By Binu Alex

Power on, India on! This catch line may have got the fancy of investors who pumped in huge money into power sector. But, given the scenario India is in, it should be 'Power on, India off'. If you want any proof for this, ask the Union Ministry of Power. It admits that at peak hours, India's power deficit is over 14 per cent from an average energy shortfall of 9 per cent during non peak hours. It varies from state to state and more industrialised you are, the more is the demand. Maharashtra, for example, faces a deficit of more than 30 per cent.That is not a good sign for the world's most exciting and emerging economy.

India's plans for the next five years are rosy but it is not clear how it will achieve this target. The 11th Five Year Plan envisages 78,577 megawatts (MW) of power generation capacity. India and China combined will soon become world's largest consumer of primary energy. China, with its rapid industrialisation and large manufacturing plants, is all set to become the biggest emitter of carbon dioxide.

International Energy Agency estimates that China will become the world's largest energy consumer by 2010 overtaking the US. It adds that by 2015 China's emissions are likely to be a third bigger than of the US. Energy scarcity and deficiency at the time of rapid economic growth and resurgence across the globe, continents, regions and nations with the beginning of 21st century itself, and more particularly, for developing economies of Asia like India and China in current century, has transformed the concept of independent nations of yesteryears to Interdependent World of 21st century, specifically in terms of technology, resources and skilled human capital for producing and trading energy.

The scenario is very simple, one resource base of energy cannot meet the entire gamut of energy consumption, and moreover the critical issues on environment and climate further necessitate to diversify energy portfolios from emissions generating energy systems to zero discharge energy systems. As a result, the trends emerging worldwide is total integration and diversification of energy portfolios, said Jagdish P N Giri, founder and executive director of Chennai based Aaditya Energy Foundation.

But there are silver linings as new ideas and new sources have given the country a rejuvenated hope of self sufficiency in energy as envisaged by the prime minister himself. One such step is setting up of India's first power exchange which aims to not only balance the prices of energy but also spur the capacity addition. Power trading is music to the ears of captive and merchant power producers. Till now their capacity was not utilised to the maximum because there was no guarantee whether the power they produced would sell.

In India the electricity market could be around Rs1.8 trillion of which trading is expected around 25%. Today, most corporate bodies have set up captive power plants which have the capacity to produce much more than they can consume. But they had no idea where to sell the excess capacity. The government has estimated the installed captive power capacity at 140,301.84 MW by 2007 end which is almost one tenth of India's total installed capacity. So setting up of the exchange is a boon to them.

Joseph Massey, director of Indian Energy Exchange, is bullish on the new venture as he sees a better price discovery mechanism through the exchange. The core competency of power producers to produce power will be harnessed while the trading will be left to those who are expert in this particular field. This will, he said, create more synergy and put the country in one uniform market. Indian Energy Exchange is promoted by MCX, an arm of Financial Technologies (India) Ltd, with PTC holding 26 per cent, Tata Power, Reliance Energy and Lanco having five per cent each.

The benefit of trading is manifold, according to experts. It brings in embedded capacity in load centres without transmission constraints, assured and timely payment system as well as capacity planning and hedging. The exchange arranges anonymous interaction between the buyers and the traders or producers and thereby reduce the unscheduled interchange (UI) charges. Trading of electricity brings it automatically as a tradeable commodity. But Forward Markets Commission (FMC), the apex regulator of commodities will not be the regulator for Indian Energy Exchange. Instead, it will be the power regulator, the Central Electric Regulatory Commission (CERC), which will hold the power to control the exchange. With no experience in trading patterns and already headless for more than one year now, analysts like Harshvardhan Khanna says the trouble will begin once a problem crops up.

The last time the chairperson of CERC walked into his office was in March 2007. It is almost a year now and the government has not cared to appoint one full time chairman. The government's apathy is nothing but its attitude towards the power sector. The trading will be on a spot basis with a touch of Futures added. The exchange will identify the price for the following day, which is the electricity sector's equivalent for the spot price.

The exchange will also determine the demand and supply gap replacing a manual bilateral agreement between the buyer and seller. As long as there is smoothness in the trading, I don't see a problem. Once some issue crops up, you can see a panic as CERC has no idea how to get into trading regulations, said Indravadan Khanna, a Chandigarh based commodity analyst who is enthusiastic about the venture. Experts are divided on whether trading in energy Futures will bring in the same problems that some agri commodities have brought to the government.

