Domain Study Indian Power Sector

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Published on July 31, 2009

Author: jaspalbhatia

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The report discusses about the complete overview of Indian power sector.

A Study on Indian Power Sector JASPAL SINGH ROLL-47 SACHIN RANGRAO DESHMUKH ROLL-06 CHANDRA MOHAN VERMA ROLL-56 ANINDYA KUNDU ROLL -22 PRAKASH POLLY MAZHUVANCHERRY ROLL-26

Table of Contents EXECUTIVE SUMMARY......................................................................................................................... 5 INTRODUCTION ...................................................................................................................................... 7 GENERATION .......................................................................................................................................... 8 Capacity ................................................................................................................................................. 8 Power Generation ................................................................................................................................ 11 Emerging technologies.......................................................................................................................... 11 Coal-based ........................................................................................................................................ 11 Fluidized bed combustion ................................................................................................................. 11 Nuclear Power .................................................................................................................................. 12 Distributed generation ...................................................................................................................... 13 Resources ............................................................................................................................................. 15 Coal .................................................................................................................................................. 15 Natural Gas ....................................................................................................................................... 16 DEMAND - SUPPLY .............................................................................................................................. 17 Sectoral demand ................................................................................................................................... 17 ELECTRICITY DEMAND FORECAST .................................................................................................. 19 Elasticity of electricity consumption with respect to GDP growth.......................................................... 20 TRANSMISSION .................................................................................................................................... 22 Review ................................................................................................................................................. 22 Overview and Structure ........................................................................................................................ 23 National grid......................................................................................................................................... 25 Grid discipline ...................................................................................................................................... 27 Private investments in transmission ....................................................................................................... 28 Technology in transmission .................................................................................................................. 29 HVDC transmission .......................................................................................................................... 29 Transmission cost structure ................................................................................................................... 30 DISTRIBUTION ...................................................................................................................................... 31 Tariffs and financial performance of SEBs ............................................................................................ 32 T&D losses ........................................................................................................................................... 32 Measures to reduce losses ..................................................................................................................... 34 Technical losses ................................................................................................................................ 34 ~2~

Commercial losses ............................................................................................................................ 34 Privatization ..................................................................................................................................... 34 Distribution reforms.............................................................................................................................. 35 New R-APDRP .................................................................................................................................... 36 REFORMS IN THE POWER SECTOR.................................................................................................... 36 Pre Reform Stage.................................................................................................................................. 36 Electricity Act 2003 .............................................................................................................................. 40 Generation ............................................................................................................................................ 41 Rural Electrification/Generation/Distribution ........................................................................................ 41 Licensing .............................................................................................................................................. 42 Trading and Captive Generation ........................................................................................................... 42 Open Access ......................................................................................................................................... 43 Distribution .......................................................................................................................................... 43 Transmission ........................................................................................................................................ 44 Tariff .................................................................................................................................................... 44 Regulatory Commission........................................................................................................................ 45 Policy Issues ......................................................................................................................................... 45 Mega Power Policy ............................................................................................................................... 45 Ultra Mega Power Projects ................................................................................................................... 46 Consumer Interests ............................................................................................................................... 46 Enforcements........................................................................................................................................ 47 Dispute Resolution ............................................................................................................................... 47 Electricity (Amendment) Act, 2007....................................................................................................... 47 Demand Side Management ................................................................................................................... 48 Environmental Reform in the Electricity Sector: ................................................................................... 49 STUDY OF SELECTED COMPANIES ................................................................................................... 51 1. NTPC Ltd. ........................................................................................................................................ 51 2. RELIANCE INFRASTRUCTURE LTD ........................................................................................... 52 3. TATA POWER COMPANY LTD .................................................................................................... 53 4. POWER GRID CORPORATION OF INDIA LTD ........................................................................... 53 5. JP HYDROPOWER ......................................................................................................................... 53 MAJOR FINDINGS: ................................................................................................................................ 54 ~3~

IMPACT OF CERC REGULATIONS ON CENTRAL PLAYERS ........................................................... 55 Generation ........................................................................................................................................... 55 Transmission ........................................................................................................................................ 58 IMPACT OF CERC REGULATIONS ON TARIFF AND END CUSTOMERS .......................................................... 59 ADVANCED METERING INFRASTRUCTURE................................................................................................. 60 RENEWABLE ENERGY......................................................................................................................... 69 Renewable Energy Scenario in India ..................................................................................................... 69 Co-Generation ...................................................................................................................................... 70 Wind Power .......................................................................................................................................... 71 Solar power .......................................................................................................................................... 71 SPV Systems ........................................................................................................................................ 72 Small hydroelectric plants ..................................................................................................................... 72 Biomass Power ..................................................................................................................................... 72 Potential ........................................................................................................................................... 72 Different Technologies Used ................................................................................................................ 73 Gasification ...................................................................................................................................... 73 Geothermal Power ............................................................................................................................ 73 NUCLEAR POWER IN INDIA ....................................................................................................................... 75 REFERENCES......................................................................................................................................... 80 ~4~

