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Overview

India is among the largest power-generating countries in the world with an installed capacity of 156.8 GW (as of Jan 2010). Over the last 6 years, the installed capacity of the country grew at a CAGR of 5.60% while the total power generated grew at a CAGR of 5.33%. The government has set an ambitious capacity addition target of 78.55 GW to be achieved by 2012.

Generation Capacity based on Ownership

The ownership of generation capacity lies in the hands of the Centre, State, and Private sector players. In the Centre, generation is mainly owned by NTPC, NHPC, and NPCIL. States have their separate corporations while in the private sector, Tata Power, Reliance Energy, GMR, and Jai Prakash Hydro are the major players. While the public sector players generate electricity from all sources (coal, gas, nuclear, hydro, renewable energy sources or RES), the private players generate power from hydro, thermal, and Renewable Energy Sources (RES) only. No private player is in the nuclear power generation space, but as India’s nuclear isolation has come to an end now, this space is likely to witness the entry of private players.

Over the last 2 years, however, private capacity increased from 13.7% (as on Jan 2008) to 18% (as on Jan 2010) and there was a simultaneous fall in the states’ share in capacity from 52.8% (as on Jan 2008) to 50% (as on Jan 2010). The Centre’s share, also, decreased (though marginally) from 34% (as on Jan 2008) to 32.1% (as on Jan 2010).

Generation Capacity based on Location

The total power generation capacity in India can also be studied on a regional basis. The Western region has the highest share in the all-India power generation capacity at 31.3%. In the Western region, power is mostly generated from thermal source; in fact around 34% of the country’s thermal capacity is installed in the Western region. The Northern region has substantial hydro potential and it accounts for 36% of the country’s hydro capacity, but still most of the hydro potential is untapped. The Southern region has the largest source of renewable (RES) generation and it accounts for 51.4% of the country’s (RES) generation capacity. The Eastern region has huge coal reserves and major portion of its capacity comes from coal; due to the easy availability of coal, most of the pit head coal base power plants are situated in the eastern region.

Generation Capacity based on Feedstock

The generation capacity in India comprises of a mix of thermal, hydro, nuclear, and renewable energy. Over the years thermal energy has become a dominant source of power generation. As of Jan 2010, thermal energy contributed 64% (100,351.5 MW) of the country’s total power generating capacity, while hydro energy contributed 24% (36,885.40 MW), renewable energy sources around 9.8% (15,427.10 MW), and nuclear energy contributed 3% (4,120 MW) to the total capacity.

Thermal fuel maintains a leading position among the fuel used for power generation. In spite of efforts to reduce the country’s dependence on thermal base generation, the cost (relatively higher for other sources of generation) or the unavailability of other sources of energy have remained a constraint. During the Tenth 5-year Plan, the planned capacity addition had a greater focus on the thermal generation space and the same trend has been continuing during the Eleventh 5-year Plan. Most of the power generation capacity will continue to be thermal as most upcoming projects are coal-based.

Hydropower is an environment-friendly alternative for thermal power generation and the operating cost for running a hydro plant is also very low; however, its share in generation has remained constant and has not attracted much investment. The hydro-thermal mix has maintained a leading position over the years, but the share of hydropower plants in total generation has fallen over the years. In the mid-eighties, the share of hydropower in total generation was comparable to that of thermal generation, but, since then, investments in hydropower generation have risen at a lower rate than investments in thermal generation. Though the operating cost for hydropower plants is lesser, the capital investment required in the initial stage is huge. Investors have shied away from the sector because of delays in environment clearances that have made the sector an unfavourable choice and have restricted capacity addition in the sector. Thermal energy, on the other hand, has gained a greater share over the 5-year plan periods and its growth rate has also been much higher, as investments from public as well as private sectors have continued to pour in. In the Eleventh Plan also capacity addition focuses more on thermal power generation, which suggests that thermal energy will remain the dominant source in the coming years.

Nuclear energy has had a very small share in the power generation pie, but its share in total power generation is likely to rise post the Indo-US Nuclear Civilian Agreement. India has only one nuclear power generation company, NPCIL, with a capacity of 4,120 MW, but due to recent developments many private and public sector utilities have envisaged plans for setting up nuclear plants. NTPC, Tata Power, GMR, Reliance Infrastructure, and GVK are some such companies.

