May 2018

EDITOR Devangshu Datta

The power sector saw several interesting developments last year. For the first time ever, in 2017-18, capacity additions in the renewables category – mainly in solar – overtook conventional capacity additions.  Power lines reached every village though 31 million households remain off the grid. AT&C losses dropped while still remaining unacceptably high. Discoms improved operating performances.  Tariffs dropped. Private players established a foothold in the transmission segment.

The sector can look to the future with optimism.  Discoms look set to whittle down adverse ACS-ARR ratios and reduce their AT&C losses. The energy mix will also change, with an increasing contribution from renewables, although thermal will remain by far the largest contributor.

But there is also cause for concern with several large problems for the sector. Financially, the sector remains in deep trouble, with most discoms making losses and over Rs 1.7 trillion in stressed assets scattered across the country. Lenders are wary of increasing exposure to the sector. Tariffs have also dropped and this has led to muted investment interest.

UDAY has given discoms a lifeline. However, most discoms are still suffering large losses although the quantum of loss has reduced and the adverse ACS-ARR ratios have improved. Backdowns, as a direct result of weak discom finances, have led to lower PLFs. Investment remains low and limited to specific areas, with few projects in the pipeline. Old problems such as difficulties in land acquisition, right-of-way negotiations, and tardy environmental clearances remain.

Most states are reluctant to allow open access, which would help merchant power producers and captive power producers considerably. The wind segment is experiencing hiccups due to the change to competitive bidding. Coal prices have risen substantially – Coal India Limited has hiked rates and cess has also been increased. Gas-based generation is moribund.  Massive investments are required in transmission and it is not obvious from where this will come.

Policy tweaks can alleviate some issues. The draft National Electricity Policy sets an agenda consistent with future developments.  It anticipates transformations in energy demand and supply, and accounts for consumer behaviour changes as concerns about pollution emerge. The new auction methodology for coal blocks should aid private players to get into mining directly.

The power sector is delicately poised. It has a great opportunity to turn around. But without the right policy measures it could slide further into the red.  Generation capacity addition must accelerate to keep pace with rising demand. Transmission has to improve alongside, and grids also need to become smarter and cybersecure. Hence, policymakers must seek ways to attract more investment.

In addition, politicians must resist the temptation to resort to populist measures such as offering free power or heavily subsidised tariffs. Discoms must be allowed to charge market-related tariffs that cover the cost of supply and states must allow open access.

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