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INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES

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INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist The World Bank STRUCTURE OF PRESENTATION Indian ... – PowerPoint PPT presentation

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Title: INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES


1
INDIA POWER SECTORCHALLENGES INVESTMENT
OPPORTUNITIES
  • New Delhi
  • May 12, 2006
  • Salman Zaheer
  • Lead Energy Specialist
  • The World Bank

2
STRUCTURE OF PRESENTATION
  • Indian Power Sector Investment requirements
    (2007-12)
  • Overview of market conditions
  • India
  • International Investors
  • Potential role of the World Bank Group (CAS
    2005-08)
  • Concluding Remarks

3
Investment Needs over 2007-12 period reasonably
well established..
  • Installed generation capacity to increase by
    about 60,000 MW (from 125,000 MW to 185,000 MW)
  • Of this about 20-30,000 MW hydro
  • Investment program estimated to cost US100
    billion
  • Generation US60 billion (Rs. 2,70,000 crores)
  • Transmission Distribution US40 billion (Rs.
    1,80,000 crores)
  • In addition
  • About 20,000 MW of existing thermal capacity to
    be rehabilitated and modernized
  • Distribution networks to be upgraded and MIS
    strengthened
  • Human resources to be revitalized
  • And
  • A low carbon growth strategy to be followed
    with international support (Post G85 meeting at
    Gleaneagles in 2005)

4
Indian market environment also broadly known..
  • Industrial, commercial, urban household demand
    increasingly commercialized. Willing to pay
    cost-recovery tariffs provided
  • Service is Efficient not willing to pay for
    theft and utility inefficiency
  • Service is demand responsive willingness to pay
    declines with outages, voltage fluctuations,
    billing hassles, etc.
  • Industrial and commercial demand now about 43-45
    of total consumption.
  • 60 of Indian firms rely on costly captive or
    back-up self-generation (compared to 21 in
    China)
  • Urban household demand about 20-25 of total
    consumption
  • Urban consumers becoming wealthier and more
    service conscious
  • Rural including agricultural - demand not ready
    for commercialization. Still needs effective
    government support

5
Some barriers to commercialization..
  • Governance of distribution utilities
  • Over 40 of energy supplied into state
    transmission systems is lost, not billed,
    incorrectly billed or payment not collected
  • Reducing to 20 would save Rs. 15-20,000 crores/y
    (3.3-4.4 billion) of generation cost (_at_Rs.
    2/kWh) or generate 25 more revenue if billed at
    the average tariff (Rs. 2.77/kWh)
  • Sector is a conduit for about Rs. 20,000 crore
    (4.5 billion) of poorly targeted and poorly
    accounted subsidies each year (from budget
    cross-subsidies)
  • Even in advanced reforming states, only 55-65 of
    electricity sales metered
  • State regulatory commissions are still finding
    their feet
  • Tariffs are distorted and do not cover costs
  • Industry tariffs are high by international
    standards (about USc 8-10) agricultural tariffs
    (accounting for 25 of consumption) are well
    below cost
  • Data quality is improving but progress on energy
    accounting/audits is slow
  • Regulations on service quality and service
    obligations yet to be enforced
  • Limited outreach efforts to enhance public
    participation
  • Fuel supply bottlenecks
  • Early stages of competition and liberalization

6
India market environment ..(3)
  • Government of India policy response is
    appropriate
  • Electricity Act, 2003
  • National Electricity Policy (March 2005)
  • National Tariff Policy (January 2006)
  • Correct focus on
  • Governance Commercialization Private
    participation
  • Competition Rural services
  • Key challenge
  • Ramp up pace and quality of policy implementation
  • What must be done to move from about 6 billion
    to 20 investment/year?
  • Overcome concerns and resistance at state level
  • Accelerated reform of distribution still a
    critical bottleneck
  • Resolve fuel supply bottlenecks
  • Engage the private sector
  • Remain conscious of international commitments
    clean energy

7
Indias carbon emissions
  • The power sector accounts for about 60 of carbon
    emissions
  • Projected emissions rise amounts to 7 of global
    increment

Source EIA International Energy Outlook 2003
(base case)
  • Energy and carbon intensity of the economy is
    lower than in China, but not declining nearly as
    fast

