The Impact of Electricity Sector Restructuring on Coal-fired Power Plants in India.

• Author: Malik, Kabir

1. INTRODUCTION

   This paper examines the impact of electricity sector restructuring on the operating efficiency of thermal power plants in India. Between 1996 and 2009, 85 percent of the coal-based generation capacity owned by state governments was unbundled from vertically-integrated State Electricity Boards (SEBs) into newly created state generation companies. The restructuring sought to expand generation capacity and reduce costs by encouraging the entry of independent power producers and by "corporatizing" unbundled generation companies. Although government owned, these companies were granted formal autonomy in technical, financial and managerial decisions. We examine whether greater managerial discretion and specialization in generation increased operating reliability and thermal efficiency at unbundled power plants.

   To examine the impact of restructuring on the operating efficiency of state owned power plants, we use electricity generating unit (EGU)-level data on measures of operating reliability and plant-level data on thermal efficiency as outcome variables. Operating reliability is measured by the percentage of time in a year an EGU is available to generate electricity (unit availability), and the percentage of time a unit is forced to shut down due to equipment failures (forced outages). (1) Thermal efficiency is measured by coal consumption per kWh and by operating heat rate--the energy used to generate a kilowatt-hour (kWh) of saleable electricity. We also estimate the impact of reform on the capacity utilization of the EGU, i.e., the percent of time the EGU generates electricity.

   To investigate the impact of reforms in the Indian electricity sector we construct a panel data set of coal-based EGUs for the years 1988-2009. The variation in the timing of reforms across states allows us to estimate the impact of unbundling on EGU reliability and plant thermal efficiency. Our difference-in-difference specification assumes that conditional on control variables--EGU/plant characteristics, EGU and year fixed effects, and state-specific linear time trends--the assignment of the timing of reforms (including not to reform) is exogenous. Under this assumption, these models identify the effect of reforms from a comparison of the performance of plants in states that unbundled with plants in states that had not yet unbundled.

   To eliminate the possibility of state-year shocks affecting our estimates of average treatment effects, we also present results from a triple-difference specification that uses EGUs operated by central-government-owned generation companies as an additional control group. These companies operate outside the purview of state governments and thus were not directly affected by the reorganization of the SEBs.

   Our results suggest that the gains from unbundling of generation from transmission and distribution were limited to the states that reformed before the Electricity Act of 2003. In these states, on average, EGUs at state-owned plants experienced a 5 percentage point reduction in forced outages as result of unbundling--roughly a 25 percent reduction compared to the 1995 average. The decrease in forced outages was accompanied by a 6 percentage point increase in availability. These results are driven largely by the improvements in operating reliability at EGUs with lower nameplate capacity. Our results are not driven by the decommissioning of old and inefficient EGUs or a commissioning of new more efficient ones, and thus represent an improvement in existing capacity. This is an important distinction as increasing reliability at existing units can likely be achieved more cheaply than by installing new capital equipment. (2)

   On average, there is no evidence of an improvement in capacity utilization due to restructuring, although the results suggest a statistically significant increase at some EGUs. For states that unbundled prior to 2003, we find that unbundling led to a significant improvement in electricity generation at smaller generating units--a 9.4 percentage point increase in capacity utilization at 110/120 MW units. Importantly, our results show no evidence that unbundling of SEBs led to the improvement in thermal efficiency at state-owned power plants.

   In summary, our analysis points to modest gains from reform. Operating reliability increased at EGUs in states that unbundled prior to 2003; but there is no evidence of an improvement in thermal efficiency. Our failure to find a larger impact from restructuring than reported in the US (Bushnell and Wolfram 2007; Chan et al. 2013) may also reflect the path that reform has taken in India thus far. In the United States unbundling resulted in independent power producers (IPPs) entering the market for generation. This has not yet occurred on a large scale in India. It may also reflect the way in which power plants are compensated for the electricity they generate. Under the 2003 Electricity Act compensation for energy used in generation is to be based on scheduled generation and to depend on operating heat rate. There is evidence that state electricity regulatory commissions have set compensation for fuel use based on very high estimates of operating heat rate, suggesting that this may not provide much of an incentive for plants to improve thermal efficiency.

