FDI in infrastructure: Key Challenges

In addition to fuel shortage for thermal power projects, the power sector in general suffers from regulatory delays, chief of which are the land acquisition and environmental clearance issues.

The Indian power sector which opened up with liberalisation and further moved towards de-licensing in 2003 has seen immense development in the past decade since the enactment of the Electricity Act, 2003 (Electricity Act). Power, being the key resource for a growing economy like India, has the potential for attracting large investments both foreign and domestic. Although the country is poised with sufficient demand for electricity, the primary issue of fuel shortage along with other bottlenecks has resulted in restricted investor sentiment.

India under the ambitious 11th Five-Year Plan, achieved a total capacity addition of 54,964 MW against a target of 78,700 MW, majority of which has been thermal power projects. The Planning Commission subsequently in the 12th Five-Year Plan has set up a target of 88,537 MW capacity addition, keeping in mind the retirement of old inefficient technologies, out of which a total of 12,539 MW has been added during the last financial year. The governments, at Central and State levels, have also strived to improve the transmission sector by significant addition of around 13,620 km of transmission lines during the last financial year.

As per the latest report of the Ministry of New and Renewable Energy, India´s renewable energy installed capacity has grown from 3.9 GW in 2002-03 to about 31.7 GW in March 2014. Wind energy has been the predominant contributor to this growth accounting for 21.1 GW or 67 per cent of the installed capacity, followed by biomass power (4 GW), small hydropower 3.8 (GW) and solar power (2.65 GW).

Although the government has, on multiple occasions, come up with new policies for the promotion of the renewable energy sector, coal remains the primary fuel for both power sector and other heavy industries such as steel. This steep demand for coal and a policy paralysis has earned India the place of third largest importer of coal, although India has world´s fifth largest coal reserves.

The coal resources in the country are almost monopolised with Coal India holding the majority share of the resource. However, Coal India has failed to supplement the growth in capacity addition of the power sector with a simultaneous capacity addition in coal mining. Red tape coupled with fresh scandals on allotment of coal mining rights has resulted in serious fuel deficiency concerns for almost all thermal projects in the country. The much celebrated ´Ultra Mega Power Projects´, have been the major sufferers in the past couple of years, due to lack of domestic coal and no pass-through provisions in their respective power purchase agreements, if they run the units on costlier imported coal, as the fuel price in the respective agreements was arrived after competitive bidding.

In addition to the fuel for thermal power projects, the power sector in general suffers from regulatory delays, chief of which are the land acquisition and environmental clearance issues. There is a significant bottleneck in obtaining the final environmental clearance for infrastructure projects in general resulting in inflated costs, for example the nuclear power project of 2,800 MW, which got the government´s in-principle approval in October 2009, got environment clearance only on December 27, 2013 resulting in revision of the project cost from Rs 14,500 crore to Rs 23,502 crore. In regard to the land acquisition process, although the previous Central government implemented the new Land Acquisition Act, its actual impact on the industry is yet to be seen.

Regulatory hurdles also include the process of entering into the standard ´Power Purchase Agreements´ and the ´Fuel Supply Agreements´ which are completely non-negotiable, often skewed in favour of government instrumentalities, consequently affecting the investor sentiment and commercial viability of the projects.

In addition to the generation sector, transmission sector also requires significant attention in the wake of age old transmission infrastructure and weak disciplinary mechanisms leading to recent incidents like over¡drawing of power by States from the national grid.

The Central government in a bid promote the global marketability of the Indian power sector and reforming the sector started off with lucrative budget offers. A brief overview of the Union budget lists out the following key proposals:

• Extension of the sunset clause for providing 10-year tax holiday;
• Rs 100 crore for a new scheme for ´Ultra Modern Super Critical Coal Based Thermal Power Technology´;
• Promise to ensure adequate quantity of coal to existing power projects and such other projects which may be commissioned by March 2015;
• Rationalisation of coal linkages to optimise transport of coal and consequently reduce the cost.

While providing various monetary benefits for the renewable sector, especially solar power, the Union budget, in a first, has mooted the development of a ´Green Energy Corridor Project´ which will be a dedicated transmission corridor for evacuation of renewable energy.

The new political regime at the Union level has also tried to achieve streamlining of the fuel allotment process by combining the ministries of power and coal. However, it is yet to be seen what kind of impact the latest reforms will provide to the power sector. Further, unless the government spells out concrete steps for fuel adequacy and optimising transport of coal, investors will be wary of the actual implementation of the proposed policies.

Although the government focuses on major promotional schemes for the renewable energy sector, such as the successful Jawaharlal Nehru National Solar Mission which has heavily increased private investment in the sector, it is to be noted that unless such incentives are extended on a long term basis, the commercial viability of renewable power projects shall be doubtful, considering the high capital cost as compared to conventional thermal power stations. Therefore, the government will be required to fund the viability gap with requisite subsidies and simultaneously aim to expand the sector with schemes such as rooftop solar schemes and wind energy incentivisation schemes. However, the government shall be required to be cautious of excessive subsidies, thereby burdening the taxpayers with such costly energy.

Further, as the primary capital cost component in setting up of renewable energy plants is the import cost of equipment, the development of domestic technology and supply chain for renewable energy equipment is also required to be promoted in the country.

In a developing economy like India, energy adequacy plays a vital role for rapid growth and development as the entire economy right from farming equipment to large industries and individual households depend upon electricity for their everyday business, making it a highly essential commodity.

Prima facie, the Indian story of the power sector is a ray of hope which needs to be cherished through the right regulatory environment to supplement the growing needs of the country.

This article has been authored by Jatin Aneja, Partner, Amarchand Mangaldas.