1

The Future of Energy Markets in India: Structure and its

Regulation

Anoop SinghDept. of Industrial and Management Engineering,

Indian Institute of Technology KanpurKanpur - 208 016

IITK REACH Symposium 2008Theme: Future of Energy

Outline

Energy and Economic GrowthReforms/Developments in

Power SectorRenewable Energy

Natural GasCoal

Interdependence of Energy MarketsCase for a Multi-sector Energy Regulator

2

Sources of Primary Energy Supply

730680633597579555289Electricity

(Bn.kWh)

33302826252314Lignite (MMT)

405383361341328310212Coal (MMT)

31313130282813Natural Gas (net)

(BCM)

12112011611210810758Pet. Products

(MMT)

2005-06(P)

2004-05

2003-04

2002-03

2001-02

2000-01

1990-91Source

GOI (2007), Petroleum Statistics - Basic Statistics 2007

Energy Indicators

So: Report on Integrated Energy Policy

3

Energy Vs. GDP

So: Report on Integrated Energy Policy

Energy and Economic Growth

Economic growth significantly depends on availability of energy inputs at economical prices.Energy mix is determined by

Resource AvailabilityTechnological OptionsEconomicsEnvironmental ConsiderationsEnergy SecurityInvestment – Policy and Regulatory Environment

4

Policy and Regulatory Reforms

Reasons for reformsCapacity ShortageLow investmentOperational and Financial inefficiencyHigh Financial LossesPoor Customer service

Energy Markets

ElectricityNatural GasCoalRenewable Energy

5

Power Sector

Power Generation Capacity by Mode and Ownership (31st March 2007; in MW)

Note: This excludes 14636 MW captive generating capacity (MW) connected to the grid.

132329390077613465412021369271121Total1711306785130659741834241Pvt. Utilities

70096097625786605361039120State Sector451213900075620589927760Central Sector

DieselGasCoal TotalNuc-lear

Rene-wableHydro

Thermal

6

Indian Power Sector - Institutional Framework (So: WB 2000)

Vertically Integrated (erstwhile) SEBs

CC C

G

D

T } Vertically Integrated SEBs

Note: Arrows Represent Contracts

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Restructured Power Sector – Pre Electricity Act 2003

Regulated Market

CC C

G

D & RS

T & BS

IPPs

Note: Arrows Represent Contracts

Restructured Power Sector – Pre Electricity Act 2003

Regulated Market

CC C

G

D & RS

T & BS

Limited competition for the market of bulk

supply

CPSUs IPPs Captive

Note: Arrows Represent Contracts

8

Wholesale Competition - Post Electricity Act 2003

Traders

GIPPs

BST

CC C

RSD

CC C

RSD

Captive

Electricity (Amendment) Act

2007

Electricity (Amendment) Act

2007

PX

Power Exchange –A Trading Platform

Buyers

Sellers

PX

Power Exchange –A Trading Platform

Buyers

Sellers

Note: Arrows Represent Contracts

The New Market Place –Power Exchange (PX)

FMC allowed forward trading in electricityCERC issued guidelines for setting up power exchanges “India Energy Exchange”, promoted by MCX, PTC and others have been setup for exchange based electricity trade. To begin operation from April 2008.NTPC et al. also plan to set up ‘another’ power exchange in the country.

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Power Market Development in India

Issues in Wholesale Competition

Transmission Pricing RegimeTransmission Capacity and Allocation of Transmission RightsOperationalising Open AccessLiberalised Fuel MarketsDesign of a Market Mechanism Market Monitoring and Mitigation of Market Power

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Issues in Retail Competition

Unbundling of Retail TariffsUniversal Service ObligationSupplier of Last ResortDemand ResponsePower Procurement from Renewable SourcesDe-politicisation of Consumer Tariffs

Interdependent Energy Markets

Policy and Regulatory Environment outline the evolution of the industry structure (towards a competitive outcome).The structure of energy markets determines the outcome in terms of investment, supply, technology choice, access and price.Interdependence of energy markets further highlight the need for greater scope for energy sector reforms.

