The government’s recent policy initiatives and schemes including the Ujwal Discom Assurance Yojana (UDAY), Power for All and e-bidding for short-term power procurement have given a renewed thrust to the power sector. However, issues pertaining to transmission infrastructure, a regulatory framework for the hydropower segment, grid stability, etc. continue to pose challenges to sector growth. Indian Infrastructure invited industry experts to express their views on major developments in the sector and the future outlook…
How has the power sector progressed in the past one year?
In the past couple of years, the country has realised the significance of adequate transmission capacity, with rising conventional and green power generation capacities. This is evident from the rise in the number of projects awarded through competitive bids in the past year, to promote competition and efficiency in project execution. Since April 2015, the government has bid out 15 transmission projects worth about Rs 300 billion. The government has also eased the process to avail of clearances and has encouraged developers to commission projects ahead of schedule by offering incentives. It helped Sterlite Power in putting projects on a fast track and thus witnessing the successful commissioning of two key transmission projects ahead of schedule. Our transmission project for the Rajasthan Atomic Power Project and the Jalandhar-Samba line were commissioned in record time. We also tied up with international partners to introduce global best practices in transmission project execution.
The sector has made commendable progress in the past few years. In the past six years, installed capacity has almost doubled from 159 GW in March 2010 to 303 GW at present. The existing installed capacity has the potential to generate 1,650 billion units (BUs), whereas total generation in 2015-16 was 1,161 BUs. At present there are virtually no peak or energy shortages and with more generation capacity in the pipeline, this surplus is expected to continue.
On the supply side, coal production has increased by 9 per cent in the past year. With increased domestic production, the import of coal has reduced, and all the power plants have stocks for over 21 days, leading to a reduction in generation costs by 20-30 paise per unit.
With increased generation capacity and coal production, the number of power sale bids at the exchange has also increased. The average price in 2015-16 was Rs 2.73 per unit, which was about 22 per cent lower than that in 2014-15. So far in 2016-17, prices have dipped further, averaging around Rs 2.43 per unit. The Vidyut Pravah app is a welcome initiative aimed at making stakeholders aware of the surplus capacity available at the exchange.
In the past year, the depth of the short-term market has also improved – power traded in the short term was 16 per cent higher at 115 BUs in 2015-16, of which 34 BUs was transacted through the power exchange. Growth in power traded through the exchange was about 22 per cent as compared to 2014-15.
Earlier, congestion was common in different pockets of the country, which led to “market splitting” at the exchange. Prices in the south were Rs 6-Rs 7 per unit whereas, for the same duration, prices in the western and eastern regions were Rs 2.50-Rs 3 per unit. Transmission capacity addition in the country has reduced the volume lost at the exchange due to transmission congestion from about 15 per cent in 2014-15 to 5 per cent in 2016-17. As a result, prices in different parts of the country have also converged. Market splitting has also reduced to a maximum of two-three bid areas. In fact, on six occasions last year, no congestion was observed, leading to a single market clearing price. This year we have already witnessed 12 such occasions, making the dream of “one nation-one grid-one price” a reality.
There is a concerted effort by the government to guide the power industry into a healthy zone, but the results are not positive so far because of certain unresolved legacy issues. The policy to swap coal linkages at government plants is likely to lead to optimised thermal tariffs. The government has also made the procurement of short-term power through an e-platform (Discovery of Efficient Electricity Price) mandatory, which should usher in transparency and fair play in the procurement of power by discoms. The coal stock position has improved and is at its highest in the past four years, and on the capacity addition front, India has crossed the 300 GW mark and is ranked number four in the world in terms of overall installed capacity.
However, several large capital-intensive projects are under stress and the government should ensure their revival in a time-bound manner. Delays in revival plans for these assets will impact the banking sector severely.
