Independent Power Producers and PPPs in India

November 25, 2014: Harry Dhaul, an economist from Mumbai University, is the Founder and Director General of the Independent Power Producers Association of India (IPPAI), a platform which was formed in 1994 as a neutral forum for discussion and examination of policy and regulatory issues critical to the development of the power sector in India.

“We [independent power producers] have added more capacity to the grid than the state, than the government. This is a pretty critical role. Nevertheless, we need nurturing; we need the state to respect the fact that private capital does not come free. Interest must be paid; payments must be made on time. That’s how the Western world has grown. We are at a learning stage in India but I believe that this market will evolve to meet that. We will evolve with a much more PPP-friendly environment that we had before.”

After restructuring its public sector in the 1990s, India has started opening up a portion of its electricity market to private investors, though most of the sector still remains publicly owned. What is your assessment of the results achieved so far and what are the most acute challenges the Indian power sector is currently facing?

Harry Dhaul: It’s true that the government has opened many opportunities to the private sector, but you need to understand how they have done it. They actually call it “additionality of resources”. They have not privatized anything as such. Additionality of resources was first restricted to the generation side. Basically, they wanted additional capacity in terms of power generation. The second thing they tried to do was privatization under a PPP model of the distribution companies. This, however, was not successful for various reasons: quality of the power supply, collection of revenue, etc.

The government is letting the private sector in different areas of the country do what it has failed to do. And yet, it has not given the private sector the complete space to function in a competitive environment, which is what the private sector is good at. It is still trying to control the environment, which has got a political angle to it. It’s a very good learning curve for everybody because the government also has had to learn how to deal with the private sector. Of course, there have been a lot of mistakes and a lot of policy changes, but the government is trying to learn from its previous experiences. Now the challenges are to engage correctly and to clarify the rules of the game, because now we are going into a stage where everybody is watching you, and your decisions need to be transparent and in the public’s interest.

Strangely, what is beginning to happen is that the private sector is expected to behave like a government, even though there are many things the private sector is not designed to do, and therefore here lies a mismatch. This is the challenge to sort out presently.

During your time as Securing Asia Chairman, you mentioned energy security and the security of energy infrastructures as two main pillars. Can you explain your vision?

Harry Dhaul: Energy security in the context of a country has two components. The first one: does the country have access to energy? And the second one: is the cost of energy accessible to the consumer? One might have access to energy but it might be so expensive that one cannot do anything productive with it. From a security perspective, every country needs to have a plan, for example, what will the energy mix be. That kind of structuring and mapping is required when talking about energy security.

In the context of security of energy infrastructure, what you are really talking about is the situation where the infrastructure needs to be protected. Security is about physical security, cybersecurity, digital security, and the protection of those energy assets.

Do you think that an increased level of private participation in the Indian power market could help leverage energy security?

Harry Dhaul: I think so. This is a very interesting question because if you are going to have foreign investors investing in the economy, they have leverage in the international market. They will definitely affect the energy security environment of the country.

You have said in the past that if India was to maintain its growth trajectory, it would need a new and revolutionary policy which addresses the concerns of the consumer and the investor equally. Is the need to allow for a reasonable return to the private investors compatible with the need to keep electricity supply affordable for the Indian customers?

Harry Dhaul: In India there is a concept called “public good versus private profit”.  One needs to look at the fact that there is no point in producing energy that is not affordable by the consumer. One also has to plan out what the consumer is going to do with the power.  Are they going to provide products or services? What is the affordability?  It all depends on what your consumer can afford and what they will do.

Number two: the private sector works on the principles of free market, and that principle works if the consumer has a choice. In the present context there is a conflict between the existing players, which are the incumbent utilities owned primarily by the government across the country. They are running on a “cost plus” basis and a concept of a competitive market. These two concepts are in conflict.  And so there arises a political issue that we have to find a way to solve. There is a cross-subsidization that takes place. There is some confusion creeping in instead of having clear-cut lines and rules. Private sector needs to make profit, and the public sector needs to give energy at an affordable price. That definitely affects the bottom line and at times it is a bit of a challenge. But it’s all a part of the normal evolution of the market.

