Sector Review

A paradigm shift

The power sector has undergone much transformation in the past 20 years. Significant legislative reforms including the Electricity Act, 2003, unbundling of state electricity boards (SEBs) and the formation of regulatory commissions, undertaken during the period have paved the way for a major overhaul in the institutional framework of the sector. Massive strides have been taken in generation capacity addition. The country’s installed capacity has grown more than threefold, with the sector witnessing accelerated capacity additions since the 1990s. The private sector’s share in installed capacity is now the highest at 45 per cent.

Renewable energy has come of age with more capacity being added from renewables than coal. Power shortages have almost ceased. All the villages are now electrified. The country has a robust integrated national grid. Fuel uncertainty issues have been largely resolved. Power procurement is now done competitively. And the power trading market has grown significantly in terms of volumes and market participants.

Despite these encouraging developments, what has not changed is the operational and financial health of state-owned discoms. A number of them continue to perform inadequately and are yet to achieve financial sustainability.

Indian Infrastructure takes a look at the significant trends and developments in the power sector in the past 20 years…

Surging capacity additions

The country’s installed base stood at 93 GW in 1998-99. At the time, the sector had the dubious reputation of always falling short on its capacity addition targets. The base today has more than tripled, reaching over 344 GW at the end of 2017-18. There has been a nearly fourfold increase in the pace of annual capacity addition. While the additions were erratic, averaging around 3,762 MW annually between 1998 and 2003 (prior to the Electricity Act), in the past 14 years, annual capacity additions have jumped to over 13,000 MW annually. Since 2011-12, the rate of capacity addition has been particularly phenomenal, averaging over 20,000 MW annually with a high of nearly 24 GW in 2015-16.

IPPs: Driving sector growth

In the 1990s, a slew of incentives were offered to private investors, resulting in an overwhelming response from both domestic and international investors. However, the euphoria failed to translate into any action on the ground. From the mid-1990s to the early 2000s, the contribution of independent power producers (IPPs) to generation as well as the installed base was a dismal 5 per cent. The near-bankrupt SEBs gave the IPPs a tough time in the collection of dues, and as a result many projects found it difficult to stay afloat while some closed down temporarily (Dabhol being a classic example). The Electricity Act, 2003, was, however, a catalyst for change that brought about a revival in IPPs. In one stroke, it cleared the biggest stumbling block – IPPs were no longer bound to sell power to SEBs. From 2004-05 to 2017-18, the private sector added close to 103 GW (or nearly 53 per cent of the total additions in this period).

Declining PLFs

In 1998-99, the overall plant load factor (PLF) of thermal power plants stood at 68 per cent. However, over the next decade or so, on the back of better technology use and improved plant management practices, PLFs improved significantly, touching nearly 78 per cent by 2007-08. In fact, the private sector recorded the best PLF performance in 2008-09 with a record high of 91 per cent. The fuel crunch, however, put a full stop to this stellar performance. The widening gap between coal demand and supply coupled with gas supply shortages crippled many thermal power plants for a long time. By 2013-14, PLFs had dropped to almost 66 per cent and by 2016-17, they dropped to an all-time low of 59.8 per cent. The major culprit was not just fuel supply but the cash-strapped discoms that stopped buying power. A glimmer of recovery was, however, seen in 2017-18, with PLFs rising to nearly 61 per cent.

Changes in fuel mix

Two decades ago, coal-based power provided over 70 per cent of the country’s installed capacity. Till today, coal continues to make up the majority share, though it has come down to 57 per cent. Hydro’s share in the fuel mix has been gradually displaced by renewables. Hydro, which accounted for 24 per cent of installed capacity back then, now only contributes 13 per cent. Renewable power’s share of about 1 per cent in 1996-97 is a significant 20 per cent now. The share of nuclear power has remained the same at 2 per cent during this period.

