KARNAVATI UNIVERSITY,

UNITED WORLD SCHOOL

OF LAW

TOPIC- “INTEGRATION OF THE INDIAN ENERGY SECTOR AND

POOR PERFORMANCE OF THE DISTRIBUTORS”
SUBJECT- INFRASTRUCTURE LAW

Submitted to- Prof. Bhavna ma’am

- Yash Joshi, Semester 9A- 20180401083

Farsheed Kavina, Semester 9A-201804010

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 DECLARATION

The text reported in the project is the outcome of our own efforts and no part of this project
assignment has been copied in any unauthorized manner and no part of it has been
incorporated without due acknowledgement.

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TABLE OF CONTENTS

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 INTEGRATION OF THE INDIAN ENERGY SECTOR

WHAT INTEGRATION?
In OECD countries, the system of centralised generation is gradually being challenged by
distributed generation. And electricity markets are rapidly becoming integrated regionally,
straddling national borders to exploit economies of scale. Integration is legitimate to reduce
the cost of producing electricity and to boost production capacity. In the electricity-supply
industry, integration generally means the development of an interconnected system operated
by a single entity, either an independent system operator or a central dispatcher. The
feasibility of integration depends on the central institution’s ability to harmonise state
regulations, a difficult task given possible political opposition. In India, integration is crucial
for two reasons:
■ to encourage investment. In this case integration implies certain clear policy objectives
such as electricity access for all, energy subsidies, energy security, and social and
environmental goals. But it also means streamlining control of the power sector and
facilitating co-operation with other energy sectors;
■ to take advantage of a larger market’s scale effects, to reduce the overall cost of electric
supply and to facilitate exploitation of additional primary energy sources. India has not yet
reaped all the full benefits of a large centralised energy infrastructure. India has to build
additional combined-cycle gas turbine plants and exploit its rich hydroelectricity potential. To
do so, electric power demand should be pooled to mitigate the commercial risks for private
investors. Recent experience shows that even rich states, such as Maharashtra, which are
willing to develop a large LNG infrastructure, face economic difficulties in doing so. This
raises the question of whether the states have the resources to develop mega-projects or
energy infrastructure from scratch. This issue has technical, institutional and financial
aspects. Several lessons can be drawn from ten years of private participation in power
generation:
■ the demand of a single state is too limited for large IPPs, as became evident with Dabhol.
Several states should participate in such a project;
■ difficulties in finalising fuel supply agreements hampered some IPP projects based on
coal;
■ poor co-ordination between the coal and power industries and the absence of a national
grid able to transmit electric power from coal rich regions to markets made it difficult to
launch large mine-mouth coal power.

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 The Benefits of Regional Electric Co-operation and Integration

This excerpt from the handbook written by E7 member companies1 (E7, 2000) describes the
main benefits of integrating a power system at regional level. Though the book’s focus is on a
region comprising independent states, most of the issues addressed are also of relevance to
India.
“For a given region, the integration of the electricity-supply industry of the member
countries, in its final stage, may be defined by two objectives. First of all, the national
electricity networks should be interconnected enough to enable substantial energy and
capacity exchanges between countries. Then, having agreed on a certain level of quality of
supply, the operators and the developers of the region’s power systems have to co-ordinate in
order to minimise the regional cost of electric power, while contributing to environmental and
social objectives.
Generally speaking, regional electricity co-operation and integration enhances the
contribution of the electricity sector to sustainable development. In OECD countries, further
integrating large and mature electric power industries may yield important environmental and
economic benefits. In developing and emerging economies, pooling electricity resources
(notwithstanding political obstacles) is crucial for the development of the electricity-supply
industry, as well as for the contribution of the industry to economic, environmental and social
objectives, which are the three pillars of sustainable development.
Regional electricity co-operation and integration ranges from sharing experience and
expertise on the operation and planning of the electric power system, to pooling activities
such as training electric engineers, research and development, integrating parts of or the
entire structure for operating and developing the electric power systems. The electric
interconnection of national power systems is considered as a very important step toward
regional electricity integration, and a decisive step toward the implementation of a regional
competitive power market. There is, in every sector of the economy, particularly sectors of
mass production, a clear case for pooling resources. This is all the truer in the electricity-
supply industry: as electricity is not storable, there is a strong incentive for pooling supply
and consumption through the interconnection of electricity networks.
Throughout the last century, the experience of utilities in the E7 countries has indicated that
the interconnection of isolated electricity networks usually results in pooling generation
resources and eventually, if the institutional structure permits, in integrating electric utilities
into larger structures. Conversely, the existence of separate political and/or institutional
structures may be an obstacle to technically and economically feasible electric
interconnections, and may lead to the development of sub-optimal power systems at the
expense of sustainable development objectives.
Last but not least, true regional integration will help to further optimise the use of generation
resources. Through more efficient exploitation of hydroelectric resources and fossil fuels
savings, it can also allow significant reductions of CO2 and other airborne emissions.
Accordingly, integration projects may benefit from the CDM, one of the flexible measures
outlined in the Kyoto Protocol.

