Power Priorities

Next steps for the new government

The power sector’s record in the past five years has been somewhat mixed. While the sector has done well in key areas such as reducing the energy deficit, improving coal production, increasing renewable energy capacity and achieving rural electrification targets, it has been unable to improve its distribution performance, with the discoms failing to meet their targets under the Ujwal Discom Assurance Yojana (UDAY). Managing grid variability with the growing influx of renewables, ensuring timely compliance with emission norms, resolving stressed assets and tackling the high discom debt pose challenges for the new government.

At the India Infrastructure Forum 2019, an eminent panel discussed the experience and achievements of various government programmes, the key issues and concerns, as well as the policy measures that need to be taken by the next government. The panellists comprised Ajay Kumar Bhalla, secretary, Ministry of Power (MoP); Gurdeep Singh, chairman and managing director (CMD), NTPC Limited; Jayant Kawale, managing director (MD), RattanIndia Power; J.P. Chalasani, group chief executive officer (CEO), Suzlon; Anil Sardana, MD and CEO, Adani Transmission Limited; Ved M. Tiwari, CEO, Global Infrastructure, Sterlite; Dr Pawan Singh, MD and CEO, PFS; and Anuja Tiwari, partner, DSK Legal. Excerpts from the discussion…

Performance under various government programmes

In the past 15-16 months, the government has electrified around 26 million households, and only 20,000 households remain unelectrified in some Naxalite areas in Chhattisgarh. The Scheme for Harnessing and Allocating Koyla (Coal) Transparently in India has also delivered results. The first round of auctions helped about five to six stressed power plants. Another initiative to resolve stressed assets has been the medium-term power purchase agreement (PPA) auctions. In the first round, about 1,900 MW of PPAs were signed. Despite the small quantum of capacity, this has been quite a satisfying experience for the government as there were no PPAs available in the market earlier. A second round of auctions, for 2,500 MW of capacity, has also been launched, while a third round is being looked at with coal linkages. More plants are expected to turn around with these efforts.

There has been some success in the hydropower segment with the government approving a new hydro policy and a few hydro projects. The new policy has generated enthusiasm among organisations in this space. Hydro PSUs have found innovative ways to revive these projects and are hand-holding some of the projects being built. In the next five to six years, significant hydro activity is expected.

Another area where the government has done well is with regard to energy efficiency programmes. These include Unnat Jyoti by Affordable LEDs for All, street lighting, energy efficient equipment, star labelling and building codes for both commercial and domestic buildings.

On the transmission side, interregional congestion has been reduced and power can now be sold anywhere across the country.

The health of distribution companies remains a concern, although some headway has been made by the segment. UDAY has brought in a culture of tariff revisions and quarterly results are being reported by discoms. The overall losses have shown a remarkable decline since UDAY started, coming down from over Rs 500 billion to Rs 200 billion (at a consolidated level). An area where the discoms have done exceptionally well is billing efficiency, which has improved significantly. Going forward, reforms like content-carriage separation and franchises are proposed to be implemented, which should improve the health of the discoms.

Stressed assets resolution

A lot of work has been done to address the stressed assets issue, especially in the wake of the report of the High Level Empowered Committee headed by the cabinet secretary. However, a key concern has been the uncertainty around the Reserve Bank of India’s (RBI) measures for removing the stress in the sector. The RBI circular of February 12, 2018 on stressed assets resolution has been recently struck down by the Supreme Court, making it difficult to correctly gauge the way forward for the sector.

Overall, the emphasis seems to be that if a project is taking the National Company Law Tribunal (NCLT) route, it is being done for a change in management of the project. However, whether a management change is the answer in most of the stressed assets is not clear. There are inherent sector issues such as non-payment by discoms, which, regardless of a change in management, will not go away. There are also concerns regarding non-availability of coal and PPAs for some existing plants. Non-commissioned capacities too are an area of concern. For these projects, there is no other option but to go to the NCLT.

