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INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES. New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist The World Bank. STRUCTURE OF PRESENTATION. Indian Power Sector Investment requirements (2007-12) Overview of market conditions India International Investors

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INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES

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India power sector challenges investment opportunities

INDIA POWER SECTOR:CHALLENGES & INVESTMENT OPPORTUNITIES

New Delhi

May 12, 2006

Salman Zaheer

Lead Energy Specialist

The World Bank


Structure of presentation

STRUCTURE OF PRESENTATION

  • 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


Investment needs over 2007 12 period reasonably well established

Investment Needs over 2007-12 period reasonably well established…..

  • Installed generation capacity to increase by about 60,000 MW (from 125,000 MW to 185,000 MW)

    • Of this about 20-30,000 MW hydro

  • Investment program estimated to cost US$100 billion

    • Generation – US$60 billion (Rs. 2,70,000 crores)

    • Transmission & Distribution – US$40 billion (Rs. 1,80,000 crores)

  • In addition:

    • About 20,000 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)


Indian market environment also broadly known

Indian market environment also broadly known…..

  • Industrial, commercial, urban household demand increasingly commercialized. 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, voltage fluctuations, billing hassles, etc.

  • Industrial and commercial demand now about 43-45% of total consumption.

    • 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 - demand not ready for commercialization. Still needs effective government support


Some barriers to commercialization

Some barriers to commercialization…..

  • Governance of distribution utilities

    • Over 40% of energy supplied into state transmission systems is lost, not billed, incorrectly billed or payment not collected

    • Reducing to 20% would save Rs. 15-20,000 crores/y ($3.3-4.4 billion) of generation cost (@Rs. 2/kWh) or generate 25% more revenue if billed at the average tariff (Rs. 2.77/kWh)

    • Sector is a conduit for about Rs. 20,000 crore ($4.5 billion) of poorly targeted and poorly accounted subsidies each year (from budget & cross-subsidies)

    • Even in advanced reforming states, 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); 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


India market environment 3

India market environment …..(3)

  • Government of India policy response is appropriate:

    • Electricity Act, 2003

    • National Electricity Policy (March 2005)

    • National Tariff Policy (January 2006)

  • Correct focus on:

    • GovernanceCommercializationPrivate participation

    • CompetitionRural services

  • 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


India s carbon emissions

India’s carbon emissions

  • Energy and carbon intensity of the economy is lower than in China, but not declining nearly as fast

  • The power sector accounts for about 60% of carbon emissions

  • Projected emissions rise amounts to 7% of global increment

Source: EIA International Energy Outlook 2003 (base case)


India power sector challenges investment opportunities

160.0

140.0

120.0

100.0

80.0

60.0

40.0

20.0

0.0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

India’s vs Global investment requirements - a large Growing Gap between demand and supply?

Financing required for the Power Sector in Emerging Markets 1990 - 2020

Cumulative

Sum ($Bn)

$2,300 Bn

High Investment Demand

Scenario (3%)

$1,900 Bn

Gap covered by public financing,

self

-

financing, donor funding,

and rationing.

Low Investment

Total Power Investment ($Billion)

Demand Scenario (2%)

Private Capital Mobilized in Power Sector

Historic

Future

Source: : World Bank, IEA, Deloitte Touche Tohmatsu Emerging Markets Group


World bank role in india conforming with country assistance strategy 2005 08

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


Bank assistance strategy builds on past engagement in power sector

Bank assistance strategy builds on past engagement in power sector….

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, UP and AP)

  • Investment support for transmission and renewable energy (through IREDA)

  • Investment in 1500 MW Nathpa-Jhakri hydro plant


India power sector challenges investment opportunities

…responds to consumer & Gov’t concerns; addresses investor priorities…

1.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 , Guatemala ]

  • “protection ‘to do business’ – labor laws, property rights; laws that work”

  • “enforceable exit strategy” [Separately ranked 4th]

    2.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.

  • “worsening payment discipline – strong negative”.

    3.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.

10


India power sector challenges investment opportunities

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 - 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”.

  • “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.

  • “new regulators show little appreciation of investor needs”.

  • “Regulators showing an increasing tendency to change rules and targets on which investment decisions are made”.

    3.Operational Control and Management Freedom

    60% of firms rated it a critical success factor. 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.Regulatory commitment sustained through long-term contract

    50% of firms rated it a critical determinant of failure. 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”

15


India power sector challenges investment opportunities

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, Jamaica, Panama, Costa Rica, Guatemala, Nicaragua, Dominican Republic

      • Africa – Kenya, Morocco

  • Respecting contracts under stress

    • Thailand, Philippines

    •  Czech Republic, Colombia, Argentina, Indonesia, China, Pakistan, India

  • Regulators perceived to be exercising “excessive” discretion and risk on the increase

    • India, Colombia, Brazil

    • Are regulators just doing their job – or are investor expectations unrealistic?

