Trends and Outlook

On a positive growth path led by reforms

The government’s initiatives in the past year to address sectoral challenges were reflected in the sector’s strong performance. A record capacity addition was registered in the conventional power as well as renewable energy segments. The country’s transmission network also reported significant growth, while it was another remarkable year for coal production. The distribution segment, which has been stressed with persistently high level of losses, also saw a hope of revival with the implementation of the Ujwal Discom Assurance Yojana (UDAY).

Another high point for the sector was the reduction in power deficits to an all-time low. While the energy deficit declined from 3.6 per cent in 2014-15 to 2.1 per cent in 2015-16, the peak deficit declined from 4.7 per cent to 3.2 per cent over the same period.

The past year also saw important policy and regulatory measures being taken including amendments in the Tariff Policy, 2006, the notification of guidelines for short-term power procurement and the release of the Ancillary Services Operations Regulations, 2015.

Indian Infrastructure takes a look at the key trends in the power sector over the past year as well as the future outlook…

Generation

  • The year 2015-16 witnessed a capacity addition of over 30,000 MW, taking the total installed capacity to 298.06 GW as of March 2016 compared to 267.64 GW as of March 2015. Over 70 per cent of the capacity addition during the year was contributed by thermal power and around 23 per cent by renewable energy sources.
  • In the first three months of 2016-17, total capacity addition was close to 5,000 MW, taking the installed grid-connected capacity to over 300 GW, as of June 2016.
  • The conventional power capacity addition of 23,976 MW was the highest ever in a year. Of this, more than 85 per cent (20,537 MW) was contributed by coal-based plants alone.
  • The renewable energy segment recorded an addition of 6,937 MW of grid-connected capacity during 2015-16, exceeding the target of 4,460 MW by over 55 per cent. This included 3,019 MW of solar power and 3,423 MW of wind power, both of which were the highest ever recorded in a year.
  • The total installed renewable energy capacity in the country reached 44,244 MW as of June 2016, overtaking the hydropower capacity.
  • Hydropower capacity addition in 2015-16 was 1,516 MW as compared to the target of about 1,300 MW for the year. The capacity addition in 2015-16 was more than double that in 2014-15 (736 MW).
  • There was no capacity addition in the nuclear power segment during 2015-16. However, the second unit of the Kudankulam nuclear power project attained first criticality (the start of controlled self-sustaining nuclear fission chain reaction in the reactor for the first time) in July 2016 after the accord of regulatory and statutory clearances.
  • With a total capacity addition of about 84,990 MW between April 2012 and March 2016, over 95 per cent of the capacity addition (88,537 MW) targeted in the Twelfth Plan (2012-17) has already been achieved.
  • Meanwhile, electricity generation in 2015-16 was around 1,102 billion units (BUs), slightly lower than the target of 1,137 BUs. The share of coal-, hydro- and gas-based plants in generation during the year was about 78 per cent, 11 per cent and 4 per cent respectively.

Transmission

  • The transmission segment performed extremely well during 2015-16 with record additions in transmission lines as well as substation capacity. Against the target of 23,712 ckt. km of transmission lines, 28,114 ckt. km was added, surpassing the target by more than 18 per cent. Transformer capacity addition exceeded the target (50,542 MVA) by over 24 per cent with about 62,849 MVA of capacity addition during 2015-16.
  • At the end of 2015-16, India’s interregional power transfer capacity stood at 58,050 MW, more than double the capacity at the end of the Eleventh Plan period.
  • During 2015-16, six projects were awarded through the tariff-based competitive bidding route (TBCB), of which five were bagged by private companies and one by Powergrid Corporation of India Limited. Further, in April 2016, to boost private sector participation, the central government announced plans to award projects worth Rs 300 billion-Rs 500 billion via TBCB.
  •  Significant progress was also made on cross-border links with the recent commissioning of two interconnections – one each with Bangladesh (December 2015) and Nepal (February 2016).

