May 2019

The reform momentum has slowed down across the power sector in the past year. AT&C losses rose after a couple of years of substantial reductions. The gap between the average cost of supply and the average revenue realised also rose in 2018-19 after dropping for two years.

Financial stress has also increased. The Supreme Court had to step in to give breathing space to around Rs 1.8 trillion worth of stressed assets. These would have been pulled under the IBC, constraining the market’s ability to deliver deleveraging solutions, if the apex court had not struck down an RBI circular.

Capacity creation has also eased up, though there was some capacity created across both generation and transmission. Renewables continued to outpace thermal generation. But the wind segment has struggled due to falling tariffs. Solar has also seen a slowdown as investors have turned cautious in the face of sudden changes in the regime, such as the imposition of a “safeguard duty” of 25 per cent on cells. Coal shortages cut down thermal PLFs, and gas-based capacity remained idle.

On the bright side, private presence in transmission increased. There is also hope that coal supply constraints will ease over the next couple of years, as new blocks are developed and start production. Nearly 100 per cent electrification has been achieved across the country, with less than 20,000 households remaining off grid. The national grid has developed better interregional capacity. The power exchanges have done brisk business as trading volumes have improved.

It’s clear that tariffs are unlikely to improve very much. The financial stress will only alleviate once there is consolidation with mergers and acquisitions of debt-laden projects. For that to happen, there also has to be some assurance that outstanding dues from state discoms will be cleared.

There is urgent need for a review of policies across the sector. UDAY has helped in terms of
debt restructuring but more needs to be done on this front. There is a need to look at the underlying
causes behind the slippage in AT&C losses after a couple of years of improvement.

There has been some movement on the policy front. The cabinet has approved various measures for the resolution of stressed projects. For example, the SHAKTI scheme has been tweaked to allow coal linkages to be used against short-term PPAs and thermal central and state power generators can act as aggregators as well. Bottlenecks in project approval and lack of investment interest (caused by the usual issues of land acquisition) and fuel deficits also need to be addressed.

Vast amounts of investments will be required to meet the anticipated rise in demand. Generation capacity has to increase and transmission networks need to be smartly reconfigured to manage larger capacities and the technical challenges of a changing power mix. Last-mile delivery, and metering and collection processes have to improve as well.

The sector stands at a crossroads. Decisive strategic planning and action on the ground will be required to ensure that it can meet the challenges of the future.

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