Investment decisions under uncertainty with special reference to IPPS in India

Abstract

Electricity is a 117 year old commodity in India. The first statute laying down the Indian Power Sector business framework was enacted in 1910, which led to Private Investments in the pre-Independence era. In the post-independence period however, the Federal Government laid special thrust on development of Indian power system by Public Sector over the first four decades. Indian laws and statutes for the power sector have since changed, particularly in the last 20 years. Shifting from the post-independence policy of development through public sector, the focus has shifted to the need for aggressive capacity addition by private sector. Government of India made special endeavours, since 1990’s, to bring in private capital for development of Indian power sector. One of the chief reasons for doing so was to address the large demand-supply gap, then prevailing. However, while the latest comprehensive statute on electricity business, Electricity Act 2003, provides special thrust on generation capacity addition and private investment, certain key policies like Government fuel policy and policy on development of power market do not seem to work in tandem with the objectives of the Act. Viability of large generation capacity recently created by private investors on the basis of specific Government assurance on coal supply and retail market creation is facing serious challenges. New restrictive conditions have suddenly been imposed by the Government instrumentalities throwing fuel supply for these plants into deep uncertainty. The other objectives of 2003 Act like developing retail market and introducing competition in the said market are yet to materialize on ground. This, along with the change in the fuel policy, inadequate power demand and sharp fall in prices in the wholesale market is leading to stranding of large-scale private capacity created. These are highly capital intensive projects involving significant public finance.