That the power sector has shown a reasonably good performance in the past year in terms of robust capacity additions, declining peak shortages, improvements under the Ujwal Discom Assurance Yojana (UDAY), and brisk progress in rural electrification, among other things, is the unanimous verdict of sector experts. However, stressed assets, slow pick up in power demand from discoms, non-remunerative tariffs and water scarcity for thermal power plants are some areas that need immediate attention. Indian Infrastructure shares the views of sector experts on the state of the power sector, its key challenges and the outlook going forward…
What has been the progress in the power sector in the past one year?
Dr Ashok Haldia
The year 2016 has been a mixed one for India’s power sector, with some great achievements in the sector despite new challenges giving a tough time to investors, developers, bankers and other stakeholders. Between March 2016 and March 2017, around 24,761 MW of generation capacity was added in the country and the total installed capacity crossed the 300,000 MW mark. While conventional power plants (largely coal) still account for more than 65 per cent of the installed capacity, renewables got a major impetus last year. The country’s total installed capacity grew by merely 8 per cent last year, while renewable installed capacity grew by 35 per cent with robust growth in solar power which doubled to 12,289 MW from 6,763 MW.
On the transmission front, around 26,300 ckt. km and 81,816 MVA of substation capacity was added in 2016-17, showing a robust growth of 30 per cent. For the first time, energy and peak deficits fell to as low as 0.3 per cent and 0.5 per cent respectively.
Under UDAY, as on March 31, 2017, as many as 27 states were on board. This is in stark contrast to just 10 states having joined the scheme till end-March 2016. Till July 2017, 16 states had issued Rs 2,320 billion worth of bonds, which was 85.39 per cent of the planned issuances. Aggregate technical and commercial (AT&C) losses have come down to an average of 20.51 per cent, while the gap between the average cost of supply (ACS) and average revenue realised (ARR) has reduced to 46 paise per kWh.
Work done by the government to fulfil its vision to provide power for all and 100 per cent rural electrification is going at full throttle and may achieve targets sooner than planned. As on July 31, 2017, of the 18,452 villages to be electrified, electrification has already been done for 14,170 villages (77 per cent) as against a target to electrify unelectrified villages in the country by 2019.
The impetus given to energy efficiency in India with the launch of various scheme like PAT, Unnat Jyoti by Affordable LEDs for All (UJALA) scheme has seen the distribution of nearly 250 million LED bulbs, resulting in savings of over 33,000 million units (kWh) per year, over Rs 130 billion per year, and an annual reduction of 2.68 million tonnes of carbon emissions. The drive has not been restricted to the distribution of merely energy efficient bulbs but also fans, air conditioners, tube lights (for urban areas) and energy efficient agricultural pumps for farmers in rural India.
Other than the above-mentioned mega policies, a few others like the New Tariff Policy, the Wind Re-powering Policy, the Wind-Solar Hybrid Policy, etc., were announced in 2016, which are expected to help the sector in the coming years.
Dr S.L. Rao
There has been a transformation in supply which is now surplus in relation to consumption. But, the number of unelectrified consumers remains very high. The price to industry is high in relation to most competing countries. Blackouts are relatively uncommon but frequent breakdowns continue in many places.
One of the major developments was the finalisation of the India-Japan civil nuclear deal, which will enable Japan to export nuclear power plant technology, provide finance for nuclear power plants in India, assist in nuclear waste management and undertake the joint manufacture of nuclear power plant components under the Make in India initiative.
Further, the government has accorded administrative approval and financial sanction to the construction of 10 indigenous 700 MW pressurised heavy water reactors (PHWRs). India has mastered the PHWR technology and Nuclear Power Corporation of India Limited has a track record of operating these reactors safely. India is building a prototype fast breeder reactor which is likely to be commissioned by the end of this calendar year. Larsen & Toubro has signed an agreement with Toshiba-controlled Westinghouse and Areva to manufacture nuclear reactors and other critical components. L&T is well poised to leverage capabilities to address both indigenous and foreign-collaborated nuclear power plants as the projects roll out and execute nuclear power plants on an engineering, procurement and construction basis.
Capacity addition in the past one year has been about 20 GW, of which coal-based thermal power added 7 GW to the grid. More than 50 per cent of the capacity addition was through renewables, largely aided by policy drivers in the solar and wind segments. However, solar added 5.5 GW against the planned addition of 12 GW.
We have seen 6,000 villages electrified through the Deen Dayal Upadhyay Gram Jyoti Yojana. Discom performance saw some financial/ operational improvements through UDAY. Yet, energy demand did not pick up and the energy deficit reduced by 1.4 per cent year on year.
Ved Mani Tiwari
Over the past few years, we have made significant progress in the power sector. From a state of power deficit, the government and private sector have worked together to make the country power surplus. Currently, our installed capacity exceeds demand and this has been made possible due to positive policy interventions as well as increased private sector participation.