Distribution

  • The performance of the distribution segment continues to be a key concern with persistently high levels of operational and financial losses, even though performance has improved in recent years. As per the Power Finance Corporation’s report,  aggregate technical and commercial losses of distribution companies stood at 22.7 per cent in 2013-14 compared to 25.45 per cent in 2012-13.
  • Aggregate losses (on a subsidy received basis) declined from Rs 705 billion in 2012-13 to Rs 625 billion in 2013-14. Accumulated book losses of discoms stood at Rs 3.8 trillion as of March 2015.
  • The stressed financial position of discoms is attributed to the steep rise in power purchase costs against the limited increase in tariffs. The power purchase cost, which accounts for about 80 per cent of the cost of service for distribution utilities, has increased by 4-7 per cent over the past three years. However, the tariff hike across states has been modest at around 4 per cent in 2015-16.
  • The government launched UDAY in November 2015 with the aim of improving the operational and financial efficiency of discoms. So far, sixteen states and union territories, namely, Jharkhand, Chhattisgarh, Rajasthan, Uttar Pradesh, Gujarat, Bihar, Punjab, Jammu & Kashmir, Haryana, Uttarakhand, Goa, Karnataka, Manipur, Andhra Pradesh, Madhya Pradesh and Puducherry, have signed MoUs under the scheme. In 2015-16, bonds worth Rs 995.41 billion were issued by eight of the  participating states – Rajasthan, Jharkhand, Chhattisgarh, Bihar, Jammu & Kashmir, Punjab, Uttar Pradesh, and Haryana. In 2016-17 so far, bonds worth Rs 483.91 billion have been floated by Rajasthan, Uttar Pradesh and Punjab. Industry estimates are that bonds aggregating about Rs 1,250 billion will be issued by March 2017.
  • Other ongoing initiatives to revive the distribution segment include the Integrated Power Development Scheme (IPDS), the Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY), the Power for All programme and the National Smart Grid Mission. Since the launch of the DDUGJY in December 2014, more than 50 per cent of the unelectrified villages (18,452) have been electrified (till July 2016). The remaining villages are targeted to be electrified by March 2017. Also, as of April 2016, IPDS sanctions have been made for 3,486 towns across 25 states at an approved project cost of Rs 248.38 billion.

Coal production

  • During 2015-16, the total production of coal was about 630 million tonnes (mt), approximately 3 per cent higher than that in 2014-15. The rate of growth in production during 2014-15 was around 8 per cent. However, between 2009-10 and 2013-14, coal production increased at a dismal compound annual growth rate of 1.5 per cent.
  • The increase in coal production was led by Coal India Limited (CIL). It achieved a record production of 538.75 mt during 2015-16, about 43 mt more than the previous year, a growth of 8.5 per cent. Singareni Collieries Company Limited, the other major coal producer in the country, produced around 60 mt in 2015-16, registering a growth of 15 per cent over the previous year.
  • The increase in production has led to a decline in the import of coal. India imported about 199.9 mt of coal in 2015-16, down by 8 per cent compared to the previous year. Moreover, India is set to export coal for the first time. The government is in talks with Bangladesh for the export of around 2-3 mt of coal to begin with.

Mergers and acquisitions

  • The past 12-18 months have seen increased merger and acquisition (M&A) activity in the power sector with the announcement of multiple deals driven mainly by the financially distressed projects. Other drivers have been uncertainty over land acquisition and fuel availability, regulatory delays and expansion of generation portfolios.
  •  Some of the recent deals include JSW Energy Limited’s acquisition of the 500 MW Bina thermal power plant from Jaiprakash Power Ventures Limited as well as a 1,000 MW power plant in Chhattisgarh from Jindal Steel and Power Limited, the merger of Siemens and Gamesa (a wind major) with Siemens holding a 59 per cent stake and existing Gamesa shareholders holding 41 per cent in the merged company, as well as Tenaga Nasional Berhad’s (Malaysia’s state-run power company) acquisition of a 30 per cent stake in GMR Energy.

Outlook

  • The outlook for power sector remains positive backed by various efforts of the government. However, the real outcomes remain to be seen. The implementation of the schemes will be a key factor in determining their success. The demand for power is likely to increase with an increase in the levels of electrification and growth in the industrial sector. This will be supported by an increase in supply from renewable capacity additions, better fuel supply and overall efficiency improvements. On the distribution front, states as well as investors have shown keen interest as well as confidence in UDAY. Further, the government is also planning to include the private sector in the scheme. The inclusion of the private sector, if it takes place, will make the scheme the most comprehensive initiative in power sector reforms till date.
  • Meanwhile, the renewable energy sector has been successful in attracting large-scale interest and investment from the industry with the ambitious capacity addition targets and government initiatives. However, the issues related to evacuation infrastructure, power offtake, resource intermittency, balancing power, land availability, etc. continue to demand greater attention. Hydropower is likely to be another key focus area for the government in the near future.

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