EXECUTIVE SUMMARY Availability of power is one of the important ingredients for industrial growth. It is an important infrastructure facility without which no industrial activity can be thought of in modern times. Increasing automation of Indian industries has created huge demand of power in India. This huge demand has resulted into demand supply gap in India in recent times. This report is based on the extensive study of the power sector in India. Both global and domestic perspectives of power sector focusing more on Indian players have been looked upon in this report. It includes the literature review by scholars which has analyzed the subject of power sector more extensively. The objective of this report is to get a comprehensive and apparent knowledge of the power sector, and to study the changes in power sector over a period of time there by analyzing various aspects of the power sector. In the report the power generation companies of the industry chosen, are the top five and bottom five companies of the power sector in India, based on the sales turnover. The trends in the demand, supply and generation in the power sector is discussed through the trend analysis. Before 2001, India‘s electricity-supply was mainly owned and operated by public sector. It was running under the risk of bankruptcy. This created a serious impediment to investments in the sector at the time when India desperately needed them. This led to the emergence of Private players in the power sector. The NTPC, Reliance Infra, Tata Power, Power Grid, & Torrent Power are the market leaders in the power sector and have high Cumulative Annual Growth Rate (CAGR). This is because of the government support, inflow of foreign investment, growing demand and use of latest technology for power generation and transmission. The best management policies are adopted by these companies. The small players GVK power, Indowind Energy, Energy Development, JP Hydro, and KSK energy are also imparting new technology, and management policies to survive the competition and meet the demand of power sector. The methodology used in report includes comparative analysis of the top 5 and bottom 5 companies of the sector. The Potter‘s five forces analysis, SWOT analysis, Trend analysis & Ratio ~5~

analysis are used to analyze the industry of power sector. The various analysis shows that there has been a continuous growth in generation and consumption of power in India. Thermal, hydro and nuclear are three major source of power generation From the installed capacity of only 1,362mw in 1947, has increased to 97000 MW as on March 2000 which has since crossed 100,000 MW mark India has become sixth largest producer and consumer of electricity in the world equaling the capacities of UK and France combined. The number of consumers connected to the Indian power grid exceeds is 75 million. Rural electrification is one significant initiative of the industry to trigger economic development and generate employment by providing electricity as an input for productive uses in agriculture and rural industries, and improve the quality of life of the rural people. The International Energy Outlook 2006 (IEO2006) projects strong growth for worldwide energy demand over the 27-year projection period from 2003 to 2030. Much of the growth in energy demand is among the developing countries in Asia, which includes China and India; demand in the region nearly triples over the projection period. Total primary energy consumption in the developing countries grows at an average annual rate of 3.0 percent between 2003 and 2030. In contrast, for the developed countries—with its more mature energy-consuming nations—energy use grows at a much slower average rate of 1.0 percent per year over the same period. This huge increase in projected demand of energy in India and China makes analysis of energy sector of these countries very important. World electricity generation rose at an average annual rate of 3.7% from 1971 to 2004, greater than the 2.1% growth in total primary energy supply. Total world consumption of marketed energy is projected to increase by 50 percent from 2005 to 2030. ~6~

INTRODUCTION An economy‘s growth, development, ability to handle global competition is all dependent on the availability, reliability and quality of the power sector. As the Indian economy continues to surge ahead, electrification and electricity services have been expanding concurrently to support the growth rate. The demand for power is growing exponentially and the scope of growth of this sector is immense. Existing generation suffers from several recurrent problems. The efficiency and the availability of the coal power plants are low by international standards. A majority of the plants use low-heat- content and high-ash unwashed coal. This leads to a high number of airborne pollutants per unit of power produced. Moreover, past investments have skewed generation toward coal-fired power plants at the expense of peak-load capacity. In the context of fast-growing demand, large T&D losses and poor pooling of loads at the national level exacerbate the lack of generating capacity. India is one of the main manufacturers and users of energy. Globally, India is presently positioned as the 11th largest manufacturers of energy. It is also the worlds‘ 6th largest energy users. In spite of its extensive yearly energy output, Indian power sector is a regular importer of energy because of huge disparity. Global and Indian economy have decelerated, but power is one of the few commodities in short supply in India. So, despite the sluggishness in production and demand for manufactured products, India remains power hungry, both in terms of normal and peak power demand. Power is derived from various sources in India. These include thermal power, hydropower or hydroelectricity, solar power, biogas energy, wind power etc. The distribution of the power generated is undertaken by Rural Electrification Corporation for electricity power supply. ~7~