So, from your point of view what positive advancements have occurred lately in the differentiation of the responsibilities?

Harry Dhaul: Transparency has come in, PPAs have come in, which are transparent and available to people, and regulatory commissions have been put into place allowing for all parties involved to get together and discuss in a transparent manner. It’s very important for people to understand why they are paying “X” price for energy. This is why transparency is a very important part of the path towards achieving the efficiency we are talking about.

In your opinion, what factor or combination of factors have prevented the Indian power sector to keep up with the incredibly rapid demand growth? What mechanisms should be put in place to rapidly overcome this situation?

Harry Dhaul: There are a few issues here. The Indian power sector is not witnessing an arithmetical growth, but rather, a geometrical growth. The aspirations of the people and their purchasing power are increasing very fast. What we usually used to call an all-electric-home (AEH) connection was a light and a fan. Now the same house may have about 120 different electrical devices. So that is one kind of growth which is taking place.

The second type of growth that is taking place is due to about 50-100 million people that are coming into the “market for power” business every year. These two make the demand for energy critical. Furthermore, the business and social pattern of the country is changing.  We are becoming more and more energy dependent. Our energy intensity per capita has gone up. Earlier on, India used to have a per capita consumption of 300 kWh/year (versus China, which was 3000 kWh/year). What people didn’t appreciate is while numbers look fine and give a certain indication, these numbers don’t reflect the fact that certain people do not need energy. For example, it’s not -20°C during winter here! So your energy density needn’t be that high. Comparisons have become a bit of a problem. The point is that as the growth is so fast, it is very difficult to catch up and meet it. There is also a very important issue of the price of electricity. If you are going to price the electricity in the right way, the demand is huge.

It is usual to see you talk about decentralized power generation as a strategic avenue for development. What role is decentralized energy generation currently playing and what are the perspectives for the next decade in Southeast Asia?

Harry Dhaul: Globally, the role of decentralized energy generation is very important. It’s much cheaper and efficient to supply the power to the consumer from decentralized points, rather than have a long distance supply. It saves line losses and it saves huge amounts of capital related to transmission infrastructure, etc. The only issue is that it depends on a locally available fuel. Nature will decide to what extent it will provide. The ecosystem in itself limits the amount you can generate.

Do you think more regional integration and grid interconnections can also be part of the solution for fostering a greater access to reliable electricity in the region?

Harry Dhaul: I think yes. Actually, the question answers itself. More regional integration and grid interconnections will foster a more reliable supply. We are actually talking about a connection to Singapore – a grid that would run across Southeast Asia. All the different regions have balances and imbalances that compensate each other. For example, monsoons in India help generate surpluses that are sent to other parts of the subcontinent. So yes, regional and international interconnections are very important.

Most developing and emerging countries have state-owned integrated electricity companies. On the generation side, it is common to see high inefficiencies and both technical and commercial losses. What steps must be taken to improve the situation?

Harry Dhaul: Get rid of them. As long as you have government companies, you will have people that are not accountable. There is engineering, commercial lobbying in these countries, but they are not concerned about the consumer, they are concerned about themselves and sustaining their growth and their existence. They will add on their cost onto the regime’s, and that has to stop.

As many countries look to private capital for investment requirements in the power sector, independent power producers will play an increasing role. What is the role for independent power producers in India?

Harry Dhaul: From zero we have come up to the level of 60,000-70,000 MW of installed capacity. We have added more capacity to the grid than the state, than the government. This is a pretty critical role. Nevertheless, we need nurturing; we need the state to respect the fact that private capital does not come free. It comes with its own “baggage”. Interest must be paid; payments must be made on time. That’s how the Western world has grown.  We are at a learning stage in India but I believe that this market will evolve to meet that. We will evolve with a much more PPP-friendly environment that we had before.

What would you recommend to potential private investors in the power sector who are thinking about extending their business to India and Southeast Asia?

Harry Dhaul: My advice is to come in, study the local environment, see what they feel comfortable with, study the risks they are willing to take, and make money.