The Indian Power Sector

F O R E S c h o o l o f M a n a g e m e n t

F M G X V I I IS e c t i o n A

G r o u p P r o j e c t

T r i m e s t e r 1J u l y 2 0 0 9

Managerial Economics 1Project

Akshat Vaid 91004 Cijil Diclause 91014 Gourab Kundu 91020 Harshdeep Garg 91023Samarth Gulati 91047

Indian Power Sector:The Various Economic Implications

a Project Synopsis

Introduction Power in the form of electricity in today’s world is one of the basic necessities. In every household the usage of electrically operated appliances is increasing day by day and so is the demand for electricity. However, the rate of increase in supply is not keeping pace with the rise in demand. The immediate implication of this is the acute shortage in the supply of power. The Government of India has said the country was facing a power shortage of 70,000 MW and assured that several measures, including a change in policy of hydro-electric generation, were being considered to fulfill the requirement [1]. Graph stating the increase in per-capita power consumption in India

Thus, it becomes imperative to come up with a sound estimation of demand for the coming years. This would help in decreasing the poor quality of service and minimizing intermittent blackouts. Peak electricity demand in a given season is subject to a range of uncertainties, including underlying population growth, changing technology, economic conditions, prevailing weather conditions as well as the general randomness inherent in individual usage.

The Project Objective

To analyze the various factors affecting demand of power in India. Further, estimate the demand that may arise in the near future.

The Project Relevance

The power sector is of paramount importance in a developing economy such as ours. The reasons behind the same are as follows:

Prevalent uncertainty in inflation and rapidly rising energy prices.

Emergence of alternative fuels and technologies. (in energy supply and end-use)

Changes in lifestyles, institutional changes etc.

For these reasons it has become imperative to use modeling techniques which capture the factors like price, income, population, technology, economics, and demographics with respect to consumption of electricity.

In view of the ongoing reform process, with associated unbundling of electricity supply services, tariff reforms and rising role of the private sector, a realistic assessment of demand assumes ever-greater importance.

Review of Literature

Energy in India for the Coming DecadesAnil KakodkarChairman, Atomic Energy Commission, India 3rd May 2007

Project Synopsis | Indian Power Sector : The Various Economic Implications 2

The reforms initiated in India since the beginning of the nineties have led to rapid economic progress and better growth rates. In the first decade of this century the growth rates seem to be still better. Studies by several academics and consultants forecast continued high growth rate for the next several decades.

Electricity is the most important component of the primary energy. Electricity-GDP elasticity was 3.0 till the mid-sixties. It has also decreased since then. Reasons for these energy–economy elasticity changes are: demographic shifts from rural to urban areas, structural economic changes towards lighter industry, impressive growth of services, increased use of energy efficient devices, increased efficiency of conversion equipments and inter-fuel substitution with more efficient alternatives. Based on the CMIE data [5], the average value of the Electricity-GDP elasticity during 1991-2000 has been calculated to be 1.213 and that of the primary energy- GDP elasticity to be 0.907. Estimating the future GDP growth rates of India from the projections made by Dominic Wilson and Roopa Prushothaman [2], taking the primary energy intensity fall to be 1.2 percent per year [6], extrapolating the electricity intensity fall from past data till 2022 and subsequently a constant fall of 1.2 percent year, the growth rates of the primary energy and electrical energy have been estimated as follows.

Period Primary EnergyPercent Annual Growth

2002-2022 4.62022-2032 4.52032-2042 4.52042-2052 3.9

These rates are the basis of the projections reported [3]. It may be recalled that historical primary energy and electricity growth rates during 1981- 2000 were 6 percent per year and 7.8 percent per year respectively.

Based on the growth rates given in the above table, per capita electricity generation would reach about 5300 kWh per year in the year 2052 and total about 8000 TWh. This would correspond to an installed capacity of around 1300 GWe. Annual primary energy consumption would increase from about 13.5 EJ in 2002-03 to about 117 EJ in 2052-53. By then the cumulative energy expenditure will be about 2400 EJ.

India Power Demand SurgesBy Goutam BhatiaEnergybiz Magazine May/June 2007

The Indian power sector has witnessed a strong all round revival in the last five years with growth rate averaging at about 6 percent per year. When India achieved freedom in 1947, the installed capacity was 1.4 gigawatts. Today it is 127 gigawatts. The current five year plan envisages adding another 68 gigawatts by 2012.