   The rest of the paper is organized as follows. Section 2 provides background on the Indian power sector and the nature of reforms and places our paper in the context of the literature. Section 3 describes the empirical approach taken. In section 4, we discuss econometric issues. Section 5 describes the data used in the study and section 6 our results. Section 7 concludes.

2. BACKGROUND

   2.1 Overview of the Indian Electricity Sector

   Most generating capacity in India is government owned. The 1948 Electricity Supply Act created State Electricity Boards (SEBs) and gave them responsibility for the generation, transmission, and distribution of power, as well as the authority to set tariffs. SEBs operated on soft budgets, with revenue shortfalls made up by state governments (Thakur et al. 2005). Electricity tariffs set by SEBs failed to cover costs, generating capacity expanded slowly in the 1960s and 1970s, and blackouts were common. To increase generating capacity, the Government of India in 1975 established the National Hydroelectric Power Corporation and the National Thermal Power Corporation (NTPC), which built generating capacity and transmission lines that fed into the SEB systems. In 1990, prior to reforms, 63 percent of installed capacity in the electricity sector in India was owned by SEBs, 33 percent by the central government, and 4 percent by private companies (Tongia 2003).

   Our analysis focuses on coal-fired power plants, which have, for the past two decades, provided approximately 70% of the electricity generated in India. (3) Coal-fired power plants in India are, in general, less efficient than their counterparts in the US. Over the period 1988-1991 the average operating heat rate--the heat input (in kcal) required to produce a kWh of electricity--of state-owned Indian plants was, on average, 13.7% higher than publicly-owned US plants, controlling for differences in age and nameplate capacity (Chan, Cropper and Malik 2014). (4)

   The higher average operating heat rates of Indian plants are due in part to the poor quality of Indian coal, but also to inefficiencies in management. The design heat rate of generating units that use coal with high moisture and/or high ash content is higher than for units with low moisture and ash content (MIT 2007). The ash content of Indian coal is between 30 and 50% (Khanna and Zilberman 1999; CEA 2011). This implies that Indian plants will require more energy to produce a kWh of electricity than comparable plants in the US. The operating heat rate of the plant may be higher than the design heat rate if the plant is poorly maintained or experiences frequent outages. (5) Pre-reform, operating heat rates at state-owned plants were, on average, 31% higher than design heat rates (Cropper et al. 2011).

   State plants have, historically, been operated less efficiently than plants owned by the central government: they have had higher forced outages and lower capacity utilization (Thakur et al. 2006). Figures 1A-1C illustrate trends in the average percent of time state and central plants were available to generate electricity (plant availability), the average percent of time plants were shut down due to forced outages, and the average percent of time the plant was used to generate electricity (capacity utilization). State power plants have, on average, had lower availability and capacity utilization than central-government-owned plants and higher forced outages throughout the 1988-2009 period.

   2.2 History of Power Sector Reforms

   Electricity sector reforms in India were prompted by the poor performance of state-owned power plants, by large transmission and distribution losses, and by problems with the SEBs' tariff structure (Thakur et al. 2005). The tariff structure, which sold electricity cheaply to households and farmers and compensated by charging higher prices to industry, prompted firms to generate their own power rather than purchasing the expensive and unreliable electricity from the grid, an outcome that further reduced the revenues of SEBs. The result was that most SEBs failed to cover the costs of electricity production. Reform of the distribution network was necessary because of the extremely large power losses associated with the transmission and distribution of electric power--both technical losses and losses due to theft (Tongia 2003).

   Beginning in 1991, the Government of India instituted reforms to increase investment in power generation, reform the electricity tariff structure, and improve the distribution network. Under the Electricity Laws Act of 1991, IPPs were allowed to invest in generating capacity. They were guaranteed a fair...