19


India power sector challenges investment opportunities

7

12

11

3

10

8

4

9

6

Consumer Payment Discipline

Possibility of Vertical Integration

Competitive Selection

Domestic Borrowing

Corruption Index Ranking

Transition to Competitive Market

Clear Rules for Exit

Judiciary's Independence

Government Efficiency

Legal Protection of Investors

Investment Grade Debt Rating

Gov’t/Multilateral Guarantee

What conditions are important?

Minor

Major

Critical

“Deal-breaker”

Rated “Dealbreaker”

Relative Rank

63%

1

3.57

Legal Protection of Investors' Rights

2

36%

3.11

3.11

40%

5

13%

2.98

15%

2.91

2.83

19%

2.83

19%

2.68

8%

2.66

10%

2.49

4%

4%

2.43

13%

2.00

2

9


Global market environment feedback from power investors roundtable world bank 2004

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. 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.

    The Response Rate

  • 48 valid responses – a 75% response


India power sector challenges investment opportunities

International Power Investors –

Firms Targeted

  • ABB Equity Ventures

  • AEP

  • AES Corp

  • Alliant Energy International

  • Alsons Consolidated Resources

  • Amata Power

  • Banpu Public Co. Ltd.

  • BG Group

  • BP Global Power

  • CHI Energy (Energia Global)

  • Chilectra

  • Cinergy Global Resources

  • CLP Power International

  • CMS Energy Corporation

  • Cogentrix Energy

  • Commonwealth Development Corp.

  • Covanta Energy

  • Delma Power

  • Duke Energy

  • Dynegy

  • E.ON Energie

  • Edison Mission Energy

23.El Paso Energy

24.Electricite de France International

25.Electricite de Portugal

26.Elyo

27.Endesa

28.EIF Group

29.Entergy Power Group

30.Eskom Enterprises

31.FondElec

32.Fortum

33.GE Capital Global Energy

34.GMS Power

35.HEI Power

36.Hydro Quebec

37.Ibedrola

38.Independent Power

39.InterGen

40.International Power

41.Keppel FELS Power

42.Korea Electric Power Company

43.Marubeni Power

  • 44.Mirant

  • 45.Mitsui & Co.

  • 46.NRG Energy

  • 47.Panda Energy

  • 48.PPL Global

  • 49.PSEG Global

  • 50.Reliant Energy

  • 51.Rolls-Royce Power Ventures

  • 52.Saur International

  • 53.Scudder Latin America Fund

  • 54.Sempra Energy

  • 55.Siemens Power Ventures

  • 56.Sithe Energies

  • 57.Statkraft International

  • 58.Steag AG

  • 59.Tomen Power

  • 60.Tractebel

  • 61.TransAlta

  • 62.TXU Corp

  • Union Energy

  • Union Fenosa

  • 65.Wartsila NSD

21


The evolving world bank program balances pragmatism with the fundamentals

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 publicly-owned distribution utilities, open access, etc.

    • Improve regulatory effectiveness in infrastructure services


World bank s assistance program 2

World Bank’s Assistance Program…(2)

Current portfolio consists of the following operations:

ProjectLoan AmtBalanceClosing Date

Powergrid II$450 m$ 60.6 mJune 2006

Powergrid III$400 m$400.0 mJuly 2011

Rajasthan Power$178 m$ 38.3 mJune 2006

Renewable Energy II$112 m$ 45.1 mMarch 2007

Under Preparation:

  • Rampur Hydropower – 412 MW approx. $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


International finance corporation also has an active power portfolio in india

International Finance Corporation also has an active power portfolio in India…

  • Allain-Duhangan 192 MW hydropower – first for IFC on merchant basis

  • Powerlinks - Tala Transmission Project – Tata Power & Powergrid JV

  • Mini hydro – IHDC (2-5 MW projects); 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 14,815 MW of generation capacity and US$15.2 billion in aggregate project costs. The portfolio currently has:

      • 7 distribution clients;5 transmission clients;

      • 61 projects in 33 countries


World bank group risk mitigation guarantees to leverage private investment

World Bank Group risk mitigation guarantees - to leverage private investment


Ibrd loans lending terms as per currently applicable waivers to indian portfolio

IBRD Loans - Lending Terms (As per currently applicable waivers to Indian Portfolio)


India power sector challenges investment opportunities

In closing….

  • 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. However:

    • Scale of investments needed cannot be mobilized unless enterprise level reforms, particularly of distribution companies, 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!

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