The renewable sources of power generation include wind power, small hydro power, biomass power, Urban & Industrial (U&I) waste to power, solar power etc. Among these sources, wind power has a leading share of 70% in the RES, while small hydro has 7%, cogeneration-bagasse 7%, biomass 5% and solar & waste to energy constitute less than 1%.

India has an expansive coastline belt from Gujarat to Kerala and from Kerala to West Bengal that provides ample scope for wind power generation. India’s wind power potential has been assessed at 45,000 MW. During the last 5 years, wind power generation projects received increased investments from the government as well as from private players, which resulted in significant capacity additions.

India’s solar power capacity is around 2 MW and the share of solar power in the current fuel mix is not very high. However, the trend is all set to change as large number of small and large-size solar projects are coming up in the near future. The Rajasthan government is set to approve solar thermal projects of 250 MW. Many other states like Haryana and West Bengal are implementing solar power projects.

During the last 6 years (FY04-FY09), growth in power generation capacity based on different fuel types was impressive. Among the sources, renewable energy sources grew at a CAGR of 39.71%, and most of the growth in this segment came from wind power. The capacity addition in the segment based on thermal energy grew at a CAGR of 3.7% (FY04-FY09), hydro energy at 4.6%, and nuclear energy at 8.7% during the same period.

Future additions to power generation capacity are likely to be affected by a number of factors, including signing of the Indo-US nuclear deal, which could lead to more generation capacity being set up on nuclear fuels, the Ultra Mega Power Projects (UMPPs) and Merchant Power Plants (MPPs), which would largely be based on coal, and the policy of basing 5% of generation capacity on RES.

Power plants based on scale

Ultra Mega Power Projects (UMPP)

The UMPPs are large-sized projects with a capacity of around 4,000 MW. Such projects are awarded under a bid process, where the government identifies specific project, location, fuel linkages, clearances and the bidders quote the most beneficial price of power for that specified project. This initiative started out with four ultra mega projects and now there are nine in the pipeline. The Central Electricity Authority (CEA), through a preliminary scrutiny, has identified a number of potential sites in India; in the first phase, four projects at pit head site and five projects at coastal locations were identified for development of UMPP. The projects at pithead locations use domestic coal for fuel and the ones at coastal sites use imported coal as fuel.

The UMPPs, each having a generation capacity of 4,000 MW, will help the country’s growing demand for power and will aid overall economic growth. Further, the Electricity Act 2003 has opened doors for privatisation, which will broaden the prospects of financial credibility of the UMPPs and will also help in successful implementation of the MPP.

A Special Purpose Vehicle (SPV) is set up for these plants to reduce the difficulties faced by the investors in early stages of project development. The payment securities of these projects are done through escrow mechanism. The projects are awarded on the basis of domestic and imported coal, respectively. Three UMPPs are awarded till date, Sasan in Madhya Pradesh, Mundra in Gujarat, and Krishnapatnam in Andhra Pradesh.

These projects get the privilege of UMPPs in extension of MPP and are offered the following concessions:

Merchant Power Plants

India is on its way to develop an electricity market and the merchant power plant is a new initiative in this direction. The merchant power plant enables generators to choose a buyer with negotiated price. This method has discarded the old pattern of long-term agreement with the buyer (as per provision in the Electricity Act 2003) and has allowed only 49% of the project to be bound under long-term contracts and the remaining 51% to remain untied. The fuel needs of the project are likely to be facilitated by Ministry of Power (MOP) in consultation with the Ministry of Coal.

Merchant power plants can either contribute towards regular supply of electricity or support the power system when the demand is high. Merchant power plants are creating additional generation reserve through their 51% untied capacity and therefore can relieve India’s power woes; currently (FY09) India is facing a peak deficit of around 12% and an energy deficit of 11%. The merchant power plants are the ideal input for a future competitive electricity market. These plants have ample scope for selling their power through exchanges as trading is now recognised as a separate activity under the Electricity Act 2003. Open access in transmission will provide a right of way to sell power to buyers at any location. The merchant power plants have many options to sell power to customers through different channels.

