Generation Review: Government initiates reforms to alleviate sector stress

Government initiates reforms to alleviate sector stress

The generation segment witnessed several policy reforms in the past year aimed at pulling it out of its stressed state. Progressive measures were announced by the government in the areas of hydro and coal. Renewables continued to outpace thermal in capacity addition though the latter still accounts for a majority share in installed capacity. As of March 2019, the country’s total installed capacity stood at about 356 GW. About 56 per cent of the capacity or 200 GW is accounted for by coal/lignite, 21.8 per cent (77.6 GW) by renewables, 12.7 per cent (45.4 GW) by hydro, 7 per cent (24.9 GW) by gas, and the rest by nuclear (6.78 GW) and diesel (637 MW).

Indian Infrastructure presents a round-up of key developments in the generation space over the past year…

Capacity addition

During 2018-19, capacity addition by conventional energy sources stood at 5,922 MW – the lowest in the past 10 years. Of this capacity, about 5,782 MW was accounted for by coal-based power plants and the remaining (140 MW) by hydro. Key projects commissioned during the year include Unit 2 (660 MW) of the Solapur super thermal power plant (STPP), Unit 1 (800 MW) of the Gadarwara STPP, Unit 6 (660 MW) of the Chhabra thermal power plant (TPP) (Rajasthan), Unit 4 (660 MW) of the Shree Singaji TPP (Madhya Pradesh) and Unit 2 (600 MW) of the Mahan TPP.

Meanwhile, capacity addition by grid connected renewable energy sources stood at 8,532 MW with solar accounting for over 6,529 MW and wind accounting for about 1,481 MW in the total. The rest was accounted for by biomass (422.7 MW) and small hydro (107.35 MW).

In terms of energy generation, total generation stood at 1,249 billion units (BUs) in 2018-19, about 3.6 per cent higher than the previous year. Of the total generation, the majority (85.8 per cent) was accounted for by thermal sources, 10.8 per cent by hydro, 3 per cent by nuclear and the rest by imports from Bhutan.

The plant load factor (PLF) of coal-based power plants increased marginally from 59.64 per cent in 2017-18 to 60.85 per cent in 2018-19. Meanwhile, the PLF of gas-based plants stood at 22.9 per cent in 2018-19, almost the same as the previous year.

Key developments

A number of key developments took place in the generation space over the past year, the latest being the central government’s measures to promote hydro and thermal power. Also, in April 2019, the Supreme Court set aside the Reserve Bank of India (RBI) circular dated February 12, 2018 for the resolution of stressed assets. The circular required banks to compulsorily implement a plan for debt resolution in a time-bound manner or refer the borrowers under the Insolvency and Bankruptcy Code. The development is a huge relief to the power sector, which has 66,000 MW of power projects worth Rs 1.8 trillion, classified as stressed assets. The stressed power generators can now negotiate debt resolution on a bilateral basis with the lenders without going through the insolvency process.

In March 2019, the cabinet approved a slew of measures for the hydropower segment, including the decision to classify large hydropower projects (over 25 MW) under renewable energy as well as rationalise hydro tariffs. Hydro purchase obligations will be notified as a separate category within non-solar renewable purchase obligations.

In the same month, the cabinet approved the recommendations of the High Level Empowered Committee regarding the resolution of stressed TPPs. In this context, the cabinet has approved the grant of linkage coal for short-term power purchase agreements (PPAs), as against the earlier norms of granting coal linkages only to those TPPs that have medium/long-term PPAs. In addition, generators have been allowed to terminate PPAs in case of payment defaults by gencos, and use the existing coal linkage to generate power and sell it in the short-term market. Further, coal quantity for the power sector in the e-auctions has been increased. Also, the cabinet approved investment by gencos in four power projects worth Rs 310 billion – the 1,320 MW Buxar TPP (Bihar), the 1,320 MW Khurja TPP (Uttar Pradesh), the 624 MW Kishtwar HEP (Jammu & Kashmir) and the 500 MW Teesta Stage VI (Sikkim).