The power sector has started witnessing green shoots. The central government’s thrust on reforming the policy and regulatory framework (for example, with changes in the tariff policy and the proposed amendment to the Electricity Act, 2003) is likely to yield substantial long-term benefits. The Reserve Bank of India has strengthened lenders by empowering them with measures required to revitalise stranded assets and effectively deal with promoters. The Bankruptcy Code, which is on the anvil, would provide a framework for expeditious remedial measures with respect to stressed assets. The past year has seen a lot of traction for investments in the renewable energy space. Large global utilities have started investing in the solar sector, which raises confidence in achieving the targeted capacity of 175 GW by 2022, which was earlier considered as highly ambitious. UDAY, if implemented effectively, is expected to restore the viability of the state distribution segment. Large-scale and successful implementation of energy efficiency schemes has, for the first time, put the focus on the criticality of demand-side management. There has been increased private sector participation in the development of transmission infrastructure, which is likely to grow manyfold in the years to come. Indeed, these and other policy and structural initiatives will take time to percolate to the state/project level, electricity being a concurrent subject.
The sector is gaining momentum and has progressed reasonably well in the past one year on the back of a series of reforms and measures initiated by the Union government including UDAY, the revision in compensation for land acquisition, coal-related reforms, etc. Numerous investment plans have also been rolled out for the development of the sector.
In particular, the transmission and distribution (T&D) segments in India are advancing at a rapid pace, the industry is migrating to high voltage direct current lines for larger distances, working on new technologies, etc. A lot of good work has been done on the interregional connectivity front. Power Grid Corporation of India Limited has made huge investments and built interstate transmission lines. However, the intra-state transmission networks, which fall under state electricity boards (SEBs), and their transmission utilities have not been able to match interstate capacity, offering enormous scope for growth and development. This is already unfolding ample opportunities for players like us. There is significant traction in the way SEBs are placing orders; they are floating more tenders, especially large-value tenders to expedite the growth of intra-regional networks.
In addition, the implementation of the green energy corridor projects has already commenced with tenders pertaining to both interstate and intra-state projects being floated. We have won approximately over Rs 70 million worth of projects in this space and are confident of winning some more.
Two big events occurred last year after combining coal and renewable energy under the Ministry of Power (MoP). One was the focus on improved efficiencies in power generation (due to greater availability of coal), cleaning scams in the coal segment and declining global fuel prices leading to improvements in coal availability at lower prices. The other was the thrust of this government on solar energy coupled with the availability of solar equipment at lower prices. Otherwise there was no change.
Do you think that UDAY will be successful in helping discoms achieve a turnaround?
Operational and financial discipline is the key to success in any business, and power distribution is not an exception. The MoP has done a commendable job of designing UDAY and bringing most states on board. If implemented in the right spirit, UDAY will not only turn around discoms but their improved financial strength will also give an impetus to generation and transmission projects. The key to its success will be the constant monitoring of the progress made by states with respect to the targets.
UDAY is one of the key initiatives of the government for reviving ailing distribution companies. The initiative is likely to result in reducing the financial obligation of discoms and improving their operational efficiency. To ensure improvements in operational efficiency, distribution companies will have to reduce their aggregate technical and commercial (AT&C) losses to 15 per cent by 2019. Further, in case discoms continue to incur losses, state governments will have to bear the future losses. This will force state governments to undertake distribution reforms in their states.
The success of UDAY will be the single most important factor in determining the turnaround of the power sector. I believe that UDAY will go a long way in the financial and operational revival of discoms that are currently opting for load shedding and will pave the way for boosting power demand, hence moving closer to the 24×7 power for all goal. In addition, the monitoring of accomplishments of states under UDAY needs to be carried out to ensure that states are carrying out its implementation sincerely.
The total outstanding debt of utilities as on March 31, 2015 is about Rs 4,060 billion. Implementation is the key driver of the scheme. It is too early to come to a conclusion as the data has just started flowing in. We can see certain improvements in terms of operational performance of discoms and AT&C losses under UDAY. Reports also show a decline in commercial losses in Uttar Pradesh and Rajasthan.