But, majority is of the opinion that in a longer scenario, the energy consumers who are utility segment of society, industry and services will overcome the crisis. The energy instruments traders will be equally strong to meet the challenges of energy stock trading. In due course, it will evolve as a true commodity to be traded at exchanges, and will not remain a sensitive issue. Certain parts of the day or the year, some states have surplus while others are in deficit. Take for example Himachal Pradesh, where a large number of hydro electric power plants are coming up.

They get 12% free supply from these plants and in addition, Himachal's power usage in summer dwindles considerably. But it continues to get power which it can now sell to other states and earn money through power exchange. And when they need the power during the winter season, they can utilise the same funds to buy back the power.

According to Shashi Shekhar, director, marketing, Power Trading Corporation a major stake holder in Indian Energy Exchange the same scenario can work even on international route. India's demand for electricity is increasing at least 12% annually. With the kind of generation that India has, it is not easy to fulfil this demand. Most plants in India are thermal which puts pressure on global warming. But there is a better scenario available, said Shekhar. You can get power from our neighboring countries during their surplus period and give it back when we have surplus. But we need to have not only good political relations in place but also a grid for distribution. But this is highly profitable and possible scenario, he added.

In Europe such a situation already exists. Norway, Finland, Sweden and Denmark have a common distribution grid from where they exchange power depending upon their utility. Similarly, India Nepal, Bhutan, Myanmar and Pakistan can also have a pact. Nepal and Bhutan have hydropower while Pakistan and Myanmar have power from gas. If India can procure electricity from these countries, not only will the climate be saved but the deficit will also decrease. The idea was mooted at the beginning of this decade and there have been talks also regarding this but considering strained relations in the region, the idea never took off and nobody expects it to get a boost in near future.

Not to be left behind, National Commodity and Derivatives Exchange (NCDEX), India's second largest commodity bourse, is partnering with NTPC to float the second power exchange. Both the exchanges will have almost all the power companies in India participating either as co owners or as trading partners. GVK Power Infrastructure Ltd (GVKPIL) is another entity that plans to enter into power trading.

The Hyderabad based infrastructure firm is waiting for ready made infrastructures like the state electricity boards, which gradually are being divided into separate generation and distribution companies, to liberalise before bidding for them. For companies like GVKPIL, it will be a natural foray to enter the power trading since it is already present in the power generation sector with its 216MW Jegurupadu I, 220MW Jegurupadu II, 464MW Gautami Power, 330MW Alaknanda Hydro Power, 600MW Govindwal Sahib and 370MW Gauriganga project.

Will this trading allow the consumers to pick up their electricity supplier? Well, on the long run, yes. Take for example the market in Norway where more than 200 utilities are competing to supply electricity in an open market, where customers can pick an energy provider at will and at no extra cost. But it all started because Norway deregulated its electricity market in 1991 and very soon a power exchange was established which was then called Statnett. It was later changed to Nord Pool when it became a common Norwegian Swedish market. Nord Pool most probably will be the benchmark that India will choose. India is already making it easy for retail customers using 1 MW or more to choose their carrier after January 2009.

But it will not be that easy for the exchange to be ready for this scenario as a lot of physical infrastructural hurdles along with software up gradation will take time to implement. At the end, the consumers will benefit, according to Jayant Deo, a former regulator and now a member of World Energy Council. With a better transmission capacity, less of T D losses, and increased competition among the producers, power tariffs will come down, Deo says.

Deo, a former member of Maharashtra Electricity Regulatory Commission, argues that for India to be free from power shortage all the state electricity boards should be corporatised and given autonomy to function. Many states have already started this and are yielding good results. Energy trading is a hot topic globally. No wonder that acquisitions of energy trading market place is equally hot. CME Group a consortium of Chicago Mercantile Exchange and the Chicago Board of Trade making it the world's largest Futures exchange has already made attempts to acquire Nymex Holdings for over $11 billion. NYSE Euronext and Nasdaq are also bidding for ICE.

Electricity trading is different from energy trading. But Electricity trading can take lessons from energy trading's mistakes like that of the Enron. In US, an initiative called the 'Close the Enron Loophole' strictly demanded that freewheeling trading by hedge funds and investment banks has hurt consumers and threatened the financial soundness of distributors.

The start of this loophole, some believe, was deliberate as in the year 2000, a lame duck US Congress passed the Commodities Futures Modernization Act which removed the words and energy from language that previously required the Commodity Futures Trading Commission to oversee agricultural and energy trading. The move is seen as an attempt to help Enron develop an electronic platform for trading energy Futures, Enron Online.