Also, there is a need to ensure that lenders are empowered to take decisions in a timely manner. The Standing Committee on Energy on stressed projects had stated that if lenders were given the flexibility to reduce interest rates for particular projects, these would not be stressed. The challenge today is that such flexibility is not available to lenders.

There are also challenges inherent in the current regulatory regime. As per the regulatory norms, an asset that has been abandoned and has no work going on attracts a general provisioning of 10 per cent; meanwhile, an asset that is fully operational but faces delayed payments by discoms also attracts the same 10 per cent provisioning. Subsequently, if the asset is declared a non-performing asset, no lender is prepared to give money to it. This issue has been flagged to RBI by the industry.

Coal availability scenario and emission norms

In the past three to four years, the sector has become quite comfortable in terms of coal availability and quality, which indicates that a lot of work has been done in coal production and logistics through the joint efforts of Coal India Limited, power generators, as well as the ministries of coal, power and railways.

There has been a healthy growth of around 6.5 per cent in power demand in the past year. Coal-based power generation has increased by 3.61 per cent, which is a very healthy sign. The increase in coal supplies offers comfort to the industry that there will not be any serious problem regarding coal availability.

Earlier, a key concern for the industry was the compliance date for the new environment norms, notified in December 2015. With the efforts  of the MoP and the Ministry of Environment, Forest and Climate Change, the date has now been moved to December 2022. However, there is a lot of work that needs to be done. Meeting the new NOx reduction norms will be a challenge. Given the quality of Indian coal, which has a high percentage of ash content, there are no proven technologies that can reach the norms’ level of 100 mg per Nm3 for new plants. So, the industry is requesting that these norms be looked at a little more liberally.

Renewable energy

The renewable energy sector has moved away from the earlier regime of accelerated depreciation and generation-based incentives to competitive bidding in the past two years. Hence, renewables have picked up purely because tariffs have come down, both for solar and wind.

However, the bidding regime has brought its own set of challenges. There are implementation issues and the renewable energy sector should not make the same mistakes as those made by the conventional energy sector.

There is also a need to address the issue of variability in power generation with renewable energy coming into the grid. Renewables now have a sizeable share of 9-10 per cent in generation. Hybrids and storage are some areas that need attention. There is also a need to promote the biomass and bagasse segments, which are important for utilising agricultural resources and urban waste.

On the positive side, the waiver of transmission charges for renewable projects (till 2022) has helped make renewable power cheaper and given a lot of comfort to the sector. The green energy corridors are another area where a lot of work has been done to integrate renewables. Further, the renewable purchase obligation has helped by assuring offtake by the state governments.

Hydropower

The new policy addresses a number of concerns, which had led to higher tariffs of hydropower projects, owing to factors such as remote location and the high cost of building roads and flood moderation. Under the new policy, the flood moderation cost component will not be included in the power costs. Further, expenditure on basic infrastructure such as the approach roads to the site will be borne by the government. Changes have also been brought in in the tariff structure following discussions with the lenders, such that the servicing ratio is maintained and there is an escalating tariff structure. The government is also working on bringing in an ancillary market, which will ensure better tariffs for hydro projects. The new policy is expected to  bring back the focus on hydro-power development.

However, there are some gaps in the policy that need to be addressed. For private sector investors, a key issue with hydropower is the signing of PPAs before the project starts. At tariffs of nearly Rs 7 per unit, discoms are reluctant to enter into PPAs with hydropower project developers. Unless the true differentiator of hydro is recognised by the regulator through a very well-developed ancillary services market and differential peaking power tariffs, hydro will not be able to compete with thermal or other fuels. What is also holding back private sector investors is the time taken to obtain clearances, despite the power ministry working with the environment ministry to address these issues.

