General Awareness

April 04, 2017 @ 01:15 PM

FDI: Little less than panacea for power sector

General awareness on current topics is essential as not only you will be getting questions on   GK in various MBA entrance exams but it will be useful for Essay writing test and WAT also.

Today, you will read General Awareness Topic  :  FDI: Little less than panacea for power sector 

Growth in energy sector is important prerequisite for the growth of an economy but the India’s power sector is in urgent need of reforms. Despite the fact that 100 percent FDI under automatic route is permitted in power sector (except in atomic energy), its growth is not commensurate with the energy requirements of the country. To give further push to the development of power sector, government took new initiative for the development of the sector.
 
Recently, government permitted foreign investment up to 49 percent in power trading exchanges in compliance with SEBI Regulations Central Electricity Regulatory Commission Power Market Regulations 2010. This included a foreign direct investment up to 26 percent and Foreign Institutional Investment (FII) up to 23 percent, where FII investments would be permitted under the automatic route while the FDI would be permitted under the government approval route. 
 
The move is expected to strengthen the power exchanges, enhance availability of power, improve distribution, and introduce global best practices. Power companies are allowed FDI up to 100 percent, but so far, India did not have a stated policy on FDI in power exchanges, creating ambiguity among investors.
 
Power exchanges are online platforms that help generators and consumers to discover prices based on the demand-and-supply mechanism. Financial Technologies promoted India Energy Exchange, which owns about 93 percent market share, and Power Exchange India Ltd, which is jointly promoted by NSE and NCDEX are the two power exchanges operational in India. They both trade around 2 percent of the total 800 billion units generated in the country. Two more power exchanges have been proposed: National Power Exchange, a joint venture of National Thermal Power Corporation (NTPC), National Hydroelectricity Power Corporation (NHPC), Power Finance Corporation (PFC) and Tata Consultancy Services (TCS) and another by Ahmadabad-based Marquis Energy Exchange.
 
The retail consumers are largely served by state electricity distribution companies but large consumers with requirement above 1 megawatt can approach power exchanges for buying electricity. The prices at exchanges are market-determined and during the past month have touched record levels. With private sector participation increasing in the power sector and the market moving from a regulated to a market-driven regime, more buyers and sellers are opting to trade electricity through exchanges.
 
As there is huge gap between demand and supply, foreign investors are attracted towards India's power sector. FDI approval will help foreign investors step into the area and help power exchanges raise funds and bring advanced technology.
 
Moreover, the collective knowledge of the world in power exchanges is very low and in India, this industry is only four years old. FDI approval means Indian power exchanges can have alliances with foreign bourses and share knowledge and expertise. Power exchanges in India are still at the periphery of the system as they are allowed to trade only in day ahead market and they await the necessary government and regulatory approvals to introduce longer tenure products. Also, volume growth on these bourse have remained muted since loss making power distributors have been opting for power cuts over buying expensive electricity from the short-term market. Increasing uncertainties in the short term market and government's stance on giving coal linkage to power generators with long-term power pacts has discouraged merchant power producers.
 
However, whether the latest move by the Government of India will be able to instill life in country’s ailing power sector is doubtful. In India, about a quarter of all power generated is either stolen or lost in transmission, five times the figure for China. Still more is given away to farmers, while the rest is sold to consumers for a loss, pushing state electricity companies toward bankruptcy and resulting in the rolling blackouts that afflict almost the entire nation every day and undermine its economic prospects. Successive governments in India at the central and state levels have considered populism, the promise of cheap or subsidized power, an effective and successful strategy. But the consequence is either no power or highly interrupted power for a vast majority.
 
The State Electricity Boards (SEBs) have run up losses of $46 billion, or 2 percent of national income, largely financed by lending from public sector banks, straining the country’s financial system. As a result, the companies have little money to invest in equipment or pay salaries, or even to pay for the electricity they are receiving from newly built private-sector power plants. Recently, cabinet approved a debt-restructuring package for the state electricity boards. While the package has given the sector some breathing space, there is no guarantee states would stick to their promises and undertake the fundamental reforms required to produce lasting benefits.
 
In gist, India is struggling to provide reliable power supplies to its 1.2 billion people and facing problems along the generation, transmission and distribution chain. The latest decision is not going to act as a magic wand where it could transform the power scenario of country in a blink of eye; however, there is no element of doubt that move is a step in right direction and likely to reduce the investment crunch in the sector. 
 
What needs to be done is that policy must be formulated in such a manner that it assures reliable round the clock power to its citizens rather than populist measures of providing unreliable and interrupting, outage and load-shedding prone free electricity. 
 
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