I N D I A ’S FIRST POWER MAGAZINE Volume 4 •No. 3.

Decem ber 1999

PowerLine

1999-12 Declining Demand Industrial Slowdown Impacts Demand for Power

Mr. Vishvjeet Kanwarpal CEO GIS-ACG Global InfraSys - Asia Consulting Group
Published: December 1999 by PowerLine

THE IMPORTANCE OF
COGENTRIX

17 NTPC - First divestment, now acquisition

23 National Power demerger
42 ST-CMS achieves closure
47 Interview with Jayawanti Mehta
57 InFocus: Consulting Services
 IN THIS ISSUE

News Briefs BPL Power: SB I’

s V. Janaki Raman 51
P roject near closure 28 D ERC’
s V.K. S o o d 52
Summary o f national and
international news developm ents 5 Asia Coastal P ow er’
s VIjay Sirse 52

Special Stories
Cogentrix bows out:
W ill the governm ent step in
Fund raising attempts:
Plan to divest Pow er G rid ’
s assets 14
Score Board
Plant of the Month
Best performing plants:
W ith P L F above 74 per cent 30 Raichur therm al plant:
Consistently high perform ance 54
Worst performing plants:
10
W ith P L F below 54 per cent 31

Videocon:
C losu re elusive 14
Forum ►InFOCUS
Problems galore:
Declining demand: Consulting Services 57
Essar-Marathon deal unresolved IS I
Industrial slow dow n impacts R eform in g SEBs
Streamlining: demand for pow er 33 H elp in g project m anagement
A P G en co and APTransco 15
Status of reform and restructuring: Financial advisory services
Knocking down hopes: From the pow er ministry website 36 Specialty consultants
Crisil slashes M P E B ’
s escrow 16 A w ord from our sponsors
CFB repowering - An option:
Gridco: G u est colum n by S.M. Kavidass 38
M ou n tin g debts 16
W hat ails SEBs?
First divestment then acquisition: G u est colum n by N ilesh M unshi 4 0
N TPC’
NHPC
s p rop osed takeover o f
17
Recruitment
66

Finance
Financial closure at last:
Companies S T -C M S overcom es obstacles 42 Directory of Products
National Power: Recent financings:
and Services
D em erger o f U K and international In India and overseas 44 67
operations 23

GAIL:
Gas giant makes foray into pow er 2 4
Power Data
Tenaga Nasional:
Increasing presence in Indian
People Utility earnings and
pow er sector 27 M oP ’
s Jayawanti M ehta 47 earnings measures:
Cum m ins E n gin e’
s R. Venkatesan 50 Figures for 1999 69
Rockwell Automation:
C risil’
s R. Ravimohan 50
Taking con trol 28 Power generation statistics:
B abcock & W ilcox ’
s G. Trivedi 51
And latest fuel prices 72