This change helped the bulk of energy trading migrating away from regulated markets such as NYMEX to non regulated electronic platforms such as Inter Continental Exchange (ICE) where trades are not reported or regulated, and which do not have margin requirements and this trading was reported to be as high as 75%. But Enron's December 2001 collapse had little to do with its trading operations. In India, power is a sensitive issue and is as delicate as agriculture. So, trading in electricity needs utmost care and any wrong move can force the government to act tough since no political party would touch issues related to common man.

The exchange can come into play the role of what companies or individual traders are doing now with much more transparency and ease. Today, nearly 15,000 million units (MU) of energy or close to 2.5% of the power produced in India are traded. The exchange will gradually take from their day ahead trades to hour by hour trade round the clock, called single trades, and then graduate to block bids bidding for a block of six hours.

In an exchange, the system becomes simple as against the telephone calls most of the electricity boards now engage in to get their deficit power reduced. In an exchange the participants buyers and sellers put in their bids for how much energy they plan to sell at what price or how much energy they are willing to buy at what price at any given hour or in block bids.

In other words, if NTPC wants to sell 1000 MW of energy at Rs 7 a unit at 3 pm, while there is a buyer who has put in bid for the same amount of electricity at the same price for that hour, then Rs 7 is the discovered price of power for that hour. Once the transaction is complete in the exchange, the information automatically goes to the national and regional load dispatch centres to allocate the required transmission corridors. The payments will be released to the seller only after the power has been delivered which is what the exchange guarantees. CERC handles physical power and so it will be comfortable for it to deal with one day ahead Futures in the power exchanges.

But many believe CERC will have to acquire expertise from either the Forward Markets Commission or global trading partners to start derivatives market. CERC can take the relief from the fact that for Futures derivatives market to develop fully there should be high volumes. At least 5,000 to 10,000 megawatts to start and to sustain a regular trading of 15,000 megawatts is necessary, said Shekhar. Should the exchange also set up a distribution system? Well, the answer is no. Just like a warehouse operates, the exchange ensures that the power is delivered to the buyer through the load dispatch centre.

And like a warehouse receipt, the load dispatch centre issues receipts of delivery for the payment to take place. All the partners in the power exchanges can have multiple memberships just like the brokers. So if NCDEX or any other firm sets up an exchange, then the same players can also play a key role in its development. However, with no sufficient power to play with, the interest for membership will not be heavy at the initial periods but will pick up as the situation improves.

Subrat Das, vice president, Lanco Infra Tech Limited, is of the opinion that the entire power scenario is changing for better. If you see the improvement of power sector in the last five years, it can only be an indicator to the changes that we are going to witness in the next five years. Yes, there are power shortages but I believe a major part of this shortages are linked to improper distribution and wastage, he asserted. The captive power plants wasted a lot of energy since they were wary of selling power to entities including state electricity boards which had poor credit worthiness. With exchange in place, this anomaly is taken care of. A power generator, especially captive power plant, can survive only if it has capacity utilisation.

It has to think in terms of cutting down cost per unit. The other challenge is to have a clean mechanism to generate power, said Das. Mahendra Kumar Garg, CEO of Reliance Energy Transmission Limited, says the consumers will benefit in terms of transparency in pricing is concerned. Right now the end users have no knowledge on what they are paying for. Trading will bring in the much needed transparency and thereby a pricing policy that, I believe, will be lower than what exists now, he said, adding that tariffs have doubled in the last two years. Load distribution, pricing, availability and generation all are not uniform.

If a state goes to election, then the state government offers freebies in terms of free power, waiver of electricity bills and that costs the electricity board a hell lot to become bankrupt. Now when the state has surplus power, it can't do anything with it. Power is a commodity which can't be stored. You generate and distribute it. So the exchange will play a key role in optimum utilisation of resources, Garg added.

As a regulator, Garg of Reliance Energy said, CERC should establish rules through physical trading, then study the pattern of Futures derivatives and then start it soon. Ultimately, he added, a trader will always look to hedging risks and also to gain from trading. Joseph Massey, Director of Indian Energy Exchange feels that at present 90% of electricity is sold through long term, bilateral power purchase agreement between buyers and producers. Yet distributors rely on traders for short term needs.

The deals negotiated over telephone and other means often tend to be non and counterparty's are never sure whether they have got the best right price in the deal. The nature of product traded on IEX is electricity that cannot stored unlike commodities that can be stored in warehouses. IEX is a spot exchange where actual demand/supply of energy takes place and price of electricity determined on the basis of bids and offers during the transaction period. Trading, Massey added, will in a way certainly save a lot of energy and that is how people will gain more megawatts of power. Participants in the power exchange shall be able to manage precisely their consumption and generation pattern.

