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Private Participation in the Indian Power Sector in the Indian Participation Power Private Public Disclosure Authorized Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT Energy and Mining Private Participation in the Indian Public Disclosure Authorized Power Sector Mukherjee Lessons from Two Decades of Experience Mohua Mukherjee WORLD BANK GROUP BANK WORLD Public Disclosure Authorized Private Participation in the Indian Power Sector DIRECTIONS IN DEVELOPMENT Energy and Mining Private Participation in the Indian Power Sector Lessons from Two Decades of Experience Mohua Mukherjee © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 17 16 15 14 This work is a product of the staff of The World Bank with external contributions. 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Private Participation in the Indian Power Sector • http://dx.doi.org/10.1596/978-1-4648-0339-0 Contents Foreword xi Acknowledgments xiii About the Author xv Abbreviations xvii Overview 1 Lessons Learned from Two Decades of Efforts to Attract Private Investment in the Power Sector 8 General Observations and a View Ahead 15 Notes 16 References 17 Chapter 1 Introduction to Private Sector Participation in the Indian Power Sector 19 The Prereform Period: From Independence to 1991 19 Phase 1 (1991–95): The Opening of the Sector to Private Investment in Generation—Independent Power Producer Policy 21 Phase 2 (1996–2003): Restructuring of SEBs, Introduction of Sector Regulators, and Initial Attempts at Privatization in Orissa and Delhi 24 Phase 3 (2003–12): Enactment of the Electricity Act and Subsequent Policy Initiatives to Introduce Competition and Create a Market in Generation, Transmission, and Distribution 25 Phase 4: Investor Uncertainty at the Start of the 12th Five-Year Plan 28 Private Participation in Generation, Transmission, and Distribution 29 Notes 29 Reference 30 Private Participation in the Indian Power Sector • http://dx.doi.org/10.1596/978-1-4648-0339-0 v vi Contents Chapter 2 Private Sector Participation in Thermal Generation 31 Key Messages 31 Importance of Power Generation 32 Placing the Indian Power Sector in an International Context 32 Growth of Private Sector Participation in Power Generation in India 33 Independent Power Projects Policy of the Early 1990s 35 Key Issues in Implementation of the IPP Policy 36 Intermediate Policy Initiatives for Private Sector Participation in Generation 37 Post–Electricity Act of 2003: Tariff-Based Competitive Bidding 38 Response of the Private Sector to Case 1 and Case 2 Procurement through Competitive Bidding 41 Comparison of Case 1 and Case 2 Bids with Noncompetitively Awarded (by Memorandum of Understanding) Projects 44 Prospects for Future Private Participation in Power Generation: What Is Holding Back Private Investors? 46 The Coal Crunch and Choices Facing Policy Makers 47 Logistical Difficulties with Physical Pooling of Imported and Domestic Coal 47 Notes 50 References 50 Chapter 3 Private Sector Participation in Transmission 51 Key Messages 51 Chronology of Private Sector Participation in Transmission 52 Legal Framework for Transmission Business 52 Private Participation Experiences 53 Current Models for Private Participation 55 Chapter 4 Private Sector Participation in Distribution 59 Key Messages 59 Distribution Performance and Chronology of Private Sector Participation in Distribution 60 Comparative Highlights of the Privatization Experience of Orissa and Delhi 64 DF Models 67 Review of Rural Franchisee Experiences 75 Review of Urban Franchisee Experiences 77 Lessons Learned for Improvement of the DF Approach: What Are the Key Variables That Must Be Properly Understood and Addressed in the Bid Process? 79 Private Participation in the Indian Power Sector • http://dx.doi.org/10.1596/978-1-4648-0339-0 Contents vii Notes 94 References 94 Chapter 5 Private Sector Participation in the Indian Solar Energy Sector 97 Key Messages 97 Progress to Date 99 Potential Bottlenecks to Meeting Commissioning Schedule Deadlines 104 Note 105 References 106 Chapter 6 Financing of the Power Sector 107 Key Messages 107 Distribution Sector Losses and Their Effects 107 Macroeconomic Outlook 109 Central Government Approach 109 Recommended Holistic Approach 111 Reference 113 Chapter 7 Emerging Issues and Proposed Approaches for the Indian Power Sector 115 Emerging Issue: The Need for Better Partnership Mechanisms with the Private Sector 115 Final Thought 118 Note 118 Chapter 8 Update 119 Review of Progress on Selection of DFs 119 Issuance of SBDs for the Appointment of DFs 122 Finalization of Key Terms of the Public-Private Partnership Model for Distribution 123 Impending Segregation of Wheeling and Supply License(s) 124 Review of Progress on Generation PPP 125 Review of Progress on Transmission PPP 127 Notes 128 Reference 128 Appendix A Organization of the Power Sector in India 129 Appendix B Dabhol–Enron: The First Lesson Learned under the New Independent Power Producer Policy 131 Appendix C Summary Case Studies of Distribution Privatization 133 Highlights of the Orissa Reform Experience 133 Private Participation in the Indian Power Sector • http://dx.doi.org/10.1596/978-1-4648-0339-0 viii Contents Highlights of the Delhi Distribution Privatization Experience 134 Appendix D Post-2012 Generation and Uncertainties Related to Domestic and Imported Fuel Supply 137 Domestic Coal-Related Uncertainties 137 Imported Coal Uncertainties 139 Improvement in CERC Indexation 140 Note 141 Appendix E Emerging Challenges for Private Investment in Transmission 143 Issues and Challenges for Private Transmission Line Developers 143 Experience in Private Projects Being Implemented versus the Transmission Framework 143 The Way Forward 145 Appendix F Comparison of Privatization to the Distribution Franchisee Approach 147 Privatization versus Distribution Franchisee 147 Appendix G Recommendations for the Way Forward on Distribution Franchisee Selection 151 Appendix H Standardization of the Distribution Franchise Process 157 Post-award Contract Management 160 Note 160 Boxes 1.1 The Green Revolution: Genesis of Free Power to the Agricultural Sector 20 2.1 What If the Coal Availability Projections Are Too Optimistic and There Is Still a Coal Shortage in 2018? 48 4.1 Shunglu Committee versus B. K. Chaturvedi Report 74 H.1 Bhiwandi Distribution Franchisee: A Success Story 157 Figures O.1 Bank Exposure to Power Sector 5 O.2 Growth Rate of Bank Credit to Select Sectors 5 O.3 Summary of Electricity Value Chain under Pressure 14 2.1 Growth of Private Sector in Power Generation Segment 33 2.2 Evolution of Ownership of Power Generation Assets, 2007–12 34 Private Participation in the Indian Power Sector • http://dx.doi.org/10.1596/978-1-4648-0339-0