GENERATION Capacity The government has revised the capacity addition target to 78,700 MW from 78,577 for the Eleventh Plan. However, while in 2007-08 it added capacities of 9,263 MW, in 2008-09 only 3,453.70 MW capacities were added against the target of 11,061 MW - 69 per cent below the target. This was due to delays in the supply of critical components in thermal projects and non- availability of fuel. The capacity addition target for the Tenth Plan (2002-2007) was estimated at 41,110 MW, out of which only 21,095 MW was achieved (2,872 MW was achieved in 2002-03, 3,952 MW in 2003- 04, 3,950 MW in 2004-05 3,468.8 MW in 2005-06 and 6,852.8 MW in 2006-07). Major projects commissioned in the central sector in 2007-08 and 2008-09 include: Sipat STPS-II in Chhattisgarh (thermal based, 1,000 MW) • Mejia TPS (block 6) in West Bengal (thermal based, 250 MW) • Ratnagiri CCPP-II (Block 3) in Maharashtra (thermal based, 740 MW) • Teesta-V (unit 1, 2 and 3) in Sikkim (hydel based capacity of 170 MW each) • Omkareshwar (block 1-8) in MP (hydel based, 65 MW each) • Kahalgaon in Bihar (thermal based, 1,000 MW) • Kaiga APP (block 3) in Karnataka (nuclear based, • Bhilai TPP in Chhattisgarh (thermal based, 500 MW) 220 MW) Major projects commissioned in the state sector in 2007-08 and 2008-09 include: Guru Har Govind (Lehra Mohabat) TPS-II project in • Rayalaseema TPS-II (unit 4) in Andhra Pradesh Punjab (thermal based, 250 MW) (thermal based, 210 MW) • Dholpur CCPP (ph 1) (unit GT 2 and ST) in • Bellary TPP (unit 1) in Karnataka (thermal based, Rajasthan (thermal based, 110MW each) 500MW) • Yamuna Nagar TPP in Haryana (thermal based, 300 • Priyadarshni Jurala in Andhra Pradesh (hydro based, MW) 39 MW) • Maneri Bhali-II (unit 1, 2,3 and 4) in Uttrakhand • Santadih unit 5 in West Bengal (thermal based, 250 (hydro based, 76 MW each) MW) • Korba East TPP (unit 1 and 2) in Chhattisgarh • Sagardighi TPP unit 1 in West Bengal (thermal (thermal based, 250MW each) based, 300 MW) • Dhuvaran CCPP Extn. (Unit ST) in Gujarat (thermal • Dugapur TPS Extn unit 7 in West Bengal (thermal based 40 MW) based, 300 MW) • Paras TPS Extension (unit 1) in Maharashtra (thermal • Bakreshwar TPS-II unit 4 in West Bengal (thermal based, 250MW) based, 210 MW) • Sanjay Gandhi (Birsinghpur) TPP Extension ST III • Purulia PSS unit (1,2,3 and 4) in West Bengal (hydro (unit 5) in Madhya Pradesh (thermal based, 500 MW) based, 225 MW each) ~8~

• Balimela-II Extn unit 7 and 8 in Orissa (hydro based, • Valuthur CCPP Extn unit GT in Tamil Nadu (thermal 75 MW each) based, 59.8 MW) • GHT (Lehra Mohabbat) TPS-II in Punjab (thermal • Priyadarshini Jurala unit 2 in Andhra Pradesh (hydro based, 250 MW) based, 39 MW) • Baglihar HEP unit 1,2 and 3 in Jammu and Kashmir • Varahi Extn unit 1 in Karnataka (hydro based, 115 (hydro based, 150 MW each) MW) • Amarkantak TPS Extn unit 5 in Madhya Pradesh • Sagardighi TPP unit 2 in West Bengal (thermal (thermal based, 210 MW) based, 300 MW) • Ghatghar PSS unit 1 and 2 in Maharashtra (hydro based, 125 MW each) Major projects commissioned in the private sector in 2007-08 and 2008-09 include: OP Jindal (Raigarh) TPP phase I and II (unit 1, 2, 3 and 4) in Chhattisgarh (thermal based, 250 MW each) • Torrent Power has synchronized Sugen CCPP block 1 in Gujarat of 376 MW • Tata power has synchronized Trombay TPS unit 8 in Maharashtra of 250 MW The total installed capacity in India rose from 89,103 MW in 1997-98 to 147,965 MW by the end of 2008-09. In addition, around 19,509 MW of captive power capacity is connected to the grid (as on March 2007). Despite the rise in installed capacity, there has been a significant shortfall in capacity additions when compared to the targets set over the last 10 years. This shortfall is the result of the absence of significant capacity additions by the states and the private sector, which can be attributed to the poor financial health of SEBs and private generators unable to achieve financial closure owing to inadequate payment security mechanisms. Most of the projects in the private sector have been delayed owing to expensive fuel costs (leading to unviable tariffs), delay in obtaining clearance from the CEA and Ministry of Environment and Forest (MoE&F), signing of power purchase agreements (PPAs) and roadblocks in achieving fuel linkage. Over the past 11 years, there has been a marginal shift in the fuel mix. The thermal-hydel mix changed from 72:25 in 1997-98 to 63:25 in 2008-09. The share of thermal plants fell on the back of increase in the share of renewable energy-based plants over the past decade. The share of nuclear power plants in the overall installed capacity, though, continues to remain low. ~9~

Power - Installed capacity by ownership Source: CEA, CRISIL Research Annual capacity additions Source: CEA, CRISIL Research Plan-wise capacity additions Source: CEA, CRISIL Research ~ 10 ~

Power Generation Power generation increased by 3 per cent, from 699.1 billion kWh in 2007-08 to 723.5 billion kWh in 2008-09. Between 1998-99 and 2008-09, it increased at a CAGR of 4.9 per cent, from 448 billion kWh to 724 billion kWh. The PLF of thermal power plants rose from 64.6 per cent in 1998-99 to 77.19 in 2008-09. The PLF of Indian plants is lower than that of their international counterparts on account of old plants, inadequate maintenance, poor quality, unsatisfactory transmission infrastructure and no means of assured fuel supply. Average PLF Source: Planning Commission, CEA Emerging technologies Coal-based Conventional coal-based plants have two major drawbacks - low overall efficiency levels and high pollution levels. As a result, technological research has focused on the development of non-polluting technologies using coal. The most popular of these technologies are fluidized bed combustion (FBC) and integrated gasification combined cycle (IGCC). Fluidized bed combustion In FBC, air is blown at high pressure through finely ground coal. The particles mix with the air and form a floating or fluidized bed. This bed acts like a fluid in which the constituent particles collide with one another. The bed contains around 5 per cent coal (or fuel) and 95 per cent of inert material (such as ash or sand). ~ 11 ~

