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NATHAN INDIA | Value Chain Of Electricity

NATHAN INDIA | Value Chain Of Electricity. Solutions powered by an understanding of the economics of competition, innovation, and reward. Executive Summary.

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NATHAN INDIA | Value Chain Of Electricity

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  1. NATHAN INDIA | Value Chain Of Electricity Solutions powered by an understanding of the economics of competition, innovation, and reward

  2. Executive Summary • Current Scenario: How the electricity sector has opened up in line with India’s liberalization process, how certain acts and regulations have helped a wider private participation • However, competition still seems to be distant hope, thanks to government interventions and regulatory hurdles • Things that need to be changed include the role of political economy in the sector, political expediency and monopolization by state monoliths • Ways to facilitate the players include effective implementation of a National Competition Policy, regulatory freedom, competition toolkit

  3. Introduction Development of the Electricity Sector in the Developed Economies • Here we do a literature review of how recent years have seen a decline in the scope of regulatory regime across countries and how major industries have become a par of market discipline and have delivered significant benefits to consumers in terms of choice, competitive rates and satisfaction from their use. • Review the natural monopoly argument in the electricity sector, suggest that deregulation is desirable • We study development of the electricity sector in the developed world and its transition to the market economy including that in Europe, France, Germany, North America, Canada, Australia, China, Japan, Russia

  4. Competition in the electricity sector • Uses of Electricity (Literature review) • Introducing Competition in the Electricity Sector • Power Suppliers • Innovation • Investment • Consumers • Lower Prices • Choice of suppliers • Others • Government • Environment Protection

  5. Government monopoly over coal • Producing around 80 percent of India’s overall coal production, the monopoly in coal is led by the state owned Coal India Ltd (CIL), gives preferential treatment to public generating companies. Coal India under CCI scanner for abuse of dominance • Government’s initiative in the last 5-6 years to allocate coal blocks to private players backfired as competition neutrality was ignored, resulted in a INR1.86 lakhcrore scam dubbed ‘Coalgate’ • The federal auditor Comptroller and Auditor General (CAG), has recommended a competitive bidding process. • We also study the auction and non auction models of coal supply in US, Australia, China, South Africa and Indonesia

  6. Government monopoly over coal (continues…) Fallout of Coalgate • Following the CAG report and its outburst the Government de-allocated 15 coal blocks • Government periodically monitors and reviews the development of allocated blocks as well as end use plants by the allocatee companies • An Inter-Ministerial Group (IMG) constituted on 21 June 2012 which would undertake periodic review and monitor the progress of allocated coal/lignite blocks and make recommendations on action to be taken including de-allocation, if required. • CBI has registered three preliminary cases on allocation of coal blocks to private companies during the period 1993-2004 and 2006-2009 • Supreme Court has questioned the Centre’s power to allocate coal bocks under existing laws

  7. Electricity Sector in India Electric Power Supply Chain Process : Statutory bodies involved in the electricity supply chain : • Central Electricity Authority (CEA) • Central Electricity Regulatory Commission (CERC) • State Electricity Regulatory Commission (SERC) • Central Transmission Utility (CTU) • State Transmission Utility (STU) • National Load Despatch Centre (NLDC) • Regional Load DespatchCentres (RLDC) • State Load DespatchCentres (SLDC) Generation (Source: Coal , Gas, Nuclear fuel or Water Storage) Transmission through high voltage lines Distribution to customers (subsidized sectors and individual metered customers)

  8. Electricity Sector in India(continues..) Generation Segment • Central Sector or Public Sector Undertakings (PSUs) • National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC), etc • State level corporations • Maharashtra State Power Generation Company Ltd (MSPGCL), Gujarat State Electricity Corporation Limited (GSEC), etc. • Private sector enterprises • Reliance, Tata, Torrent, Adani et

  9. Electricity Sector in India(continues..)

  10. Transmission Segment - Opened for private investments in 1998 • CTU nodal agency provides • Medium terms ( 3 months to 3 years) • Long terms (12 to 25 years) • Power Grid Corporation of India Ltd. (PGCIL) plays the role of the CTU. • Sector is a natural monopoly as electricity passes through grids that are less resistant • Dominated by the public sectorAdani and Lanco have big plans Electricity Sector in India(continues..)