P O W E R L I N E •December 1999
 P O W E R F O R U M

Declining Demand
Industrial slowdown impacts demand for power

Vishvjeet Kanw arpal, Sujatha Srikum ar,

Partner, Head, Infrastructure
Asia Consulting Group Sector Ratings
Crisil

O fficial, Rakesh Mohan, Researcher,

ICRA Director-General, TERI
NCAER

Power sector experts comment on the findings of the 16th Electric Power
Supply (EPS), which suggests that the peak demand for power could be far
less than earlier projections. What are the causes for this dip in demand
and what is its likely impact on IPPs...
According to the 16th EPS report, peak
demand would be 84,500 MW in 2001-02 as
against the 15th EPS projection of 95,767
MW, Do you agree with this estimate?
ICRA
We cannot comment unless we see the full
report and the methodology used for com ­
puting these figures.
Vishvjeet Kanwarpal
Yes. In 1996, when the Ministry o f Power
was still forecasting 142 G W extra capaci­
ty addition requirement, Asia Consulting
Group (ACG) forecasted the additional
capacity requirement as not exceeding 80
G W in the same time span. A C G ’ s agreement with downward revisions as
National Power & Energy model at that
time did not include the impact on
demand o f such factors as captive power,
DSM, reduction in T & D losses and trans­
mission efficiencies. If these factors are
taken into account, the demand projection
can be reduced even further.
Thankfully, downward demand revisions
have almost been the norm across several
countries in Asia. India is no exception.
One o f the key problems in Asia has been
that 10-year peak demand projections have
been interpreted as current demand by
most in the industry. Instead o f planned
gradual capacity addition, attempts at rapid
generation capacity have been the norm.
Rakesh Mohan
I have not seen the 16th Power Survey.
G oing by your figures, the drop in pro­
jected peak demand could be owing to sev­
eral factors. These include slowdown o f
The level of demand
risk faced by IPPs will
vary from state to state.
States that are facing a
slowdown in demand or
large capacity additions
will require lesser
power and hence IPPs
may find it difficult to
complete negotiations.
ICRA
the economy - especially industry - in
1998-99, significant diversion o f industrial
load to captive power units, the lowering
effect on demand o f persistent short sup­
ply and positive effect o f better load man­
agement by some units.
Sujatha Srikumar
I would not be able to comment on the
accuracy o f the numbers without seeing
the methodology behind the survey. But as
a general trend I suspect that demand has
been overestimated in the past, as indus­
trial recession was not envisaged. The kind
o f industrial growth that was being con­
templated has not happened.
TERI
Since we do not have the 16th EPS pro­
jection report we would not be able to
comment on the exact numbers that have
been reported. However, we are broadly in
compared with the 15th EPS projections.
T E R I also had the chance to present its
m odelling results to the Planning
Commission and the Ministry o f Power,
which yielded figures significantly lower
than what the 15th EPS had projected. As
per the latest projections, we anticipate the
power requirements during the terminal
year o f the Ninth Plan to be about 517 bil­
lion kwh and that in the 10th Plan to be
about 700 billion kwh. Phis is almost
exactly in line with the estimates o f the

P O W E R L I N E * December 1999 33
16th EPS as reported in the Hindustan
Times. While I do not have immediate
access to the peak demand figures corre­
sponding with the above energy demand
(since most o f our modelling members are
away), I tend to agree with the estimates o f
the 16th EPS.
India needs distributed
generation that takes
into account the limita­
tion of our grid struc­
ture and power evacua­
tion capacity. The
obsessive focu s on gen­
eration needs to give
way to transmission
investments and effi­
ciency to meet the
country’s needs.
Vishvjeet Kanwarpal
According to the CEA, shortages have
reduced from 18 per cent in 1997-98 to 11
per cent in 1998-99. Do you think this is an
accurate f i n d i n g ? ___________
ICRA
We cannot comment unless we see the full
report and the methodology used for com ­
puting these figures.
Vishvjeet Kanwarpal
Given the regional overlap method o f cal­
culating national peak demand shortage
and the relatively large capacity addition
in states such as Gujarat and Maharashtra,
it is quite possible.
Rakesh Mohan
The figures you mention apparently again
relate to the “
peak-load”. The supply posi­
tion is closely monitored and hence the
accuracy o f the figure should not be in
doubt. All the factors that I mentioned
earlier, more particularly the industrial
slowdown and the increased resorting to
captive power, could explain a statistical
improvement in the peak-load shortage
34
scene. It is better to see this trend along­
side the figures o f energy demand and
shortage and the category-wise trends, i.e.
for industry, domestic, etc.
Sujatha Srikumar
It is again very difficult to comment on the
accuracy o f the finding. T he general trend
is that a few capacity additions have hap­
pened. Therefore the picture today is
slightly different than what it was last year.
TERI
As per our information from the CEA,
official shortages for the period 1997-98
and 1998-99 should be in the range o f 11
per cent and 14 per cent respectively.
That being as it is, in general we feel that
the official shortages reported underesti­
mate the likely actual shortages. This is
because in the official estimates, the
unrestricted demand is computed based
on actual demand met, (corrected for
power restrictions in force during that
period) and does not take into account
the effect o f reduced voltage and frequen­
cy fluctuations and the contribution o f
captive source o f generation.
What is the level of demand risk faced by
IPPs? Which states are particularly vulnera­
ble to this risk?
ICRA
This will vary from state to state. States that
are facing a slowdown in demand or are fac­
ing large capacity additions will require
lesser power and hence, IPPs may find it
The drop in projected
peak demand could be
owing to several
factors, including slow­
down of the econom y
in 1998-99 and signifi­
cant diversion of indus­
trial load to captive
power units.
Rakesh Mohan
P O W E R L I N E •December 1999
difficult to complete the negotiations. But
this is a state-specific issue and would also
depend on the extent o f the baseload and
peak-load deficit in each state. IPPs today
operate as baseload plants and therefore a
baseload surplus (with a peak-load deficit)
may be disconcerting.
Vishvjeet Kanwarpal
Exaggerated demand projections by gov­
ernment agencies are a source o f tremen­
dous risk to IPPs. This has already
proved disastrous to IPPs in countries
such as Pakistan, Indonesia, Thailand,
China and so on. In 1996, A C G had fore­
casted that several states were likely to
face a surplus situation in the next few
Demand has been over­
estimated in the past,
as industrial recession
was not envisaged. The
kind of industrial
growth that was being
contemplated has not
happened.
Sujatha Srikumar
years. N obody believed this at that time.
Today it is a reality.
The states that are most vulnerable to sur­
plus power in India are Maharashtra,
Gujarat, Andhra Pradesh, Orissa, Tamil
Nadu and Karnataka. In such a situation,
“ mega projects”are a systemically highly
unviable proposition. India needs distrib­
uted generation that takes into account the
limitation o f our grid structure and power
evacuation capacity. The obsessive focus
on generation needs to give way to trans­
mission investments and efficiency to meet
the country’ s needs.
The issue is whether demand projections
are revised before or after substantial
capacity addition. In the case o f Pakistan,
where peak demand projections were
almost 50 per cent higher than realistic
demand projections, IPPs face tremendous
offtake and payment risk.