The temperature in a FBC is 800-900 C, compared with 1,300-1,500C in pulverized coal combustion (PCC). The lower temperature helps in minimizing the production of nitrous oxide. Furthermore, most of the sulphur dioxide formed can also be absorbed with the help of absorbents like limestone. The other advantages of FBC technology are its compact nature, ability to burn low calorific value coal (up to 1,800 kcal per kg) and produce less erosive ash. FBC-based plants also have lower capital costs (8-15 per cent lower) as compared to PCC-based plants. At present, the only constraint in using this technology is its small size. While the maximum size of a PCC-based power plant unit could be around 1,500 MW, FBC plants have a maximum unit size of only 250 MW. Integrated gasification combined cycle IGCC technology is used to enhance the thermal efficiency of coal-based power plants and reduce emissions. In IGCC plants, the coal is gasified using a gasifier. The gaseous coal is purified to remove pollutants such as sulphur. The purified coal is subsequently burnt to generate hot gases, which are used to run a gas turbine. The exhaust gases, containing waste heat, are used to boil water and generate steam. The steam is used to run a steam turbine. IGCC technology can deliver thermal efficiency of up to 48-50 per cent. In addition, it can be used with other heavy fuels such as refinery residues and petroleum coke. IGCC technology is also environment friendly, as pollutants such as sulphur dioxide and oxides of nitrogen, are reduced to very low levels. However, the cost of IGCC plants is higher than conventional plants. Nuclear Power Nuclear power plants reduce carbon dioxide emissions. However, safety concerns abound, particularly those relating to exposure to harmful nuclear radiations. In addition, the cost of a nuclear plant is around three times higher than that of a gas-based plant. However, new technologies are being developed to address some of the safety issues associated with nuclear power plants. Pebble bed modular reactor The pebble bed modular reactor (PBMR)differs from a conventional ‗light water‘ reactor as it utilizes no fuel rods and cooling water. The fuel comprises nearly 15,000 small carbon and ceramic-coated specks of uranium that are pressed into a small pebble. The pebble is coated with a layer of graphite. Inside the pebble, uranium undergoes fission and releases heat. However, the graphite layer traps the radioactivity. Around 300,000 pebbles are kept in a reactor, which is cooled by a flow of helium gas. The helium gas expands due to the heat and spins an electricity generating turbine. However, since helium is chemically and radiologically inert, it does not become radioactive as it circulates through the pebble bed. ~ 12 ~

One of the main advantages of PBMR technology is that relatively small units producing 100-150 MW of power can use it. In addition, the core of the reactor does not melt even at high temperatures, as the operating temperature continues to remain below the melting point of the ceramic pebbles that contain the fuel. This helps prevent safety hazards. Distributed generation In distributed generation, small generators are located near the consumer site, within the distribution system. Distributed gencos are not directly connected to the transmission grid. Considering the technological improvements and reduction in the costs of small generators, the amount of power consumption through distributed generation is expected to rise in the future. Comparison of different modes of generation: Type of Generation Advantages Disadvantages Thermal Power Plants Low cost of generation Long gestation period Abundant availability of coal. Emissions of carbon dioxide and oxides of sulphur Lack of flexibility in operation. Hydro Electric Plants Low operating costs Long gestation period The absence of emissions Economic and social costs associated with Flexibility of operations the rehabilitation and resettlement of the population affected by the submergence of land Submergence of forests and loss of marine life due to large water reservoirs Possibility of inducing earthquakes Nuclear Power Plants Do not emit gases or particulate matter Maintenance of high safety standards for Low cost of generation eliminating the possibility of nuclear hazards High capital costs and long gestation period Diesel Generation Sets Short gestation period High efficiency in varying load conditions Flexibility to use fuels such as HSD, LDO, LSHS and FO Modular installation (possible to add ~ 13 ~

more units). ~ 14 ~

Resources In India, power generation is largely dependent on coal, gas, nuclear and hydroelectric sources. Non- conventional sources of energy such as wind and solar energy, account for a small share of the total installed capacity. Fuel oil and diesel are largely used in captive power plants. Coal In India, the proportion of coal-based capacity has increased significantly over the years. According to the Geological Survey of India, in January 2008, the total coal reserves in India were estimated at around 257 billion tonnes (including the non-recoverable reserves under riverbeds or urban areas). Out of this, proven reserves stood at 99 billion tonnes, while indicated reserves were 121 billion tonnes, the rest being accounted by inferred reserves. In India, the majority of coal reserves are concentrated in the eastern and south eastern regions. Jharkhand, Orissa, Madhya Pradesh, Chhattisgarh, West Bengal and Andhra Pradesh account for around 95 per cent of the country‘s total coal reserves. The power generation sector is the largest end-user of coal in India. In 2007-08, it made up for almost 71 per cent of total coal consumption. In February 1997, the Central government allowed private sector companies to mine coal for captive consumption; and for supply and distribution. In the past, only Coal India Ltd (CIL), a public sector company, could undertake commercial mining and supply of coal. CIL is organized into several regional subsidiaries, which mine coal in their respective regions. Till March 1996, prices of all grades of coal were regulated. However, in April 1996, the prices of A, B and C grades were deregulated. In February 1997, the price of D grade coal was also deregulated. During 1990-2000, the average pithead price of coal increased at a CAGR of 11 per cent. In June 2004, CIL increased the pithead price of coal by 14-16 per cent. Prices were revised again in December 2007 - there was a 10 per cent increase by CIL and its subsidiaries, and by 15 per cent increase by North Eastern Coal Fields Ltd. Even if prices rose further, it will not have any impact on the power sector, as all PPAs have a fuel cost passage clause. In view of high ash content of Indian coal, the MoE&F has stipulated that all future power plants (situated 1,000 kms away from the pit-head) should be based on washed coal. But, the existing washery capacity in India is not adequate to meet the requirements of the power sector. In ~ 15 ~