Captive Power Plants

A captive power plant (CPP) is any generating station set up by an organisation to meet its own power requirement. The CPPs cater to the electricity requirement of industrial units in a large scale. The captive power generation capacity in India is 19,509.49 MW (Apr 2008).

The Electricity Act 2003 encouraged captive power generation in India and further provisions in the Act took captive power to competitive market by opening the market for players to invest in captive power generation. Open access allows captive generators to sell power to any buyer no matter what the location.

CPP capacity grew at a CAGR of 5% during the last 5 years (FY04-FY08) and industrial and commercial demand were the drivers of growth. Increasing demand from industrial consumers, who are suffering from inadequate power supply and high tariff rate charged by State Electricity Boards (SEBs), find captive generation as the best alternative for meeting their demand. Coal-based generation dominates captive power generation also and constitutes around 42% of the captive capacity. Another reason for higher capacity of coal-based captive generation is the cost of generating electricity from coal, which is cheaper than diesel and naphtha. Different industries like manufacturing, commercial, service, hospitality, as well as educational institutions have captive power capacity based on diesel generators. In recent times, cogeneration and waste heat recovery are emerging as the best alternatives among all fuel types for CPPs, as companies get the Clean Development Mechanism (CDM) benefits under this system in addition to achieving energy efficiency.

The future of captive generation is very bright as industrial demand will keep on increasing and activities like trading through exchange will provide a platform to captive generators to sell surplus power at a profitable margin.

Regulations in Power Generation

Specific Policies for Power Generation

The Indian government over the last 15 years has introduced several policies for promoting power generation. The government’s liberalisation policies of 1991 and the consequent amendment in the Electricity (Supply) Act have given way for a new framework of the industry that involves private efforts and investments. Further, the government has taken measures to improve investments in the power sector, especially from private players. Some of the major policy initiatives in generation are:

Private Power Policy 1991 – Under this policy any private company can set up thermal projects, hydro projects and wind or solar projects of any size. Foreign investors are also allowed to invest in projects with ownership upto 100% with government approval. Due to this policy, many private players entered the power generation business during this period and set up generation plants.

Liquid Fuel Policy 1995 – This policy permitted private players to set up short gestation power projects using fuels like naphtha and fuel oil. The policy has in a way aided quick capacity addition from these liquid fuel-based power plants and encouraged the use of liquid fuel in power plants; under this policy, capacity addition of 12,000 MW was planned based on liquid fuel.

Policy for Renovation and Modernisation of Existing Plants 1995 – The government decided that Renovation and Modernisation (R&M) of generating stations was beneficial and efforts were taken to realise these benefits. Both public and private investments were made and the funds were raised through traditional funding like loans from financial institution and external agencies. However, the ownership of renovated plants remained with SEBs. Under a separate option, the R&M was carried out through privatisation or through transfer of ownership. While taking any of the options, factors like relative economics, financing other priority areas and the result price of energy was considered. The participation from private investment in R&M programme, however, was on a lease, rehabilitate, operate and transfer (LROT) sale of plant and joint venture between SEBs and private companies basis.

Hydropower Policy 1998 – Hydropower is economic, non-polluting, and environment-friendly; due to all these benefits, the government announced a policy on hydropower development for exploiting the vast hydropower potential available in India. Several initiatives were taken to provide incentives to hydropower projects, which included the following:

Mega Power Policy 1998 – This policy focused on the development of projects with capacity of 1,000 MW and more, those catering power to more than one state and considered them as a mega power project. Projects were being awarded through competitive bidding mechanism. CEA, Power Grid and NTPC were to provide support in identifying sites, arranging transmission network and preparation of feasibility report. This policy was revised in 1998 and the revised policy offered some fiscal incentives. The incentive given to these projects were:

This policy created interest among private players to enter into mega projects as different incentives and benefits were available to them. Private participation not only increased competition but also increased economies of scale in mega projects to bring tariff at a comparatively lower rate than tariff of other projects.

