AES Corporation, one of US' leading power generation and distribution companies, has offered to invest $1.7 billion to set up a new coal-fired power plant in the Indian state of Bihar.

AES Corporation (NYSE:AES) has filed a letter of 'expression of interest' with the State Industrial Promotion Board to set up a coal power plant in the Bhagalpur district of Bihar. Ever since the formation of a new state out of Bihar the state has been struggling to meet its power demands. Several of its power generation units went to the new state and the one's which stayed under the Bihar State Electricity Board's control are non-functional.

The power situation in Bihar is dismal, to say the least. With a functional installed capacity of about 240 MW, Bihar's two thermal power plants manage to generate only about 120 MW everyday. The power demand, on the other hand, is a staggering 2,200-2,500 MW per day. Although the central grid has promised to allocate more than 1,600 MW to fulfill the power demand, these promises are rarely kept leading to high power deficits.

The Bihar State Electricity Board was hoping to get 600 MW from the Subansiri power station in Arunachal Pradesh, India's largest hydro-electric power plant, which is set to be completed by 2012. However, the generation company NHPC, owned by the Indian government, signed a power purchase agreement with another state ignoring earlier agreements with Bihar and three other eastern states.

Coincidently (or perhaps not), these four states (Bihar, West Bengal, Orissa and Jharkhand) are controlled by opposition parties to the Congress-led central government, while the state which would benefit from the new power agreement, Rajasthan, is controlled by a Congress government.

For long, Bihar had been the weak point in India's economic march to become a superpower. Previous state governments completely ignored economic development, employment generation and crime had become one of the biggest problems of the state. Under the present government Bihar was able to record the fastest economic growth rate among all Indian states during the 2008-09 fiscal.

In order to maintain this pace of development power demand of the state must be met. While Bihar and its neighboring states are placed in the richest resource belt of India, it continues to lag in the overall economic development with thousands of people moving to metropolitan cities like Delhi and Mumbai in search of employment.

If AES' plan to set up the power plant is approved it would bring more foreign investors as the power sector in India has tremendous opportunities of growth. However, there remain certain fundamental hurdles in the approval and implementation of the project.

The Bihar government has told AES that land acquisition and arrangement of coal would be entirely the company's responsibility. But AES could use its experience in setting up a 240 MW power plant in the neighboring Chattisgarh and an on-going project in chandigarh to overcome these problems.

Hat tip: Business Standard
Image: David McNew/Getty Images (PicApp)

The views presented in the above article are author’s personal views and do not represent those of TERI/TERI University where the author is currently pursuing a Master’s degree.