addition, CIL does not have adequate funds to invest in coal washeries. However, the private sector has undertaken some initiatives for setting up coal washeries with foreign participation as well as in collaboration with CIL. Natural Gas Natural gas-based power generation capacity (including naphtha-based capacity) accounted for around 10 per cent of the total installed capacity as of March 2009. Further, of the total natural gas produced in India, 35 per cent is sourced to generate electricity and 29 per cent to produce fertilizers. At the end of 2007, the proven and recoverable reserves of natural gas in India were estimated at 1,055 billion cubic meters (bcm). Around 40 per cent of the gas reserves are located off the western coast, in the Bombay High and the Hazira fields. In 2007-08, the gross production of natural gas was around 32.3 bcm. In the past, a large portion of gas production was flared or re-injected due to inadequate evacuation infrastructure. The Hazira-Vijaipur-Jagdishpur (HVJ) pipeline evacuates about 40 per cent of the gas produced in India. Most of the fertilizers, petrochemicals and power plants based on natural gas are located along this pipeline. The consumption of natural gas for power generation and other end uses (like fertilizers) is expected to increase significantly over the next 5-10 years, as natural gas is an environment friendly and economic fuel. In India, the consumption of natural gas was 114.2 mmscmd in 2007-08. However, the unmet demand continued to be around 20 mmscmd. At the current rate of production, the known and recoverable gas reserves of India are expected to last for around 30 years. In order to supplement domestic supply, India is expected to import natural gas, either through pipelines or as liquefied natural gas (LNG). Hence, substantial investments will be required in receiving terminals, regasification plants and cryogenic shipping vessels to import LNG. Additional investments are also required in pipelines for the inland distribution of natural gas. New domestic supply of natural gas has commenced from Reliance Industries Ltd (RIL)‘s KG Basin block. It is currently producing 40 mmscmd of gas, and is expected to ramp this up to 80 mmscmd of gas by December 2009. Also, discoveries of large natural gas reserves in Myanmar have prompted several multinational companies to propose construction of pipelines to transport the surplus natural gas to eastern and northern India. In addition, there are proposals to lay pipelines from West Asia to India ~ 16 ~

(Afghanistan-Pakistan-India). The proposed pipelines include an onshore pipeline from Iran-Pakistan- India and a submarine pipeline from Oman. However, neither proposal has progressed due to unresolved political and economic issues. DEMAND - SUPPLY Demand for power registered at a CAGR of around 6 per cent from 1998-99 to 2008-09. Further, there has been a sectoral shift in demand for electricity. The share of the industrial sector declined steadily till 2001-02, and then started rising at a flat rate. The share of industrial demand has increased from 25 per cent in 2002-03 to 37 per cent in 2006-07. The agricultural consumption, after peaking at 31 per cent in 1998-99, declined to 22 per cent in 2006-07. Conversely, domestic demand rose steadily, from 20 per cent in 1996-97 to 24 per cent in 2006-07. As per the forecast of the Seventeenth Electric Power Survey (EPS), energy demand will increase at a CAGR of 8.4 per cent to 969 billion kWh during the Eleventh Five-Year Plan period (2007-2012). Peak demand is projected to register a CAGR of 12.3 per cent to 167,054 MW. The government has revised the capacity addition target to 78,700 MW from 78,577 MW for the Eleventh Plan. However, in the first 2 years of the Eleventh Plan only 12,716.70 MW of capacity has been added as against the target of 27,396 MW. This is because only 9,263 MW against the target of 16,335 MW was added in 2007-08. In 2008-09, the target fell short by 69 per cent due to delays in the supply of critical components of thermal projects and non-availability of fuel. Therefore, in 2008-09, only 3,453.70 MW was added against the target of 11,061 MW. Taking these factors into account, CRISIL Research estimates that only around 44,846 MW of capacities will be added during the Eleventh Plan period. The central sector is expected to account for a major portion of the capacity additions (37 per cent), followed by the state sector (35 per cent) and the private sector (28 per cent), respectively. Sectoral demand The pattern of electricity consumption in the various sectors has changed considerably over the years. During 1996-97 to 2006-07, electricity consumption in the agricultural, commercial, industrial and domestic sectors increased at a CAGR of 4.9 per cent. ~ 17 ~

Agricultural sector: The agricultural sector had a very low share of power consumption during the early 1970s. However, stress on rural electrification led to an increase in power consumption from 10-15 per cent in 1970 to 31 per cent in 1998-99. But low tariffs and lack of proper metering resulted in under- recoveries and inefficient utilization of power in this sector, which led to the sector‘s share in power consumption declining to 22 per cent 2006-07. Industrial sector: Electricity consumption in the industrial sector increased at a CAGR of 5.1 per cent from 1996-97 to 2006-07. However, the share of the industrial sector in total electricity consumption fell from 37.2 per cent in 1996-97 to 30.2 per cent in 2001-02; but with the opening up of the power sector, it gradually rose to 37.6 per cent in 2006-07. In view of the continuous uptrend in industrial electricity tariffs, power-intensive industries find it economical to set up captive power plants, especially through co-generation. Further, irregular power supply and increasing shutdowns caused by power shortages, has forced players to rely on captive power facilities. Domestic sector: In the domestic sector, electricity consumption grew at a CAGR of 7.2 per cent from 1996-97 to 2006-07. The share of the domestic sector in total electricity consumption went up from 19.7 per cent in 1996-97 to 24.4 per cent in 2006-07, driven mainly by urbanization and the increasing usage of household appliances (geysers, air-conditioners, etc). ~ 18 ~