New Hydro Policy 2008 – The new hydro policy addresses different issues pertaining to development of hydro potential. The provision to award projects to developers through tariff base bidding up to 2011 will give private players flexibility to tie up with states for setting up projects. In order to enable the project developer to recover the cost incurred by him in obtaining the project site, the policy permits a special incentive by way of up to 40% of saleable energy for trade as merchant sales. This policy aims for the welfare creation and creation of infrastructure and common facilities to achieve 1% additional power above the existing 12% free power provided exclusively for local area development. Under the policy, the government is likely to provide soft loans for small hydro plants with capacity up to 25 MW.

Supply Dynamics

Capacity Addition

India has a target to achieve power for all by the end of the Eleventh Plan. According to the CEA estimation 78,577 MW is to be added during the ongoing Eleventh Plan and the contribution is divided among different sectors and types of sources.

The capacity addition initiatives taken during the Tenth 5-year Plan have a distinct skew towards coal-based thermal plants and this has been carried forward for the Eleventh 5-year Plan as well. In fact most of the planned capacity addition depends on thermal energy.

According to a research done by the Working group report for the Eleventh 5-year Plan and monthly update project status by CEA and primary research of companies, it is estimated that 84,907 MW of capacity is likely to be added during the 5-year period, of which 77% is likely to be in the public sector and 23% in the private sector. In the private sector, 80% of the projects are already under construction and the remaining 20% are yet to start. The public sector projects are in the ratio of 53:47 of announced and under construction.

RES and Nuclear Power

The RES sector merits a report on its own because of the plethora of opportunities it has to offer. The working group on the Eleventh Plan states that the RES sector programmes of the Ministry for the Eleventh Plan have been drawn up in the light of the recommendations made by CASE, the Planning Commission, and IEPR. Accordingly, it is proposed that the development and deployment strategy be rationalised and in case of development a thrust is to be given through a sector-based approach in place of individual technology approach adopted during the Tenth Plan. The approach adopted hitherto was somewhat lacking in focus, suffered from lack of effective coordination, even led to duplication of efforts in some cases, with the result that desired outcomes and impact might have been somewhat affected at times. These shortcomings are sought to be overcome through well defined aims, target areas, integration of efforts and proper coordination among different programmes.

A plan outlay of about Rs 40 bn has been set aside for subsidies for the projects in case of implementation within the Plan period. A ball park figure of Rs 731 bn of investment is needed. This will be done mainly in the private sector and hence, there is a good opportunity to explore in terms of financing potential.

The estimated cost per MW for setting up a nuclear power plant is around Rs 65 mn. Most nuclear projects are under construction and have a plan outlay of about Rs 219.70 bn.

Shortfall in Capacity Addition

The shortfall in capacity addition has been carried over from the Tenth Plan period to the current Eleventh Plan. The capacity addition targeted for the Tenth Plan fell short by 51%, which indicated the massive shortfall.

During the last 6 years, less than half of the capacity was achieved by thermal and hydro power. The major reason behind the shortfall in thermal energy was the fuel and equipment shortage whereas in hydro, procedural clearance like necessary approval and acquisition of sites hampered the pace of capacity addition.

Key Input Requirements

Fuel – Coal is a major input in power generation, and almost 76% of planned generation capacity during the Eleventh Plan was from thermal sources, and the contribution of coal was about 90%. The total demand of coal at the end of Eleventh Plan was projected at 544.5 mn tonnes as compared with 482 mn tonnes, indicating a shortfall of around 62 mn tonnes.

India’s current coal demand is increasing at a rapid pace as majority of the upcoming projects are thermal-based; however, the situation is very critical on the supply side as many coal-based power plants are running with less than a week’s stock of coal. This situation started becoming critical from the beginning of 2008 when many companies suffered huge losses. As of Sept 2008, 50 out of 81 thermal power plants in India had less than a week’s stocks.

Material – Many materials are required for commissioning power projects that involves plant equipment and several construction activities. Steel, cement, copper, aluminium, etc are the main materials used for power projects. The demand for these materials varies according to the type of plant (hydro, thermal, or nuclear) and type of project (green field or expansion).

Manpower requirement - This segment has huge requirement of skilled and unskilled manpower for operation as well as for maintenance of power plants.