Private Participation in the Indian Power Sector: Lessons from Two Decades of Experience (Directions in Development)

The state of the Indian power sector today is an acknowledged constraint to the country’s growth aspirations. This book examines the home-grown Indian experience with private sector participation in power, identifies emerging risks, and proposes specific actions for government consideration, so that the power sector may fulfill its important role in India’s growth story. Seeking financing, efficiency, and project management skills from the private sector to complement public sector efforts, the state governments and the central government have invited private participation in power for the past two decades. They have followed a continuously evolving process starting with the independent power producer policy of the early 1990s, which sought only to attract new investment in generation. Despite these efforts, the rate of growth in energy supply has not kept pace with the growth in demand. Much more private sector investment and engagement in the sector is likely to be required to complement the government’s own efforts to improve supply, quality, and reliability of power. The passage of the Electricity Act of 2003 was a signature achievement, moving the sector away from the previous route of negotiated Memoranda of Understanding with investors to a market-driven approach that forced potential investors to compete aggressively for generation, and later also transmission, contracts. Removal of generation licensing requirements and the introduction of competition under the Electricity Act elicited a significant private sector response in generation, a limited but respectable response in transmission (few transmission lines were tendered in the first place), and a varied but limited response in distribution. The quality of baseline data provided to the distribution franchisee about the state of the network and the customer base is a perennial problem. Lessons learned about methods for successful distribution franchising, including specified loss reduction trajectories, are gradually finding their way into standardized bidding documents. Different qualification requirements for bidders are emerging for different locations. In the future, franchisees may also need greater independent access to power supply for their service areas, for example, by combining generation and distribution through private players.

This book reviews the major developments in and the lessons learned from the 21-year (1991-2012) experience with private sector participation (PSP) in the power sector in India. It discusses the political economy context of the policy changes, looks at reform initiatives that were implemented for the generation sector, describes transmission and distribution segments at different points in the evolution of the sector, and concludes with a summary of lessons learned and a suggested way forward. The evolution of private participation in the Indian power sector can be divided into different phases. Phase one was launched with the opening of the generation sector to private investment in 1991. Phase two soon followed - early experiments with state-level unbundling and other reform initiatives, including regulatory reform, culminating in divestiture, and privatization in Orissa and Delhi respectively. Phase three, the passage of the electricity act of 2003 by the central government, followed by a large increase in private entry into generation and forays into transmission and experiments with distribution franchise models in urban and rural areas during the 11th five-year plan (2007-12) period. In phase four, at the start of the 12th five-year plan (2012-17), the sector is seeing a sharp reduction in bid euphoria and greater risk aversion on the part of bidders, who are concerned about access to basic inputs such as fuel and land. In this context, the report is structured as follows: chapter one gives introduction; chapter two presents private sector participation in thermal generation; chapter three presents private sector participation in transmission; chapter four deals with private sector participation in distribution; chapter five deals with private sector participation in the Indian solar energy sector; chapter six deals with financing of the power sector; chapter seven presents emerging issues and proposed approaches for the Indian power sector; and chapter eight give updates.

The passage of India's Electricity Act of 2003 was a signature achievement, moving the sector toward amarket-driven approach that forced potential investors to compete aggressively for generation and transmission contracts. India's 2005 National Electricity Policy recognized electricity as one of the key drivers for rapid economic growth and poverty alleviation in the country. Yet the policy’s target—electricity for all and 1,000 kilowatt-hours (kWh) available per capita by 2012—was not met. Despite a 20-year reform process and private-sector participation, the rate of resource augmentation and growth in energy supply has been less than the rate of increase in demand. Numerous challenges need to be addressed before India can overcome severe energy shortages and achieve its desired national policy objectives. Private Participation in the Indian Power Sector: Lessons from Two Decades of Experience examines the home-grown Indian experience with private sector participation in power, identifies emerging risks, and proposes specific actions for government consideration, so that the power sector may fulfill its important role in India’s growth story. Much has been achieved, and the Indian power sector can rightfully take its placeamong the bold reformers. Yet a large agenda remains, and a more rigorous focus on implementation, particularly on last-mile reforms in the distribution sector, will be required. Close coordination among variousstakeholders and unrelenting attention to efficient execution through decentralized authority to make technical decisions, together with a robust emphasis on monitoring, evaluation, and transparent sharing of data and performance statistics, will help in achieving this objective.