Private participation in power - Enabling environment vital to energy security

In view of the widening electricity demand-supply gap, huge investment requirements and shortfall in investment targets, it is imperative for the government to create an enabling environment to attract greater private participation in the power sector.

India's energy sector is currently confronted with multiple challenges, which stem not only from supply-side constraints but also from demand pressures imposed by a buoyant economy and a growing population. As per recent Planning Commission estimates, if economic growth is sustained in the 7-8 per cent range, the energy demand would rise by at least 5.2 per cent annually.

In the face of relatively inflexible supply options, the gap between energy requirement and availability can only be expected to widen in the future. This gap raises serious concerns, not only about the country's energy security but also on the sustainability of its economic growth momentum. On a more micro-level, the shortage could lead to rising incidence of power outages and greater import dependency on fossil fuels such as crude oil and coal.

Let us first take a look at where we stand in terms of overall investment achievement in the energy sector. The World Bank has estimated the minimal annual investment needed for energy and related infrastructure at about 5 per cent of the 2003-04 GDP. This translates to an annual investment of about Rs 1,27,170 crore (considering GDP at a factor cost of Rs 25,43,500 crore in FY 2003-04).

On the other hand, the Ninth (1997-02) and Tenth Plans (2002-07) envisaged an average annual investment requirement of Rs 67,340 crore and Rs 82,500 crore for the electricity, gas and water sectors together. It is worth noting here that India's Five-Year Plans currently envisage a much lower level of investment (about 53-60 per cent) vis-à-vis the levels recommended by the Rakesh Mohan Committee.

Annual outlay
Between 1997-98 and 2003-04, the energy sector outlay, as a proportion of India's annual Plan outlay, was 21-23 per cent. Among the energy sub-sectors, electricity has typically constituted about 12-13 per cent, oil and gas nearly 6-8 per cent and coal a meagre 0.15 per cent of yearly planned outlays.

While the outlay seems adequate, India's performance in translating these outlays into actual investment has been rather unsatisfactory. For the energy sector as a whole, the shortfall between envisaged public investment and actual expenditure is estimated at Rs 48,730 crore in the Ninth Plan and Rs 24,140 crore in the initial two years of the Tenth Plan.

Assuming an average annual investment shortfall of Rs 12,071 crore , the cumulative shortfall for the Tenth Plan could be as high as Rs 60,360 crore. It is clear that if the present trend persists, the shortfall in utilisation of the planned outlay will be as much as 23.9 per cent higher in the Tenth Plan vis-à-vis the Ninth Plan. Thus, not only are the envisaged levels of investment in the energy sector below the desired level but the conversion of planned outlays to actual investment is also showing a deteriorating trend.
In such a situation, rising energy demand can either be serviced by augmenting the domestic supply infrastructure or by increasing the quantum of imports. It is evident that both these options place a huge investment demand on the government, which is already constrained on the fiscal front. It is, therefore, imperative to attract private capital, so as to supplement public financing of energy projects.

Though recent regulatory reforms have attracted some private investment, the energy sector continues to be dominated by the public sector; with the omnipresence of state-owned entities in all three segments of the electricity sector, national oil companies (NOCs) in the oil and gas sector, and Coal India Ltd in the coal sector. Even the liberalisation of captive mining has not generated adequate private investments due to several entry barriers in the coal sector.

Attracting investment
The low level of private participation and investment is pervasive across India's energy sub-sectors. For instance, the private sector accounted for about 26.6 per cent of the generation capacity addition in the Ninth Plan and this is expected to be just 9.9 per cent in the Tenth Plan.

Further, capacity addition by the private sector has also not matched the targeted levels. Only 5,061 MW of capacity was added by private power projects against the envisaged 1,75,88 MW in the Ninth Plan period, and the corresponding numbers for the Tenth Plan are expected to be 3,090 MW and 7,121 MW respectively.

In view of the widening demand-supply gap, huge investment requirements and shortfall in investment targets, it is imperative for the government to create an enabling environment to attract greater private participation in the energy sector.

But this remains a daunting task as the sector, currently dominated by public monopolies, has ineffective separation between potentially competitive and monopoly segments and faces price control distortions. All these factors inherently prevent private investment in the sector and limit competition even in segments that are amenable to it, such as retail supply and distribution of electricity and oil and gas.

To encourage greater private participation in the energy sector, India needs to identify the various entry barriers in its regulatory, institutional and legislative framework and devise mechanisms to eliminate them. It is only when reforms are initiated in this direction that the country can achieve the goal of sustained economic growth, energy access for all and long-term energy security.