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Strengths and Challenges of Andhra Pradesh Power Sector

A critique of the Andhra Pradesh power sector, examining its soundness as well as its shortcomings.

COMMENTARYnovember 17, 2007 Economic & Political Weekly24Strengths and Challenges of Andhra Pradesh Power SectorN Sreekumar, M Thimma Reddy, Raghu KA critique of the Andhra Pradesh power sector, examining its soundness as well as its shortcomings.The power sector in Andhra Pradesh (AP) presents a mixed picture. There is the history of excellent generating stations, pioneering work on rural electricity supply cooperatives and good progress in village electrification. Financial and performance crises set in during the early 1990s and AP followed Orissa and Haryana in taking up the World Bank crafted power reform package. Public protests and other factors put the brakes on this process and in 2003, the state government discontinued the World Bank loan after the first instalment. Loan conditions such as annual tariff hikes, dis-tribution privatisation and offering utility stocks on public issue were not taken up. Power was a major issue in the 2004 elec-tions, which brought the Congress Party back to power after a gap of 10 years. Free power was announced on the party’s first day in office and expectations were high that major people-oriented policy shifts would be in the offing. Today, theAP power sector is a mix of strengths and limitations. On one hand, the sector has made a profit for three years in a row, state subsidy figures have been dropping, well deserved support is being extended to the state-owned Andhra Pradesh Power Generation Corporation (APGENCO) and the AP power sector has been rated as number one by the ministry of power for the third consecutive year. On the other hand, like in other states, this summer was a season of power short-ages and crisis. No progress has been made on renegotiating the unfavourable independent power producer(IPP) con-tracts. Several gas-based stations continue to remain idle because of gas shortages. There are reports on reinviting players likeBPL. Further, the quality of supply and service to rural areas continues to be poor and are, in fact deteriorating. Some of these are disturbing indications that the Congress government has not learnt from the mistakes of the previous Telegu Desam Party (TDP) regime and are not taking up an integrated approach to solving power sector issues.Supply IssuesAs a front-runner in the market-oriented reform process,AP was in the lead to in-vite private companies to set up genera-tion projects. The mad rush to sign memo-randa of understanding (MoUs) with the then TDP government is well known. MoUs to set up 119 projects adding up to 7,481MW (which was more than the then installed capacity) were in place and there N Sreekumar ( is with the Prayas Energy Group,Pune; M Thimma Reddy and Raghu K are with the People’s Monitoring Group on Electricity Regulation, Hyderabad.
COMMENTARYEconomic & Political Weekly november 17, 200725was an instance of a dozen MoUs being signed on the night before the competitive bidding guidelines were introduced in 1995. In July 1996, the GVK plant was one of the firstIPPs in the country to be com-missioned. With nearly 2,750MW capacity from gas-based projects (five operational and four ready to be commissioned), the AP power sector is very dependent on gas-based private generation projects. The shortage of gas was therefore, the major reason for the power shortage in 2007 summer. The reform process has meted out unfair treatment to the state-owned generation company APGENCO. The burden of employee terminalbenefits was passed on to APGENCO; for many years it was not allowed to claim depreci-ation and there were constant threats of privatisation.Support for Coal and HydroThe Congress government has shown a shift from the preoccupation with encoura-ging gas/private players for generation and has changed the approach to APGENCO. It has extended support to coal and hydro projects of APGENCO by sanc-tioning projects (totalling over 7,000MW in the next five years) and extending man-agement support to these projects. Hydro projects are mostly linked to the massive lift irrigation plans of the government. The coal-based projects are extensions of existing projects (like Kothagudam, Rayalaseema, Vijayawada) as well asgreen field projects like Krishnapatanam. The contract for one of the 4,000MW ultra mega power projects located at Krihna-patanam (based on imported coal) is expected to be awarded this year.It should be noted that these projects will take years to start generating power. Rising demand and shortage of gas supply led to the power crisis in the 2007 summer – the reported shortage was 1,250 MW, with a peak demand of 8,100 MW. The state had to purchase power at Rs 6/unit