MARKET STRUCTURE OF POWER SECTOR IN INDIA

Group: 3, Section: DAiswarjya Mahapatra 15P183Bikash Sagar Padhy 15P193Huzefa Lokhandwala 15P203Mohit Sharma 15P213Ria Rochlani 15P223Vibhor Dhote 15P238

Power Sector: An Introduction

The most Critical sector for a modern economy Energy security has become one of the topmost concerns India: 3rd largest producer & 5th largest consumer Total generation capacity: 1102.9 TWh Primarily controlled and regulated by the Ministry of Power The 3 pillars of power sector: Generation, Transmission &

Distribution

Generation (Source: Coal , Gas, Nuclear,

Water)

Transmission through high voltage lines

Distribution to

customers(subsidized sectors and individual metered

customers)

Electric Power Supply Chain

Indian Power Sector: A brief history

Generation Capacity in 1947: 1,362 MW Central and State governments responsible for all initial power generation

and distribution expansion Major investment in thermal and hydro-electric sectors Nuclear power developed at a slower pace; introduced in the 1960s Concept of operating power systems on a regional basis crossing state

boundaries was also introduced in the 1960s The Electricity (Supply) Act, 1948 was amended in 1991 to encourage

privately owned power generating facilities and selling power in bulk to the grid or other persons

Mega power projects of greater than 1000 MW capacity and supplying power to multiple states was introduced

GoI promulgated the Electricity Regulatory Commission Act (1998) for setting up Independent Regulatory bodies at both Central and State levels

Indian Power Sector: Current Scenario

PRESENT POWER SCENARIO OF INDIA

INSTALLED CAPACITY

(248509.63MW)

ANNUAL GENERATION(1102.9 TWh)

SUPPLY DEMAND GAP(4.1% PEAK)

PER CAPITA CONSUMPTIO

N(917.18)

PLF(68.15)

ELECTRIFIEDVILLAGES(95.60%)

Indian Power Scenario: Key Initiatives

Capacity addition of 88.5 GW between 2012 and 2017 (out of which a total of 50.9 GW has been added); further 86.4 GW during 2017-22

Make in India initiative to bring in foreign investment in the sector Launch of Ultra Mega Power Project Scheme through tariff based

competitive bidding; 4 UMPPs sanctioned in Budget 2015-16 Coal Mines (Special Provisions) Bill passed; e-auction of mines Civil nuclear deals with USA, Canada, Australia & France signed;

ensures required Uranium supply Solar energy target revised to 100 GW by GoI; Subsidy of Rs

150.5 million to be provided to develop rooftop solar projects Renewable energy capacity additions of 30 GW are planned in

the next five years to meet the growing energy demand Wind energy is estimated to contribute 15 GW

Indian Power Sector: Generation

Hydro15.20%

Nuclear2.09%

RES13.31%

Coal60.72%

Gas8.31%

Oil0.36%

Indian Power Generation Sources

Indian Power Sector: Generation Sources

Thermal Power Largest source of power Generates 65% of consumed

electricity Major sources: Coal, Gas & Diesel Total Installed Capacity: 172286.09

MW

Hydro-Electric Power 5th in terms of exploitable

hydro-potential Economically exploitable potential

was about 84,000 MW at 60% load factor

Total Installed Capacity: 40730.09 MW

Nuclear Power 4th largest source of electricity in India Total Installed Capacity: 5780 MW 21 nuclear reactors in operation in 7 nuclear

power plants 6 more reactors under construction

Indian Power Sector: Renewable Energy Sources

Renewable Energy Sources 5th largest installed wind power

capacity Installed wind power capacity: 23,763

MW Installed solar power capacity:

4,060.65 MW Target of 20,000 MW by 2022 High potential for generation of

renewable energy Total potential estimated: 147615 MW

Indian Power Sector: Governing Bodies

• General Policy in the electric power sector and issues relating to energy policy 

• Research, development and technical assistance relating to hydro-electric and thermal power

• All matters relating to Central Electricity Authority, Central Electricity Board and Central Electricity Regulatory Commission

• Rural Electrification

Ministry of

Power

• Advise the Central Government on the matters relating to the national electricity policy

