Will power grid failure stir in reforms? Experts discuss

Last week, 21 Indian states plunged into darkness as the northern, north-eastern and eastern grids collapsed. Power was restored within the day but, India's abysmal infrastructure created headlines around the world. An embarrassed government put up a brave defense.

The recent grid failure is a mere symptom of a larger crisis facing India's power sector. While the blame game continues on what caused the collapse, reality is everyday, in most states demand outstrip supply. Large parts of rural India are still powerless and power generation has fallen short of targets year after year.

State discoms are virtually bankrupt and companies are starved of fuel. Will the grid collapse shock the state into action finally and push ahead the much needed reforms?

To discuss the roadmap for powering India, GV Sanjay Reddy, chairman, CII Southern Regional Council and VC, GVK Power & Infra, Anil Sardana, chairman of CII National Committee on Power and managing director, TATA Power and Sunand Sharma, member, CII National Committee on Power and country president, Alstom India discuss the ground reality in an interview with CNBC-TV18.

Here is the edited transcript of the interview on CNBC-TV18.

Q: The usual blame game has started on what really led to the collapse that we saw twice over 24 hours last week and the fact of the matter is that whether it is following the grid discipline or whether it is penalties, haven't actually acted as deterrents. This is as I pointed out, a mere symptom of a chronic malice facing this sector?

Reddy: Yes, I think you have captured it in your first statement very well. The problem is not only in the distribution, transmission and generation. Broadly, my view is that one has to have a comprehensive look at the power sector and come up with a way forward within a short-term, medium-term and long-term plan.

Q: Let's talk about what we are seeing, as far as generation is concerned. Year after year, we failed to meet our targets. The former power minister Sushil Kumar Shinde on his way out defended the government saying that we added 20,000 megawatts in capacity in one year compared to what we have done in any other plan. That's hardly something to boast about given the fact that China outstrips us 6 times annually every single year?

Reddy: In the last few years one thing which has happened is the amount of investment that has started on a cumulative-basis. It has been phenomenal but, obviously without enough planning on some of the key areas including fuel, environment etc. I think these problems surfaced when power plants started going into generation.

While there are lots of problems in every sector, I think one has to focus primarily in terms of a long-term energy policy. If I recollect, the last time India really had a long-term energy policy, it was in 2000 or 2001. We really need to look at a long-term integrated energy policy and energy security plan.

Sharma: All these matters are extremely well established. I think one of the things which needs deep focus is the fact that we have multiplicity of decision making. In manufacturing for example, after being encouraged hugely by the planning process, we and our competitors and others have made vast investments across India in anticipation of planning which would require about 25,000 to 30,000 megawatts of new power plants installed every year.

So, as you started by saying that generation is already there but, no one anticipated the fact that there would be such a huge gap in the supply of coal or gas or the low hanging fruit of hydro would not become available because of issues such as environmental clearances which rose late in the day. The entire thing is symptomatic of a lack of very high level coordination.

We, in the private enterprise cannot be the ones to encourage the government internally, from department to department or speak with each other and remain coordinated. The integrated policy is actually on record.

Q: On paper it maybe there but, in reality it is a very different situation? One of the issues that Sunand raised, which is perhaps the most critical issues facing the sector at this point in time is the lack of clarity as far as fuel is concerned. Whether it is coal, whether it is gas, we do not know where the fuel is going to come from. It becomes a battle between the coal ministry and the power ministry. Then the prime minister's office steps in and it becomes a battle between the oil ministry and the power ministry. Still there's no clarity on what happens as far as fuel supply is concerned and most plants running at below capacity?

Reddy: Absolutely. I think it is a structural problem. I always saw this as an issue because in India the different ministries focus on its own area and I really do not know whether this can be solved. One has to really think through about how do we make decisions which are able to address everything in a comprehensive manner.

I must say that about 4 months, 5 months ago when we as an association of power producers approached the prime minister, he was extremely positive, very emphatic that he will put his entire team to find a solution.

