Blackouts shine light on broken power sector

REUTERS Wed Aug 1, 2012 7:45pm IST

1 of 2. A gas oven mechanic waits for customers in his shop during a power-cut in Kolkata July 31, 2012.

Credit: Reuters/Rupak De Chowdhuri

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REUTERS (Reuters) - As India's power minister stood up to address parliament one day last May, the chamber was plunged into darkness and a roar of laughter went up.

(For slideshow click reut.rs/MPXNUl)

Rolling power cuts are part of daily life in India, where energy production falls far short of the demands of a fast-growing economy and an increasingly affluent population, but blackouts for two days this week across a vast swathe of the country were no laughing matter.

Three of India's five transmission grids collapsed on Tuesday, cutting power to states where some 670 million people live, more than half of the country's population. That blackout, one of the world's worst, followed a similar breakdown across the north the previous day.

It is not clear what sparked the massive failures.

The central government has accused state governments of taking more electricity from the grids than their allotted quotas, and some have blamed disappointing monsoon rains for a surge in power demand from farmers struggling to irrigate their land.

However, deep-seated problems spanning the generation of power to its distribution mean a repeat of this week's fiasco cannot be ruled out.

"So many things have been ignored. So many things have not been done. It is lack of initiative and wrong initiative, wrong policy and no policy," said Suresh Prabhu, who was power minister in a previous government led by the main opposition party.

Prabhu said the power sector was in complete chaos and risked collapse if no action was taken quickly.

POWER PLANT DELAYS

India has installed power capacity of 205,000 megawatts (MW), about 35 percent more than it had five years ago, thanks to an aggressive drive by the government to add more.

However, that is still only about a fifth of China's capacity, and so - even though one third of Indians are not even connected to a power grid - there is a gap between supply and demand, with the peak-hour deficit reaching about 10 percent.

Efforts to accelerate the pace of capacity addition have been thwarted by hurdles standing in the way of land acquisition and clearances for power projects, including regulatory delays and environmental concerns.

Government data shows that the average delay for construction of thermal power projects is running at 15 months, but some have been on the drawing board for years.

Take the case of billionaire Anil Ambani's plan to set up a 7,480 MW plant at Dadri in Uttar Pradesh. A decade after the project was announced it is still not operational after protests by farmers over land acquisition and a legal challenge that is still pending in the Supreme Court.

Coal and natural gas shortages have crimped the rollout of new plants and left many existing units running below potential, where in all some 15,000 MW of capacity are lying idle.

Ambani's Reliance Power (RPOL.NS) has built the first phase of a $1.8 billion plant in Andhra Pradesh, sourcing state-of-the-art equipment from General Electric Co (GE.N), but it doesn't have the gas to start it up.

The fuel shortage is acute when it comes to coal, which accounts for two-thirds of the country's power generation.

India has about 10 percent of the world's coal reserves but output by the near-monopoly Coal India (COAL.NS) has stagnated, importing coal is far more costly and a lack of rail capacity from ports has held up supplies. Many power plants have less than seven days' of coal stocks, a level seen as critical to continuous operation.

"Coal India has enough reserves. But evacuation (transportation) is the main problem," said a senior coal ministry official. He said Coal India had set aside $900 million to lay train tracks in the next five years but the railway ministry had not responded to the plan.

DISTRIBUTION COMPANIES IN TROUBLE

While generation capacity has increased, renovation of the transmission network has not kept pace, which means that about one-third of production is lost at this stage.

"A lot of the transmission network is not old," said Kameswara Rao, leader for power and mining at Price Waterhouse Coopers India. "We are running but the treadmill is even faster."

Perhaps the biggest challenge, though, is the health of decrepit distribution companies that depend on subsidies and face huge losses from low tariffs and rampant power theft. Together, they are now saddled with debt worth some $35 billion and are increasingly unable to pay for new supplies.

"Generation capacity will only get financed if the financiers feel that the generators are selling power to distributors who are financially capable of paying for it," Planning Commission deputy chairman Montek Singh Ahluwalia said recently in defence of a government plan to bail out the mostly state-owned distribution companies.

Populist-inclined state governments have made it difficult for distributors to set cost-reflective tariffs. However, with bank loans drying up, many distributors have been forced to raise tariffs sharply over the past six months.

To be fair, there have been many steps to reform the power sector over the past decade.

The generation, transmission and distribution segments of the industry have been separated to allow each to work on its own, and private investors have been drawn into generation in particular, now accounting for about one quarter of capacity.

However, more sector reform is unlikely to come quickly from a government that appears to feel it has much to be proud of.

Sushilkumar Shinde, who was promoted from power minister to home minister even as the country reeled from Tuesday's blackout, told a news channel the next day: "I rate myself as an excellent power minister."

(Additional reporting by Rosemary Arackaparambil, Malini Menon and Ketan Bondre; Editing by Frank Jack Daniel and Robert Birsel)

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