• formulate short-term and perspective plans for development of the electricity system

• Specify the technical standards, grid specifications., and safety requirements for construction, operation and maintenance of electrical plants and electric lines

Central

Electricity

Authority

Indian Power Sector: Acts and Policies

The Indian Electricity Act 1910

• State government granted licences for supply of power; for norms for laying down wiresThe Electricity Supply Act 1948

• Mandated the creation of State Electricity Boards (SEB’s)

Legislative and Policy Initiatives, 1991• Private sector participation in electricity generation

The Electricity Regulatory Commissions Act 1998• Setting up of Central and State Electricity Regulatory Commissions

The Electricity Act 2003• Generation was freed from licensing; liberalisation in captive power policies• Open access to transmission lines to promote competition• 100% metering mandatory; regulatory commission decides the retail tariff• grievance redressing mechanism for consumers

National Electricity Policy, 2005• Development of rural electrification, realization of hydro potential, development of a

national gridNational Tariff Policy, 2006

• Guidelines to the SERCs for the fixation of tariffs for their respective entities as well as CERC

Indian Power Sector: Government Strategies

12th Five Year Plan (2012 2017) Recommends generation based on estimated 9% growth in energy requirement per year.

Sector Hydro Thermal Nuclear Total (%)

Central 5,632 11,246 2,800 19,858 (26.2%)

State 1,456 12,340 - 13,796 (18.2%)

Private 2,116 40,015 - 42,131 (55.6%)

All India 9,204 63,781 2,800 75,785 (100%)

Source: Ministry of Power, 12th Plan (2015 – 2017)

Indian Power Sector: Government Strategies

Types of Capacity Capacity Addition during the 13th Plan (MW)

Hydro 63,400

Thermal 12,000

Nuclear 18,000

Total 93,400

Capacity addition requirement during the 13th Plan (2017 – 2022)

Source: Ministry of Power, 12th Plan (2015 – 2017)

Indian Power Sector: PEST

Political Interference from government Poor infrastructure leads to higher industrial costs Corruption and political inefficiencies

Economical High price elasticity among domestic consumers; Subsidies from govt Shortage of source fuel (Volatility in the supply curve) Difficulty in land acquisition (raises entry barriers) Uncertainty of supply form power generators; Set-up of CPPs; Loss of

revenue Social

PILs and protests against various power projects due to environment concerns

Pressure to reduce carbon footprint Social concerns due to various industrial accidents

Technological Absence of high end technology for various newer and cleaner technology

(Ex: Thorium based nuclear plants) Inefficient generation technology

Power Market Structures

1. Monopoly model2. Single Buyer Model - a single entity purchases power

from all generators on a competitive basis and in turn sells it to the supply entities

3. Third Party or Open access model - the generators are in a position to enter into direct contract with distributors or large consumers without the need of an intermediary buyer. This, however, requires an open access to the transmission system.

4. Power pool (Wholesale or spot market) model - The power pool model envisages different generators selling to a pool and the distributors or large consumers buying from it. The pool functions as a marketplace for trading. An open access transmission system is a prerequisite for this model too.

Indian Power Sector: Market Structure

A natural monopoly is “An industry in which multi-firm production is more costly than production by a monopoly” High capital costs High barriers to entryThere might be a tendency to exploit the power and raise prices. Hence, governments plays the role of regulation and avoid market imbalance

2 types of costs:Marginal Cost: In absence of natural monopoly, MC decreases with the economies of scale, then increases again as the company faces growing pains like inefficiencies, bureaucracy, employee over-load, etc.