Power - Category-wise consumption Source: Central Electricity Authority (CEA) Power - Demand and supply, Source: Ministry of Power, CEA ELECTRICITY DEMAND FORECAST Electric power surveys: The CEA constitutes a committee every 4-5 years that carries out a comprehensive survey of various consumer segments for estimating the demand for power. The committee publishes the EPS, which provides state-wise demand forecasts, both in terms of energy and peak power requirements, for a 15-year period. It also provides a sector-wise estimate of energy demand for a 5-year period. The consumer segments taken into account by the EPS are: • Domestic • Commercial ~ 19 ~

• Agricultural • Public lighting • Industrial [low tension (LT) and high • Public waterworks tension (HT), separately] • Non-industrial bulk consumers • Railway traction Power - Demand project ions Note: Figures are based on the 17th Electric Power Survey (EPS), published in February 2007. Source: CEA Elasticity of electricity consumption with respect to GDP growth Electricity consumption is strongly related to the level of economic activity. However, over the past 25 years the elasticity of electricity consumption vis-à-vis the gross domestic product (GDP) has been gradually declining. This decline is likely to continue, owing to: • An increase in the share of the services sector (about 56 per cent in 2007-08, compared to less than 30 per cent in 1990-91). • Efforts by industries to improve energy efficiency (to enhance competitiveness) through more efficient technologies and energy audits. • Greater reliance on captive power plants by power-intensive industries due to the high tariffs charged by SEBs and poor quality of grid power. The average annual GDP growth rate (at constant prices) during the Eighth, Ninth and Tenth Plan periods was 5.9 per cent, 5.5 per cent and around 7.7 per cent, respectively. The annual growth in electricity generation during these periods was 7.2 per cent, 5.7 per cent, and 4.4 per cent, respectively. ~ 20 ~

Elasticity of electricity generation with respect to GDP is the percentage change in generation corresponding to a 1 per cent change in GDP. The elasticity of electricity generation (not including captive generation) with respect to GDP has fallen from around 1.47 during the Sixth Plan period to around 0.60 during the Tenth Plan period. This implies that energy usage in the economy has declined, partially due to a rise in the share of the services sector (which is less energy-intensive as compared with the industrial sector) in the GDP and partially due to an improvement in energy efficiency. ~ 21 ~

TRANSMISSION Review The transmission segment plays a key role in transmitting power continuously to various distribution entities across the country. Further, the transmission sector needs concomitant capacity additions in line with the generation capacity additions to enable seamless flow of power. The government‘s focus on providing electricity to rural areas has led to the power T&D system being extended to remote villages. The total length of transmission lines in the country has increased from 2.50 million circuit kilometers (ckm) in 1980-81 to 6.94 million ckm in 2006-07. Power-Transmission Lines The decline in 2003-04 is due to reconciliation in data done by the Data Supplying Organization in 33/22 kV, 15/11 kV and in distribution lines up to 500 volts. Source: CEA Transmission line addition (April 2008 to Substation addition (April 2008 to March March 2009) Source: CEA 2009) Source: CEA ~ 22 ~

Overview and Structure A reliable T&D system is important for the proper and efficient transfer of power from generating stations to load centers. A T&D system comprises transmission lines, substations, switching stations, transformers and distribution lines. In order to ensure reliable supply of power and optimal utilization of generating capacity, a T&D system is organized in a grid, which interconnects various generating stations and load centers. This ensures uninterrupted power supply to a load centre, even if there is a failure at the local generating station or a maintenance shutdown. In addition, power can be transmitted through an alternate route if a particular section of the transmission line is unavailable. In India, the T&D system is a three-tier structure comprising distribution networks, state grids and regional grids. These distribution networks and state grids are primarily owned and operated by the respective SEBs or state governments (through state electricity departments). Most inter-state transmission links are owned and operated by PGCIL, with some jointly owned by the SEBs concerned. In addition, PGCIL owns and operates a number of inter-regional transmission lines (part of the national grid) to facilitate the transfer of power from a surplus region to one with deficit. The transmission capacity added, over the years, has been lower than the generation capacity addition. This is also seen by lower investments in T&D compared to generation. Globally, every rupee invested in generation has an equal amount invested in T&D, however in India, every rupee invested in generation has a corresponding 50 paisa invested in T&D. This has also resulted into excess loading of transmission lines at around 90 per cent. The transmission capacity added as a part of the national grid in the previous year has been at a brisk pace of 5,550 MW from December 2006 to December 2007. This has been in line with the target of 37,150 MW to be added by the end of Eleventh Plan. The current inter-regional capacity stands at 17,000 MW (as on December 2007). ~ 23 ~