to tide over the crisis, resulting in a heavy burden of nearly Rs 1,000 crore on state finances. Questions about why a peak load of 8,100 MW could not be met when the installed capacity was 11,500MW (includ-ing contributions from central stations) were raised. Little or no generation was possible from the 3,500 MW hydro stations. Existing gas-based stations were running at half their capacity due to shortage of gas. New gas-based stations could not be commissioned due to gassupply issues. Thus, only around 7,500 MW capa-city was effectively available to meet the peak load of 8,100MW. The situation was made worse because of the maintenance problems at some thermal stations. There were also no concerted effort on demand side management, except in agriculture. TheAP power sector carries the cross of bad purchased power assessments (PPAs) with the firstIPPs and hasty unplanned PPAs with new gas-based IPPs. The first PPAs made theIPP powercostly as has been pointed out by many including the comptroller and auditor general’sreports. Table 1 shows the capital costs and levelised tariffs for different gas-based projects inAP. It can be seen that the all IPP projects have high capital costs and tariffs compared to the joint sector Andhra Pradesh Gas Power Corporation (APGPCL) project. It can also be seen the capital cost for the four gas IPPs is comparatively lower. This has been due to a transparent PPA review process and to some extent, competitive bidding. There have been de-mands to review thePPAs of GVK and Spectrum projects, and the Congress government had initiated the process but it has not been completed. High costIPP power has resulted in high power pur-chase costs. Considering the poor history of IPP contracts, the recent announcement by the chief minister that BPL will be in-vited to take up the Ramagundam coal-based project once again, is disturbing. It may be recalled that theAP Regulatory Commission had forced many modifica-tions to the PPA withBPL to bring down the cost. It finally cancelled thePPA since financial closure was not achieved in time andAPGENCO was expected to exe-cute the project. Four gas-based IPP projects adding up to 1,500 MW capacity were approved by the AP Regulatory Commission in April 2003, just before the Electricity Act came into force. This was done despite the lack of firm availability of gas supply being pointed out. Now these plants are ready to be commissioned and there is no gas. In fact, as noted earlier, the gas supply is not even sufficient to operate the existing plants. There has been a failure on the part ofGAIL to provide the committed gas supply. Possible gas supply from Reliance (from the Krishna Godavari basin, from 2008) will be costly and would nearly double the power generation cost. The AP government has been asking for the estab-lishment of an upstream gas regulator, pushing for an allocation of 50 per cent of profit gas to AP and suggesting a levy for the right of way for gas pipelines. One saving grace is that the state has managed to renegotiate with developers to get an exemption from paying fixed charges (to the tune of Rs 1,020 crore/year) till the gas supply issue is resolved. Idle gas power capacity has been the single biggest cause for the power shortage. The burden on the state may be Rs 2,800 crore next year if this is not sorted out. It is not clear how and when this complex issue will be resolved. There has been no integrated approach to planning of supply inAP. There has been criticism that the load forecast pre-pared by the Transmission Corporation of Andhra Pradesh(APTRANSCO) in 2003 was inflated so as to approve the fournew gas-based projects. A reasonable attempt by the Regulatory Commission to rational-ise tariffs of the non-conventional energy projects has been caught in court battles. There is the case of a 37MW mini power plant from which not one unit has been purchased (because of high variable cost), but the utility is paying Rs30 crore/year as fixed cost. Agriculture and industry de-mands have been growing over the years. The massive lift irrigation projects now being executed are expected to need about 2,400 MW and there are doubts as to Table 1: Cost Comparison of Gas-Based ProjectsProject Year CapitalLevellisedSector/Selection FinalisedCostTariffRoute (RsCr/MW)(Rs/kWh) APGPCL 1990 2.3 1.80 JointsectorGVK 19963.8 2.01 MoU routeSpectrum 1997 3.6 1.99 MoU routeLANCO 1999 4.0 2.57 Competitive biddingBSES 2000 3.3 2.54CompetitivebiddingFour gas IPPs2003 3.2 2.25 Not commissionedApproximate figures computed from respective PPAs and reports. Table 2: Performance of Distribution CompaniesItem 2003200420052006Revenue (Rs crore) 9628 10877 11473 12991Profit/loss (Rs crore) -125 76 57 291T&D loss (per cent) 26.1 22.3 21.4 20.2State subsidy (Rs crore) 1876 1513 1715 1599Source: Compiled from tariff orders.