The issuance of UDAY bonds is also in progress, with about Rs 1,000 billion worth of bonds issued in 2015-16. The operational performance, with definitive targets, is being monitored regularly by government authorities.
The distribution segment in India, and thus the discoms, is facing high operational inefficiency and huge financial losses. UDAY seeks to restore the financial health of discoms through financial engineering in the short term and through a series of measures for improving financial and operational performance in the mid- to long term. An important feature of the scheme which distinguishes it from earlier similar financial packages is that it provides for the funding of future losses by state governments. This will ensure state government involvement and commitment in pursuing measures as contemplated under UDAY, towards long-term financial sustainability of discoms. UDAY has the necessary ingredients to reform the distribution segment with a focus not only on the reduction in AT&C losses, but also on a reduction in the cost of power (through measures such as increase in the supply of cheaper domestic coal, coal linkage rationalisation, liberal coal swaps from inefficient to efficient plants, etc.). Considering the nature of the challenges involved, even partial success in the implementation of the measures envisaged in the scheme is expected to improve the financial health of discoms.
With regard to UDAY, we will have to wait and watch, as only time will reveal its ultimate outcome. From what we hear, UDAY seems to be progressing well. States have already issued bonds worth Rs 1.66 trillion under the scheme. The interest cost burden of power distribution utilities also seems to be reducing. It was recently reported that discoms, mainly in Jharkhand and Jammu & Kashmir, have settled dues of about Rs 100 billion owed to central generation companies in April, thereby bringing down the total outstanding amount by 45 per cent, from Rs 220 billion in March.
In addition to improving the balance sheet of SEBs, UDAY is also expected to reap benefits like achieving operational efficiency and reducing the cost of power, which would lead to adequate availability of power at lower prices. This in turn would increase the demand for power, resulting in an increase in power offtake by SEBs and subsequently result in the need to build more T&D infrastructure.
Discoms are in poor shape, especially SEBs, because of populist pricing including free power, power theft, inefficient operation of state sector generation plants and the inability of state regulators to offer remunerative tariffs. In the past, schemes to reduce discom debt have not resulted in any long-lasting solution and the debts accumulated again. UDAY moves a good part of the discom debt to state budgets. This will relieve the burden on them, but only temporarily, since the basic problem of unremunerative tariffs would still remain. State governments will have less to spend on other areas like health, education, law and order, etc. It is unlikely that their poor budgetary positions will make state governments eschew “political” pricing of power.
What are some of the unresolved issues that need to be addressed on priority in the sector?
There are three major concerns in the Indian power sector. The biggest challenge is how to connect every household, even in the remotest villages, across the length and breadth of the country to power generating assets. For this to happen, it would be critical to strengthen our interstate and sub-transmission networks. States can achieve this by promoting competitive bidding for their transmission projects. As proven in interstate transmission projects, the tariff-based competitive bidding model will reduce transmission costs and the duration of project execution.
Integrating a very large amount of renewable energy with the grid is the next challenge. While solar and wind projects can be executed in a few months, it takes a few years to commission transmission networks.
Energy storage is yet another challenge and is going to play an important role in integrating renewable energy. We expect the government to come up with guidelines for the integration of large-scale energy storage systems with the grid.
A number of issues need to be addressed in the power sector:
- Duration of long-term contracts to be reduced: Presently, more than 90 per cent of our generation capacity is tied up under long-term contracts while only 10 per cent is traded through the short-term market. In order to ensure a more competitive power market, we need to reduce the duration of long-term contracts to a maximum of 10 years by which time the debt is serviced. Thereafter, the power generators must be encouraged to participate in the market.
- Discoms need to optimise power procurement: Discoms need to take proactive measures to replace high variable cost power with the low-cost power available on the exchange.
