Power Summit 09

INFRASTRUCTURE AND GOVERNMENT

PowerSummit2009 MeetingtheGoalofPowerforAll

KPMG IN INDIA

1

Enabling Speedy Capacity Addition in Power Sector Steps towards meeting the vision of ‘Power for All’ by 2012 Powerisacriticalinfrastructureintoday’stimeandoverthepastfewyears,the GovernmentofIndiahasstrivedhardtomeetthedemandforthisbasic requirementofitspeople.PosttheElectricityAct,2003,whichprovidedan enablingframeworkforacceleratedandmoreefficientdevelopmentofthesector –significantreformshavebeenwitnessedtilldate.Section3(1)oftheElectricity Act,2003,requiredtheCentralGovernmenttoformulatetheNationalElectricity Policy(NEP),inconsultationwithotherstakeholders.Accordingly,theNEPwas releasedinFebruary2005,andaimedatproviding‘powerforallby2012’–an ambitioustargetgiventhestateofthesectorandtheutilitiesoperatingatthat time.Today,afteryearsofreformsinthepowersectorthecountryisstillfar behinditsambitiousgoals–withover1lakhvillages1 stillnothavingelectricity connectionandthepeakloaddeficitat13,124MW(onanallIndiabasisforFY 2008-09)2.Thus,thisisthetimetoanalysethekeyissuesandthemeasuresand stepsrequiredsoastoachievethevisionof‘PowerforAllby2012’.Keycurrent andpotentialfutureissues/bottlenecksofthevarioussegmentsofthesector havebeenidentifiedandanalysedbelow.

1 ProgressreportonVillageElectrificationason30-06-2009,MinistryofPowerwebsite 2 CEAReport,PowerScenarioataGlance,July2009

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2

Generation

Peak load capacity deficit Theenergyandpeakpowerdeficitinthecountryhasbeenestimatedatcloseto elevenpercentandfourteenpercentrespectively,withNorthernandWestern Regionswitnessingevenhigherdeficits. Region

Energy (MU)

Deficit (%)

Peak

Requirement

Deficit (%)

Demand (MW)

Northern

24,369

-13.6

35,932

-15.7

Western

20,990

-12.6

35,503

-19.6

Southern

18,465

-6.4

28,387

-8.4

Eastern

8,091

-6.5

12,829

-7.0

North Eastern

844

-12.9

1,760

-22.2

72,759

-10.7

114,412

-14.2

Source: CEA Generation Monthly Report, Aug 2009

Inabilitytomeetpeak-loaddemandhasledtoprolongedhoursofload-shedding facedbytheconsumersandprocurementofpowerfromshort-termmarketsat veryhighrates(nearlyINR73 perKwh)bytheutilitiesduringtheseperiods.The governmentfocusonadditionalgenerationcapacitydevelopmenthasresultedin manyprivateplayerssettingupbaseloadpowerplantsindicatingessentiallythe persistenceofpeakloaddeficitgoingforward. AsperKPMGinIndia’sanalysisrelatedtoprojectionofgenerationcapacity additionundervariousscenariosandconsidering16thEPSfiguresforenergyand peakdemand,itisanticipatedthatwhiletheoff-peakdeficitsituationisexpected toeasetoafairextentandcouldpotentiallyevenbecomesupplyadequate;peak deficitsmaycontinuegoingforward. 0.0% -7.0% -8.4% -10.0% -11.9%

-12.8% -16.3% -19.2%

-20.0% -

-30.0%

2009

2010

2011

2012

2013

2014

Peak Deficit (MW) projections Source:PowerSummit2009:MeetingtheGoalofPowerforAll

3 AsperCERC,weightedaveragepriceofshort-termtransactionofelectricitywas7.31inFY2008-09

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3

Thisanalysisessentiallyhighlightstheneedforadequatefocusonpeaking capacitycreationandpromotionofoptimalmixofgenerationcapacitybetween base-loadandpeakingplantsincludingafavorablehydro-thermalplantmix. Someofthekeyareasrequiringfocusforpromotionofhydro-powergeneration are: • Differentstatesfollowdifferentcriteria4toawardhydroprojectsaddingto confusionanddelayinhydrocapacitydevelopment.Hence,transparent nationallevelguideline/policyisrequiredforuniformityinawardingofhydro powergenerationprojects. • Landacquisitionhasbeenoneofthekeybottlenecksinthedevelopmentof powerprojects.StateGovernmentsneedtodevelopequitableRehabilitation &Resettlement(R&R)policyandprovidesupportfortransparent implementationoftheR&Rpackage. • Normallyittakes1–1.5yearstosecuretheenvironmentandforestclearance fortheproject,hencedefinitetime-linesneedtobespecifiedforproviding differentclearancesfromStateandCentralGovernmentdepartments. • StateandCentralGovernmentneedtofocusondevelopmentofintegrated organizeddatabaseofgeologicalinformationofdifferentprospectivehydro powergenerationsites.Itshouldhelpreducethechancesofgeological surprisesandtimeperiodforprojectdevelopment. • Ashydropowergenerationprojectsusuallyhavelargedevelopmentperiod andtake4-7yearsofconstructionperiod,thereisaneedfordevelopmentof debtmarketenablinglendingforlong-termgenerationprojects.Itshould promotemoreinvestmentsintohydropowergeneration.

