The World Bank has approved a US$600 million loan to the Power Grid Corp. of India, backed by a Government of India guarantee, designed to strengthen the country’s electricity transmission system to increase reliable power exchange between regions and states.

The Fourth Power System Development Project (PSDP IV) aims to reduce transmission losses and cut the cost of energy through further investments in transmission systems. It will also contribute to the clean energy initiative through both the ability to transfer surplus hydro energy to power deficit regions in India and relieve some of the pressure to build generation facilities, particularly in and around the major load growth centers.

Despite a booming economy, India’s growth potential is constrained by inadequate electricity services and limited power generation and supply infrastructure. Over 40% of the population is without electricity, and the cost of erratic and insufficient power supply is high for industry as well as households, which causes 60% of Indian firms and a large percentage of homes to rely on captive or back-up generation. The power sector has improved in recent years, albeit in an environment where demand for electricity continues to outstrip supply. The Electricity Act of 2003 brought together structural and regulatory reforms designed to foster competitive markets, encourage private participation and transform the state’s role from service provider to regulator. PSDP IV will facilitate these objectives of the Act.

“India’s policy reforms in the power sector are beginning to pay off,”said Isabel Guerrero, World Bank Country Director for India.“The sector’s financial performance is improving and more and more villages are being electrified. At the same time, the need to boost the rural economy where about 30 percent of villages are not electrified and improve the investment climate are placing additional demands on the country’s power supply system. This project, by strengthening transmission networks within and between regions, will enable more power to reach the people across the country."

Looking forward, the Government of India has established an ambitious mission of “Power for All by 2012.” This will entail increasing country’s installed generation capacity to more than 200,000 MW by 2012, up from the current level of 140,000 MW. The country’s transmission plan focuses on the consolidation of the national grid by adding over 60,000 circuit km of transmission network by 2012, which will carry 60 percent of the power generated in the country.

The Bank has been actively involved in the reform and development of the transmission sector in India, and specifically in the creation and strengthening of the Power Grid Corporation of India. The World Bank has made three direct loans to Power Grid since 1993. During this period, the company has nearly tripled its transmission network, its assets have grown more than eight-fold to US$7.3 billion, and revenues have increased more than six times to over US$1 billion.

The project will finance the strengthening of five transmission schemes: East-West Transmission Corridor, Western Region System Strengthening Scheme II, Eastern Region System Strengthening Scheme I, Balia-Bhiwadi HVDC Bipole System, and North-West Transmission Corridor.

The loan, from the International Bank for Reconstruction and Development (IBRD), has a 20 year maturity, which includes a 5-year grace period.