Rajesh K Mediratta, vice president of IEX, informed that the current short term trading constitutes only three per cent of the total energy market. Power markets generally operate with power purchase agreements (PPAs) for long term trading and bilateral contracts for the short term. For very short term requirements there is the unscheduled interchange (UI). In future, these markets will be complemented by the exchange which will have standard contracts, nation wide choice, better price and payment security.

He further said that to ensure that power exchange time line is consistent with the timeline of the system operators the exchange will inform the required transmission capacity to Regional Load Despatch Centres (RLDC) which in turn will inform it about the available transmission capacity. Auctions will be carried out resulting in trade schedules which will be released to the system operators. System operators will finally issue the schedule to all the participants. And then the money will be exchanged and financial settlement will take place, Mediratta said.

Both the power cycle and the financial settlement cycle, will be closed at the power exchange level in 24 hours for the trade done on day ahead basis. The entire process will be internet based. Jayant Deo said the Electricity Act 2003, is based on the philosophy that consumers benefit through competitive markets. The Act has de licensed generation, encouraged captive power by allowing them to sell almost half of the generation, without any license requirements, said the former member of MERC. Deo is bullish on the trading as he says trading platform of Indian Energy Exchange has already started attracting merchant power plants, which was not financed earlier, for lack of assured market. Thus capacity additions by captive and merchant power plants are going to help increase availability of power. As for as affordability is concerned, the competition is bound to give benefits as is the case with mobile telephony, he added.

Among the sources of getting power, Deo said coal and gas, local as well as imported, are the main sources of fuel. India is also tapping hydel sources in a big way. Atomic power has a definite role but it is dependent on political economy.

Deo is furious why India with its year round sun shine cannot develop its 100 MW solar thermal plant? In the US they are building 100 MW solar thermal power plant using private VC funds. In fact, one NRI is advancing the money, to show that generation costs are competitive with conventional system. As a person closely connected with government affairs, Deo is of the opinion that trading in energy Futures will not bring in the same problems that some agri commodities have brought since power is also a sensitive and political issue in India. Electricity is highly regulated and exchange route is not compulsory, hence the fear of runway prices is baseless. The current UI rates are Rs 10 per kilowatt hour, he added. In any case the upper price limit is cost of diesel power which many users have to incur in case of shortage.

POWER FOR ALL

Union power minister Sushilkumar Shinde has categorically stated that total power generation as envisaged in the 11th Plan Accelerated Power Development and Reforms Programme will match India's demand for electricity. The present set of state electricity boards are filled with people who can never achieve a professional quality for the organisation. It needs a major revamp which may not be possible for respective state governments. Privatisation, in all likelihood, is going to face stiff opposition from the government allies.

If the bodies cannot be privatised, where do you get competent people to work in abysmal government salaries? The other major contributor to these bodies going bankrupt is the non recovery from the customers. The government of the day, from time to time, comes up with schemes which gives amnesty to all and sundry who have to pay heavy electricity bills. Even though the scheme is for people who cannot afford to pay, it benefits even those who can. A farmer, by definition, is a farmer whether he is a pauper or a millionaire, as calculated for Income Tax purpose.

One third of the total bills raised are not realised or not billed. These bodies are not bound by any energy audits similar to what CAG does in financial section. A large variation between the set target and revenue realised should be considered as a serious lapse, even connivance with the customers indulging in energy.

In a bid to boost capacity creation, in this Plan period and beyond, the Union power ministry proposes to further rationalise the existing mega power policy under which additional concessions may be given. This will be available to companies creating capacities of 1,000 MW and above for thermal power and 500 MW and above for hydel projects.

For the North East, it will be hydel projects of 330 MW and above, Sushil Kumar Shinde, Union power minister, said. Referring to the ultra mega power projects where the government did hand holding for capacities in excess of 4,000 MW, he said of the nine projects proposed three had been sold and efforts were on to bring at least one unit within this Plan period. He said India had failed to fulfil its power sector capacity creation programme for three successive Plan periods since the Eighth Plan.

This was mainly due to lack of monitoring, and equipment supply problems. Union power secretary Anil Razdan said India would have to depend on 'king coal' for its energy security but efforts would have to be made to ensure that it was clean coal which was being burnt. Energy efficiency was also important. Different states adopt different methods for not only producing and procuring power but even distribution. But surprisingly India's two most industrialised states Maharashtra and Gujarat have not added substantial power generation capacity since 2000 which can match the development of industry.