Equipment supply AccordingtotheCEAdata5,againstthetargetof78,700MW,only12,717MW hasbeencommissionedintheXIthplanperiod(FY2008-12)6 sofar.Oneofthe keyreasonsfordelayisduetolongerdeliverytimeofplantequipmentsbythe suppliers.AsperCEA7,ofthe67,293MWgenerationcapacityunder construction;EPCandBoPrelatedfactorsaccountedformajorityofdelayin projectimplementation.BHEL,keysupplierofpowerequipmentsinthedomestic market,hascapacitytoproduceonly10,000MWeachyear(Thoughitisplanning torampitscapacityto15,000MWbyendof2009)8.Thecompanyorder-bookto turnoverratioofgreaterthan4forFY2008-09indicateslongtimeperiodfor deliveryofgenerationplantequipmentbythissupplier.

4 Variousparameterssuchasupfrontequity,shareoffreepower,cash-lessequitystakeintheproject, competitivebiddingarekeycriteriaforawardofhydropower 5 CEAwebsite;www.cea.nic.in;ProjectMonitoringsection 6 Thermal:8105MW;Hydro:3393MWandNuclear:220MW;Source:CEA 7 CEAwebsite;www.cea.nic.in;ProjectMonitoringsection 8 BHELfinancialstatementforFY08-09 ©2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmember firmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

4

Manyprivateplayershavealsoenteredintoequipmentmanufacturingspacein jointventureswithforeignplayersfortechnologyinputs.Suchcapacityaddition needstobeencouragedthroughfavorablepoliciestomeetthegrowingdemand fromthepowersector.

Turbine and generator capacity

35000

35000

30000

30000

25000

25000

20000

20000

MW

MW

Boiler and auxiliaries capacity

15000

15000

10000

10000

5000

5000

0

0 2010 BHEL

L&T and MHI

2015 Thermax

2010 Others

BHEL

L&T and MHI

2015 Tosiba & JSW

Alstom & Bharat Forge

Others

Source:Infraline

Apartfromcosts9,thetime-frameforadditionalmanufacturingcapacity commissioningandimpendinghugeorderbooksizearesomeofthekeyreasons forvariousprojectdeveloperstolookatimportofequipmentsfromcountries suchasChina,Koreaetc.Offorty-threesupercriticalunitsboughtbyIndian companiessofar,ordersforonlyfourhavebeenplacedwithIndiancompanies. Chinesecompanieshavebaggedordersfortwentysixboiler–turbine–generation sets(BTG).Koreansmanagedeight,whilethreewenttoRussiancompaniesand twotoItalianfirms10.However,therehavebeensomeconcernsraisedrelatingto suitabilityoftheseequipmentsintheIndianenvironment. Generationprojectdevelopersneedtoidentifytheequipmentsupplier consideringnotonlythecompetitivenessofthepriceofferedbutalsothe reliabilityofdeliveryandqualityassuranceoftheequipmentssupplied. Additionally,developersneedtoset-upformalteamsforidentifyinginadvance anylikelydelaysinthesupplyofthemainandBoPplantequipmentsfromthe equipmentsupplier(s)andinitiatingappropriatemitigationmechanismsforthe same.

