1. Overview

The energy sector has become a crucially important industry in India due to recent growth in the economy. The total installed capacity in India as of March 2009 was around 147,000 MW and the government  plans to add another 78,000 MW power generation capacity by 2012.

Thermal power contributes 64% of total installed capacity (53% coal based, 10% gas based and 1% oil based) followed by hydro power which constitutes 25% of the installed capacity. The other two important power generation sectors are nuclear power (3%) and renewable power (8%). Around 87% of the current installed capacity is by the government, of which 52% has been created by the state government and the balance is by central government. But slowly, private participation is also increasing and makes for  13% of the installed capacity. The current energy consumption which is around 700 units per capita per year is quite low compared to the other nations and is expected to grow significantly in the near future.

2. Power Market

In India long term contracts exists between central government and state governments as well as among state governments to trade power from states which have surplus power to the state which has a power deficit. This model breaks when both the states under contract have power deficits. Also this model is unable to provide solution to the problems of short term power demand. Though power trading was introduced in India in 2003 by   an act, the power exchange is at a very nascent stage in India. The major obstacles in the development of a mature power exchange in India are

·         Very few power generation units have participated in the exchange and nearly 89% of the market is controlled by top five sellers.

·         In India, power contracts are typically of short term (less than three months) or long term (twenty five years). There is a lack of medium term contracts (one to five years) and real time/ balancing contracts (contracts based on random events and contingencies, which give rise to intra-day demand and supply needs of power and enables participants to enter the market on a real time basis and trade power).

·         Also the current market lacks innovative products and all the Indian power exchange market operates in the delivery mode. The trading of power as commodity and as derivatives/ future contracts with power as an underlying commodity are yet to evolve.

·         India is a power deficit nation with an 8%-to-10% deficit. This deficit market is a big hindrance to the introduction of future trading as delivery on maturity cannot be guaranteed.

·         As bulk of the power trade in India is through power purchase agreement (PPA), there is little or no surplus power available for short term trading.

·         The regulatory framework for power trading to prevent speculative trading, to prevent predatory pricing, to ensure price stability in India is also not mature.

Power contracts in India currently are mainly of three kinds

·         Near term contracts: This kind of contracts are driven by real time demand supply interaction and here electricity is commoditized

·         Short term contracts: These contracts are based on seasonal demand supply pattern and pricing is determined on the basis of utility of end use, bargaining power of counterparties and enforceability of reliability guarantee

·         Long term contracts: These contracts are based on long term demand supply trends and the price is determined by long term demand growth projections, quality of power supply (i.e. economic of scale, peaking capability, technology used)

3. Transmission and Distribution

Once electricity is generated, it needs to be delivered to the end users. The electricity delivery mechanism is divided into two broad categories namely transmission and distribution. Transmission is the transfer of bulk transfer of power over a long distance at high voltages generally 132 KV or higher.

India is divided into five regions (north, east, south, west, north-east) for transmission system. The interconnected transmission system in each region is called the regional grid. Besides there is a national grid which facilitates inter-region power transfer to ensure optimal usage of total power generated.

The distribution system is basically designed to transfer the power from sub stations, connected to the grid, to the end users. In India, the transmission and distribution loss is around 26% which is one of the highest in the world and in some states it crosses 60%. The loss is due to technical reasons like unplanned extensions of distribution lines, overloading of the system elements like transformers and conductors and lack of adequate reactive power support as well as commercial reasons like low metering efficiency, theft & pilferages.

4. Policy

To facilitate adequate electricity for all Indians, the central government has implemented the Electricity Act 2003. The act deals with all the major areas of electricity business i.e. generation, transmission and distribution.