Renewables: The sunrise sector

About two decades ago, people widely acknowledged the potential of renewable energy, but large-scale deployment still had to be demonstrated. The installed renewable capacity then was a paltry 1,077 MW. Even as late as 2004-05, the installed renewable base barely touched 4,000 MW. Renewable tariffs were astronomical, equipment costs were high and there were no real incentives to invest in the sector. Today, it has surpassed all expectations. Grid-connected installed capacity reached almost 69 GW in 2017-18. Over the past three years, solar power capacity has increased at a compound annual growth rate of over 100 per cent. In 2017-18, the solar segment recorded the highest capacity addition among all power generation sources, surpassing thermal capacity addition for the first time. With the government’s aggressive target of reaching a renewable capacity of 175 GW by 2022, the segment is slated to witness exponential growth in the next few years.

Discom losses

The restoration of discoms’ financial health is still the most crucial issue in the power sector. Aggregate losses of all SEBs were close to Rs 113 billion in 1996-97 and increased tenfold to reach Rs 1.12 trillion by 2014-15. Successive governments have tried to address these losses through three bailout packages. The first was in 2002, when the government introduced a one-time settlement scheme for SEB dues, the second in 2012, termed as the financial restructuring package and the third in 2015, with the Ujwal Discom Assurance Yojana (UDAY). With UDAY, some success has been achieved with losses decreasing from Rs 515 billion in 2015-16 to Rs 346 billion in 2016-17. The gap between the average cost of supply and average tariff, which was 70-80 paise per unit till about 2001-02, has now come down to 22 paise.

AT&C losses

Till the 1990s, officially declared estimates showed that transmission and distribution (T&D) losses were in the range of 22-26 per cent. Actual estimates were undoubtedly much higher at 40-50 per cent. In 2001-02, the aggregate technical and commercial (AT&C) loss concept was introduced (to precisely measure the gap between billing and collection) and the losses were estimated to be around 37 per cent. The Accelerated Power Development and Reforms Programme (APDRP) was launched in 2003 to bring down AT&C losses to 15 per cent by 2007. However, the segment failed to come out of the red with losses still at a significant 31 per cent by the end of the programme. The APDRP was relaunched with revised terms and conditions as the Restructured Accelerated Power Development and Reforms Programme (R-APDRP) in 2007 and did show some positive results. AT&C losses were lower at 24.6 per cent in 2014-15. The R-APDRP is now a part of the newly launched Integrated Power Development Scheme (IPDS), which is much bigger in scope and coverage than its predecessor. Now, with UDAY, discoms are required to limit losses to 15 per cent by next year. The current level of losses is around 19 per cent.

Coal market reforms

Till as late as 2013-14, India’s coal story was marred by shortages and unmet targets. Since 2015-16, the sector has significantly turned around its performance. From chronic shortages, the coal industry has seen a steady growth in supply. In pursuit of its 1 billion tonne by 2020 target, the country’s largest coal company, Coal India Limited, has witnessed a sharp increase in production, rising from 536 million tonnes (mt) in 2015-16 to 554 mt in 2016-17 and further to 567 mt in 2017-18. The introduction of captive coal block auctions has been another decisive development for the sector in the recent past, with the government doing away with the arbitrary allocation of coal blocks. Since December 2014, five rounds of auctions have been announced with 30 blocks (of the 204 cancelled blocks) being auctioned so far. More recently, in one of the biggest reform moves since the nationalisation of the coal sector, the government has allowed commercial coal mining by private players.

Private interest in transmission: From monopoly to competition

In 1998, transmission was officially recognised as a separate activity and private investment was invited in transmission with the passage of the Transmission Bill. But, for a long time, not much came of it. The first and only private project at the time was the Tala transmission project, which was executed by Powerlinks Transmission (a joint venture between Power Grid Corporation of India Limited [Powergrid] and Tata Power). Competitive bidding guidelines for transmission projects were introduced in 2006, though the first set of independent transmission projects were not awarded till 2010. The situation is vastly different today. More than 40 projects have been awarded through competitive bidding, of which around 30 have been awarded to private players. Competition is intense, with private majors in close contest with state major Powergrid to win these projects.