8
Indias vs Global investment requirements - a
large Growing Gap between demand and supply?
Financing required for the Power Sector in
Emerging Markets 1990 - 2020
Cumulative Sum (Bn)
2,300 Bn
High Investment Demand
Scenario (3)
1,900 Bn
Gap covered by public financing,
self
-
financing, donor funding,
and rationing.
Low Investment
Total Power Investment (Billion)
Demand Scenario (2)
Private Capital Mobilized in Power Sector
Historic
Future
Source World Bank, IEA, Deloitte Touche
Tohmatsu Emerging Markets Group
9
World Bank role in India Conforming with Country
Assistance Strategy (2005-08)
  • Continue to support state level reforms
  • Critical for mobilizing the volume of investments
    needed to meet Indias demands in an affordable
    manner
  • Support rural access to spur rural development
  • Show-case mechanisms for scaling-up a low-carbon
    power generation program
  • Continue to support expansion of the national
    transmission system to facilitate access and
    trade
  • Continue to provide analytical, advisory and
    capacity building support

10
Bank assistance strategy builds on past
engagement in power sector.
  • Pre-1990s
  • Investments in thermal and hydropower generation
    at the central and state government levels
  • Expansion of the transmission system
  • Investments in state distribution systems
  • 1990-Present
  • Investment, budget and advisory support for state
    level reforms (Orissa, Haryana, UP and AP)
  • Investment support for transmission and renewable
    energy (through IREDA)
  • Investment in 1500 MW Nathpa-Jhakri hydro plant

11
responds to consumer Govt concerns addresses
investor priorities
  • 1. Legal protection and framework defining
    investor rights
  • 63 of firms rated it a deal-breaker ranked 1
    of 12 factors
  • contract enforceability
  • clarity in market rules Brazil ?, Guatemala ?
  • protection to do business labor laws,
    property rights laws that work
  • enforceable exit strategy Separately ranked
    4th
  • 2. Payment discipline and enforcement
  • 40 of firms rated it a deal-breaker ranked 2
    of 12 factors
  • Both generation and distribution investors
    considered it important
  • we cannot fix it on our own government
    support essential.
  • worsening payment discipline strong negative.
  • 3. Guarantee from Government or Multilateral
  • 36 rated it a deal-breaker overall rank 5 of
    12
  • support needed till the business becomes
    commercial
  • why should we take on the risk of a bankrupt
    business?
  • Interestingly not a determinant for success
    best and worst experience.

10
12
What 50 global investors have reported on why
investments succeeded or failed
  • 1. Retail tariff level and cash-flow discipline
  • 65 of firms rated it critical - First overall
    rank for success or failure
  • we have learned enough to avoid countries with
    unsustainable retail tariffs
  • Government assurances to raise tariffs or
    provide subsidies not very comforting.
  • Tariff levels should be high enough without
    subsidies
  • 2. Fair adjudication of tariff adjustments and
    disputes
  • 50 of firms rated it a critical determinant of
    failure. Second rank in case of failure.
  • new regulators show little appreciation of
    investor needs.
  • Regulators showing an increasing tendency to
    change rules and targets on which investment
    decisions are made.
  • 3. Operational Control and Management Freedom
  • 60 of firms rated it a critical success factor.
    Second overall rank
  • Key to deriving value from investment
    economies, cost reduction
  • Unanimous verdict that public-private operational
    partnerships are not important (lowest ranked)
  • 4. Regulatory commitment sustained through
    long-term contract
  • 50 of firms rated it a critical determinant of
    failure. Third overall rank
  • a contract is a contract
  • if the contract looks cozy it probably is
  • need to make sure that the contract is on firm
    economic and financial ground

15
13
How Satisfied are Investors? A Country
Assessment
  • Being a small country is not a liability
  • Multiple entrants (over 4) No dissatisfied
    investors
  • Latin America Bolivia, Jamaica, Panama, Costa
    Rica, Guatemala, Nicaragua, Dominican Republic
  • Africa Kenya, Morocco
  • Respecting contracts under stress
  • ? Thailand, Philippines
  • ? Czech Republic, Colombia, Argentina, Indonesia,
    China, Pakistan, India
  • Regulators perceived to be exercising excessive
    discretion and risk on the increase
  • India, Colombia, Brazil
  • Are regulators just doing their job or are
    investor expectations unrealistic?

