New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist The World Bank

Indian Power Sector Investment requirements (2007-12) Overview of market conditions
India International Investors

Potential role of the World Bank Group (CAS 2005-08) Concluding Remarks


000 MW of existing thermal capacity to be rehabilitated and modernized Distribution networks to be upgraded and MIS strengthened Human resources to be revitalized And: A “low carbon growth” strategy to be followed with international support (Post G8+5 meeting at Gleaneagles in 2005) 3 . 2.000 MW (from 125.000 crores) In addition: About 20..000 MW) Of this about 20-30.000 crores) Transmission & Distribution – US$40 billion (Rs.000 MW to 185.000 MW hydro Investment program estimated to cost US$100 billion Generation – US$60 billion (Rs.80.Investment Needs over 2007-12 period reasonably well established….70. Installed generation capacity to increase by about 60. 1.

Industrial. commercial. billing hassles. 60% of Indian firms rely on costly captive or back-up self-generation (compared to 21% in China) Urban household demand about 20-25% of total consumption Urban consumers becoming wealthier and more service conscious Rural – including agricultural . Industrial and commercial demand now about 43-45% of total consumption. Still needs effective government support 4 . urban household demand increasingly commercialized..demand not ready for commercialization.Indian market environment also broadly known…. voltage fluctuations. Willing to pay cost-recovery tariffs provided: Service is Efficient – not willing to pay for theft and utility inefficiency Service is demand responsive – willingness to pay declines with outages. etc.

2/kWh) or generate 25% more revenue if billed at the average tariff (Rs.3-4.000 crore ($4.5 billion) of poorly targeted and poorly accounted subsidies each year (from budget & cross-subsidies) Even in advanced reforming states.Some barriers to commercialization….. Governance of distribution utilities Over 40% of energy supplied into state transmission systems is lost.77/kWh) Sector is a conduit for about Rs. only 55-65% of electricity sales metered State regulatory commissions are still finding their feet Tariffs are distorted and do not cover costs Industry tariffs are high by international standards (about USc 8-10). 2. 20. 15-20.000 crores/y ($3. not billed. agricultural tariffs (accounting for 25% of consumption) are well below cost Data quality is improving but progress on energy accounting/audits is slow Regulations on service quality and service obligations yet to be enforced Limited outreach efforts to enhance public participation Fuel supply bottlenecks Early stages of competition and liberalization 5 .4 billion) of generation cost (@Rs. incorrectly billed or payment not collected Reducing to 20% would save Rs.

2003 National Electricity Policy (March 2005) National Tariff Policy (January 2006) Correct focus on: Governance Competition Commercialization Rural services Private participation Key challenge: Ramp up pace and quality of policy implementation – What must be done to move from about $6 billion to $20 investment/year? Overcome concerns and resistance at state level Accelerated reform of distribution still a critical bottleneck Resolve fuel supply bottlenecks Engage the private sector Remain conscious of international commitments – clean energy 6 ..(3) Government of India policy response is appropriate: Electricity Act.India market environment ….

India’s carbon emissions 500 Million metric tons of carbon 450 400 350 300 250 200 150 100 50 0 1990 2000 2010 2020 Source: EIA International Energy Outlook 2003 (base case) •The power sector accounts for about 60% of carbon emissions •Projected emissions rise amounts to 7% of global increment 453 337 251 156 Energy and carbon intensity of the economy is lower than in China. but not declining nearly as fast 7 .

2020 160.300 Bn High Investment Demand Scenario (3%) Gap covered by public financing.India’s vs Global investment requirements .0 40. donor funding.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Historic ehcuoT ettioleD .a large Growing Gap between demand and supply? Financing required for the Power Sector in Emerging Markets 1990 .900 Bn Low Investment Demand Scenario (2%) Total Power Investment ($Billion) 140.0 80.knaB dlroW : puorG stekraM gnigremE ustamhoT Future 8 2020 :ecruoS .0 100. and rationing.0 20.AEI . self -financing. $1.0 Private Capital Mobilized in Power Sector 0.0 60.0 Cumulative Sum ($Bn) $2.0 120.

World Bank role in India: Conforming with Country Assistance Strategy (2005-08)… Continue to support state level reforms – Critical for mobilizing the volume of investments needed to meet India’s demands in an affordable manner Support rural access to spur rural development Show-case mechanisms for scaling-up a low-carbon power generation program Continue to support expansion of the national transmission system to facilitate access and trade Continue to provide analytical. advisory and capacity building support 9 .

Pre-1990s: Investments in thermal and hydropower generation at the central and state government levels Expansion of the transmission system Investments in state distribution systems 1990-Present: Investment. budget and advisory support for state level reforms (Orissa. Haryana.Bank assistance strategy builds on past engagement in power sector…. UP and AP) Investment support for transmission and renewable energy (through IREDA) Investment in 1500 MW Nathpa-Jhakri hydro plant 10 .