Our installed capacity, as on June 30, 2017 was 330 GW, against 304 GW a year ago. Thermal continues to lead with 220 GW (+6 GW during the year) capacity, followed by renewables at 58 GW (+14 GW) and hydro at 44 GW. The net addition of renewables, which includes solar and wind, is taking place at a much faster pace as compared to conventional sources.
While the generation-side challenges have largely been addressed, transmission-side issues still remain. This is one of the reasons why on the one hand we have surplus power while on the other, 300 million people do not have access to reliable power. The government sees transmission as a key bottleneck in its programmes like power for all and 24×7 power supply. While the sector has opened up to private sector participation, we would like more and more projects to come up for bidding via the tariff-based competitive bidding (TBCB) route, so that power is delivered to the most underserved households at the most economical cost.
Our total transmission line length up to 220 kV, as on June 30, 2017, stood at 374,706 ckt. km, against 347,294 ckt. km last year. Good progress was made at other voltage levels as well. Transformer capacity up to 220 kV rose to 764,070 MVA from 675,584 MVA last year and other voltage levels also registered good growth.
What have been the most impactful policy moves over the past year?
Dr S.L. Rao
Power trading, greater activity on the energy exchanges, more open access permissions in many states, expansion and smoother operations of interstate transmission, transfer of a good part of discom debts to state government budgets, increase in renewable energy (but little enforcement by state regulators of using the minimum renewable energy as laid down by them) are some of the important policy moves.
Norms set for emission mitigation (for thermal plants) resulted in the Central Electricity Authority (CEA) finalising a phased implementation plan of ~122 GW for flue gas desulphurisation retrofits by 2022-23.
There was greater adoption of UDAY by states in 2016-17, resulting in the reduction of AT&C losses to ~19.7 per cent (~2 per cent reduction year on year) and the ACS-ARR gap to Re 0.56 per unit (Re 0.07 reduction year on year). Takeover of ~75 per cent debt by participating states, reduced ~Rs 120 billion in interest cost for discoms.
The solar park scheme (addressing developer concerns regarding clearances and offtake) and a shift from the feed-in tariff (FiT) regime to competitive bidding led to a downward movement of unit tariffs in the solar and wind segments. Availability concerns with respect to solar and wind will have to continue to be mitigated through increases in the addition of coal-based power plants. The Green Energy Corridors project is expected to smoothen offtake from renewable plants.
The implementation of the UJALA scheme resulted in improvements in energy efficiency.
Waste-to-energy is a new field that is seeing development with the launch of the Municipal Solid Waste Rules, 2016 and the Swachh Bharat Mission, and the policy push for erecting plants at existing landfill sites, without environmental clearances.
Ved Mani Tiwari
The government has made some impactful policy moves during the year. The Tariff Policy, 2016, lays emphasis on adopting TBCB in the state transmission sector too. Earlier, only central projects were coming up under TBCB and as per the new policy, states are to adopt this as well. Jharkhand has been the first state to move to TBCB and we are confident that other states will follow.
The introduction of the infrastructure investment trust for infrastructure financing has been a big positive for the sector. It is the most cost-efficient route for raising infrastructure capital and we are proud to be the first power transmission company to have listed our InvIt instrument on the bourses.
Giving preference to domestic manufacturers for government purchases, as a part of the Make in India initiative, is also very encouraging. We are amongst the largest manufacturers of power cables and power conductors and would like to partner with the government in its key initiatives such as Power for All, railway electrification, etc.
We are also enthused by the government’s progressive steps towards introducing energy storage systems, e-vehicles, etc. which will be game changers in the time to come.
What are the key challenges in the sector that remain unaddressed?
Dr Ashok Haldia
The diminishing demand for energy and a power-surplus situation is surely a state of worry for a developing country like India. With significant capacity addition in the past, many states are currently reaching a power-surplus situation. The overall demand has not caught up with the supply side and this is resulting in record low deficits and low plant load factors (PLFs) for most power plants. The growing volume of surplus capacity implies rising fixed-cost payments for the non-requisitioned or backed-down power. This scenario may continue for a few more years with less-than-anticipated growth in demand, a significant increase in renewable capacity addition, decreasing costs as well as migration of discom consumers due to increased open access and captive options.
Further, more and more industrial consumers are migrating away from discoms and directly obtaining power from the generators of their choice. In addition, renewable energy capacity, which is not usually backed down, is growing rapidly with falling prices. Therefore, surplus power with distribution companies is bound to grow.
