While the power sector took some positive steps to spur growth such as rationalisation of goods and services tax (GST) rates for renewable energy projects, push towards the development of green energy corridors, the sector saw some lows as well. Limited fuel availability for coal- and gas-based power plants and outstanding discom dues adding to the financial stress of power producers as well as a slowdown in new renewable capacity additions has set alarm bells ringing. Indian Infrastructure invited industry experts to comment on the power sector’s performance during the past year. Excerpts…
What has been the progress in the power sector in the past year?
The progress in the power sector has been quite significant not just in the past year but the past three years. The availability of power has gone up sharply and the country is now surplus in terms of power availability. This is a tremendous feat. There are many issues that still remain. The first and most significant problem is that of coal availability. Our coal availability should have been good as we are rich in terms of our own coal mines. However, this has not happened and the sector remains mismanaged. Coal must be made an essential commodity and strikes should not be allowed in coal mines, as this can lead to disruption in supplies. Coal management in mines should not be done by bureaucrats, but by experts.
Another key concern for the power sector is that of gas shortages. We have built considerable gas-based capacities based on projections of availability from Reliance Industries Limited’s Krishna-Godavari block. However, there was an unforeseen lowering of gas production from the block. As a result, about 25,000 MW of gas-based generation is lying stranded. The government should not permit such a situation to develop. We need to find a way to make this capacity operational. We also need a careful inspection of private gas producers to make sure that gas production is not being held back in anticipation of better prices.
The renewable energy sector saw a slump in capacity addition in 2018-19 (8.62 GW) as compared to 2017-18 (11.78 GW). This was primarily driven by a decline in solar capacity addition while wind capacity also slipped by 10.5 per cent during the same period. Still the capacity addition in renewables was two and a half times the conventional energy capacity addition during the same period.
Contrary to statistics, the renewable segment has seen numerous offtakers in the bids conducted by the Solar Energy Corporation of India, NTPC Limited, Maharashtra State Electricity Distribution Company Limited, Gujarat Urja Vikas Nigam Limited and other nodal agencies during the second half of 2018 and so far in 2019. Thus we expect considerable capacity addition in the years ahead.
However, challenges such as outstanding dues with discoms, slower augmentation of transmission infrastructure, threatening and challenging of the sanctity of long-term power purchase agreements (PPAs) by state governments, uncertainty of waiver of transmission charges beyond March 2022, etc. are to be addressed to keep up the pace of additions. It is worth mentioning that the government had already taken cognisance of the situation and invited renewable energy developers to the Ministry of New and Renewable Energy’s recently conducted Chintan Baithak to address the challenges faced by the sector.
On the power sector front, India is undergoing a massive transformation. From the goal of being a power-surplus country, the spotlight is now entirely on green energy and power for all. This entails heavy investment in the renewable energy and power transmission segments across the country.
Transmission is the backbone of the power sector and has a significant role to play in enabling the government’s vision of 24×7 Power for All and meeting our renewable energy targets as part of the global climate change commitments. The sector has already made great progress as a result of the government’s commitment to competition through a plethora of favourable policies and schemes.
An investment potential of over Rs 4.2 trillion is envisaged over the next five years in the Indian power transmission segment alone. Transmission networks connected to renewable projects are estimated to present a standalone opportunity of around Rs 420 billion in the next couple of years. This will require fresh capital investment as well as recycling of invested capital for the development of greenfield projects.
The new phase of growth requires new solutions for energy delivery. In the capital-intensive power sector, innovative models for funding along with increased transparency are the need of the hour. We, at IndiGrid, believe that we are in the right place at the right time, offering a unique investment proposition in a sector that has traditionally witnessed a great degree of volatility and lack of attractive investment opportunities.
IndiGrid was formed in 2016 as an infrastructure investment trust (InvIT) with one key goal in mind – “democratisation of power” in the country. We strive to provide an inclusive ownership of power resources to a much larger investor base across the country, while ensuring strong and robust corporate governance as the foundation framework for this unique platform.
What has been the impact of the key initiatives taken by the government?
Unfortunately, there have not been any positive initiatives. To begin with, the government’s policies of providing free and subsidised electricity to the agricultural sector have resulted in issues related to both power and water supply. There is overuse of water to the extent that is making many states face water shortages and disruption in power supplies. The government needs to lay down strong rules so that only efficient pump sets are used by the agricultural sector. Further, free power should stop and, if given, it should be from the state government and not the electricity company or discom. Another issue is the lack of efficiency in the sector due to government ownership of power plants. The whole question of the government being in the business of electricity generation is something which needs to be examined. Similarly, the presence of the government in the distribution segment should also be examined. The solution to this is to encourage private ownership. Further, regulatory commissions should lay down performance standards and ensure that strict penalties are imposed on entities that do not meet them.