3. addresses investor priorities… 1. property rights. laws that work” “enforceable exit strategy” [Separately ranked 4th] 2.…responds to consumer & Gov’t concerns. Guatemala ] “protection ‘to do business’ – labor laws. Legal protection and framework defining investor rights 63% of firms rated it a “deal-breaker” – ranked 1 of 12 factors “contract enforceability” “clarity in market rules” [Brazil . “worsening payment discipline – strong negative”. Guarantee from Government or Multilateral 36% rated it a “deal-breaker” – overall rank 5 of 12 “support needed till the business becomes commercial” “why should we take on the risk of a bankrupt business?” Interestingly not a determinant for success – “best” and “worst” experience. Payment discipline and enforcement 40% of firms rated it a “deal-breaker” – ranked 2 of 12 factors Both generation and distribution investors considered it important “we cannot fix it on our own” – government support essential. 11 10 .

“new regulators show little appreciation of investor needs”. Regulatory commitment sustained through long-term contract 50% of firms rated it a critical determinant of failure. “Regulators showing an increasing tendency to change rules and targets on which investment decisions are made”.First overall rank for success or failure “we have learned enough to avoid countries with unsustainable retail tariffs” “Government assurances to raise tariffs or provide subsidies – not very comforting”. Second overall rank Key to deriving value from investment – economies. cost reduction Unanimous verdict that public-private operational partnerships are not important (lowest ranked) 4.What 50 global investors have reported on why investments succeeded or failed… 1. Retail tariff level and cash-flow discipline 65% of firms rated it critical . “Tariff levels should be high enough without subsidies” 2. Fair adjudication of tariff adjustments and disputes 50% of firms rated it a critical determinant of failure. Second rank in case of failure. Operational Control and Management Freedom 60% of firms rated it a critical success factor. 3. Third overall rank “a contract is a contract” “if the contract looks cozy – it probably is” “need to make sure that the contract is on firm economic and financial ground” 12 15 .

India Regulators perceived to be exercising “excessive” discretion and risk on the increase India. Panama. Argentina. Colombia. Pakistan. Morocco Respecting contracts under stress Thailand.How Satisfied are Investors? – A Country Assessment Being a small country is not a liability Multiple entrants (over 4) – No dissatisfied investors Latin America – Bolivia. Brazil Are regulators just doing their job – or are investor expectations unrealistic? 13 19 . Jamaica. Nicaragua. Dominican Republic Africa – Kenya. Philippines Czech Republic. Guatemala. Costa Rica. Colombia. China. Indonesia.

11 3.83 2.83 2.91 2.What conditions are important? Minor Rated “Dealbreaker” 63% 36% 40% 13% 15% 19% 19% 8% 10% 4% 4% 13% Relative Rank 1 2 5 7 3 4 6 9 8 10 11 12 Major Critical “Deal-breaker” Legal Protection of Investors Legal Protection of Investors' Rights Consumer Payment Discipline Gov’t/Multilateral Guarantee Government Efficiency Judiciary's Independence Clear Rules for Exit Investment Grade Debt Rating Transition to Competitive Market 3.11 2.00 3.66 2.49 2.68 2.43 2.98 2.57 Corruption Index Ranking Domestic Borrowing Competitive Selection Possibility of Vertical Integration 14 9 2 .

Global market environment – Feedback from Power Investors Roundtable (World Bank 2004) The Target Group Firms that invest their own equity outside their home countries Local/domestic firms not included Lenders not included – they follow the equity sponsor The Target Universe 65 firms in final survey. The Response Rate 48 valid responses – a 75% response 15 . An ever decreasing number: 7 mergers 7 exits from emerging markets 2 went into receivership The Survey Instrument A 7-page standardized survey to all firms Sent by email/fax – follow-up phone calls.

BG Group BP Global Power CHI Energy (Energia Global) Chilectra Cinergy Global Resources CLP Power International CMS Energy Corporation Cogentrix Energy Commonwealth Development Corp. 8. 6. GMS Power 35. 55. 45. GE Capital Global Energy 34. Mirant Mitsui & Co. Keppel FELS Power 42. 17. 54. InterGen 40. 13. 64.ON Energie Edison Mission Energy 23. Ltd. 48. 52. Independent Power 39. NRG Energy Panda Energy PPL Global PSEG Global Reliant Energy Rolls-Royce Power Ventures Saur International Scudder Latin America Fund Sempra Energy Siemens Power Ventures Sithe Energies Statkraft International Steag AG Tomen Power Tractebel TransAlta TXU Corp Union Energy Union Fenosa Wartsila NSD 16 21 . 16. Eskom Enterprises 31. 4. ABB Equity Ventures AEP AES Corp Alliant Energy International Alsons Consolidated Resources Amata Power Banpu Public Co. 58. 59. FondElec 32. 14. 12. El Paso Energy 24. 9. Endesa 28. 10. Ibedrola 38. 65. 21. 56. 7. 53. Entergy Power Group 30. 49. 57.International Power Investors – Firms Targeted 1. Electricite de Portugal 26. 47. 15. 2. Electricite de France International 25. Marubeni Power 44. 50. EIF Group 29. HEI Power 36. 11. 60. 20. Fortum 33. Korea Electric Power Company 43. 63. 62. 3. 18. Elyo 27. 19. Hydro Quebec 37. 5. 51. 22. 61. 46. International Power 41. Covanta Energy Delma Power Duke Energy Dynegy E.

