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Presentation on theme: "INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES"— Presentation transcript:

New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist The World Bank

Indian Power Sector Investment requirements ( ) Overview of market conditions India International Investors Potential role of the World Bank Group (CAS ) 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 US$100 billion Generation – US$60 billion (Rs. 2,70,000 crores) Transmission & Distribution – US$40 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 G8+5 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 ,000 crores/y ($ billion) of generation cost 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 India’s carbon emissions
The power sector accounts for about 60% of carbon emissions Projected emissions rise amounts to 7% of global increment Under any scenario, these plans and trends presage major increases in carbon emissions. The US Energy Information Administration expects carbon emissions growth to average 3% per annum through 2025, with the power sector a major contributor. Worryingly, India’s carbon and energy intensity – carbon emissions, and use of energy, per unit of economic output – have held fairly flat, instead of declining rapidly as in China – perhaps in part reflecting the impact of poor pricing and the pressing need for reform in so many energy-consuming industrial sectors in India. 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 India’s vs Global investment requirements - a large Growing Gap between demand and supply?
Financing required for the Power Sector in Emerging Markets 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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 Continue to support state level reforms –
World Bank role in India: Conforming with Country Assistance Strategy ( )… Continue to support state level reforms – Critical for mobilizing the volume of investments needed to meet India’s 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 & Gov’t 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 Legal Protection of Investors Legal Protection of Investors' Rights 3.57 36% 2 Consumer Payment Discipline 3.11 40% 5 Gov’t/Multilateral Guarantee 3.11 13% 7 Government Efficiency 2.98 15% 3 Judiciary's Independence 2.91 19% 4 Clear Rules for Exit 2.83 19% 6 Investment Grade Debt Rating 2.83 8% 9 Transition to Competitive Market 2.68 10% 8 Corruption Index Ranking 2.66 4% 10 Domestic Borrowing 2.49 4% 11 Competitive Selection 2.43 13% 12 Possibility of Vertical Integration 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 /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 Dynegy E.ON Energie Edison Mission 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. International 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 Union Energy Union Fenosa 65. Wartsila NSD 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 Bank’s 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. $400 m ( ) Thermal Power Rehab – 600 to 1000 MW ($ 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 US$2.5 billion (11% of business) Good performance to date Invested (since 1990) in 14,815 MW of generation capacity and US$15.2 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 LIBOR-based, Variable spread loan Interest
IBRD Loans - Lending Terms (As per currently applicable waivers to Indian Portfolio) LIBOR-based, Variable spread loan Interest USD loans Yen loans 6 month LIBOR 5.03% 0.15% Spread over LIBOR 0.18% Commitment Fee 0.07% Front-end Fee 0.04% Total World Bank Interest Rate 5.32% 0.44% + currency exchange rate impact – deemed export/import duty exemption* *Applicable to ICB procurement funded from loans provided by multilateral agencies. Principal Moratorium 5 years Repayment period (incl. moratorium) 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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