The net result is that the industry associations are complaining that they were promised moon but given nothing. While Gujarat's installed capacity is around 9,600MW Maharashtra has 12000 MW. With such lackluster approach, India will not achieve the target to eliminate power shortages by 2012. On paper, the plan is contemporary but analysts doubt whether the plan can translate into action with the present set up. The plan includes launching of a campaign by all states against power thefts, setting up special courts for disposal of such cases creating a professionally managed National Power Project Management Board attached to the Union ministry of power setting up of a Standing Group of Power Ministers to look into all issues affecting the sector, and a sub committee of this group to work out the financing aspect of creating additional power generating capacity in the country.

The inadequacy in power sector may be one reason why former power secretary R V Shahi has come out with a book Towards Powering India: Policy Initiatives and Implementation Strategy. The book is based on Shahi's experience of conceptualising and formulating legislation, policies and schemes, and about their meticulous implementation. Lack of coordination between various government agencies is just one of the problems that the country faces.

Recently the power ministry and the Central Electricity Authority blamed state run equipment supplier Bharat Heavy Electricals Ltd (BHEL) for delay in commissioning of 2,000 MW generation capacity because it could not put equipments in place. On one hand the power ministry is putting all its pre conditions in cold storage for fiscal concessions to new generating units under the Mega Power Policy, the projects get delayed by silly reasons. The ministry has exempted customs duty on project imports, a 10 year Income Tax holiday and deemed export benefit provided they install a minimum 1,000 MW in thermal and 700 MW in hydroelectric projects. The only norm that the promoters have to follow is to have a minimum installed capacity and that it would have to sell at least 80 per cent of power at a tariff arrived through competitive bidding to get the mega status.

According to Giri, the scenario of manifold enhanced power generation, by using a large fuel base in terms of clean development mechanisms will make the commitment in reality. Use of nuclear fuel to generate extra 50,000 MW of electricity, is the available option in near term. The technology of using super critical thermal power generation enhancing coal burning efficiency, reducing emissions and using tested methods and technologies of emissions' capture and sequestration are being explored to use them widely at the power plants.

The clean environment and prevention of climate change will bear extra cost in power generation that can be mitigated by enhancing energy resource base and using more efficient and sustainable technologies in long term, he added. With the advent of liberalisation, privatisation, and globalisation at Indian economy to explore and exploit the emergence and growth of Global Village and Global Market, Indian Hydrocarbon Sector also derived a new instrument on 'New Exploration and Licensing Policy' (NELP) to involve private sector investments and participation in India's quest for energy to meet energy scarcity at large.

Accordingly, a number of exploratory and producing petroleum blocks were offered to private energy companies and consortium of energy producers in India. On account of resource crunch and scarcity for liquid petroleum and its greater footprints on environment and climate, and more over the growth of natural gas as the dominant fuel till mid century or beyond, the production of natural gas has gained significant momentum.

And Natural Gas Producers like Reliance and Oil and Natural Gas Corporation Limited have claimed to discover 20 24 trillion cubic feet of natural gas under Krishna Godavari petroleum basins, where Reliance has the major stake. Under open market policy and free trading mechanisms, global energy market is creating some conflict in deciding natural gas price, particularly in terms of fertilizer and power subsidies.

However once the issues are resolved, the government has to take care of all the stakeholders from farmers to power consumers to natural gas producers, according to Giri.Key components in the power industry can work wonders, according to Jitendra Mamtora, CMD of Transformers Rectifiers. And this is the reason that the company he set up in 1981 has made leaping progress and today it is a 240 crore company and is now looking at IPO.

Innovation, he still believes, is the key and research in this sector can never cease. Transformers are an essential component in supplying electricity to end users in industry, They enable voltages to be raised for transmission over long distances from distant power stations, and then progressively reduced to the levels required by consumers.

Power transformers can work well in Indian conditions especially when the load shifts from one area to another, one season to other round the year. When transformers are very lightly loaded, for example when an office closes for the evening, or school holidays start, losses are increased. The losses due to transformers in a power network can exceed 3% of the total electricity generated, equivalent to about 40% of the total loss from the system.

With inputs from Rakesh Kumar, New Delhi and Anil Patil, Mumbai news@commodityonline.com and bull

This story appeared in COMMODITY MARKET, India s No. 1 news magazine on commodities

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