9 AsperKPMGinIndia’sanalysisChineseequipmentsuppliesare10-20percentcheaperthanIndian manufacturers 10Internetsearchfromfinancialchroniclenewsarticle

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5

Issues in fuel supply Transparent and speedy process for coal allocation TheMinstryofPower(MoP)inordertofacilitatecapacityadditionthrough MerchantPowerPlants(MPPs),hasbeencoordinatingwiththeMinistryofCoal toidentifycoallinkages(for1000MWplant)andcoalblocks(for500-1000MW plant)forallotmenttosuchplants11.However,theframeworkforsuchfuel allocationisyettobenotifiedandthisuncertaintyiscausingdelaysinplansfor newcapacities. Improvement in mining efficiency Thedemandforcoalhasbeenincreasingattherateof8-9percentperyear12 whileCoalIndialimitedproductionhasgrownattheCAGRof5.7percentover thelast5years13.Inordertoincreaseitsproduction,CoalIndiashouldneedto investinnewtechnologies(forbothunder-groundandopencastmining),process improvementsforplanningandexecutionofprojects,andinstitutionalizea comprehensiveriskmanagementframeworkwithaplantomatchinternational productivitylevels.AsastepinthatdirectionCILshouldlookattechnology transferarrangementsthroughmechanismssuchasjointventureswith technicallyadvancedminingplayersforcoalmining.Theorganizationshouldalso encouragecompetitionamongitsvarioussubsidiariesforefficientproductionand providethemsupportforintroductionofnewertechnologies. Fuel transportation Thefailureoftransportationinfrastructuretokeeppacewithgrowthincoal productionhasbeencausingproblemsintimelysupplyofcoaltogenerating stations.AccordingtotheinternalassessmentbyCoalIndiaLimited,lackof freightcorridorsandfeederrouteshashinderedtransportlogistics14.Delaysare createdbecausefreighttrainsgetalowerprioritythanpassengertrains. Additionally,supplyofcoalduringthefair-weatherperiodofNovembertoMarch topowerstationshasbeenaproblemasrailwaywagonsduringthisperiodwere mostlyusedtoshipfertiliserforKharifandRabicrops.Sincelastcoupleofyears, substantialgenerationcapacityhasbeenplannedbasedonimportedcoalhence transportationinfrastructureforthesameneedstobedevelopedinatimely manner.

11 MinistryofPowerwebsite;R.V.Shahipaperon“India’sstrategytowardenergydevelopmentand energysecurity” 12 InfrastructureTodaymagazine,August2009 13 CoalIndiaLimitedwebsite 14 BusinessStandardarticle“CoalIndiablamesinfrastructureforsupplyproblems”January2008 ©2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmember firmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

6

Inordertoincreasefreightcapacityfromthecoal-producingregions(centraland easternIndia)tothedemandcentersinthenorthernandcentralpartsofthe country,itisnecessarythatIndianRailwaysaugmentcapacity.Specialfreight corridorsarerequiredtoenhancespeeds,cutcosts,andincreasethesystem's reliability.Inordertocatertoprospectiveincreasingsupplyofimportedcoal, StateandCentralGovernmentsneedtoworktogethertoidentifypotential projectsforgreen-fieldandbrownfieldportcapacitydevelopmentincludingthe evacuationinfrastructureatkeylocationsalongtheeasternandwesterncoasts.

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7

Transmission

Uncertaintiesinavailabilityoftransmissionsystemcapacitieshadbeenaconcern forsomeoftheMerchantPowerPlantswhoarenotsureoftheircustomers. Significantportionofnewcapacityiscominginthecoalbeltstateswhilethe demandcentersareintheNorthernandWesternregionsofthecountry. AccordingtothePGCIL,plannedincrementalinter-regionalpowertransfer capacitywillbe19,000MWby201215.Buildingthisoutinatimelymanneris criticalforthepowermarkettofunctioneffectively.Tilldateonlytwoprojects havebeenawardedtotheprivatedevelopers16. GovernmentofIndianeedstocontinuetotakestepstospeeduptheprocessof augmentingthetransmissionnetworkinIndia.TheMoPhasnowissueddraft StandardBidDocumentsforselectionofTransmissionServiceProvider.TheMoP hasalsonotifiedPowerFinanceCorporationandRuralElectrificationCorporation toactastheBidProcessCoordinatorstoundertakebiddingforfewidentified projects.

Project implementation delays Keymilestoneslikestatutoryclearances,landacquisition/“RightofWay”,EPC selection&orderandprojectcommissioningofintegratedprojectsneedtobe monitoredcloselyatthecentralizedlevelandanybottleneckshouldberesolved withactiveassistancefromcentralmonitoringauthority.Recentreports suggestingMinistryofPower(MoP)hasconstitutedagroupofex-Power Secretariestomonitorprogressofpowerprojectsisastepintherightdirection.

Use of better technology for efficient project implementation Securing“Rightofway”hasbeenakeyissueintransmissionproject implementation.Useofbettertechnologiessuchasthirdgenerationtechnologies (FACTS–FlexibleACTransmissionSystems)andnewconductortechnologiescan helpinachievinghigherpowertransfercapabilitiesacrossthesameRightsof Way(RoW).ThesetechnologiesshouldbeseriouslyexploredbyIndianpower transmissioncompanies.