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Q: Where does that take us, it doesn't take us very far because then there is an Empowered Group of Ministers that will meet, it hasn’t met yet, it hasn't been scheduled to meet yet. Then there is the larger issue of what you do with gas prices? Should it be market aligned? Should it not be market-aligned, each ministry has its own view? The suppliers of gas have their own view, so we are still stuck in middle of all of this and there has been no action that has taken despite those several meetings?

Reddy: It is a complex issue apart from the fact that we have splintered ministries. We also have an issue that it's a subject which is shared both by the state and the centre. Then politics comes into play as to who is governing the state, who is governing the centre and so on.

Today, we have a problem and I agree that we have to find a solution. But, I am more concerned that if we don't continue our path in terms of finding ways to push investment in the sector, maybe we will end up in a much more serious situation in 2-3 years time.

Q: You have a target at Tata Power of generating 26,000 megawatts by 2020 and you are saying you are going to be unable to deliver on that because of lack of coal availability and that is forcing you to look outside of India. Is that going to be a large part of the solution because you are not able to untangle our regulatory issues, policy issues in India and companies are going to be forced to look outside?

Sardana: Certainly, that is one of the challenges the companies are going to embrace. The trouble we have today is of a larger dimension. We need to worry about the energy security that the country needs to resolve.

You talked about fuel and Sanjay mentioned the fact that coal issues are not going to be solved overnight. The mines cannot be dug up overnight. But, I think we have a larger issue in hand. It is important for the country to decide what security they will have over a period of time, what fuel mix they will use.

We already have a complexity in terms of this being a concurrent issue. Therefore, the states look at it myopically. But, the centre must come out with a detailed policy in terms of what kind of a mix would they look at in terms of 3-5 -10 years horizon.

Q: One of the other big problems that this sector is faced with is the virtually bankrupt discoms. Once again we are hearing from the government that they are going to put together a restructuring package as far as discoms are concerned. Some states are okay with it. Some states are not onboard with it. The power minister in an interview said that perhaps by the end of August the cabinet will actually clear another restructuring package for discoms. But, the perennial problems that this sector is faced with haven't been dealt with. Is this like throwing good money off to bad?

Sardana: Completely. I endorse your viewpoint. Delhi got into the PPP model 10 years back. 2002 is when they started that. Today the results are there to be seen. The sad part is I don't see the reason why the government needs to be in this business. In fact it's just because of the vested interest that the whole thing is moving around in circles.

Otherwise, the government should actually get into the PPP mode and be at the driver’s seat to actually demand performance. It's completely unfathomable as to why the government should be in this kind of a business. I have seen numerous occasions in which the hinterland, when you can't manage your peak supply you disconnect customers. Is this the way to do things in this present age?

The whole world has moved into reliable electricity. People are talking about smart grid. That's merely a fashion statement in India. How do you manage a smart grid in India?

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Q: A lot of things have become a fashion statement. In fact after the grid collapse, islanding has once again become the fashion statement with states like Delhi saying that why can't we go for islanding as Bombay did. But I will get to that in just a bit. Sunand, let's be realistic. If the government were to go ahead with an integrated energy policy and actually be able to translate that not just on paper but in reality, great, but in the short-term now since the power ministry at least seems to be suggesting that it wants to do business, it wants to attract private investment, what do you think are those priorities that need to be addressed?

Sharma: The subject of electricity needs to be understood, I support Anil as a matter of national security, not just in terms of the fact that you need to have electricity for every other action of life but the fact that if you are aiming at growth rates which are being suggested by government on a continuous basis. This year when you look at the factor of drought and the planning commission deputy chairman said it may drop this growth rate even further, think it through.

What you have, as I said earlier, is the symptom of a very long-term business in the form of electricity which requires anywhere between 48-84 months to install a generation plant depending on the fuel to a very short-term fix on a branded basis.

Q: Then you got to deal with at least a 15-month delay which is the average delay that we see as far as power plants are concerned in this country?

Sharma: Sure. So far as what you said about islanding and Anil mentioned about discoms, it is not the first year that this is being discussed. It's a very serious matter. Why is electricity not treated like any other commodity? Why is the theft of electricity not treated like the theft of any other commodity? It's so obvious.