Many renewable energy projects face the potential threat of reeling under stress if states continue to push project developers to cut tariffs of existing power purchase agreements (PPAs) which were signed when tariffs were higher. These measures may put on hold the ambitious target of adding 175 GW of renewables by 2022. The problem has been aggravated with recent auctions in both wind and solar project bidding, which saw tariffs drop sharply to Rs 3.46 per unit (in the case of wind in February 2017) and Rs 2.44 per unit (for solar in May 2017). Since then, discoms in Gujarat, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Karnataka and Jharkhand have been trying to renegotiate earlier PPAs that they had signed. The situation has been further aggravated with Uttar Pradesh cancelling PPAs for thermal power capacity aggregating 3,800 MW. The loans taken by the developers to set up the capacity may become non-performing after the cancellation/renegotiation of PPAs, adding to the existing burden on banks. It is high time the Ministry of Power (MoP) intervenes with state governments and discoms and ensures that they “honour their commitments”.
Another concern is with regard to solar module prices which have started showing a reverse trend with prices increasing. With recent developments such as China having installed around 24 GW in the first half of 2017 and continuing with the policy of FiT, strong demand for solar modules is coming from China itself. This is putting a lot of pressure on Indian solar power developers. For instance, in the case of the Rewa project and the recent Bhadla solar park project auctions wherein financial viability of the project(s) have been worked considering that majority of solar modules shall be sourced from China in the price range of $0.26 to $0.28 per watt peak. It is understood that the deliveries up to December 2017 are coming at around $0.30-$0.32 per watt peak for the Indian solar power developers. If this trend continues, the viability of the recent auctions will surely be at stake.
Hydropower is another segment which requires immediate attention and dedicated focus like the solar segment has received. The government should focus on sorting out issues hampering the segment to attract the much- awaited investments. The new hydro policy is expected to give much impetus to the same. Also, the concept of smart cities is yet to be commercially exploited in an integrated way. The idea of smart cities as well as a smart grid is yet to be fully operationalised to yield benefits which can reduce technical and financial losses to acceptable levels. Another concern is that battery storage is still at a nascent stage. All the grid-level solar projects awarded till date are without a storage facility or infrastructure. Recently, solar storage project bids have been shelved which may dent the solar storage industry.
Dr S.L. Rao
The principal challenge is to make distribution viable and prices competitive for the industry. Some of the key issues are that state government ownership of most of the electricity distribution segment has resulted in large-scale theft, labour indiscipline, staff collusion in thefts of electricity, severe restraints on optimising electricity purchase through open access (though this has improved somewhat), continuing with many inefficient and aged state-owned generating plants, governance of electricity by central and state government bureaucrats instead of professional managers, and selecting electricity regulators mainly from among retired bureaucrats.
India’s per capita electricity consumption (~1,075 kWh in 2016-17) is significantly lower than that in developed nations such as the US, the UK, China and Japan. Despite an increase in generation capacity in recent years, ~300 million Indians (of ~1.33 billion) lack access to electricity.
Ambitious capacity addition plans for renewables (especially 100 GW for solar, which will require a capital investment of Rs 5 trillion-Rs 6 trillion), could be hampered by challenges in integrating this energy into the grid and the lack of energy storage solutions. Inadequate domestic solar manufacturing (only ~10 per cent of the ~2.5 GW annual solar module manufacturing capacity is operational) has led to cheap imports (~90 per cent of solar cells/ modules – mostly from China and some from Malaysia and Taiwan – are dumped in India at rates 30-40 per cent cheaper). While anti-dumping investigations have commenced to counter this issue, the development of local manufacturing is necessary.
Another challenge is that of stressed assets (~47 GW), comprising ~14 GW with no fuel supply agreements and ~33 GW with no PPAs, contributing ~17 per cent of overall bank debts.
Enforcement of emission mitigation norms will have cost implications (per MW capex of Rs 4 million-Rs 4.5 million). Additionally, ~40 GW of installed coal-based power capacity (~21 per cent of the total) lacks the space required to install the necessary equipment.
Demand from energy-intensive industries (cement, steel, transport) is expected to revive slowly. Hence, PLFs in coal-based plants (~60 per cent) are expected to remain stagnant. Owing to low demand, a decision was taken to end the scheme for supplying subsidised, imported regasified liquefied natural gas (for gas plants to run at ~30 per cent PLF). An increased focus on energy-efficient products (LEDs, fans, tube lights) could further reduce power demand.
Among the 27 states/union territories currently enrolled under UDAY, the progress has been non-uniform. Only 10 of the 42 discoms were profitable by 2016-17. Water scarcity is an impediment for sustained hydro/coal-based plant operations, and this resulted in temporary plant shutdowns – almost three months in extreme cases. Demand for power will improve when electricity is accessible without outages, discom finances revive, discoms begin to purchase more power and there is an uptrend in industrial growth.