Privatisation of distribution: Serious efforts yet to be made

While most of the distribution business was managed by the SEBs and their successor entities back then, the distribution segment today is still primarily in the hands of the state sector. After the Odisha and Delhi distribution reforms, no state has taken the outright privatisation model reform route. Political considerations and the financially insolvent state of the SEBs were key challenges to the privatisation process. The softer route – the distribution franchise model – was, however, adopted by a few states after the success of the Bhiwandi franchise in Maharashtra, awarded in 2007. A number of players such as Torrent Power, CESC Limited, India Power Corporation and Essel have since been awarded distribution franchises. The past couple of years in particular have seen some revival of activity in this space with new franchises awarded to CESC Limited and Tata Power.

National grid: Mission accomplished

One of the primary missions of the government has been to create a national electricity grid to increase the transfer of power between the country’s five regional power grids. The year 2014 marked the accomplishment of this goal. The southern grid was connected with the central grid in December, thereby for the first time creating a “One Nation, One Grid, One Price” system. Industry observers note that there are several days during which a single price of power has prevailed pan-India.

Grid discipline: A job well done

Up to the 1990s, there was no formal system of financial incentives to promote grid discipline. The introduction of the availability-based tariff  regime in 2000 by the Central Electricity Regulatory Commission (CERC), was the first significant measure to address this issue. The grid discipline mechanism was further strengthened in 2009 and 2010 with the introduction of the Indian Electricity Grid Code regulations and the unscheduled interchange mechanism. However, grid stability was thrown into sharp focus in 2012 with the infamous collapse of the northern grid, when it was found that utilities were using the mechanism as a route for trading electricity and exploiting shortages. Since then, there has been a significant review of protection systems, regulations, transmission planning and islanding schemes. The transmission grid frequency is now almost always maintained at 50 Hz. Ancillary services have also been introduced and are further expected to ensure that demand and supply are balanced at all times.

Power trading: Bigger and better

Prior to 2001, power exchange between the states and vertically integrated utilities was characterised by small, intermittent volumes. With the creation of PTC Limited, short-term power trading as a business concept was introduced. At the time, trading volumes stood at 1,500 million units, a share of only 2 per cent of total power generation. The real game changer was the 2003 reforms. The first trading licence was granted to PTC and the years that followed saw competition in this segment heating up as a number of new players secured trading licences. Trading volumes grew to almost 21 billion units (BUs) by 2007-08. Another turning point was the launch of the two power exchanges in 2008. Short-term trading volumes rose to 127 BUs by 2017-18 with the trading market holding a share of 11 per cent in total power generated. Power exchanges now account for nearly 35 per cent of the traded volumes. Another positive has been the growing participation of open access industrial consumers to tap power through this route.

Regulatory reforms

The 1990s were a decade of regulatory reforms. The period saw the creation of the country’s apex regulatory body, the CERC, in 1998 and the setting up of independent regulatory commissions at the state level. In 1996, Odisha, with the highest loss making SEB at the time, was the first state to create an electricity regulatory commission as part of its power reforms. After Odisha, a number of states followed similar reform approaches by passing their own state power sector reform bills or setting up state commissions under the Electricity Regulatory Commissions Act, 1998. Apart from tariff setting, one of the most tangible contributions of these state commissions was transparency. The real level of T&D losses, the quantum of power consumed by the agricultural sector, etc. were some facts that became known. The Electricity Act, 2003, granted more powers to the state electricity regulatory commission (SERCs). Today, there are 28 state regulators (and two joint electricity regulatory commissions). Aspects such as renewable energy, demand-side management and the performance of utilities have been given due attention by them. Open access restriction by states and lax renewable purchase obligations (RPO) enforcements are, however, still some of the biggest regulatory impediments that the reforms have not been able to address.

Conclusion

Much progress has already been made due to the adoption of progressive measures. What lies in store for the power sector could redefine it in many ways. Proposed amendments to the Electricity Act and the Tariff Policy that aim to fix the power distribution segment, besides reforms and government schemes such as UDAY, IPDS and Saubhagya are expected to have a far-reaching impact on the sector.

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