Rakesh Mohan
I doubt if there is a general risk on demand
for IPP power. If there are local problems,
I think the answer lies in improved trans­
mission and distribution so that those in
need o f power actually receive supply o f
acceptable quality. This is a weak link in the
system, as is the issue o f rational pricing.
Sujatha Srikumar
So far, demand has not been an issue in
India. But international experience has
shown that as projects com e up, demand
does becom e an important issue. This is a
risk that India will have to face in future.
We have already seen this to some extent
in the state o f Maharashtra, when Enron
came onstream earlier this year, though
the entire power demand has not been
met by the project. T h e lumpiness in
capacity creation is causing demand-side
problems in Maharashtra. Therefore, the
states that have seen the first set o f big
projects through could benefit by carry­
ing out a reassessment o f their demand
situation.
TERI
To estimate the vulnerability o f IPPs to risk
associated with demand growth is a full-
fledged exercise. However, we should look
at the following factors for assessing the
demand risk - the mix o f sales to agricul­
ture and industry; the captive power policy
o f the state; the industrial as well as devel­
opmental policy o f the state; the influence
o f regulatory reform. We are currently not
in a position to provide an authoritative
ranking o f states by this factor.
The government is targeting the economy to
grow by 6 per cent per annum. What do you
think the energy demand would be if the
economy grows by 6 per cent?
ICRA
If the economy grows at 6 per cent per
annum, the demand for power should
grow at about 8 per cent per annum.
Vishvjeet Kanwarpal
Demand forecasting in emerging econo­
mies is an extremely complex task. The
14th survey was the first time that comput­
ers were utilised for demand forecasting.
POWER FORUM
Forecasting in pre-IPP years was primarily
a“ planning wish” . T he linear correlation
between power demand and econom ic
growth in most Asian countries collapsed
in the early 1990s. The fundamental struc­
ture o f economies (both at the national
and state levels) is changing and so are the
basic drivers o f electricity demand.
Calculations o f electricity demand based
on simplistic assumptions o f economic
growth are a dangerous and rampant over­
simplification. Each state has a unique
demand composition and sectoral energy-
intensity profile which is evolving rapidly.
Rakesh Mohan
Here I think we are talking o f total energy
from all sources o f which electricity is only
one part. The demand growth differs for
As per the TERI model,
we estimate that with
an econom ic growth of
6 per cent in the Ninth
Plan period, electricity
demand would grow at
5,5 per cent.
TERI
each type. Demand o f electricity, petro­
leum and particularly natural gas has been
increasing at an elasticity o f above one to
G D P growth. I think this trend will con­
tinue for the next few years. Elasticity o f
coal demand growth, on the other hand, is
below unity.
Sujatha Srikumar
I am not competent to comment on this
question. I will only say that the growth in
energy demand happens only when there is
a real and healthy growth in the economy.
TERI
As per the model that TER I has, which is a
least-cost optimisation model and, there­
fore, is probably much more optimistic on
performance than the real life situation, we
estimate that with an economic growth o f 6
per cent in the Ninth Plan period, electri­
city demand would grow at 5.5 per cent. ■
P O W E R L I N E •December 1999 35