Ved Mani Tiwari
While the MoP has introduced a policy for incentivising early commissioning of projects, issues related to revised scheduled commercial operation dates and upstream/ downstream readiness are yet to be resolved. Deliberation on the early commissioning policy and the adoption of international best practices will make the standard bid document more effective. Developers like us who invest a lot in technology and project management to deliver projects ahead of schedule will be greatly encouraged if early commissioning is rewarded.
While in principal states have agreed to move to TBCB, a push is required for its implementation. Competitive bidding will benefit consumers through reduced tariffs. Defining the threshold limit for competitive bidding is also required at this stage.
One of the key issues faced by infrastructure developers are those related to right-of-way (RoW) and forest clearances. Simplifying these clearance procedures will reduce the timelines involved and speed up project execution.
Players from countries which do not allow Indian developers to participate in their market should face similar restrictions. While foreign direct investment is important for the overall growth of the power transmission segment, the government should keep in mind the reciprocity accorded to us by other countries.
What is the sector outlook for the next one-two years?
Dr Ashok Haldia
Considering all the impediments and challenges being faced at present, I still feel that the power sector offers immense potential for growth in the near future. This is evident from initiatives taken by the government like sustained improvement in domestic coal availability, as well other policy initiatives, which will improve the financial position of state-owned electricity distribution companies in the next two to three years. UDAY has already started showing its positive impact.
Discoms will benefit from the lower cost of power purchases, due to improved domestic coal availability, the subdued tariff level of short-term traded power as well as the lower price of electricity being procured from long-term sources (largely renewables). Further, an improvement in domestic coal availability will mitigate coal supply risks and the risk of under-recovery in fuel costs. The government is also planning in a big way to have electric and hybrid vehicles on Indian roads by 2020. Battery electric vehicles and plug-in hybrid electric vehicles will surely offer rewards as compared to conventional vehicles and will become one of major demand centres for electricity in the coming years. The development of the electric vehicle market in India will lead to the development of associated markets like those for charging stations, batteries for the vehicles, etc. This will surely give an impetus to the power sector.
Dr S.L. Rao
The next two years will be better than the previous two. We must bring pressure to bear, perhaps through the Finance Commission, to compel more remunerative tariffs. The cost of free or cheap electricity to select voting blocs like farmers must be borne directly by state governments and not the distribution companies. If full distribution privatisation is not possible, most distribution and collection functions could be handed over to franchisees. Appointments of all electricity regulators (and for other sectors as well) should be delegated to an independent body of eminent persons. Regulators must be subject to Central Vigilance Commission oversight. Electricity pricing should follow market pricing norms‚ and any support to vulnerable groups must be at the government’s cost. Electricity thefts including those by employees should be treated as criminal offences and a special wing of the police should be set up to prevent such crimes.
Despite the challenges expected to be faced by the power sector in the next one-two years, there is some cause for cheer. A phase-wise plan for the replacement of old and inefficient power plants (~40 GW) will lift sentiments in the power project execution business.
The enforcement of new emissions control norms where flue gas desulphurisation systems ought to be installed in power plants (~122 GW) as finalised by the CEA will see business activity in the sector.
While power demand is expected to rise in line with economic growth, setting up new coal-based power plants (considering a gestation period of four-five years) needs to be continued to meet the demand growth and to boost the sector. Untangling stressed power projects will also bring cheer to developers. The government is taking steps in the right direction, ensuring fuel availability, PPAs and debt restructuring.
Positive developments on the nuclear front are expected to be seen in the next few years. Renewables will be on a growth path, though with some hiccups due to falling prices of solar projects. To ensure continued availability and reliability, thermal power will continue to remain the favourable solution over the next decade.
Ved Mani Tiwari
Power transmission is on a very strong footing. With 300 million people to be provided reliable power, the transmission segment will get due attention. With 175 GW of renewable energy addition expected by 2022, the transmission segment is expected to receive
Rs 2,600 billion of investment. The private sector will play a key role in making this investment possible. We are at a cusp of secular growth for the next couple of years.
Dr Ashok Haldia, Chief Executive Officer and Managing Director, PTC India Financial Services Limited
“The next two years will be better than the previous two.We must bring pressure to bear, perhaps through the Finance Commission, to compelmore remunerative tariffs. ”
Dr S.L. Rao, Former Chairperson, Central Electricity Regulatory Commission
“While power demand is expected to rise in line with economic growth, ordering new coal-based power plants needs to be continued to meet the demand growth and to boost the sector.”
Shailendra Roy, Chief Executive Officer and Managing Director, L&T Power, Whole-time Director, L&T
“While the transmission sector has opened up to private sector participation, we would like more projects to come up for bidding so that power is delivered to the most underserved households at economical costs.”
Ved Mani Tiwari, Chief Operating Officer, Sterlite Power