  11. Distribution Segment • SEBs own majority of the distribution segment in the electricity supply chain • 3 private sector companies operating in the distribution sector - distributing electricity in Delhi only Electricity Sector in India(continues..) Market Share (Sales Revenue) of Top 10 Firms in Electricity Distribution

  12. Distribution Segment (Cont..) • State promoted Discoms have been facing huge losses due to selling electricity below costs or giving them free to agriculture and rural sectors. Collectively, state Discoms have an outstanding loans of around INR80,000 crore according to Shunglu Committee. • According to Mint report of 07 Jan 2013, the state government of Andhra Pradesh has estimated that the state needs INR 49,189 crore to supply around 1 trillion units in 2013-14 financial year. Of this INR 12,725 crore will have to be raised through consumers if tariff rates are not allowed to be raised. • If the government wants more private players to be in the distribution it will have to allow them to fix their own or, at least, adhere to a more liberalized tariff regime. Electricity Sector in India(continues..) AT&C Losses for 2009-10 and 2010 -11

  13. Electricity Sector in India(continues..) Profit/Loss before Prior Period Adjustment from 2005-06 to 2009-10

  14. Electricity Sector in India(continues..)

  15. We have studied changes suggested through various electricity laws including Indian Electricity Act, 1910, Electricity Supply Act, 1948, Amendments to Electricity Supply Act, 1948, The Electricity Regulatory Commission Act, 1998, Electricity Act, 2003 (Act) • The objective of the path breaking electricity Act was to promote competition, ensuring supply of electricity in all areas, rationalization of tariff, having transparent policies and creation of CERC • The Act was supplemented by the National Electricity Policy (NEP) and National Tariff Policy (NTP). • While all these moves aimed at removing regulatory hurdles and creating a smooth transition to a more competitive electricity sector much still require to be achieved. History of regulation in the electricity sector

  16. The Toolkit Approach: We use CUTS Toolkit to analyze distortions • Distorts level playing fields between competitors, eg in the name of creating public goods, pronounced through subsidies, procurement policies. Our analysis suggests that tariff rates between 2007-08 to 2011-12 have always been higher than the WPI • Creates entry barrier, eg Coal sector a virtual monopoly of CIL. Then FDI in nuclear power not allowed, target of getting 20 GW of nuclear energy by 2020 remains a distant hope • Limits free and fair market process such as auctioning, eg auctioning of natural resources, merchant power plants still not prevalent. In transmission private investments allowed through CERC • Promotes monopolies and their abuse, eg CCI issued notices to CIL and subsidiaries for non transparent contract conditions Distortion effects of regulation on competition

  17. How the electricity sector can benefit from NCP?The NCP will ensure transparency, accountability and take care of information asymmetry which currently persists • NCP will help achieve level playing field in generation and transmission: Anexample of how this can be done is the case of Ispat Industries which was demanding open access in transmission from MSEDCL as allowed by Electricity Act 2003. MERC ruled in favour of Ispat in 2012 • Functional autonomy for independent operators: The functionaries having membership on the board of independent regulatory organizations CTUs and STUs will not be allowed having a say in generation and retail supply • Restructuring of Electricity Boards: Unbundling in some states have not been effective due to lack of regulation, the NCP will ensure that Economic benefits of the national competition policy

  18. Data Analysis • Impact on Private Sector • Unbundling of SEB’s • Share of Private Sector • Entry of New Players Impact of regulation on competition in the electricity sector

  19. Data Analysis (Cont..) • Impact on Consumers a) Increase in generation capacities • Open Access Implementation Impact of regulation on competition in the electricity sector

  20. Impact of regulation on competition in the electricity sector Status of Open Access Applications in India

  21. Impact of regulation on competition in the electricity sector Data Analysis (Cont..) • Impact on Consumers b) Rural Electrification • PradhanMantriGramodyayaYojna (PMGY) • Accelerated Rural Electrification Programme (AREP) • Rajiv Gandhi GrameenVidyutikaranYojna (RGGVY) • Rural Electrification under Minimum Needs c) Electricity Tariff Rates

  22. Impact of Regulation on Private Players – Case Study • Tata Power • Reliance • Adani Power Ltd • LancoInfratech Ltd Issues faced by Private Players • Insufficient Availability of Coal • Tariff Sustainability affects lumpy investments • Infrastructure and logistical constraints • Regulatory hurdles Impact of regulation on competition in the electricity sector

  23. Government Monopoly over Major Inputs – Coal • Unbundling of process: Not Successful • Retail Trade in Electricity: Open Access still a distant target • Ensuring Financial Health- Poor Performance of State Electricity Boards • The Problem of Subsidization • Tariff Setting and Non Revision Issues and recommendations

  24. Issues and recommendations Subsidy to Agriculture and Domestic Sector & Uncovered Subsidy (INR crore)

  25. Thank you • Nathan India is an economic consulting firm that specializes in survey design and research, market and business analytics and competition policy. • Nathan Economic Consulting India Private Limited • Chennai Office Delhi Office • New No.45, T.T.K. Road, G-C Ground Floor, Level 4,Rectangle 1, • George Ponnaiya Building, Commercial Complex D-4, • Chennai-600018, Tamil Nadu, India Saket, New Delhi-110017,India  • T: +91 44 4293 7700; F: +91 44 4293 7773 T: +91 11 4051 4051 • E-mail: nathanindia@nathaninc.com • www.nathaninc.com

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