Vulnerability of Power Sector from Financial Globalisation

Power Sector in India

• Installed capacity ~ 110,000 MW (4 to 6% growth)

• Power sector turnover ~ $35 Billion p.a.• ~ 50% houses without electricity (need very

small quantity of power)• Generation ownership ~ 20% private, 25%

Central and by rest state government• Distribution largely controlled by States

Major Stages in Electricity Sector

NTPC,Agri 1975-90 Increased Access & Federal intervention

Growth 1950–75 Major Growth, Public Ownership

IPP Era 1991-98 Private Power Projects

E Act 2003 Competition

WB Model 1996-2002 Orissa & others

International influences

1. Early period – import of equipment and finance (WB, Bilateral funding)

2. IPPs (1992–2002)

3. Un-bundling, Regulatory Commissions, Privatisation (1996+)

4. Competition /market model (2003+)

The IPP Era

• Major fall in US capacity addition

• IPP concept emerged in most developing countries

• State / utility finances under stress bypassed by financing project on future cash flows + govt guarantees

• Preferential treatment to MNCs

• Demand over projection

• No competitive bidding

• One sided, high-cost contracts

• Allegations of huge pay-offs

• Influence of Export Credit Agencies (G8), MDBs, & Governments

• International arbitration

High Cost of IPP Projects Comparison of CCGT Plants Around the World

0

200

400

600

800

1000

1200

1400

- 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

Capacity MW

Cos

t per

kW

($/

kW)

LNG NG 1 NG 2

DPC

600-800 3

$/kW Plants ~400-600 18

800-1000 4 > 1000 3

Contribution of IPPs in India (1991-2001) v/sEfficiency Improvement of Existing Plants

Contribution to Incremental Generation in FY 02

0

10000

20000

30000

40000

50000

60000

State /Central - IncrementalGeneration- better performance

Licensees & IPPs (Total Generation)

Only IPPs (Total)

MU

Time wasted, basic issues ignored (worsening finances of sector), large compensation paid by many countries, Several Scams!Several Scams!

Examples of IPPs

• Dabhol (Enron) Maharashtra 2200 MW• Maheshwar (MP) 400 MW• Spectrum (Rolls-Royce), GVK, Lanco, + several

others (AP) improved distribution recoveries to pay IPPs

• Bujagali (AES) 200 MW Uganda (role of IFC, WB Inspection Panel, corruption project cost now reduced by 30%)

• Pakistan, Indonesia, Thailand … Large share of projects have continued…

Un-bundling, privatisation, independent regulation (WB model)

• IPP process was unsustainable without improved recoveries from distribution. Section in WB was opposed to IPPs – promoted sector restructuring

• Orissa model – attempted in some countries• In 1998, India adopted Regulatory commissions at

the national level (in an attempt to reduce interference of minister in tariff setting and investments)

Rapid Replication of WB model - Un-bundling, Privatisation, and Independent Regulation

WB states

• Uttar Pradesh (UP)

• Haryana

• Andhra Pradesh (AP)

• Rajasthan

• Karnataka

ADB states

• Gujarat

• Madhya Pradesh (MP)

• Kerala

Major Features:

Govt Ownership Private Ownership

Budgetary Support Private Capital

Self-reliance Globalization

Cross-subsidy Cost-based Pricing

Experience of distribution privatization

• No clear verdict that it is superior, difficult to implement in India

• Major changes – e.g. Capital investments proposed by a Mumbai utility, tariff increase for poor

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900

-5 -4 -3 -2 -1 0 F 1 F 2Year

Rs

Cr

Impacts and continued problems

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100

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250

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450

500

19

75

19

77

19

79

19

81

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85

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87

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89

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91

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93

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01

20

03

Pa

isa

/U

Industry

Agriculture

Agv Cost

Formation of RC

0%

10%

20%

30%

40%

50%

60%

1975 1980 1985 1990 1995 2000

% o

f E

ner

gy

Ava

ilab

le

T&D loss Agri. Unmetered Share

Maharashtra Utility: Estimated Theft of Euro 500 Mn p.a.

Hidden T&D losses

Large Increase in Government Subsidy

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250

500

750

1000

1250

1500

1750

1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

Mil

lio

n E

uro

s

AP Gujarat Karnataka MP Rajasthan

Grown to a quarter of expenses on All social services (that includes Revenue & Capital expenses on Education, Medical, Water-supply / sanitation, Housing, Urban development, Labor welfare, Social security, etc.)

Grown to a quarter of expenses on All social services (that includes Revenue & Capital expenses on Education, Medical, Water-supply / sanitation, Housing, Urban development, Labor welfare, Social security, etc.)

Competition in Power (Bulk / Retail)Regulator

Market

California adopted market solution even for Transmission pricing

California story of manipulation

• Industry unwilling to share high cost Nuke (stranded costs) in face of low cost gas

• Competition based on power-pool was setup• Consultant called “Perot Systems” implemented

power Pool. • “Perot Systems” also gave blue-print to rig the

system through back-door consultancy to Reliant and others! These generation companies rigged the pool using “Perot Systems consultants” (Death Star, Get Shorty, Fat Boy, etc.)

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Ap

r-9

8

Jul-

98

Oct

-98

Jan

-99

Ap

r-9

9

Jul-

99

Oct

-99

Jan

-00

Ap

r-0

0

Jul-

00

Oct

-00

Jan

-01

Ap

r-0

1

Jul-

01

Oct

-01

Jan

-02

Ap

r-0

2

Jul-

02

Oct

-02

Sp

ot

Ma

rke

t P

ric

e (

$/M

Wh

) California

PJM

New England

California – Gas, electricity prices were rigged generating large rents.

Public money was extensively used for bail over and above corporate bankruptcies

Power revenues went from $ 2 to 9 Billion - 62% of the increase was due to monopoly power [Severin Borenstein 2000]

Government closed down pool, entered in high cost long-term PPAs. Moving back to regulated model

Problems with power markets

Scales of manipulation go up dramatically,

Needs larger regulatory capacity,

Difficult to implement in several countries

Continuous intervention required

Indian Situation• Partial competition

aimed at forcing tariff rationalisation, lowering cost of generation, and capacity addition

• Several problems in implementation, opposition by state

Desired Direction in India• Need for experiments of restructuring public sector

– in collaboration with unions and other actors• Hold back fundamental changes in the sector• Increase democratic control on policy, operation of

utility accountability at different levels• Increase regulatory capacity• Franchisee model needs to be moderated