- A performance-linked financial and operational turnaround plan, UDAY was brought in by the government to improve the health of beleaguered discoms. It has been quite fruitful so far and we expect similar results for the tail-ender discoms in due course of time.
- The waiver of transmission charges for renewable projects has spurred investments in interstate transmission system-connected renewable projects and the desired extension of the waiver beyond March 2022 will certainly keep up the pace of investment in this segment.
- The development of green corridors for evacuation of renewable energy generated in high concentration areas has been a great support for harnessing and optimally utilising renewable resources. In addition, it has also been helping states with lower renewable resources improve their energy mix.
- To increase the ease of doing business, the government has enacted the Goods and Services Tax Act thereby rationalising the taxes levied on solar and wind generating plants across the country.
- The imposition of safeguard duty on imports of solar photovoltaic (PV) modules and steel structural material for solar power plants has facilitated local capacity building and reduced dependence on imports.
InvIT guidelines were issued by the Securities and Exchange Board of India (SEBI) in 2014 with the objective of mobilising capital for operating infrastructure assets in India and releasing capital for future investment in infrastructure.
During the short span of two-three years of coming into existence, InvITs have quickly been gaining momentum among institutional investors to help garner funds that would finance the country’s increasing infrastructure investment needs, estimated to be Rs 50 trillion by 2022, to enable sustainable development.
There have been six listings of InvITs and real estate investment trusts (REITs) in the past three years garnering around Rs 300 billion across infrastructure assets ranging from roads, transmission, commercial real estate and gas pipelines with participation from marquee investors such as the Canada Pension Plan Investment Board, GIC Private Limited, Brookfield, Blackstone, KKR, Omeros Corporation, Schroders, Allianz Capital Partners, the International Finance Corporation, and so on.
Global as well as domestic investors’ enthusiastic participation is testimony to the robustness of the regulations around InvITs and speaks volumes about the confidence and trust in this platform globally amidst marquee investment managers as a credible vehicle to efficiently invest in operating infrastructure assets for the yields they seek.
In the past few months, several new InvITs have been announced in the renewable energy, telecom infrastructure and other sectors. The government is also evaluating InvITs for their monetisation programme. With the InvIT track record of the past two years, it is evident that InvITs will become the norm for financing infrastructure for private as well as public assets.
What are the key challenges that remain unaddressed?
As I said earlier, giving free power needs to stop. Also, government ownership at the central and state levels is very unfortunate and has not led to efficiency. Another key challenge is the availability of raw material, that is, coal, oil and gas. We need to make sure that our coal mines are functioning efficiently. Further, we are importing almost all our gas, and this exposes us to international geopolitical tensions. There is also a need to explore for more domestic gas, and this must see greater participation from private players. Another issue is that of electricity theft, which has still not been addressed. And again, the root cause of such problems is government ownership.
There are several unaddressed issues in the sector.
- There should be a restructuring of the 70:30 (supply:service) ratio as defined for the purpose of taxation of engineering, procurement and construction contracts by the GST Council, to 90:10 that would lower the tax burden for the solar PV industry and is in accordance with the Central Electricity Regulatory Commission’s benchmark capital cost of solar PV for 2016-17.
- The issue of hoarding of land by original equipment manufacturers in wind-based projects has been raised by renewable energy developers for a very long time. To address this concern, a level of transparency is required.
- In addition, conversion of non-agricultural land used for setting up renewable projects is the need of the hour, as the process of conversion varies hugely across states and consumes considerable time in the project delivery cycle.
- The domestic module manufacturing industry has seen a boost; simultaneous development is needed in back-end manufacturing capabilities of ingots and cells to reduce our dependence on imports. Besides incentivising existing module manufacturing capacities, the setting up of new facilities is equally essential if we wish to achieve the target of 300 GW solar by 2030.
- Average transmission and distribution losses in India exceed 21 per cent of total power generation. The losses are almost 2.5 times the world average. Therefore, retiring the high-loss networks, strengthening the existing system and augmenting capacity are the need of the hour.
All of these will not only improve the bankability of PPAs but will also improve the confidence level of developers and investors.
What is the sector outlook for the next one to two years?
This depends on government action. The power sector has got tied with politics, just like water. We are not charging enough for the water that we supply. We really need to ensure that our power supply is taken care of. Another thing we must do in the future is to go all out on generation from renewable sources, especially solar and wind. We also need to use solar and wind for local generation and distribution, especially in village clusters. This will enable the villages to take care of their own consumption needs and ensure that there is no misuse by local authorities. Moving forward, we also need to lay down very stringent rules for equipment for which power is used so that the electricity is not wasted.