Further, in order to revive power procurement by discoms, the Ministry of Power (MoP) launched Pilot Schemes I and II for facilitating the procurement of power through competitive bidding from the commissioned coal-fired plants that have not entered into a PPA. In the first round, conducted in April 2018, 1,900 MW of capacity was tied up at a tariff of Rs 4.24 per kWh for a period of three years. In the second round, conducted in 2019, the lowest bid of Rs 4.41 per kWh was discovered.

On the nuclear front, positive developments took place in terms of international collaborations with equipment suppliers. In March 2018, Nuclear Power Corporation of India Limited signed an industrial way forward agreement with Électricité de France S.A. (EDF) for a 9.6 GW nuclear power project in Jaitapur, Maharashtra. In June 2018, GE and EDF signed a strategic cooperation agreement for the construction of six EPR reactors of 1,600 MW each at Jaitapur. Overall, the government is looking to expand the installed nuclear capacity to over 22 GW by 2031 from the current base of less than 7 GW.

Compliance with environmental norms

There were some developments on the environment front as well, with the MoP issuing a notification in May 2018 allowing investments in the installation of emission control technologies to be considered for tariff pass-through. This came as a relief to gencos since the deployment of flue gas desulphurisation (FGD) systems and electrostatic precipitators requires substantial capex. As of February 2018, FGDs for 1,820 MW hadbeen commissioned of a total targeted capacity of 166.9 GW. Meanwhile, bids have been invited for FGD implementation for another 15 GW of capacity.

Also, the National Green Tribunal passed an order in November 2018 regarding penalties of up to Rs 50 million on plants not meeting the 100 per cent fly ash utilisation mandate. The order has been currently stayed by the Supreme Court.

M&A deals

RBI’s circular of February 12, 2018, spurred consolidation in the power generation segment with lenders trying to sell stakes in projects to recover their dues. However, not many deals fructified and following the recent Supreme Court judgment, the future of these deals is uncertain. One such deal was Renascent Power Ventures Private Limited’s acquisition of a majority stake (75.01 per cent) in Prayagraj Power Generation Company Limited, which operates the stressed 1,980 MW Bara TPP in Uttar Pradesh, at an estimated value of Rs 60 billion. Recently, the Uttar Pradesh Electricity Regulatory Commission has ordered Renascent Power to reduce tariffs as it will benefit beyond what was contemplated at the time when the tariff for the TPP was fixed.

In March 2019, the cabinet approved NHPC Limited’s acquisition of Lanco Infratech’s 500 MW Teesta hydroelectric project in Sikkim. NHPC was declared the highest bidder by the creditors of the debt-laden project. Further, in December 2018, NTPC Limited completed the acquisition of the 720 MW Barauni TPP in Begusarai district of Bihar from Bihar State Power Generation Company Limited.

In another strategic deal, in September 2018, Caisse de dépôt et placement du Québec, one of Canada’s largest pension fund managers, acquired a 40 per cent stake in CLP India Private Limited. With this partnership, CLP India is better placed to capitalise on opportunities in low carbon businesses.

Challenges and the way forward

Fuel deficits and outstanding dues from discoms continue to deter the generation segment’s growth. As of February 2019, the outstanding amount from discoms to IPPs stood at Rs 138.7 billion, according to PRAAPTI (Payment Ratification and Analysis in Power Procurement for Bringing Transparency in Invoicing of Generators).

In addition, coal shortages resumed in the segment and in July 2018, the MoP had notified the issue of shortages and instructed the states to import coal to meet demand. The issue of coal shortages will be resolved once new mines commence production, but this may take two to three years. Also, gas-based generation capacity continued to idle with no concrete measures by the government to ensure gas availability. Now, the central government is reportedly considering a proposal to allow gas-based power plants to sell electricity in the spot market under a subsidy scheme.

Further, with the integration of renewable energy into the grid, TPPs need to incorporate flexibility in their operations. As per a recent report by the Central Electricity Authority, the maximum power demand is expected to reach over 225 GW and the quantum of renewable energy to be integrated into the grid will go up to 108 GW in 2021-22. The integration of this quantum of renewable energy would cause thermal generation to back down to around 80 GW. In other words, TPPs will be required to operate at a minimum PLF of about 25.73 per cent to accommodate renewable power generated into the grid and to balance the system. This is a huge challenge for TPPs as significant investments will be required to meet the flexibility requirements.