19
14
What conditions are important?
Minor
Major
Critical Deal-breaker
Rated Dealbreaker
Relative Rank
63
1
3.57
Legal Protection of Investors' Rights
2
36
3.11
3.11
40
5
13
2.98
15
2.91
2.83
19
2.83
19
2.68
8
2.66
10
2.49
4
4
2.43
13
2.00
9
2
15
Global market environment Feedback from Power
Investors Roundtable (World Bank 2004)
  • The Target Group
  • Firms that invest their own equity outside their
    home countries
  • Local/domestic firms not included
  • Lenders not included they follow the equity
    sponsor
  • The Target Universe
  • 65 firms in final survey. An ever decreasing
    number
  • 7 mergers
  • 7 exits from emerging markets
  • 2 went into receivership
  • The Survey Instrument
  • A 7-page standardized survey to all firms
  • Sent by email/fax follow-up phone calls.
  • The Response Rate
  • 48 valid responses a 75 response

16
International Power Investors Firms Targeted
  • ABB Equity Ventures
  • AEP
  • AES Corp
  • Alliant Energy International
  • Alsons Consolidated Resources
  • Amata Power
  • Banpu Public Co. Ltd.
  • BG Group
  • BP Global Power
  • CHI Energy (Energia Global)
  • Chilectra
  • Cinergy Global Resources
  • CLP Power International
  • CMS Energy Corporation
  • Cogentrix Energy
  • Commonwealth Development Corp.
  • Covanta Energy
  • Delma Power
  • Duke Energy

23. El Paso Energy 24. Electricite de France
International 25. Electricite de Portugal
26. Elyo 27. Endesa 28. EIF Group 29. Entergy
Power Group 30. Eskom Enterprises 31. FondElec 32.
Fortum 33. GE Capital Global Energy 34. GMS
Power 35. HEI Power 36. Hydro Quebec 37. Ibedrola
38. Independent Power 39. InterGen 40. Internatio
nal Power 41. Keppel FELS Power 42. Korea
Electric Power Company 43. Marubeni Power
  • 44. Mirant
  • 45. Mitsui Co.
  • 46. NRG Energy
  • 47. Panda Energy
  • 48. PPL Global
  • 49. PSEG Global
  • 50. Reliant Energy
  • 51. Rolls-Royce Power Ventures
  • 52. Saur International
  • 53. Scudder Latin America Fund
  • 54. Sempra Energy
  • 55. Siemens Power Ventures
  • 56. Sithe Energies
  • 57. Statkraft International
  • 58. Steag AG
  • 59. Tomen Power
  • 60. Tractebel
  • 61. TransAlta
  • 62. TXU Corp

21
17
The fundamentals have not changed - Factors that
enable and attract investment
  • Well-managed reform Increasing ability of
    utility to generate internal cash for investment
    through
  • cost reductions
  • timely tariff adjustments to recover the cost of
    supply, and
  • efficient collection of posted tariffs
  • Keeping the financial house in order
  • Improving access to debt financing from
    domestic/international debt markets by
    maintaining profitable operation acceptable
    debt service ratio
  • Reducing risk maintaining a healthy regulatory
    environment Attracting domestic foreign equity
    funding -
  • creating and maintaining sector structure,
    regulatory and legal environment conducive to
    minimization of country/project investment risk

18
The evolving World Bank program balances
pragmatism with the fundamentals
  • Support service improvements in 2-4 states
  • Improve efficiency, service quality and
    governance of state utilities
  • Support rural access to spur rural development
  • Complement or supplement the Rajiv Gandhi Rural
    Electrification Program to ensure
    demand-responsiveness and sustainability of rural
    services
  • Show-case mechanisms to scale-up low-carbon power
    generation
  • Develop hydropower potential in an
    environmentally and socially sustainable manner
  • Strengthen capacity of 1-2 state governments to
    manage and utilize hydro resources in an
    efficient and responsible manner
  • Reduce barriers for rehabilitating thermal power
    plants and improving their fuel efficiency (part
    of low carbon growth agenda)
  • Promote renewable energy development (through
    IREDA/MNES)
  • Continue to support expansion of national
    transmission system to facilitate access and
    trade
  • Continue to provide analytical, advisory and
    capacity building support
  • Build awareness and consensus around sector
    reform issues governance of publicly-owned
    distribution utilities, open access, etc.
  • Improve regulatory effectiveness in
    infrastructure services

