Not Enough Power To The People

New investment means electrical equipment makers thrive, but reform lags

In India, power is politics. Electrical power, that is. The potency of the issue was proved once again last month, when the government of Maharashtra, India's most industrialized state, announced it was facing a severe power shortage and imposed blackouts of up to three hours a day on urban areas, including some districts near megacity Bombay. When businesses and consumers protested, the state governors changed their minds and instead imposed nine-hour-a-day power cuts in rural areas. That's when the real trouble broke out. Angry rural mobs went on a rampage, torching the offices of the Maharashtra State Electricity Board in Pune and marching menacingly on the office of the board's chief engineer in Nagpur, causing the terrified official to lock himself up in his office. The issue was settled only when the courts intervened, directing the hapless Electricity Board to impose uniform power cuts across the state.

The power shortages are a major embarrassment to the Congress Party-led government in New Delhi on the first anniversary of its taking office last May. Providing adequate power was a key plank of the government's election platform. But in these hot, dry months, the country still faces an acute shortage of 13,000 megawatts a day. Moreover, Congress has done little to improve the performance of the state electricity boards, which still generate and distribute most of India's power. Twenty-eight of the 29 boards lose money. None produces adequate power, and up to 40% of what they do produce is either stolen, leaked, or given free to local farmers -- practices that cost the industry an estimated $5 billion a year. Maharashtra is a sore point: It's home to the rusting, 2,184-Mw embarrassment called Dabhol, built by disgraced U.S. power company Enron Corp. in 1996. The plant was closed down four years ago, and continuing legal battles are preventing it from reopening and alleviating the state's power crisis.

The power situation is especially frustrating for Congress since there is reason for optimism. That's because its predecessor passed reforms that are expected to result in billions in private investment and a major increase in power capacity over the next decade. "What changed? Deregulation," says Madhav Bhatkuly, managing partner of Bombay equity fund New Horizon. "In the next 10 years, the Indian power sector could be as big a market as telecom is today."

The big change was the Electricity Act of 2003, which created state regulatory commissions for the first time, allowed private and state players to compete freely, and increased penalties for theft of power. To give the state electricity boards more money to upgrade their facilities, the government last year forgave $7 billion in debt the boards owed federal power companies. At the same time the federal companies, which provide 35% of India's power, are united behind New Delhi's resolve to double capacity, to 212,000 Mw, by 2012. Government-owned National Thermal Power Corp., India's largest power provider, is building and expanding dozens of plants across the country.

The impact of the deregulation is already evident in the overflowing order books of companies that build power plant equipment. Bombay securities firm SSKI estimates that fully liberalizing the sector will attract $200 billion in investment over the next decade, with the equipment makers being major beneficiaries. Bharat Heavy Electricals Ltd. (BHEL), India's largest engineering company and power equipment supplier, has $8 billion in orders to build power plants from Kashmir to Kerala. Bombay-based transmission tower builder KEC International Ltd. has $200 million in back orders, the bulk with national transmission company Power Grid Corp. And European engineering companies such as ABB (ABB ), Alstom (ALSGY ), and Siemens (SI ) are expanding operations. ABB, the Swiss-Swedish engineering giant, has gleaned $365 million in orders to supply power and automation technology to Power Grid and to private distributors like Tata Power and Reliance Energy. "India is a key focus for us -- the opportunities will grow as economic reforms in sectors like power gather pace," says Ravi Uppal, ABB India's country manager.


For some, however, change hasn't come nearly fast enough. "India is playing catch-up with already existing demand," says Philip Jackson, an Asia energy expert at JPMorgan Chase & Co. (JPM ) in Hong Kong. "Ideally, it should be ahead of the game and planning for future capacity." But 65% of India's power is still provided by state electricity boards, and they aren't embracing reforms with any enthusiasm. That's because the politicians who control them use them for patronage. True, a week after the power riots in Maharashtra the state government announced it would stop giving free power to farmers. But there is no telling how long that will last. "When electrons meet elections," says Salman Zaheer, lead energy specialist at the World Bank in New Delhi, "power sector reform is not the top priority."

Meanwhile, "foreign investment is waiting and watching," says Rupa Devi Singh, director, power practice, at India's leading rating agency, Crisil. Although the equipment makers have benefited from the recent jump in expenditures, many foreign players will not test India until they see signs of a true free market in power. Settlement of the Dabhol-Enron litigation would be one sign of progress -- and there are reports that a deal may be imminent. Another signal will come when the government fulfills its promise to create a free market for all power producers. Technically that exists now, but regulations are yet to be written. "When that happens, the barriers will truly fall," says Gajendra Haldea, chief adviser to the National Council for Advanced Economic Research in New Delhi, which the government consults on power reforms. Among those eagerly awaiting a true free power market are companies such as the steel and aluminum makers, who operate their own power plants and want to sell excess power. That would add as much as 20,000 megawatts to the national grid, and would give consumers the choice of buying power from competing companies rather than just from the state.

Equipment players such as BHEL are pragmatic. His company has "already factored in any delays in power reform," says BHEL Chairman Ashok K. Puri. The only thing that might trip up the growth in his sector, he says, would be "macroeconomic factors like oil at $105 a barrel." But such a spike may be more likely than a quick fix to India's power shortage.

By Manjeet Kripalani in Bombay

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