Transmission lines Source: Ministry of Power &CRISIL Research The transmission system in India operates at several voltage levels: • Extra high voltage (EHV): 765 kV, 400 kV and 220 kV • High voltage: 132 kV and 66 kV • Medium voltage: 33 kV, 11 kV, 6.6 kV and 3.3 kV • Low voltage: 1.1 kV, 220 volts and below Transmission and sub-transmission systems supply power to the distribution system, which, in turn, supply power to end consumers. In order to facilitate the transfer of power between neighbouring states, state grids are inter-connected through high-voltage transmission links to form a regional grid. There are five regional grids: •Northern region: Delhi, Haryana, Himachal Pradesh, Jammu and Kashmir, Punjab, Rajasthan, Uttaranchal and Uttar Pradesh •Eastern region: Bihar, Jharkhand, Orissa, Sikkim and West Bengal •Western region: Dadra and Nagar Haveli, Daman and Diu, Chhattisgarh, Goa, Gujarat, Madhya Pradesh, and Maharashtra •Southern region: Andhra Pradesh, Karnataka, Kerala, Pondicherry and Tamil Nadu •North-eastern region: Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura ~ 24 ~

As peak demand for power does not take place at the same time in all states, it results in a surplus in one state and deficit in another. Regional or inter-state grids facilitate the transfer of power from a surplus region to the one facing a deficit. These regional grids also facilitate the optimal scheduling of maintenance outages and better coordination between power plants. These regional grids will be gradually integrated to form a national grid, whereby power from a surplus region can be transferred to another, resulting in the optimal utilization of generating capacity. For instance, the eastern region has some surplus power, which is transferred to the western and northern regions as the two regions have deficit scenarios. National grid In order to optimize the utilization of generation capacity through the exchange of power between the surplus and deficit regions, and exploit the uneven distribution of hydroelectric potential across various regions, the Central government in 1981 approved a plan for setting up a national grid. The plan envisaged setting up high-voltage transmission links across various regions in order to enable the transfer of power from surplus to deficit regions. The advantages of a national grid system are: A flatter demand curve (or a higher system load factor) on account of the exchange of power between regions, resulting in a better PLF and more economical operations; Lower investments required for new generation capacities (a full-scale national grid is expected to reduce the need for new capacities by up to 10,000 MW in the next 10 years.); Better scheduling of planned outages of power plants; and Improved stability of the grid, as the share of an individual generating station in the total capacity declines with greater integration of the power system. The process of setting up the national grid was initiated with the formation of the central sector power generating and transmission companies - National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC) and PGCIL. PGCIL was given the responsibility for planning, constructing, operating and maintaining all inter-regional links and taking care of the integrated operations of the national and regional grids. A national grid would enable optimal utilization of energy resources by facilitating a uniform thermal-hydel mix among various regions. From a regional perspective, the exploitation of ~ 25 ~

thermal and hydroelectric resources may not be economically viable in some cases, although it may be so from a national perspective. For instance, Arunachal Pradesh had a hydroelectric potential of around 50,000 MW. (The hydro potential available in Arunachal Pradesh is the highest in the country.) However, of this, only 400 MW has been developed and a further 3,000 MW is under development by NHPC and NEEPCO. Another 23,000 MW of capacities are being planned by various central and private sector players. However, in terms of installed capacity, 95 per cent of the potential is yet to be developed. The hydroelectric potential of the north-eastern region and eastern region is around 60,000 MW and 10,000 MW, respectively. Hence, with the integration of the eastern and north-eastern regions, the hydroelectric potential of the north-eastern region can be used to meet the peak demand of the eastern region. Setting up a national grid requires the gradual strengthening and improvement of regional grids, and their progressive integration through extra high voltage (EHV) and HVDC transmission lines. Coordination among the states within a region and among the various regions is critical for the operation of the national grid. This would require an efficient and reliable communication system, comprising microwave links and dedicated data/voice transmission lines between the load dispatch centers and generating stations. In addition, synchronization of frequencies is required to integrate regional grids. In the case of a difference in frequencies, HVDC transmission would be effective in integrating the grids through an asynchronous link. Although some inter-regional links are operational, these do not have adequate capacity to transmit bulk power, and are often loaded to capacity. The national grid, when fully operational (likely by around 2012), is expected to have a total inter-regional transmission capacity of 37,150 MW. Major milestones in national grid Source: CRISIL Research ~ 26 ~

Power - Inter-regional power capacity Source: PGCIL Inter-regional capacity (till December 2007 17,000 MW) Source: Working Committee Report and CRISIL Research Expected Inter-regional capacity by 2011-12 (37,150 MW) Source: Working Committee Report and CRISIL Research Grid discipline Several problems related to the integrated operations of regional grids can be attributed to the lack of discipline among grid constituents. Grid discipline involves maintaining the grid frequency within ~ 27 ~

tolerance limits (49.2-50.3 Hz) and complying with the directions of the Regional Load Despatch Centers (RLDCs), with respect to load despatch and drawing of power. There have been several instances of grid collapse after constituent states drew excess power or because there were fluctuations in the grid frequency. Under the Electricity (Supply) Act, SEBs are expected to comply with the directions of RLDCs to ensure the integrated operation of regional grids. However, in the absence of adequate incentives and disincentives, RLDCs are unable to enforce the directives. Further, load management, through load shedding or backing down by each of the constituents, is an important aspect of the operation of a grid system. Inadequate load dispatch and communication facilities often result in lack of co-ordination with respect to the scheduling of load and generation between states. In 1999, the CERC drafted the Indian Grid Code, which, along with the incentives and disincentives notified under the Availability-Based Tariff (ABT) Order, is expected to induce better grid discipline among the various grid constituents. Unscheduled interchange (UI) charges are levied on defaulting entities which overdraw/under draw from the grid and disturb the grid balance. Previously, the UI charges had been escalated up to Rs 10 per unit of excess capacity drawn. However, recently the CERC in order to improve the grid stability reduced the band (i.e. From 50.5-49.0 Hz to 50.3-49.2 Hz), and charges to Rs 7.3 per unit of excess units drawn. Private investments in transmission In 1998, the Central government enacted the Electricity Laws (Amendment) Act, which recognized transmission as an independent activity (distinct from generation and distribution), and allowed private investments in the sector. According to the government policy, the STUs, SEBs or their successor entities and the central transmission utility (CTU) PGCIL will identify transmission projects for the intra-state and inter- state/inter-regional transmission of power, respectively. ~ 28 ~

