” The
been awarded, of which 20 have announced some Corporation of Holland expressed interest in Economic Times, 27 January 2005.

finds. A national gas pipeline grid connecting over
8,000 kms and able to transport about 100
MMSCMD is also being proposed. While gas may
hold the promise of unlocking growth in the power
sector, the outcome will depend on the willingness
of private investors and Government to make the
initial investment in supply infrastructure.
investing US$ 1 bn on hydel projects in Himal 10. National Electricity Plan, 2005. Central Electricity Authority.
11. Planning Commission Xth Plan.
12. International Energy Association, 2002.
... the emerging 13. “Tata Steel scouts for coal mines in Australia, NZ,” Business
Standard, 26 January 2005. “Jindals eyeing coal mine in
challenges to growth Indonesia,” The Economic Times, 28 January 2005.
14. Coal India Limited and its subsidiaries effectively control about
relate to the remaining 90% of domestic coal production and distribution.

issues of regulatory Sandeep Kumar, Anurag Khetan and Bishal Thapa

CONCLUSIONS
Despite the potential offered by the India’s
power sector, investors have long been weary of
the sector’s bureaucracy and regulatory
complexity. Now with a critical mass of progress in
reforms, private investors have been quick to pick
reform and fuel supplies
Pradesh. More recently, Alstom picked up a 25%
stake in Torrent Power; AES has expressed interest
in re-acquiring the distribution company in Orissa
are with the New Delhi office of ICF Consulting. The
authors wish to acknowledge support of Shanthi
Muthiah (ICF Washington DC office) and Harriet
Hoexter (ICF London office).
www.icfconsulting.com

5
Reprinted from WorldPPower 2005