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Why Fuel Sector Reforms are important?

Coal - Demand and Supply Characteristics

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Sector Wise Coal Consumption (1970-71) (million tonnes)

1970-71

Cement3.5 (5%)

Railways, 15.6 (22%)

Power (Utilities)

13.2 (18%)

Steel & Coke Ovens

13.5 (19%)

Domestic (soft coke) 4.1 (6%)

Other Inds., 21.8 (30%)

Sector Wise Coal Consumption (2004-05) (million tonnes)

Significantly high share by Power Sector.

2004-05

Power (Utilities),

280.75 (74%)

Steel & Coke Ovens

29.06 (8%)Other Inds. 28.31 (7%)

Cement, 14.84 (4%)

Fertilizer 2.51 (1%)

Power (Captive)

23.88 (6%)

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Ownership Wise Coal Production (1970-71) (Total = 72.95 million tonnes)

1970-71

17.85, 24%

55.1, 76%

CIL TISCO/IISCO/DVC/Private/Captive Mines

Ownership Wise Coal Production (2004-05) (Total = 382.62 million tonnes)

Significantly high share of Govt. Sector.

2004-05

323.58, 85%

35.3, 9%23.74, 6%

CILSCCLTISCO/IISCO/DVC/Private/Captive Mines

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Natural Gas - Demand and Supply Characteristics

Sector Wise Demand Projection for Natural Gas (2007-08)

Sector wise Demand Projection for Natural Gas (2007-08) (in MMscmd)

Fertilizer 40.82 (23%)

City gas 12.08 (7%)

Industrial 15 (8%)

Petch., Ref. & Int. Con.

25.37 (14%)

Sponge Iron, Steel 6 (3%) Power 80

(45%)

So: GOI (2007)

15

Sector Wise Demand Projection for Natural Gas (2011-12)

Sector wise Demand Projection for Natural Gas (2011-12) (in MMscmd)

Power 125 (44%)

Petch., Ref. & Int. Con.

33.25 (12%)

City gas15.83 (6%)

Fertilizer79.36 (28%)

Industrial 19.66 (7%)

Sponge Iron, Steel

7.86 (3%)

So: GOI (2007)

Supply Projection for Natural Gas (2007-08)

Supply Projection for Natural Gas (2007-08) (in MMscmd)

Private & Jt. Ventures23.26 (33%)

ONGC 47.28 (67%)

LNG, 30.45, 30%

So: GOI (2007)

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Supply Projection for Natural Gas (2011-12)

Supply Projection for Natural Gas (2011-12) (in MMscmd)

RIL 40 (15%)

GSPC54 (20%)

LNG83.12 (29%)

Private/Jt. Ventures

57.22 (21%)ONGC

41.08 (15%)

So: GOI (2007)

Economics of Iran-Pakistan-India Natural Gas Pipeline (Oil = USD 80/bbl)

5.49.148.127.42 @7.02LNG from Iran

7.1713.5512.0411.34 @10.94

LNG from Qatar

5.38.897.97.26.86IPI Pipeline

(Rs. / kWh)

(USD/mmbtu)

(USD/mmbtu)

(USD/mmbtu)

(USD/mmbtu)

(USD /Bbl)

Cost of Delivered Power (incl T & D loss) ##

Cost of Delivered Gas at Consumer End *

Incl. Trans. charges and Mktg. Margin &

After Custom Duty @ 5% /Post Gass.

Price at Indian Border /

Price of JCC

Note: @ - Landed Cost of LNG

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Power Sector Development Depends Significantly on Fuel Sector ReformsPower sector has been liberalised and is expected to see greater share of private sector activityCoal sector remains largely within the domains of the government.Slow Pace of reforms in the coal sector.Natural Gas market regulator has limited scope. This influences Supply (Quantity), Price as well as contractual design for fuel supply to power sector.Fuel Supply Risk Management – Absence of long-term market for coal and natural gas.

