Powerless In Summer

The Story Of The Power Sector Reforms

Prabir Purkayastha

INDIA’S power policies are in a quite a bit of mess. It is now clear that we are likely to see large power cuts this year, the impact of which is already visible. After more than 15 years of so-called market based power sector reforms, we now have huge shortages along with high cost of power. If we look at what the Chinese have done in the same period, the contrast could not be clearer. They are installing the equivalent of two Indian grids every five years – they add India’s total installed capacity every two and a half years and have also emerged as the biggest global manufacturers of power plant equipment. Their equipment costs are lower by a whopping 20-40 per cent from that of other manufacturers. No wonder that China, with low cost and abundant power, is emerging as the world’s favourite location for setting up manufacturing facilities, with even Indian companies making a beeline for China.

Let us look at simple figures between India and China’s developments. In the late half of 80s, India was adding about 4,500 MW per year. Starting with an installed capacity of 42,585 MW, we added about 21,400 MW in the Seventh Five Year Plan. In the same period, the Chinese, whose grid was approximately twice ours, were adding about twice what we were – around 9000 MW per year. So the rate of growth of both India and China were quite similar – they had a larger base but both were adding capacity at the same rate. However, the story changes radically if we look at the comparative figures today.

In the last 17 years we have barely reached the capacity addition levels we had in the Seventh Plan. In the Eighth, Ninth Five Year Plans we have added 16,422 MW and 19,095 MW respectively. In the Tenth Plan, we have added another 23,514.5 MW. In the same period, China has increased its installed capacity massively: starting from around capacity additions of 9,000 MW per annum, they are now adding a whopping 50,000 MW per year against our annual additions of around 4,000 MW. While they have accelerated their addition of installed capacity, we have slowed down ours! No wonder today we look only to be a service hub, relying on a good telecommunications network and our human skills. We have given up trying to match China in manufacturing.

Indian Power Scenario: 1985-2007

China Power Scenario: 1990-2005

THE DIFFERENCE IS IN POLICIES

How did China manage to accelerate its power program while we were slowing down ours? This is directly the result of the kind of policies followed. They decided that if they had a certain amount of money available for investments in the power sector, they had to make that money do more. This meant that cost per MW had to come down if they had to increase installed capacity more rapidly. They settled on two elements for reaching lower cost per MW for their new plants. One was that they ordered their equipment in bulk and therefore could take advantages of economies of scale. If any company places an order for 20 turbines instead of say 2, the price is not 10 times but possibly only 5-7 times. This brought down the costs per every MW added. The second was that they indigenised their power manufacturing rapidly: detailed transfer of technology and manufacturing agreement with Chinese accompanied every bulk order placed on any international company. As a result, not only did they secure equipment at lower costs than any other country, they built the base for their next level of development: they successfully built an equipment manufacturing sector, which produces lowest cost equipment in the world.

If we take the situation in 1980s, India had a stronger equipment manufacturing sector than the Chinese. BHEL had the ability to produce 4,000-5,000 MW power equipment annually. There were no Chinese companies, which could match BHEL in either the range or in the capacity of its manufacture. While BHEL has remained where it was, today, there are three Chinese companies that have the ability to produce 20,000 MW annually. Shanghai Power, Harbin Power and Dongfang are all many times the size of a BHEL.

Not only is China cheaper than India in the international market, even in our home market, Chinese plants cost less than BHEL’s. One can argue on the quality of Chinese plants as Indian manufacturers do. But the fact remains that Chinese plants are working in China with high reliabilities. They also are installing new plants at a rate much faster than any other equipment manufacturers. As we all know, quality comes from mass production: it is the ability to mass produce power plant equipment that is leading to their lower costs and finally their equipment reaching performance standards of other manufacturers.

The above trajectory is not surprising. Before the 90s, India had adopted the same path. We indigenised manufacturing capacity and had standardised our equipment. The result was that BHEL was able to beat all global competition in the Indian market for its equipment. All of NTPC’s global tenders bar one were won by BHEL. With standard unit sizes and an indigenous manufacturing base, all we had to do was to expand the market to lower our costs. This would have meant more plants being installed with the same amount of money and finally cheaper power as one important component of cost of power is obviously the capital cost per MW.

ALBATROSS OF MARKET REFORMS

Instead, the Indian power policy decided to embark on “ambitious” market reforms. There were essentially three elements to this strategy. The first was to invite private capital to invest in new power plants. The second was to reduce public investments in power generation. The third was to use the liquid fuel or hydrocarbon route for power generation, particularly in the west coast. Projects such as Enron bear the hallmark of all these policies.

It is instructive that all the private investors then were asking for power purchase agreements based on capital costs, which were Rs 5 to 6 crore per MW. Even 15 years later, the costs per MW with Chinese technology is not more than Rs 2.5 to 3 crore per MW. Even BHEL plants have capital costs way below figures for such private power plants. BHEL at that time had made an offer to the government that if they are given sufficient orders they could supply plants at Rs 2.5 to 3 crore per MW, an offer that was summarily rejected as not reflecting the market reforms that the government wanted to bring in. And projects such as Enron had naphtha as the fuel as this would mean they could go on-stream quickly. At that time, oil was $10 a barrel. Today, with oil prices at $50-60 a barrel, it has proven preferable for state boards to pay the fixed costs of naphtha-based plants and not draw any power from them.

If we look at how the Indian power sector has treated the indigenous equipment manufacturing sector in terms of policies, the situation is even worse. Not only has the Indian government tried to introduce polices by which BHEL was not helped to acquire technology and also not encouraged to increase its manufacturing capacity, it has actually suffered reverse discrimination in its own domestic market. In the recent open tenders, for Sipat, Barh and Yamunanagar, BHEL has either been disqualified for not having technology for supercritical boilers or has been priced out by cheaper Chinese or Korean equipment. Here, not having a plan for importing or developing technology of supercritical boilers before opening out the market, as well as no import duties on finished equipment are responsible for BHEL losing out.

PENALISING BHEL

The current duty structure is a completely inverted one as semi-finished or raw materials are taxed but finished goods are not. Thus there are no import duties for power plants above a certain size –– in the name of super thermal power stations, all duties are waived for plants of 1000 MW and above size. This obviously penalises BHEL as they have to pay high duties for intermediate or primary raw materials while the finished goods comes without any duties. Instead of helping indigenous manufacture, we are now entering a phase where it is the foreign companies that the government wants to help. The long-term threat to the power sector is once indigenous manufacturers such as BHEL are priced out in the domestic market, the prices can then go up without hindrance.

We have written earlier that all countries help their domestic industry, while preaching the virtues of “free market”. It requires a particular kind of stupidity to believe these self serving slogans to open out the Indian market and not use it as the Chinese have done to improve its market position. The irony is that while Indian equipment manufacturing industry has missed a golden opportunity to upgrade their technology leveraging on the size of the Indian market, those countries preaching the virtues have not gained either. The market is clearly now with Chinese, Koreans and the Russians, with BHEL playing second fiddle. Companies such as Alstom, ABB, Siemens and other such companies seem to be on the way out. They may still be around for some more time. But with no domestic market after 2012 in Europe and the US, their days seem to be numbered. Unfortunately, with the policies being followed currently, BHEL may not be far behind.

Indian power sector reforms need a critical re-examination. However, the government is unwilling to do this exercise, mired as it is in its chase for market driven reforms. With such faith in the market, there is no short-term hope for the power sector. The only hope is that sooner rather than later, the government will wake up to the simple fact that the power reforms are not working. That is the time we can try and salvage what remains of the sector.