- Implement open access in letter and spirit: Many states have been adopting restrictive practices like increasing the cross-subsidy surcharge and wheeling charge, as well as levying an additional surcharge to make open access unviable. The key objective of open access is to usher in competition and improve overall efficiency. Thus, open access needs to be promoted and not perceived as a threat.
- Strengthen distribution infrastructure: Though there is a power-surplus situation in the country today, the paradox is that on the one hand about 50 GW is not scheduled for transmission and, on the other, more than 25 per cent of our population does not have access to electricity. We need to build distribution infrastructure to take power to the people and ensure 24×7 power for all.
The major issue in the sector today is providing relief to stressed assets, as investments of lakhs of crores are under threat of turning into non-performing assets due to various reasons. The government should also focus on areas such as fuel linkages and power tie-ups by states.
On the thermal side, investment in new capacity has hardly taken place since 2011-12. Most of the projects that had started construction around 2011-12 are nearing completion. Unfortunately, there has hardly been any long-term Case 1 bidding. Most of these projects require long-term tariffs in the range of Rs 4-Rs 5 per unit in order to service debt and provide acceptable returns on equity for investors. Compared to this, the current prices in the merchant market range from Rs 2-Rs 3 per unit. Thus, the risk of projects becoming unviable looms large, and a chunk of the investment made in these assets faces the threat of losing its economic value.
If India has to sustain the 7-8 per cent growth rate over the next decade, per capita electricity consumption and hence power availability also needs to grow at the about the same rate. Further, the figures for peak demand do not include latent demand that exists and the widespread load shedding across most states. There is a large demand, actual, potential or latent, that is to be met. However, capacity addition in the conventional sector is likely to slow down to a compound annual growth rate (CAGR) of about 4 per cent for the next four to five years, as compared to a CAGR of about 11 per cent in the past five years.
The hydro sector needs policy, regulatory, fiscal and infrastructural support. Projects have got stuck due to reasons such as time and cost overruns, a lack of willingness to enter into power purchase agreements, funding gaps, geological surprises, lack of clearances and a need for last-mile funding. Financial institutions are ready to provide debt finance, but there is no clarity on the likely tariffs. Most of the states are reluctant to buy hydropower as the tariff appears to be high. However, if a perspective on the economic life of these assets is taken, hydropower is in effect cheaper. A need has been long felt for having a central utility that can procure hydropower and then sell it to states at tariffs which are transparently determined. A hydropower obligation or a regulation that recognises run-of-the-river hydro projects of less than 100 MW capacity as renewable projects can revive interest in the sector.
Many projects are still getting delayed due to operational issues like right of way, forest clearances and delays in getting approvals for railway and highway crossings. These burden the contractor in terms of time and cost overruns. Besides, engineering, procurement and construction contractors also encounter contractual challenges like delays in closure of contracts, lack of redressal mechanisms, etc.
Cost-efficient and remunerative tariffs, subsidies and cross-subsidies entirely to the state government account and not to that of discoms, good leadership and management of discoms by appointing professionals to head them, distancing the government by barring any directions from them to discoms, punitive drives against electricity thefts, staff discipline, reducing discom staff by better use of information technology, as well as removing retired bureaucrats as regulators and appointing truly independent and courageous people from other disciplines are steps that need to be urgently taken to resolve issues in the sector.
What is the sector outlook for the next one to two years?
With an investment potential of nearly Rs 15 trillion in the next four to five years in power generation, distribution and transmission, the Indian power sector provides immense opportunities. In view of the government’s mission to ensure power for all, we will witness an unprecedented expansion of T&D networks. By introducing UDAY, the government has already set the right tone for improving the financial health and operational efficiency of discoms and this will start showcasing results in the next two years. We will also see a higher quantum of renewable electricity being fed into the grid as the government is promoting renewable energy like never before.