Energy Market Characteristics in India

NELP / to be approvedPipelines –PNGRB

PNGRBDHG/NELPDHG/NELPNatural Gas

Min. of CoalMin. of CoalMin. of CoalMin. of CoalCoal

PPAs/CERC/ SERCs/PX

Licensed by SERCs (Dist.)CERC (Tran.)

Delicensed*---Electricity

PricingMarketing/Distribution

Mining /Production /Generation

Exploration / Licensing

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Multiple Regulatory Jurisdictions

Sectoral RegulatorsPower – CERC and SERCsCoal – Min. of CoalNatural Gas – PNGRB

Competition Commission of IndiaForward Markets Commission

Inter-linkages of Energy MarketsHigh and increasing dependence of power sector on coal and natural gas.Absence of a competitive coal market and entry barriers hampers development of power projects.In spite of ample coal reserves, the power sector faces a great challenge in securing coal linkages.The sector is witnessing a rent seeking behaviour through ‘hoarding’ of coal mines.Cross sector merger and competition issues.

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Case for a Multi-Sector Energy Regulator

The inter-linkages of energy sectors make it an appropriate time for a multi-sector Energy Regulator encompassing “Electricity, Gas and Coal Sector”.International experience suggest that a single energy regulator brings in regulatory harmonization and is able to address bottlenecks.

Energy Sector Regulators

Country Established Initial Stage Power Coal Gas

Germany 2006 1998 –Telecom and Posts; 2005 – Electricity and Gas 2006 - Railways

Y Y

Italy 2000 1996 – Electriicity 2000 - Gas

Y Y

Mexico 1995 (As a consultative body for Electriicty since 1993)

Y Y

USA 1977 (As Federal Power Commission since 1920)

Y Y

Japan 1995 Y Y

Philippines 2001 Y -

UK 2000 Ofgas since 1986; Offer since 1989

Y Y

Argentina 1992 Y ---

Argentina 1992 --- Y

Chile 1978 1978 Y Y Y

Sri Lanka 2007 2002 – Electricity and Water2007 – Petroleum

Y

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Proposal for a Multi-sector Energy Regulator

Why a Multi-sector Energy RegulatorScope of RegulationAdvantagesInternational PracticeWay Forward

Renewable Energy

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Generation Capacity from Renewable Energy Sources (MW) as on March 2005

118426381142627282980Total

13718374342627282912Private Companies

3554700000Central Sector

352733800038Govt. Dept.

338883000030State Sector

TotalTotal Renew

able

Urban & Indl. waste

Biomass Gasifier

Biomass Power

Wind

A Market for Nationally Tradable Renewable Energy Credits

Promotion of renewable energy incldesrenewable portfolio standards (RPS)non-fossil-fuel obligations feed-in tariffs green certificates tax incentives and subsidy

India - RPS + Feed-in-tariffs + tax incentives + subsidyA market for Renewable Energy Creditsbring in economic efficiency in technology choice and resource utilisation.

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Areas for Collaboration

Aspects of energy sources including renewable energy and technologies

PolicyRegulatoryMarket Structure / CompetitionEconomicsFinancialEnvironmental

References“Power Sector Reform in India: Current Issues and Prospects”, Energy Policy, Elsevier, Vol. 34 No. 16, 2006.“A Market for Renewable Energy Credits in the Indian Power Sector”, Renewable and Sustainable Energy Review*, Elsevier.“Economic Policy and Regulatory Initiatives to Address Technical Challenges in the Indian Power Sector”, Directions‘06.“Economics of Iran-Pakistan-India Natural Gas Pipeline: Implications for Energy Security in India”, Submitted to EPW.“Policy Environment and Regulatory Reforms for Private and Foreign Investment in Developing Countries: A Case of the Indian Power Sector”, 2007, DP No. 64, ADB Institute, Tokyo.“Rural Electrification in India: Economic and Institutional Aspects of Renewables”, with J. Cust and K. Neuhoff, Submitted to EPRG WP series, University of Cambridge. Report of the Working Group on Power for the 11th Five-Year Plan (2007-12), 2007, Sub-group on Policy and Regulatory Issues , Planning Commission.