Transmission concerns

The ministry has done extremely well in promoting tariff-based competitive bidding and ensuring that there is fair play in terms of private sector participation. However, at the state level, there needs to be a renewed focus on ensuring that competitive bidding is the only way that transmission projects are built. Another key issue that the government needs to work on is separating the role of Power Grid Corporation of India Limited as the central transmission utility (CTU) from its role as a developer in order to create a level playing field. Further, the transmission charges (on a per unit basis) for renewable energy projects are nearly five times those of fossil fuel plants. These charges need to come down in order to make the sector viable, and this can happen only when there is greater competition.

Right-of-way (RoW) issues are also a key concern. For this, a nodal agency is needed that would take care of implementation issues, given that execution risks in this industry are very high. Similarly, collectors could be empowered to decide on RoW issues in a manner that is prudent.

Some commercial issues also require government intervention. The recent RBI circular of January 16, 2019 puts the repayment of rupee debt on the negative list of the external commercial borrowings framework. This amounts to equity-like funding being blocked and hence, government intervention is needed. Another commercial issue relates to a hike in domestic insurance tariffs, which have increased multifold  in the past six months for transmission assets.

Captive power rules

The captive power arrangement was introduced in the Electricity Act, 2003 fundamentally to offset the burden of cost subsidy on industrial consumers. However, the tighter versions of the captive power rules that have been proposed are becoming a pain point for industrial consumers and taking away from the ease-of-doing business. While this is being done to bring back consumers to discoms, the latter have not been able to cater to their needs. Therefore, for industries, especially heavy industries that require 24×7 power, higher tariffs charged by discoms that are not able to deliver become a major burden.

Distribution reforms wish list

Last-mile reforms in the power distribution segment are important, so that there can be more competition in distribution. Privatisation can bring in significant positive outcomes as it would reduce the control of political establishments significantly. Delhi’s privatisation model has definitely been a great success.

The proposed carriage and content separation will open up a lot of opportunities for the private sector. With the monetisation of assets that the state transmission utilities and discoms own, there will be a substantial deleveraging of their balance sheets as well.

However, government plans and policies such as eliminating cross-subsidies and allowing open access will ultimately lead to cross-subsidising consumers moving away from discoms and, hence, to higher consumer tariffs. Political will is therefore needed to ensure that people pay for quality power, whatever the price.

Further, there are issues that would need to be addressed as more houses are wired up. As more people get connected to the grid under government electrification schemes, their aspiration for power supply will increase. However, the gap between the cost of supply and the revenue to serve the additional households would be huge and would have a significant impact on discom balance sheets.

Lastly, the government needs to continue its focus on UDAY. Given that the objective of this policy mechanism is to address one of the most fundamental problems in the sector, it should be ensured that it does not lose steam.

Government priorities

Compliance with environmental norms is definitely an issue that the MoP plans to focus on and which could be a challenge in the months to come. The timeline has been relaxed once, but this option may not be available a second time.

Inadequate availability of gas is another issue. Gas-based projects (aggregating 25,000 MW) are national assets and involve huge investments. Earlier the MoP implemented a scheme using the Power System Development Fund to subsidise some of these projects. The High Level Empowered Committee has recommended that the government examine a revival scheme, which could be implemented along the earlier lines. The scheme is under the consideration of the government. More gas supplies are expected to come in from the Oil and Natural Gas Corporation and, along with regasified liquefied natural gas mixed in the right proportion, could make the scheme viable. Also, gas-based capacities will get absorbed with a demand growth of 7-8 per cent.

On the energy efficiency side, the government will be putting in more effort in the area of electric vehicles. In the transmission segment, it is working on separating the role of the CTU. Meanwhile, the MoP will continue to put pressure on the discoms to manage their resources better. The pressure on the discoms to perform will continue. Further, as more connections get added under the rural electrification scheme, discom balance sheets could get impacted. However, this should not be looked at only in terms of discoms incurring more losses. Ultimately, as consumers get access to electricity and become used to it 24×7, they will have to pay for it. So, the challenge for the government would be to provide 24×7 power supply.

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