The Electricity Act has been in position since 2003. Special magisterial powers are available. Actions should be taken and again in support of Anil, wherever it has been implemented and he pointed out to the situation in Delhi, the results speak for themselves. That is a low-hanging fruit.

It's the easiest thing to implement and the messages are all over the place. The question is really about implementing that which you already know requires to be implemented and implementing it firmly and quickly.

Q: Are coal-imports the only solution to India's power problems?

Reddy: We faced a crisis in 2006 when we set up gas projects to generate 1,000 MW and GAIL couldn’t supply enough gas. We were stranded for three years and that taught us that owning and controlling a source of fuel was vital.

We identified Australia on lower political risks and availability of huge assets. For the short-term, there is adequate stranded capacity in the country. Even if the government imports fuel, it will not able to address the problem because of the infrastructure bottlenecks.

Q: Is it is a political problem as states have not increased tariffs for decades?

Reddy: I am not talking about increasing the tariff. But the government has to import and at least bridge the gap of 10,000- 15,000 MW to at least partly  solve the problem.

Q: UMPPs are now facing an uncertain future because of imported coal and the revised policy of the Indonesian government. Is industry hesitating to pay for the increased cost of power?

Sardana: I think you are wrong. UMPPs are a great success. The 4,000 MW at Mundra is going to support 2% of India’s population at 90 paisa a unit. Can you source power more competitive? Can you have a generation capacity which is environmentally-friendly? I think it is an amazing experiment.

Q: But why are companies complaining to the government?

Sardana: Even if coal prices have increased and Mundra's per unit costs go up by 65 paisa, the power from the Mundra UMPP will still be one of the most competitive sources in the country.

Q: So should the government subsidise power companies?

Sardana: The government should either compensate any increase in coal prices of use its diplomatic muscle to ensure Indonesia adheres to the contracts that were entered into. If Indonesia has changed rules we should take action - either fall in line or use our influence to ensure standard prices.

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Q: But as of now, the government is saying we are not going to provide you a cushion, we cannot bear the burden of what the Indonesian government is done. In that context, till the time that perhaps they were to be persuaded by your argument and make some changes, what happens to these UMPPs? Do then become financially unviable?

Sardana: But we are generating power. Two of the units are already on the grid, the others are all there ahead of schedule to come onto the bar. We are still contributing to the country’s needs. It’s important for the country to take a position with the regard to what we are saying, and if the decisions can be taken faster, that helps the standard capacity to come back.

Q: If we don’t actually see any of these reforms being taken forward, if we don’t see the government moving faster as far as these crucial decisions are concerned, will private investment suffer? Is private investment going to stay out of the power sector because the government clearly needs you to pitch-in, that’s part of their big 12th five year plan as far as the infrastructure space is concerned?

Reddy: The situation is it’s beyond private sector decision making. It is gone to the stage where banks, who actually finance 70-80% of the project amount, have become very sensitive to these issues. The minute when you go and meet the chairmen of banks, before you open and use the ‘P’ word, the answer is no. So it’s become extremely difficult for us as industry to convince banks to be able to lend to the power sector.

We as entrepreneurs take risk, and if we see an opportunity we may still go after it as long as we see the message is right, intent is good. But the banks have become very wary.

Q: Veerappa Moily is going to be calling all of you in for a meeting, so what are your top three demands going to be?

Reddy: Our demands are going to be focus on some immediate solution, which will provide fuel to stranded capacities. We need to address the economic issue in terms of cost; I think we have to find whoever is willing to pay.

Secondly, stop the clock and start thinking about what the next medium-long term issues are, basically the fuel security and financial security of the sector.

Sharma: Very straight forward. These two grid failures were a very important wake up call. Please, go ahead and implement that which you already have without any waste of time. Ensure that laws, rules and powers are properly implemented.

Sardana: I would say implement distribution reform, that’s foremost. Make sure that the consumer gets the benefit of seeing what the world does on the electricity side.

Number two, for projects, the clearances entail some 60 steps. It takes close to about 5-7 years to establish a project from the day you conceptualise that. So besides settling the fuel issues etc, make sure that the clearances are done through a single window and people are not made to move from one window to the other. It becomes more predictable, and it is clearly time bound.