The Indian government’s thrust on renewable energy with a core focus on solar power dominated the power sector in 2017-18. The government has planned the addition of 175 GW of renewable energy by 2022 and to increase the share of renewables in the overall energy mix to 40 per cent by 2030. It is also anticipated that India’s peak demand for power will increase from the current level of 183 GW to 226 GW by 2021-22 and 299 GW by 2026-27. Considering the demand projections and the likely retirement of 22.7 GW of capacity, total capacity addition of 175 GW, including 47.8 GW of coal-based power projects currently under construction, is envisaged by 2022. Similarly, for the period 2022-27, another 175 GW of capacity addition and retirement of 25 GW have been envisaged.
The development of an ecosystem in the energy storage space that largely comprises battery-based energy storage is burgeoning. Such an ecosystem will not only spur the development of energy generation projects clubbed with existing renewable projects (thereby firming up availability of power), but will also increase the penetration of renewable energy in mainstream consumption, thus increasing the share of renewable energy. For capacity building, intervention from the government is essential to address the hiccups, thereby drawing the desired investments into the sector. Further we may also see some consolidation to address operational inefficiencies of several non-core players with smaller capacities.
SEBI, with the perspective of safeguarding stakeholder interests, has been proactive in implementing strong and robust corporate governance as the foundation framework for this unique platform.
A robust regulatory framework has worked well and resulted in attracting global capital. Moreover, in a bid to make InvITs mainstream, SEBI took a very pragmatic step earlier this year by approving two amendments to the InvIT Regulations in April 2019, giving them more flexibility to raise funds.
The leverage limit for InvITs was raised from 49 per cent to 70 per cent of the total asset value (with stringent restrictions) ensuring that most credit risks to any borrowing are minimised structurally. Along with this, the trading lot value was significantly reduced from Rs 500,000 to Rs 100,000 in order to improve liquidity and depth of the market.
Owing to the stringent regulations, InvITs predominantly own operating assets which insulates them from some of the key risks inherent in the infrastructure sector such as financial closure, regulatory approvals, time and cost overruns, etc. As InvITs are required to distribute a minimum of 90 per cent of their cash earnings to investors, it provides a stable and predictable yield to investors. These factors and a reducing interest rate environment make InvITs a compelling investment in today’s uncertain times beset with high volatility.
Since our listing in June 2017, maintaining stable growth amidst volatility has been our key focus. Since our initial public offering, we have acquired another six operational transmission assets, growing from an asset base of Rs 38 billion to Rs 106.67 billion currently. On the back of these acquisitions, IndiGrid has distributed a total of Rs 24.56 per unit in the last nine quarters since being listed in June 2017.
Our endeavour to ensure stable growth has been well appreciated by global investors. IndiGrid’s preferential issue worth Rs 25.14 billion, launched in May 2019, was highly successful with participation of several global marquee investors including KKR and GIC. A primary investment of this size by marquee global investors is a testimony to IndiGrid’s credibility as a stable yield and growth platform. With a strong pipeline visibility of up to 11 assets and assets under management of Rs 170 billion over the next two years considering only the sponsor assets, IndiGrid is on course to achieve its mission of Rs 300 billion AUM by 2022. Apart from the sponsor assets, there seems to be a dynamic market for third-party assets as well.
While InvITs are well regulated by SEBI and offer predictability of cash flow from operating assets, there are some policy changes required to enable banks and insurance companies to subscribe to debt securities issued by InvITs.
At our end, we will continue to ensure robust risk management mechanisms and high standards of performance delivery, which have accounted for our success so far. We intend to continue to provide investors with a credible and transparent investment opportunity in the Indian power sector.
“The government’s policies to provide free and subsidised electricity to the agricultural sector have resulted in issues related to both power and water supply. There is overuse of water, which is making many states face water shortages and disruption in power supplies.” Dr S.L. Rao, Former Chairperson, CERC
“The development of an energy storage ecosystem will not only spur the development of generation projects clubbed with existing renewable projects, but will also increase the renewable energy penetration in mainstream consumption.” K.V. Sajay, President, Solar, Wind and Regulatory Affairs, Hero Future Energies
“An investment potential of over Rs 4.2 trillion is envisaged over the next five years in the transmission segment alone. Transmission networks connected to renewable projects present a standalone opportunity of around Rs 420 billion in the next couple of years.” Harsh Shah, CEO, IndiGrid