The STUs and CTU will invite private companies to implement these projects through an independent private transmission company (IPTC) or on a JV basis. The IPTC would be selected through an international competitive bidding process. The primary criteria for selection would be the quoted transmission service charges (TSC) and the technical, managerial and financial capabilities of the bidders. In the case of JV companies, the CTU and STUs could own an equity stake of up to 26 per cent. JV partners could also be selected on the basis of an international competitive bidding process. Further, the primary selection criteria would be the technical and financial strength of the bidders. Transmission service charges would be determined on a cost plus basis under the supervision of the CERC or SERCs. The IPTC‘s role will be limited to the construction, ownership and maintenance of transmission lines. Operations of the grid, including load dispatch, scheduling and monitoring, will be undertaken by the STUs and the CTU at the intra-state and inter-state/inter-regional level, respectively. The CTU and STUs will be involved in the development phase for obtaining project approvals and various regulatory and statutory clearances (such as environment and forest clearance and securing right-of- way), and will transfer the same to the selected private companies. Technology in transmission HVDC transmission One of the pre-requisites for integrating grids is to synchronies their frequencies. In India, synchronous integration of regional grids was not possible due to variations in frequencies and voltages. Therefore, the most viable alternative is the asynchronous transfer of power through HVDC transmission links. Advantages of HVDC transmission Cost consideration: DC conductors cost less than AC conductors, as DC transmission requires smaller conductors for carrying the same load of power. In addition, only two conductors are required for DC transmission, while AC transmission requires three. However, the cost of HVDC terminals is higher than that of AC substations. Hence, for a given load of power to be transferred, there is a break-even distance, beyond which, DC transmission would be more economical (approximately 600 km for 500 MW). ~ 29 ~

Maintaining independence of the systems: Impact on a system (due to disturbances in the other) is eliminated due to asynchronous linking. Right of way: For an equivalent load of power transferred, HVDC transmission requires lesser right of way compared with AC lines, as each HVDC line can transmit a higher quantum of power. Transmission cost structure Capital costs The capital costs of the transmission line network have a significant impact on transmission tariffs. Capital costs depend on: Configuration of the line :The configuration of the transmission line, in terms of voltage levels (220 kV, 400 kV, 765 kV etc), mode of transmission (AC or HVDC) and other parameters (single circuit or double circuit) have an impact on the overall capital cost per km. Although the capital cost of transmission projects can vary significantly, the average estimated costs per km for different configurations are: Transmission lines 220 kV double circuit: Rs 5.0-6.0 million per ckm 400 kV single circuit: Rs 7.5-8.0 million per ckm 400 kV double circuit: Rs 11.0-11.5 million per ckm 765 kV single circuit: Rs 15.0-16.0 million per ckm Transmission system components Source: CRISIL Research ~ 30 ~

Cost of setting up a transmission line Source: Industry publication DISTRIBUTION Distribution is the last and critical leg in the supply of electricity, reaching end consumers such as residential, commercial, agricultural and industrial segments. Distribution has several components such as pricing to various customers, cross subsidization etc. However, as this is a lucrative business, it has been held by the respective state entities, with private participation being marginal (only 5-7 per cent of the total). Further, issues is distribution vary from T&D losses to rural electrification etc. The government has begun a number of initiatives to improve the electricity supply to villages. As part of its initiatives, the power distribution system has been extended to reach remote villages. At the end of 2008-09, a total of 488,926 villages were electrified. However, T&D losses in the country remain high at around 28 per cent, compared to an average 10-15 per cent in developed countries. This is because of inadequate metering and theft of electricity. (The difference in the amount of electricity supplied and the amount actually metered is usually reported as T&D losses.) High T&D losses are also attributed to the T&D of a large amount of power at low voltage - the rise in rural electrification has resulted in the proliferation of low voltage (less than 11 kV) transmission lines. T&D losses rose from 22.27 per cent in 1995-96 to an estimated 26.91 per cent in 2007-08. The losses peaked at 33.98 per cent in 2001-02, but since have registered a declining trend. ~ 31 ~

Power: T&D losses P: Projected; E: Estimate Source: CEA Tariffs and financial performance of SEBs In India, average electricity tariffs are lower than the average cost of supply (cost of generation plus T&D costs). The gap between average tariff and average cost of supply has increased from 36 paisa per kWh in 2005-06 to 49 paisa per kWh in 2006-07. The main reason for this has been the annual losses of all SEBs which have been increasing continuously - the commercial losses of all SEBs have gone up from over Rs 40 billion in 1991-92 to Rs 257 billion in 2006-07. Power: Costs and tariffs Source: Planning Commission T&D losses T&D losses can be classified into two main categories: Technical losses ~ 32 ~

The technical component of T&D losses has an inverse relationship with the voltage configuration o

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