Power Sector in India-Challenges and Opportunities

India is a power deficient country with peak power demand shortages of
upto 15% which requires load shedding and leads to lost productivity
worth billions of rupees. With the liberalization of the economy,
during the nineties, came about an increased focus on ramping up power
production capacity. This focus culminated in the Electricity Act 2003
which abolished requirement of a license to produce power.

This led to the entry of numerous private sector players in the power
sector such as Reliance Power, Tata Power and Lanco Infratech etc.
Each of these players were vying for a share of the pie and either
conjuring up MOUs for potential projects with state governments or
bidding in the tariff based bidding for thermal power projects for
projects identified by the government.

In case of the tariff based bidding, the government forms a shell
company which takes care of land acquisition and primary clearances.
The bidders bid for the lowest rate at which they will sell power.
This rate or tariff is a levelised for the design life of the project
which is mostly 25 years. While coming to this rate the power sector
companies consider important factors like availability, proximity and
cost of fuel in addition to the cost of infrastructure and equipment.
The bidders make an effort to seek competitive advantages over other
in by reducing their costs by identifying economical equipment vendors
as well as forming an operation plan which helps them bring down the
tariff to the lowest possible figure. It can be pointed out here that
the projects nearer to the source of coal bring out lower tariffs as
the cost of coal transportation is reduced. Most ultra mega power
projects(UMPPs) are located near coal mines, such as Sasan or at port
locations ,such as Mundra, where imported coal is directly available.

A little about project execution – once a project is awarded to a
bidder, the bidder takes up the execution starting with the award of
equipment contracts to suppliers. Almost all private sector power
players are sourcing equipment from China. This equipment is 60% the
cost of that supplied by domestic players such as BHEL. The reason for
this gap and the quality of this equipment can be the subject of
another essay, however China’s huge manufacturing capabilites with
cheap manpower enables them to line manufacture power equipment. Site
clearance and leveling is the first activity that is taken up followed
by start of construction for major facilities. A typical time frame
from zero date to unit commissioning for a typical 500 MW unit is 36
months. The process involves collaboration of structural designers,
equipment suppliers and construction personnel. An efficient and
experienced team of professionals is a must for any organization
attempting to execute such a project. Some private players, due to
lack of quality personnel, are going for EPC contracts to Chinese
players. However lack of sufficient checks and balances at the
organization’s end can lead to poor equipment and construction quality
as well as system integration.

Major challenges in power capacity addition are: - inability of
agencies responsible for tendering viable projects within time frames
specified; inability of agencies taking up projects to complete them
in schedule; insufficient trained manpower to competently handle major
projects; problems in financial closure and availability of funds and
lack of international best practices in project execution in Indian
companies. Another major challenge to the
sector is the issue of land acquisition
which is holding up a number of projects in the country. We could get a
taste of that in Singur which was well publicised. Many such Singur's
are there all over the country with the land acquision process being
subeverted for vested interests. This is a major area of worry and one that
needs sweeping reforms.

Infrastructure is an area that needs huge capital expenditure. It is
no longer possible for the government to meet the infrastructure
demand of the growing economy from its own funds. The involvement of
the private sector in partnering the government to achieve
infrastructure targets is a must. However, the private sector has a
core profit motive. The challenge is to align the profit motive with
quality infrastructure creation. Added difficulties like political
biases and presence of vested interests in government not to mention
potential for corruption are major hindrances to the smooth
functioning of this sector. There are no simple solutions and we are
seeing rapidly evolving dynamics.
The targeted 11th plan spend of USD 500 billion has the lion’s share
for the power sector at USD 160 billion. This is obviously a great
opportunity for business! You can have a share of that USD 160 billion
in case you choose to participate in the proceedings. The sector needs
good managers and leaders to resolve the dilemma of coexistence of
profit and welfare motives. It needs managers who build systems which
can make this symbiosis possible and leaders who are strong enough to
see the projects through. In this lies an opportunity for anyone
interested in this sunrise sector which has opportunity beyond
description. For anyone who is up for the challenges in this sector
there exists no upper bound! Good luck!

Sanjeev Sharma
ISB CO 2011