Power Sector in India-Conventional Energy Power Generation, Transmission and Distribution

Posted in Finance Articles, Total Reads: 1731 , Published on 07 July 2015

The power sector did not succeed as Telecoms sector despite earlier privatization due to improper liberalization. Only generation was liberalized and not transmission and distribution. Globally, power industry has moved from highly vertically integrated to unbundled structure. It’s like buying any other commodity like soap.  Consumers can choose from which company they want to buy the electricity. This structure has increased competition and brought in more efficiency. But this did not happen in India. Too much political interference and uncertainties have further contributed to this failure.

Power Generation: The Capacity additions in 11th plan (2007-12) w.r.t to the target of 90,000 MW has fallen short to only 55, 000 MW).Total installed capacity was about 200,000MW plus 31,000 MW of captive capacity connected to the grid.

Demand-supply gap: Supply has grown slightly faster than the demand and hence the deficit has marginally come down and demand–supply gap has reduced marginally.

Sector-wise consumption of power: Industrial and domestic constitutes more than 65% of the consumption.

Major changes in the power generation trends in terms of ownership of fuel

  • Increasing proportion of private sector generation from14 % to 27%
  • Increasing proportion of renewable energy from 8 to 12% (and decrease in hydro generation)

Case 1 and case 2 bidding parameters in generation

Since January 2011, the government has made it mandatory for all power projects to be bid out through competitive bidding.

  • Case 1: In Case 1 route, a particular state would call for bids to meet its power requirement. The companies bidding can select any location and any type of fuel to serve that requirement. The state do not specify the type of fuel. The players need to follow an International Competitive Bidding (ICB) strategy.  This is typically done by states which do not have their own fuel reserves.   The process followed is RFQ, RFP and awarding. The lowest bidder who satisfies all other selection criteria will win the bid. About 23, 500 MW generation capacity has been awarded through this route and most are coal based.
  • Case 2: Under the Case 2 route, a state, usually with resources but facing a constraint on the funds needed to put up the project, fixes the location and fuel requirements and asks players to bid accordingly. It is also through International Competitive bidding. The land availability is taken care of by the state. The case 2 routes cover UMPP (> 4000 MW, Central government planned projects) and MPPs (> 1000 MWs, state planned projects.)

Transmission: T&D structure in India:

  • A T&D system is important for the proper transfer of power from generating stations to load centers.
  • A T&D system comprises transmission lines, substations, switching stations, transformers and distribution lines.
  • In India, the T&D system is a three-tier structure comprising distribution networks, state grids and 5 regional grids.
  • We do not have a full fledged national grid.  The national grid currently has an inter-regional transmission capacity of 28,000 MW.

Advantages of national grid:

  • As peak demand for power does not take place at the same time in all, it results in asymmetric demand and supply in states
  • National grid facilitates the transfer of power from a surplus region to the one facing a deficit.
  • Additionally, they also facilitate the optimal scheduling of maintenance outages and better coordination between power plants.

Distribution: In India T&D losses are in the range of 27%. Though it has reduced from abut 33% five years back, it is still high compared to the international standards of less than 10%. The reasons for these losses are:

  • Technical Losses
    • Low Voltage transmission
    • Transmission losses have inverse relationship with voltage. (losses are inversely proportional to the square of voltage being transmitted)
    • If high voltage is transmitted, the technical losses would be about 4-5% but at low voltages, it can go up-to 15-18% of the total energy transmitted.
    • Large parts of the country consume low voltage power (especially in the rural areas) and hence high losses.
    • Numerous transformation
      • More the conversion from one voltage level to another, the losses would be higher.
      • India operates at 5-6 voltage levels which lead to higher losses.
    • Commercial Losses: Non-metering, non-billing, faulty billing, pilferage.

The financial status of DISCOMs is very poor to say the least. The accumulated losses are about Rs. 1.8 trillion in 2011-12. Apart from high T&D losses, poor finances are due to the gap between ACS and ARR (Average Cost of Supply and Average Revenue realized) is steadily increasing. Also, state governments do not reimburse fully the subsidies booked by DISCOMs.

The major distribution reforms are being undertaken and the Distribution Franchisee model could help in improving the grid efficiency

  • Reduce the gap between ACS and ARR.  More than 20 states have hiked the electricity tariffs in the last 2 years.
  • States are adopting Distribution Franchisee Model (It is also an opportunity for private players)
  • Distribution franchisee model is the middle path between government monopoly and privatization and also less controversial.
  • Privatization involves the transfer of ownership of business and assets from the state distribution company to a private company.  Though highly beneficial, it is also politically controversial.
  • A Distribution Franchisee is an outsourcing model in which the franchisee is empowered to distribute electricity within a designated area for a prescribed period and collect revenues directly from the customers.  There is no ownership of assets.
  • The major benefit is the revenue of the DF is linked to improvement in operational efficiency. Higher the efficiency DF is able to bring, his profits would increase.
  • This model has resulted tin tremendous improvement in many areas
  • Many state governments are increasingly adopting DF model.

Future projections in capacity and deficit (12th 5 year plan between 2012-13 to 2016-17)

80,000 MW is expected to be added (compared with 55,000 MW in the previous 5 years). About 58% of the capacity additions will come from the private sector. Major challenge in capacity addition could be availability of Coal as majority (80%) of the planned capacity is coal based. Deficit is expected to come down from 8.5% to 4.3%.


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