COMMENTARYnovember 17, 2007 Economic & Political Weekly26whether the associated hydro projects can meet this demand. Demand side management programmes have focused only on agriculture and there too, field im-plementation has been poor. For example, the government claims that 90 per cent of farmers have procured capacitors but sam-ple surveys show that only 10-20 per cent farmers have installed them. Even during the summer crisis, there were no decisive moves to initiate energy efficiency meas-ures in government offices and industry, when there are many examples of other states making such moves. Maharashtra had initiated the innovative Akshay Prakash Yojana of voluntary community led load management with utility support; The Maharashtra Regulatory Commission had created two new consumer categories for malls and commercial hoardings, with tariff as high as Rs 8.5/unit and Rs 11/unit (higher than diesel generator set cost); states like Haryana and Karnataka have been aggressively promoting energy efficient compact fluorescent lamps (CFLs); some states have initiated a campaign to switch off air conditioners in government offices; a few states have promoted solar water heaters, making it compulsory for some or offering concessional tariffs, etc. It is high time thatAP also took up similar initiatives and the recent report that the Eastern Distribution Company is starting a programme to replace bulbs withCFLs is a welcome sign. Distribution IssuesThere are four distribution companies in AP. As per the World Bank crafted reform calendar, they are all to be privatised by 2008 but they all remain in the public do-main as of now. A combination of manage-ment initiatives, political support and tech-nology (like energy audits and segregation of feeders), supported by staff motivation has resulted in good performance by the companies in financial and technical effi-ciency. This is evident from Table 2 (p 25).It can be seen that over the years, reve-nue and profits (after considering state subsidy) have grown; transmission and distribution(T&D) losses and state subsidy (actual or as percentage of revenue) have come down. Of the 212 towns in the coun-try with less than 20 per cent aggregate technical and commercial(AT&C) losses, 96 are in AP. Distribution transformer fai-lures have dropped from 30 per cent (2001) to 10 per cent (2006). There has been no tariff hike for the past four years and in-dustry tariff has dropped from Rs4.06/unit (2003) to 3.70 (2006), resulting in high growth in industrial consumption. With the use of information technology (IT) and improved consumer care systems, there is a general perception of improved quality of supply and service to urban and high-end consumers. Considering the geo-graphical area, the number of consumers and complex consumer mix, these figures are commendable. They show how public owned utilities can perform well, given
COMMENTARYEconomic & Political Weekly november 17, 200727the right management practices and pro-per staff incentive/disincentive measures. An interesting feature of the AP power sector is the free power policy. As a hea-ling touch for distressed farmers, this was announced as soon as the Congress Party came power. It made power free to all far-mers and waived the existing arrears. After some consultation, this policy was modified to exclude rich farmers from free power and to mandate demand side management measures to avail of free power. It is reported that nearly 95 percent of farmers get free power. Agriculture tariff was 30 paise/unit before the intro-duction of this scheme, when the cost of supply to agriculture was Rs 2.50/unit. Therefore, the additional financial burden introduced by the free power policy was only Rs400 crore. Free power policy significantly reduced the harassment faced by farmers. It does not result inex-cessivegrowth in agriculture power con-sumption since power supply continues to be rationed for seven hours in a day. The negative impact of free power in the future would be in terms of an excessive use of groundwater.Anintegrated approach towards groundwater regula-tion, rationalising cropping patterns and promotion of demand side measures with farmer participation would improve this policy. The other side of the coin is the condi-tion of rural power supply. The heavy em-phasis on financial performance has resul-ted in utter neglect of rural power supply. Rural and poor consumers are totally ne-glected or at best looked upon as a neces-sary evil. Increasing deaths due toshocks is one manifestation of this neglect. The deaths due to shock were asmanyas865in 2006, out of which half were farmers and contract workers. The quality of supply and service in rural areas have deteriora-ted. Many farmers report motor burnouts every season and the cost of