and efficient collection of posted tariffs Keeping the financial house in order: Improving access to debt financing from domestic/international debt markets by maintaining profitable operation + acceptable debt service ratio Reducing risk & maintaining a healthy regulatory environment: Attracting domestic & foreign equity funding creating and maintaining sector structure.Factors that enable and attract investment Well-managed reform: Increasing ability of utility to generate internal cash for investment through – cost reductions timely tariff adjustments to recover the cost of supply. regulatory and legal environment conducive to minimization of country/project investment risk 17 .The fundamentals have not changed .

The evolving World Bank program balances pragmatism with the fundamentals… Support service improvements in 2-4 states Improve efficiency. service quality and governance of state utilities Support rural access to spur rural development Complement or supplement the Rajiv Gandhi Rural Electrification Program to ensure demand-responsiveness and sustainability of rural services Show-case mechanisms to scale-up low-carbon power generation Develop hydropower potential in an environmentally and socially sustainable manner Strengthen capacity of 1-2 state governments to manage and utilize hydro resources in an efficient and responsible manner Reduce barriers for rehabilitating thermal power plants and improving their fuel efficiency (part of “low carbon growth” agenda) Promote renewable energy development (through IREDA/MNES) Continue to support expansion of national transmission system to facilitate access and trade Continue to provide analytical. advisory and capacity building support Build awareness and consensus around sector reform issues – governance of publiclyowned distribution utilities. open access. 18 Improve regulatory effectiveness in infrastructure services . etc.

1 m Closing Date June 2006 July 2011 June 2006 March 2007 Under Preparation: Rampur Hydropower – 412 MW approx.3 m $ 45.World Bank’s Assistance Program…(2) Current portfolio consists of the following operations: Project Powergrid II Powergrid III Rajasthan Power Renewable Energy II Loan Amt $450 m $400 m $178 m $112 m Balance $ 60.0 m $ 38. $400 m (2006-07) Thermal Power Rehab – 600 to 1000 MW ($120-140 m IBRD. $40-60 m GEF) Being Identified: State utility development & reform – dialogue with 3-4 states Rural electricity services – dialogue with Ministry of Power Hydropower development – dialogue with Ministry of Power and 2 states Establishment of institute for regulation and competition 19 .6 m $400.

International Finance Corporation also has an active power portfolio in India… Allain-Duhangan 192 MW hydropower – first for IFC on merchant basis Powerlinks .2 billion in aggregate project costs. 5 transmission clients.815 MW of generation capacity and US$15. The portfolio currently has: 7 distribution clients. considering windpower Considering financing private distribution companies (NDPL) TA (with North American Rural Electrification Cooperatives Association) to PFC for rural electrification Worldwide. IFC has a power portfolio of US$2.5 billion (11% of business) Good performance to date Invested (since 1990) in 14.Tala Transmission Project – Tata Power & Powergrid JV Mini hydro – IHDC (2-5 MW projects). 61 projects in 33 countries 20 .

World Bank Group risk mitigation guarantees .to leverage private investment IFC IFC Guarantees (partial credit structures usually for local financing) Interest Rate and Currency swaps MIGA Political Risk Insurance expropriation transfer restriction breach of contract war & civil disturbances IBRD/IDA Guarantees partial risk partial credit 21 .

04% Total World Bank Interest Rate 5. Variable spread loan 6 month LIBOR Spread over LIBOR Commitment Fee Front-end Fee Interest USD loans Yen loans 5.03% 0.07% 0.07% 0. 5 years 20 years 22 . moratorium) 5 years 20 years 0.18% 0.15% 0.18% 0.04% 0.Lending Terms (As per currently applicable waivers to Indian Portfolio) LIBOR-based.IBRD Loans .32% + currency exchange rate impact – deemed export/import duty exemption* Principal Moratorium Repayment period (incl.44% *Applicable to ICB procurement funded from loans provided by multilateral agencies.

particularly of distribution companies.In closing…. However: Scale of investments needed cannot be mobilized unless enterprise level reforms. are ramped up Private or public companies cannot fix cash inadequacy without government help AND We know from painful experience that a policy environment that is unfavorable for the private sector will be unfavorable for the public sector too! 23 19 . World Bank is committed to helping India meet its power sector objectives: Improve efficiency and quality of electricity distribution – key to “unblocking” internal resources Expand rural access Enable electricity trade and transmission of power Develop hydropower and other renewable energy potential in an environmentally and socially sustainable manner Reduce barriers for rehabilitating thermal power plants and improving their fuel efficiency – other financial support for a “Low Carbon Growth” strategy being formulated Policy framework has improved considerably – regulatory frameworks are also becoming more competent and transparent.

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