FDI in power sector: Focussed approach is the key

Per capita consumption of electricity is one of the potent indicators of a society’s human development index. India’s per capita consumption has crossed the landmark 1000 kwph in 2015.  Still it lags behind the world average (3126 kwph) and is way behind some of the developed and middle income countries like China (4074 kwph).

Our growing urbanisation and economic growth means we would need a lot more electricity than what is available today. In the year 2015 the peak demand deficit for power stood at 3.5 percent.  A cursory glance at the statistics may elicit a response that it’s not much. But the narrow gap between demand and supply is due to subdued demand. Once the economic activities pick up pace there would be a yawning gap between demand and supply. 

To bridge this gap and keep pace with the rising demand we need a lot of investments in power sector and the central as well as state governments can’t shoulder this responsibility alone. They need funds and foreign direct investment is a step in the right direction.     

Since the beginning of 21^st century the increasing demand of power raised the pitch for opening up the power sector for foreign investments. In 2012 the then UPA (United Progressive Alliance) Government allowed 100 percent FDI in power sector. 

Even before the overhaul of the FDI regulations in power sector investments were trickling in. Between the years 2000 and 2015, $9.7 billion was invested in power sector. Ever since the NDA (National Democratic Alliance) Government has come to power the total FDI inflow has been to the tune of $11 billion (in a span of three years). 

These are impressive numbers but account for only 3 percent of the entire FDI inflow in the country. Of the 10 sectors mentioned by the Reserve Bank of India (RBI) power sector was at the ninth spot.

The reason for cautious investment trend lies in the challenges posed by the structure and ground realities of the power sector. The biggest challenge is arriving at a competitive tariff structure which is acceptable to both the power producer and the consumer. 

Due to lack of clarity in pricing which included absence of long term power purchase agreement (PPA) and weak demand in August 2017 as many as 21 GW (gigawatt) of commissioned private sector coal based power plants were lying idle or operating at sub-optimal levels.  

Another peculiarity of the investment pattern is that most of the FDI has come into the generation arm of the power sector. The other two sectors transmission and distribution (which deals with the consumer supply) have seldom benefitted from large scale investments. 

While investment in generation is always a priority, in India, equal if not more need is felt in the transmission and distribution sectors. India’s Transmission & Distribution Losses (euphemism for theft) stand at staggering 23 percent. This is due to faulty electricity metres, old and dilapidated distribution system and weak out-dated transformers. 

To deal with this situation the government in 2008 initiated Restructured Accelerated Power Development and Reforms Programme (R-APDRP). The focus of the program was to bring down AT&C loss, adoption of information technology in energy accounting, consumer care and strengthening distribution network of State Power Utilities. 

It is here that the government can benefit from targeted FDI. This is a huge opportunity area as most of the state power utilities are financially weak and also don’t have the technical and human resource abilities to upgrade the legacy systems. 

 Investments in manpower training, smart metering and general improvement of distribution system that brings down the T&D loss from 23 percent to 10 percent or less will phenomenally improve the health of the state power utilities. FDI can be attracted by offering a long term stable profit sharing mechanism to those companies who bring in their technology as well as finances.

Another opportunity lies in the renewable energy space. In the last one decade, away from the eyes of the mainline media, renewable energy has scripted an emphatic story of growth and expansion. Even before committing to Paris Climate Deal, India had fundamentally revised its ambition of expanding installed renewable energy capacity especially solar energy. 

Today our target for 2022 has been revised (20000 megawatt under Jawaharlal Nehru National Solar Mission initiated in 2009) to 100000 megawatt. Similarly wind energy goals have been revised and together the installed renewable energy capacity target now stands at 175000 megawatt.   

If the government consciously directs FDI in solar and wind sectors as well as in manufacturing of equipments and batteries and storage research segment it would fundamentally alter the energy sector in general and renewable energy sector in particular. 

This way India would be able to judiciously utilize the foreign funds and make up for the slow start during the first decade of the 21^st century.