15 Totalinter-regionalpowertransfercapacityofthePGCILhasgoneupto18,700MWasonDec2008 andPGCILplansincreasethenationalgridcapacityto37,000MWbyendof11thplan(Source: www.projectsmonitor.com) 16 TalaprojectwasawardedtoTataPowerandRELwasselectedtoexecuteWRSSproject.Source: MinistryofPowerwebsite ©2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmember firmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

8

Distribution

Open-access as an enabler for capacity creation OpenAccessimpliesthatabuyercanchoosehisownsupplierandviceversa andthebuyersandsupplierswouldbeentitledtothenon-discriminatoryuseof transmissionlinesordistributionsystemfortransferringpowerfromgeneration toconsumptionpoints.Freedomandeaseofgettingopenaccessdowntothe retailconsumerlevelisasignificantsteptowardsmovingtoafullycompetitive powermarketandthisisexpectedtoultimatelyfacilitategenerationcapacity addition.Today,merchantpowerdevelopershavetodependlargelyontenders issuedbystateutilitiesthroughtheCase1routetotieupcapacitiesthrough long-termcontracts.Thisisessentialforthemtogetcomfortofminimumoff-take andachievefinancialclosure.However,iftheretailsegmentweretoopenup, thenaccesstolargecustomerswouldhaveprovidedanalternateoptionfortie-up onmediumtolong-termbasis.Merchantdeveloperscouldthenbeproactivein identifyingbuyerstomaketheirprojectsviableratherthanwaitfortenderstobe floatedandprocurementprocessestobecompletedforsettinguppower projects.Thismayspeedupcapacityaddition. MostoftheSERCshadfixedatimelineofend2008foropeningupthe State

Cross-subsidy Surcharge

Maharashtra Rs.0.00/kWh Delhi *

Rs.0.00/kWh

Gujarat

Rs.0.37/kWh

Source: Open-access orders of State ERC’s * - Only for Domestic category consumers

distributionopenaccessforconsumerswithconnectedloadoflessthan1MW. Further,takingcuesfromtheNationalTariffPolicy,afewstateregulatorshave passedordersforreductionofcross-subsidysurchargeintherecentpast. Thisisexpectedtopromoteopenaccessasreductionincross-subsidieswillhelp maintaintheattractivenessofacheaperpowersource.Fewregulatorslikethe MaharashtraStateElectricityRegulatoryCommissionhavekeptazerolevelof cross-subsidysurcharge17 soastopromotecompetition. Whiletheretailmarketrepresentsaminisculeproportionofthepowermarket currently,thisisexpectedtoincreasegoingforward.Asthedemand-supplygap beginstonarrowdown,competitiveadvantagemaybegintoshifttowardsaccess tocustomers.Insomestates,thisislikelytohappensooner.Generatorsand powerplayersmaydowellthroughactiveplanningtodeveloptheircapabilities andstrengtheningtheirpresenceinthisareaastheretailsupplysegmentbegins toopenup.

17 MaharashtraElectricityRegulatoryCommissionwebsite;Open-AccessTariffOrder

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9

Onceweovercomethesupplydeficitandretailcompetitionestablishesinits truesense;i.e.freedomofchoice,availabilityofproductsandinformation symmetryamongconsumers;theinflectionpointisexpectedtobereached.A wellfunctioningpowermarketcanalsogoalongwayinhelpingensurethatthe prolongedhistoryofpowerdeficitinthecountrywillnotrepeatitselfinfuture. Progressinopen-accessimplementationisexpectedtoboostinvestmentin generation,transmissionanddistributioncapacitydevelopment.Following initiatives/focusareasmayassistde-bottleneckopen-accessprogress: Implementation level initiatives: • Delay in decision with respect to open-access application: Therehavebeen numerousinstancesofSTU/Distributionutilitiestakinginordinatetimein accordingapprovalorrejectiontotheapplicationsreceivedforopen-access. Absenceofaccountabilitybeingfixedbytheregulatorandstrictcompliance ofthesameallowsconcernedauthoritiestodelayopen-access implementation. • Notification of Intra-state ABT by state regulators: Intra-stateABThelps ensureefficientenergybalancingandsettlementmechanismnecessaryto facilitateopenaccesstransactions.Asperthecompilationmadebythe ForumofRegulators(FoR),only8stateshavenotifiedintra-stateABT18.Lack ofcrediblebalancingandsettlementmechanismatthestatelevelactsasa bottleneckforimplementationofopen-access. Maximum Inter Regional Transmission Requirement (2014-15) Region