Entry Barriers

Economies of scale act as a barrier to entry as new players are not able to realise cost economies like a monopolist, and are subsequently forced out of business

New firm might try to set up a large plant, but the capital required will be too difficult to be raised

Natural monopoly may arise due to extremely high fixed cost of generation and distribution

High Debt exposure which is 5% of GDP

Long Run average cost should fall in long term, however they suffer losses due to subsidies and price ceilings

Pricing Mechanism

If more than one power firm provide electricity to the same area then each firm would have high ATC – compete against each other and no one achieves economies of scale If one firm were to produce electricity for the entire area – the monopolist ATC would be much lower than the case, if the market were more competitive

Profit Maximization MC = MR Socially Optimal Price MC = D Fair Return price ATC = D

Monopolist – restricts its output and extract higher price from the customers

Need arises for govt. to regulate the prices Combination of price control and subsidies –

Helps achieve a more socially optimal output

Pricing Mechanism

High ATC associated with the industry wont allow the firm to earn great amount of economic profit If govt. sets a price at Qso, the firm would suffer an economic loss and won’t survive in the market – Need for subsidy Max production by firm – Qrm (beyond that MR is negative) Govt. provides a subsidy to the firm that reduces MC So, Govt. pays for the production of output at the socially optimal price Price Ceiling – realistically met

ATC reduced Firm realizes an economic profit Thus enabling power companies to sell at much lower cost

Subsidy cost of GOI to state discoms FY 15: 3500 crore FY 16: 2500 crore

Tariffs for Consumers

1. Tariff paid by the end consumers to DISCOMSTariff =fixed cost +semi fixed cost + variable cost = Rs. (a + b*KW +c*KW-h)

a=fixed cost independent of the maximum demand and actual energy consumed(land, labor, capital, interest and depreciation)

b=constant which when multiplied by maximum KW demand, is a semi fixed cost which takes into account the size of power plant

c= a constant which when multiplied by by actual energy consumed (KW-h) gives the running cost, gives the cost of fuel to produce the energy consumed

Tariffs for Discoms

Power Tariff for DISCOMS It is regulated by CERC (central electricity regulatory

commission). This tariff system is called availability based tariff (ABT).

depends on the availability of power, tends to make the power system more stable and reliable

Tariff = Fixed charge + capacity charge + UI (Unscheduled interchange) The capacity charge is for making the power available to

them and depends on the capacity of plan UI Charges are incentives given or penalties imposed on

the generating stations

Distribution Mechanism

Mechanism of ABT The generating stations commit a day ahead about the schedule

power which they can provide to the regional load dispatch centre (RLDC).

The RLDC conveys this information to various SLDC which in turn collects the information from various state DISCOMS about the load demand from various types of consumers.

The SLDC sends load demand to RLDC. And now RLDC allocates the power accordingly

If power demand is equal to power supplied and the system is stable and frequency is 50 Hz

If state overdraws or a GS under supplies, this leads to deviation in frequency and system stability

If the frequency is less than 50 Hz, implies demand is more than supply, then the GS which supplies more power to the system than committed is given incentives

If frequency is above 50 Hz, implying supply is more than demand, incentives are provided to GS for backing up the generating power

If GS supplies less power than contracted, then penalties are imposed

Externalities

Mining Alteration of water tables Drainage from mining sites, including acid mine drainage

and discharged mine water Exposure to asbestos, cyanide, mercury of other toxic

materials used on-site Pollutants in emissions from thermal power plants

Particulate matter Sulphur dioxide Oxides of nitrogen Carbon monoxide

Externalities

Global warming damages CO2 emissions, which are unavoidable in the fossil-fuel

combustion process, are known to contribute to increases in global temperature due to the greenhouse effect

Fly ash Power plants in India largely receive low grades of coal (E,

F, and G), which contain large amounts of inherent ash and extra ash contributed by extraneous material like shale, which get mixed during opencast mining

Future focus of Power SectorThe power situation in India is characterized by – Demand exceeds supply High Transmission and Distribution (T&D) losses Low Plant Load Factor (PLF) Peak demand and energy shortages Poor financial health of the State Electricity

Boards (SEBs) and severe resource crunch Power sector reforms in the country and

consequent privatization of generation, T&D have been sluggish, due to complexities involved

Contd.

The government should implement the following strategies- Private Public Partnership (PPP) model will be useful for

quality power generation, transmission and distribution Focus on Renewable sources of energy Ministry of power should promote reduction of T&D loss and

restructuring of SEBs Implementation of electrical energy conservation projects at

various sectors will also help in reduction of peak demand along with the financial gains through reduction of energy consumption

The electricity regulatory commissions should exercise adequate control on power tariffs

Increased project size (Ultra Mega Generation & Transmission Projects)

Thank You