The country has emerged as the second largest potential destination for investments in power after China. The government of India has made certain provisions which will attract investment leading to strengthening the existing transmission and distribution network and also creating additional transmission network to match the envisaged generating capacity. The investment to meet this end would be $210 billion. The transformer industry in


India is a matured industry estimated at around $1.5 billion. The growth is expected to be in range of 18 percent a year. The growth will be driven predominantly by domestic market requirements.

India's Power Sector OutlookExhibition on Power, Exhibition on Energy, Conference on Power, Conference on Energy, Indian Power sector, Mumbai 25 Dec 2008

The Power & Energy Infrastructure sector in India is poised for a major take-off. The APDRP (Accelerated Power Development & Reforms Programme 2002 - 2012) has seen an addition of around 22,000 MW during last five years. And during the next five years, a capacity addition of over 78,000 MW has to be setup by 2012. (A commitment to increase 15,600 MW capacity per annum). The Market Potential to sustain the GDP Growth rate of India @ 8% plus per annum needs the power sector to grow at 1.8 - 2 times the GDP rate of growth as espoused by economists, planners and industry experts. This would mean a YOY capacity addition of 18,000 - 20,000 MW to achieve this ambitious plan of moving India to a Developed Economy status, as an Economic Global Powerhouse. The Target Mission:‘POWER for All by 2012’ would mean achieving the target of 1000 KwHr (Units) of per capita consumption of electricity by this period.

To achieve this goal, the following are critical:• Attract US $ 250 Billion Investment into the sector. (FDI & Domestic Investment Combined)• Adequate Capacity Growth to Sustain GDP Growth at 8% plus.

• Reliable & Quality Power On 24 x 7 basis, at leastin Urban & Industrialized areas.• 100% Rural Electrification with Adequate & Qualitative Power for irrigation purpose.• Increasing the Role of Hydel & Renewable Energy in the Energy Mix.• Urgent need to develop the alternatives, both in the Fuel & Technology terms.• Focus on implementation (Outcomes are more important than Outlays).As espoused by the Indian Prime Minister, Dr. Manmohan Singh

Execution Methodology

Parameters: Number of households. Average residential electricity

price rupees per kWh. Average business electricity price

rupees per kWh. Household sector per capita

disposable income.

On-site Project Analysis

Even after more than sixty years of India’s Independence, the Power Sector is still a monopolistic market, with the government undertakings ruling the roost. Having said so, new private players have entered the market and are making consistent efforts to consolidate their market share. With the ever rising demand for power, their entry into the market was just a matter of time.


Here’s a look at the key market players in the power sector of India: Government Undertakings:

NTPC: National Thermal Power Corporation.

NHPC: National Hydel Power Corporation.

NPCIL: Nuclear Power Corporation of India Ltd.

Private Undertakings: BSES: Reliance Energy. Tata Power.

Analytical Tools Used

The statistical tools which are to be used in the study are as follows:

Time series analysis: the fluctuations in time series data arises due to secular trends, cyclical fluctuations, seasonal variations and random influences will also be considered for the study.

Regression

Smoothing Technique Barometric Forecasting

Proper error determination methods will be employed to measure the deviation between forecasted values and corresponding actual values.

Sources of Data

Secondary information for study will be collected from rich internet database sources like indiastats.com, EBSCOhost, and other search engines along with various online journals. Also weekly economic surveys like Economic & Political Weekly will be consulted.References[1] Sushil Kumar Sinde, Union Minister for Power, at Lok Sabha 29 Apr 07[2]Dominic Wilson and Roopa Purushothaman, “Dreaming with BRICs: the path to 2050” Global Economics Paper No 99, Goldmann Sachs, 1st October 2003. [3] R. B. Grover and Subash Chandra, “A strategy for growth of electrical energy in India”, Document No 10, Department of Atomic Energy, Mumbai, India, August 2004.[4] International Energy Agency (IEA), Key World Energy Statistics, 2003.[5] Centre for Monitoring Indian Economy (CMIE) 2002, “Energy”, April 2002 [6] International Energy Agency (IEA), ‘World Energy Outlook 2002 Highlights’ p 32.


Documents

The Indian Power Sector