motor replace-ments has become a major concern. Distri-bution transformer failures are not atten-ded to in time and farmers resort to their own repair skills. Operation and main-tenance have been subcontracted and there is a severe staff shortage especially in rural areas. Even though the village elec-trification inAPis100 per cent, 30 per cent of the households remain unelectrified. It is unlikely that the existing distribution companies will give a fair deal to non-remunerative rural electrification. Thecurrent directionseems to encourage a franchisee based approach but it isfraught with many uncertainties and problems. Metering of 11 kVfeeders has been 100 per cent, but the metering of distribution transformers supplying agriculture pump-sets remains low at 10-20 per cent, despite numerous directives by the Regulatory Commission and demands by consumers.Individual pumpsets are not metered. Due to this, there are doubts about the validity of agriculture consumption, with many analysts pointing out that it is infla-ted by 10-20 per cent. After several re-quests, an exercise to assess agriculture consumption was entrusted by the Andhra Pradesh Electricity Regulatory Com-mission (APERC) to the Indian Statistical Institute. Its report is not yet public but it is reported that the survey has projected lower agriculture consumption. It is ob-vious that lower value of agriculture con-sumption will imply higherT&D losses. There is pride in the repeated number one rating given to the AP power sector by the rating agency, CRISIL. But a reading of theCRISIL report makes it clear that the parameters considered are from an inves-tor’s point of view. The assessment param-eters are tuned to financial risk factors of the sector and not to equity or environ-mental sustainability. For example, free power earns negative marks for AP where-as there are no negative marks for poor quality of service in rural areas. AP has also been praised for a high utili-sation of schemes like the Accelerated Power Development and Reform Pro-gramme(APDRP) and high investment in the distribution sector. Many states tend to emulate AP in costly schemes like the High Voltage Distribution System(HVDS) and city Supervisory Control and Data Acquisition System(SCADA). But there has not been any public scrutiny or systematic evaluation of these heavy investments. The euphoria on good performance may collapse if these investments do not give the expected returns. The last three years have seen good monsoons and this has been a great relief. One shudders to think of the impact of a drought on the sector and the state. As a part of the electricity act, the power purchase function has been delegated to distribution companies since 2005. Central coordination of this activity by APTRANSCO had many advantages. Power purchase has not been a focus area for distribution companies and they do not have the requisite expertise to handle this function. Currently, distribution compa-nies are struggling to manage power pur-chase contracts with support from two or three state level committees. Limitations and ChallengesTheAP power sector has many strengths: it shows up a model of public sector im-provement with good management prac-tices and is capable of raising funds from Indian and international financial institu-tions. The state has been sensitive to power issues, with timely disbursal of budgetary funds, showing a readiness for high cost distress purchase of power, tough bargaining withIPPs to reduce con-tract burden, high pitch follow-ups for gas allocation and pricing, etc. It has given utilities space to operate without short-term political interference.The financial and technical efficiency has no doubt improved but the rural and poor continue to be neglected. Responses to the supply crisis have often been knee jerk reactions and there is no integrated approach to address them. There have been no sincere efforts towards promot-ing energy efficiency measures. It is worth noting that the impact of improper capa-city addition or power purchase can easily wipe out all the progress gained through good management. There have been moves by some states to follow theAP ex-ample of high tech investment inIT or schemes like the HVDS or SCADA. Doing this without systematic evaluation would be counterproductive. Observers also point out that the high profile reform process has been losing steam. The regulatory process continues to have technical efficiency but has not been able to push the sector towards better equity. The AP power sector has to gear up to face the challenge of continued demand growth and rural electrification. Only in-creased public participation in the policy and regulatory processes can improve the situation.

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