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In developing countries, the important financial risk perceived by private investors combined
with the scarce domestic financial resources force the electric power industry to call for the
support from international funding institutions. These international funding institutions tend
to favour regional co-operation projects versus separate national projects. They also urge the
governments to reform their power sector toward more regulatory and financial
independence, and to promote competition, wherever feasible. Interconnection projects will
find the required funds more easily if they benefit financially independent and internationally
accountable electric utilities. Conversely, an efficient electric power wholesale competition
requires a minimum level of interconnection.”

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 Integration of Political Decision-Making at the Federal Level

Private investment, especially foreign investment, favours large power projects. To attract
investments to India, a sizeable power market must be developed. This requires, at the very
least, pooling the power demand of neighbouring states to mitigate commercial risk.
Technical and economic integration of state power markets would be facilitated by regional
or federal integration of the institutional structure of the electric supply industry. This is all
the truer because SEBs are allocated a budget and do not have the possibility for financial
leveraging that central generating companies have. The states, which developed and still
control more than 60% of Indian power generation capacity, are now political and
institutional barriers to the development of a much-needed integrated power market.
Despite the willingness expressed over the past decade by successive Ministers of Power to
advance fast-track projects and carry out a mega-power policy, many projects have been
delayed or stalled by lack of agreement on fuel supply. Achieving fuel supply agreements
would be facilitated if liquid fuels, gas and coal were controlled at the federal level by the
same political entity as the one controlling the electric supply industry. In that case, clear and
efficient co-ordination should be developed between the ministries concerned and the electric
power industries.
The Indian electricity system as a whole should be planned, developed and operated as an
integrated system. This would allow the development of an integrated longterm energy
resource plan, as has been recommended by the World Bank for some time (World Bank,
1999). A minister for energy could be responsible for developing and supervising
implementation of a comprehensive energy strategy

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 Horizontal Integration of the Electric Supply Industry

The recent negotiation between states and the Government of India to find a solution for the
payment of arrears owed by SEBs to central-sector power corporations demonstrates that
central and state governments may not share the same understanding of key issues. State
governments often are exploiting the fact that, under the Constitution, electricity is mainly
their responsibility. This can lead to considerable delays in the implementation of reforms at
the state level.
The basic administration unit in India remains the state, and each state runs its own utility. In
the 1960s, a first step toward integration was taken by grouping the states into six regions. In
1975, the central government established generating companies, one for thermal power plants
and another for hydroelectric power plants (NTPC and NHPC). Later, the national
POWERGRID company was created. In recent years, NTPC developed its generating
capacity faster than did the SEBs, which have been suffering from a deteriorating financial
situation. This trend should be encouraged, along with competition between central
generating companies.
The mega-project policy, which calls for the development of large generation projects to
supply more than one state, is a good start toward integration of the Indian power sector. Of
the 18 mega-projects announced however, few have shown much progress. For these to
advance, more secure guarantees need to be provided, perhaps from the central government,
and the whole procedure needs to be streamlined. All IPP projects, not just those announced
as mega-projects, should be co-ordinated by a federal entity. And a single buyer should
probably be responsible for power purchase agreements. PTC could be that entity

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 LIST OF REFERENCES

1.