19
World Banks Assistance Program(2)
  • Current portfolio consists of the following
    operations
  • Project Loan Amt Balance Closing Date
  • Powergrid II 450 m 60.6 m June 2006
  • Powergrid III 400 m 400.0 m July 2011
  • Rajasthan Power 178 m 38.3 m June 2006
  • Renewable Energy II 112 m 45.1 m March 2007
  • Under Preparation
  • Rampur Hydropower 412 MW approx. 400 m
    (2006-07)
  • Thermal Power Rehab 600 to 1000 MW (120-140 m
    IBRD 40-60 m GEF)
  • Being Identified
  • State utility development reform dialogue
    with 3-4 states
  • Rural electricity services dialogue with
    Ministry of Power
  • Hydropower development dialogue with Ministry
    of Power and 2 states
  • Establishment of institute for regulation and
    competition

20
International Finance Corporation also has an
active power portfolio in India
  • Allain-Duhangan 192 MW hydropower first for IFC
    on merchant basis
  • Powerlinks - Tala Transmission Project Tata
    Power Powergrid JV
  • Mini hydro IHDC (2-5 MW projects) considering
    windpower
  • Considering financing private distribution
    companies (NDPL)
  • TA (with North American Rural Electrification
    Cooperatives Association) to PFC for rural
    electrification
  • Worldwide, IFC has a power portfolio of US2.5
    billion (11 of business)
  • Good performance to date
  • Invested (since 1990) in 14,815 MW of generation
    capacity and US15.2 billion in aggregate project
    costs. The portfolio currently has
  • 7 distribution clients 5 transmission clients
  • 61 projects in 33 countries

21
World Bank Group risk mitigation guarantees - to
leverage private investment
IFC MIGA IBRD/IDA
IFC Guarantees (partial credit structures usually for local financing) Interest Rate and Currency swaps Political Risk Insurance expropriation transfer restriction breach of contract war civil disturbances Guarantees partial risk partial credit
22
IBRD Loans - Lending Terms (As per currently
applicable waivers to Indian Portfolio)
LIBOR-based, Variable spread loan Interest Interest Interest
LIBOR-based, Variable spread loan USD loans USD loans Yen loans
6 month LIBOR 5.03 5.03 0.15
Spread over LIBOR 0.18 0.18 0.18
Commitment Fee 0.07 0.07 0.07
Front-end Fee 0.04 0.04 0.04
Total World Bank Interest Rate 5.32 5.32 0.44
currency exchange rate impact deemed export/import duty exemption currency exchange rate impact deemed export/import duty exemption currency exchange rate impact deemed export/import duty exemption currency exchange rate impact deemed export/import duty exemption
Applicable to ICB procurement funded from loans provided by multilateral agencies. Applicable to ICB procurement funded from loans provided by multilateral agencies. Applicable to ICB procurement funded from loans provided by multilateral agencies. Applicable to ICB procurement funded from loans provided by multilateral agencies.
Principal Moratorium 5 years 5 years 5 years
Repayment period (incl. moratorium) 20 years 20 years 20 years
23
In closing.
  • World Bank is committed to helping India meet its
    power sector objectives
  • Improve efficiency and quality of electricity
    distribution key to unblocking internal
    resources
  • Expand rural access
  • Enable electricity trade and transmission of
    power
  • Develop hydropower and other renewable energy
    potential in an environmentally and socially
    sustainable manner
  • Reduce barriers for rehabilitating thermal power
    plants and improving their fuel efficiency
    other financial support for a Low Carbon Growth
    strategy being formulated
  • Policy framework has improved considerably
    regulatory frameworks are also becoming more
    competent and transparent. However
  • Scale of investments needed cannot be mobilized
    unless enterprise level reforms, particularly of
    distribution companies, are ramped up
  • Private or public companies cannot fix cash
    inadequacy without government help
  • AND
  • We know from painful experience that a policy
    environment that is unfavorable for the private
    sector will be unfavorable for the public sector
    too!

19
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