Requirement

Scenario

Nothern

13500 Import

Winter peak

Western

11000 Import

Summer peak

Southern

4000 Import

Winter/Summer peak

Eastern

25000 Emport Winter peak (23000 MW Own Gen. + 2000 from NER

Northeastern

4000 Export

• Availability of sufficient transmission capacity: Thepeakdemand(inMW)is expectedtoreachalevelof1,52,746MWby2011-1219fromthecurrentlevel of1,09,809MWattheendofFY2008-09. Giventhatopenaccessiscriticallydependentontheavailabilityoftransmission capacitybothinter-regionandwithinregion,CentralandStateGovernmentsneed toplanandimplementrequiredtransmissioncapacityadditioninatimelymanner.

Monsoon peak

Source: CEA website

18 ForumofRegulators’STATUSREPORTON“ISSUESPERTAININGTOTARIFFPOLICY”,2007-08 19 www.cea.nic.in;Demandasper17thEPS

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10

Enhance planning and contracting efficiencies Efficiencyinplanningisatthecoreofasuccessfultimelyandcost-effective infrastructurebuild-out.Planninghasvariouselementstoit: • Designingoftherighttechnicalsolution • Theoptimalphasingandroll-outoftheinfrastructureplanand • Choiceoftherightexecutionmethods Unfortunately,thereseemstobeaseriouslackoffocusonthisareaamongthe utilities,ifonegoesbytheextentandlevelofresourcesassignedtothis importanttask.Clearly,theneedofthehouristogivethisactivitythehighest focus.Itwouldbeworthwhiletorememberthatover80percentofthepower infrastructurethatwillexisttwentyyearshenceisyettobebuiltandefficient planningtodaywillhelpusachievethatinanefficientway20. Stateutilitieswilldowelltohaveastatelevelagencydedicatedwiththetaskof holisticplanningatthestatelevel.Thisshouldincludeplanningrelatedtofuel mix,generationlocation,transmissionsystemandevenchoiceoftechnology relatedtotheseareas.Also,importantistobringtheelementofenvironmental sustainabilityasanintegralpartoftheplanningprocess.Suchanagencywillalso lookathowtheprojectscouldbeexecutedinthemostefficientmannerwhether throughprivateparticipationrouteorstateutilityroute. Thiswouldmeanbuildingsignificantcapabilitywithinthedesignatedagencyto carryoutthistask.Adequateresourcing,impartingtherightskillsandsettingup theplanningprocessesforsuchanagencyarenecessary.TheroleofSTUmay beenhancedtoplaythisimportantrole. Theothersignificantbottleneckisthetimetakentotenderandawardcontracts. ThisappliesbothforprojectstobeexecutedthroughthePPProuteorself developedprojectsbytheutilities.Aclearstrategytoimproveefficiencyofthe tenderingandcontractingprocessisurgentlyrequired.Utilitieswilldowellto applytheirattentiontothisimportantareaandlookatinnovationsandprocedures toexpeditethis.

20 KPMGinIndia’sPowerSummit2009:MeetingtheGoalofPowerforAll

©2009KPMG,anIndianPartnershipandamemberfirmoftheKPMGnetworkofindependentmember firmsaffiliatedwithKPMGInternational,aSwisscooperative.Allrightsreserved.

in.kpmg.com

KeyContacts Pradip Kanakia Head - Markets Tel: +91 80 3980 6100 e-Mail: [email protected] Jai Mavani Head - Infrastructure and Government Tel: +91 22 3983 5724 e-Mail: [email protected] Santosh Kamath Director Infrastructure Advisory Tel: +91 22 3983 6288 e-Mail: [email protected]

Theinformationcontainedhereinisofageneralnatureandisnotintendedtoaddressthecircumstancesofany particularindividualorentity.Althoughweendeavortoprovideaccurateandtimelyinformation,therecanbeno guaranteethatsuchinformationisaccurateasofthedateitisreceivedorthatitwillcontinuetobeaccurateinthe future.Nooneshouldactonsuchinformationwithoutappropriateprofessionaladviceafterathoroughexaminationof theparticularsituation.

©2009KPMG,anIndianPartnershipandamember firmoftheKPMGnetworkofindependentmember firmsaffiliatedwithKPMGInternational,aSwiss cooperative.Allrightsreserved. KPMGandtheKPMGlogoareregisteredtrademarksof KPMGInternational,aSwisscooperative. PrintedInIndia.