First, in the next one to two years, an impetus must be given to augment and reinforce transmission infrastructure to ensure the seamless transfer of electricity across the country. The commissioning of transmission lines, especially connecting the west to the north and south, will enable a uniform market throughout with an efficient/single price discovery. Similarly, building last-mile distribution infrastructure is equally important to deliver power to consumers. Second, the implementation and regular monitoring of accomplishments by states under UDAY is critical for the development of a vibrant power sector. Third, we need a structured approach for the augmentation of renewable energy as its grid integration is a major challenge, considering the variable and infirm nature of renewable resources. Developed countries like Germany are able to manage scheduling and balancing of this energy by transacting all their energy through the exchange. Similarly, in India also, exchanges need to be leveraged extensively to balance renewable energy and secure grid operations.
The priority for the government and all the stakeholders would be to steer the sector out of the current situation, as economical and viable power is of critical importance for sustained economic growth. It is anticipated that there will be no new capacity addition announcements by developers in the thermal segment, owing to the slow absorption of the power already in the pipeline. However, capacity addition in renewables is anticipated, piggybacking on favourable policies. The 24×7 Power for All and Make in India initiatives will certainly bring new demand for tie-up of untied capacities. In coal mining and transmission, we foresee technology upgradation resulting in better availability of fuel and transmission access. On the distribution side, it is anticipated that discoms would reduce their losses and improve their financial and operational efficiencies gradually as required under UDAY and regulators would periodically revise tariffs in line with the latest tariff policy.
The outlook for the sector is challenging but positive. On the thermal side, initiatives being undertaken by the government to remove infrastructural bottlenecks and to address stressed/ stranded capacity are leading to completion of projects. Investors are now evincing greater interest in these projects.
UDAY has so far been very encouraging and if implemented effectively, would drive operational efficiency and financial discipline in discoms. This is also expected to lead to an increase in the demand for electricity in the long term and an increase in Case I bids. Stranded assets are likely to see a resolution with the increasing involvement of lenders in effecting a change in management/ownership. The resolution process is also likely to inflict some pain on lenders, by way of increased provisioning, albeit this will be temporary, till the actual economic value of the assets gets restored.
New thermal capacity addition in the next few years will be largely driven by state-owned companies. Further, in the power value chain, the focus has already shifted to transmission while growth in the renewable sector is expected to continue. The measures needed to develop hydropower and to address the problems of projects under development are also expected to be crystalised. The increasing share of renewables will help in achieving the optimal energy mix.
I would say that the developments in the power sector are very encouraging which gives a very positive outlook for the sector going forward.
The outlook will not change dramatically until the government is stopped from exercising control over the sector, either by privatisation or by law. Government policies must permit the purchase and sale of electricity from/to any source in the country. Besides this, there is a need for career management in discoms, clarity on payments for cross-subsidies, and undertaking purchases from the most economical suppliers and not necessarily from ones within the state.
“The biggest challenge is how to connect every household, even in the
remotest villages, across the length and breadth of the country with
power generating assets.”
Pratik Agarwal, Chief Executive Officer, Sterlite Power Transmission
“It is anticipated that there will be no new capacity addition announcements
by developers in the thermal segment, owing to the slow absorption
of the power already in the pipeline.”
K. Raja Gopal, Director and Chief Executive Officer, Lanco Power Limited
“On the thermal side, the initiatives being undertaken by the government
to remove infrastructural bottlenecks and to address stressed/stranded
capacity is leading to completion of projects.”
Dr Ashok Haldia, Director, PTC India Financial Services Limited
“There is significant traction in the way SEBs are placing orders – they
are floating more tenders, especially large-value tenders to expedite
the growth of intra-regional networks.”
Vimal Kejriwal, Managing Director and Chief Executive Officer, KEC International Limited
“There is a need for career management in discoms, clarity on payments
for cross-subsidies, and undertaking purchases from the most economical
suppliers and not necessarily from ones within the state.”
S.L. Rao, Former Chairman, Central Electricity Regulatory Commission