3.6 The potential for competition

The regulatory impact of competition has yet to be felt in any substantive way in the Indian power sector. It is not surprising that there are multiple barriers to the development of competitive conditions. Some key areas are listed below.

(a) There are only a few suppliers in the bulk power market. The dominant generator is NTPC with around 20% of the national generation capacity and over 80% share of the regional availability in supply. In the states, the bulk of the generation capacity is with the SEBs. The share of IPPs in state level capacity is less than 5%.
(b) There are no merchant generators in India. All IPPs have long term contracts, assuring recovery of full fixed cost and return on equity at 68.5% PLF. Some IPPs even have guaranteed offtake of power. The capacity of central generators is allocated to specific states under the Gadgil formula. Hence there is inadequate untied capacity to allow for open market operation.
(c) Schedule VI of the E (S) Act which has been used as a guiding principle for tariff setting for licensees and now has directional value for regulatory commissions, is essentially a cost plus regime. In the case of central generators, all costs on the basis of norms determined in 1992 are passed through and any efficiency gains are retained by the Company. There is therefore little incentive to shift to a more competitive market situation.
(d) POWERGRID's Inter regional transmission capacity at around 5000 MW is around 5% of the national generating capacity, though inter-regional exchanges of energy at around 7.3 billion units represent less than 2% of national consumption. In some areas transmission bottlenecks restrict free power flows thereby creating isolated power market pockets.
(e) Most regions suffer from chronic power and energy shortages. Allowing markets to operate under these conditions would result in the allocations of power on the basis of capacity to pay. This could significantly alter the demand, supply balances in States.

While these imperfections are unlikely to fade away in the short term a number of initiatives can be conceived off which would stimulate the development of competitive conditions.

(a) More market players are required to have effective competition. One way to simulate this gradually might be for each unit of a large CGSs to compete in the market place. For such competition, "ring fencing" of the accounts of each unit would be required to ensure that one unit does not subsidise another. This will introduce market rivalry for achieving efficiency, which can be beneficial to the customers and society in general.
(b) Increasingly, IPPs would need to be built as merchant plants, rather than based on long term contracts with states. For this to happen, private investors would need to be confident that a free market was in operation. Generators would want assurances that they would have open access to the transmission system and participate in the regional bulk power market.
(c) The central and state government owned entities might gradually divest their generating facilities.

The Central Government has notified Power Grid Corporation of India Ltd. (POWERGRID) as the Central Transmission Utility (CTU). The CTU will transmit energy through the inter-State transmission system, plan and coordinate the inter-state transmission system, with other players in the power sector including CEA, and exercise supervision and control over the inter-state transmission system. The ownership and management of regional load dispatch centres (RLDCs) has also been given to the POWERGRID through an amendment of the Electricity (Supply) Act, 1948. RLDCs are to ensure integrated operation of the power system in the concerned region. Currently, POWERGRID wheels the power generated by the central sector generating units and delivers it to the SEBs/STUs. The Electricity Laws (Amendment) Act, 1998 envisages private investment by allowing transmission licensees also to construct, maintain and operate any inter-state transmission system. However they have to operate under the direction, control and supervision of the CTU. The legislative framework views transmission as a natural monopoly, and hence has given a dominant role to the CTU. The potential for competition is limited in transmission. However some of the following initiatives, which foster competitive conditions, are possible :

1. investments that reduce system losses and transmission constraints, allowing better competition between generators;
2. better transmission pricing signals for the location of new generation plants and reactive compensation for reduction of losses and constraints;
3. ancillary services like reactive power, emergency power, spinning reserve etc; which are neither priced separately nor provided adequately by the constituents.

3.7 Conclusion

Markets can produce significant efficiencies. There is no guarantee however that they will be immediately successful. Recent attempts to create markets in other countries have achieved limited success or have failed for a variety of reasons. This is not to say that markets should be avoided. However markets need a structural, legal and commercial base before they can achieve their full potential. Given the complexity of the issues involved, the necessary preconditions for successful markets and the low margins for errors in the system, it may be worthwhile to conceive of a regional implementation plan for the move to market determination of prices and quantities of supply. In this manner the efficiency and effectiveness of the proposed changes can be tested before they are applied to the national system. In any case the first priority before the Commission will be to extract the efficiencies possible within the existing system before moving to the next stage of market development. This strategy will also ensure that many of the preconditions like reduction of information asymmetry, creation of surplus capacity and institutional support which are necessary for market operation, are in place, before utilities and consumers are exposed to the discipline of the market. Gradualism with directional incentives will be the motif of the Commission’s strategy for the move to markets.