Trends and Outlook

Tackling stressed assets crucial for sector growth

There were both positives and negatives for the power sector over the past year. The household electrification drive is expected to meet its target in the next couple of months with only the last few households pending electrification. With respect to the Ujwal Discom Assurance Yojana (UDAY), although the final outcome of the scheme that ended in March 2019 is yet to be released, early reports suggest that discoms across states are likely to have missed the targets.  Apart from this, conventional capacity addition has certainly taken a hit with the growing renewable capacity and issues such as lack of power purchase agreements (PPAs) and fuel uncertainty. Moreover, the build-up of stressed assets continues to be a pain point for the sector. In this regard, the government is likely to implement the recommendations of the high-level empowered committee (HLEC) soon, and this is expected to bring relief in the coming months.

Capacity addition trend

  • During 2018-19, capacity addition from 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 hydropower projects.
  • Total energy generation in 2018-19 stood at 1,249 billion units (BUs) (excluding renewable energy), 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, followed by hydro (10.8 per cent).
  • 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.

Setting up evacuation infrastructure for renewables

  • In the transmission segment, about 22,437 ckt. km of lines were added at the 220 kV and above voltage level in 2018-19, a decline of 3 per cent over the previous year. Meanwhile, AC transformer capacity of about 72,705 MVA was added during the year.
  • Significantly, 24,000 MW of interregional transfer capacity has been added during the past two years. As a result, interregional power transfers increased from 138 BUs in 2016-17 to 182 BUs 2018-19.
  • To ensure adequate evacuation infrastructure for existing and upcoming renewable energy projects, the government has accepted the proposal to have the Central Electricity Regulatory Commission give early approvals to transmission schemes identified for 66.5 GW of National Renewable Energy Mission projects.

Distribution network loss unabated

  • Unabated aggregate technical and commercial (AT&C) losses continue to hamper the power distribution segment. For the states participating in UDAY, losses declined from 20.2 per cent in 2016-17 to 18.7 per cent in 2017-18, and further to 18.2 per cent in 2018-19. However, this is higher than the 15 per cent target that was to be achieved by March 2019.
  • On a positive note, the gap between the average cost of supply and the average revenue realised decreased from Re 0.41 per unit in 2016-17 to Re 0.17 per unit in 2017-18. Apart from this, discom losses declined by more than 60 per cent, from Rs 378.77 billion in 2016-17 to around Rs 150.5 billion in 2017-18. However, the latest estimates suggest that the losses increased to Rs 283 billion in 2018-19.
  • As of May 2019, outstanding discom dues stood at Rs 402 billion, as compared to dues of Rs 303 billion as of May 2018.

Growing renewables

  • During 2018-19, renewable energy capacity addition stood at 8.5 GW, surpassing the additions in the conventional energy segment. The share of renewable energy in the total generation mix stood at 10 per cent in 2018-19 (126 BUs), as compared to 8 per cent in the previous year.
  • However, the renewable energy segment added less than 60 per cent of its targeted capacity of 15,602 MW during the year. Currently, one of the key factors dampening investor sentiment in the segment is the recent move of PPA renegotiation by state governments/regulators. For instance, on July 1, 2019, the Andhra Pradesh government stated that it will review the PPAs signed between the state discoms and power generators to renegotiate tariffs. Besides this, the imposition of safeguard duty, issues relating to the goods and services tax (GST), and project delays continue to hamper the development of projects.
  • In order to give a leg-up to the ailing hydropower segment, the government, in March 2019, approved a slew of policy measures, including the much-awaited renewable energy status to large hydropower projects (of more than 25 MW capacity) and notifying the hydropower purchase obligation as a separate entity within the non-solar renewable purchase obligation.

Coal production trends

  • During 2018-19, coal production stood at 730.35 mt (provisional), marking an increase of around 6 per cent over the previous year. Meanwhile, coal demand stood at 969.46 mt during the year. On a year-on-year basis, coal imports witnessed an increase of 13 per cent in 2018-19 to reach 235 mt.
  • Coal stock availability at thermal power plants (TPPs) has been fluctuating owing to various reasons such as weather conditions and demand-supply dynamics. As of July 28, 2019, the coal stock at TPPs was enough to run them for 14 days; however, it is much below the normative requirement. Meanwhile, there were three power plants with critical/ supercritical coal stock. In the past year or so, the number of power plants with critical coal stock has varied from zero to 33.

Mounting stressed assets

  • The mounting level of stressed assets in the power generation segment has become a pain point for the sector. The latest estimates suggest that stressed thermal assets stand at 38 GW and entail a total cost of Rs 2.91 trillion. To resolve the issue of stressed assets, the HLEC had, inter alia, recommended allowing the use of coal linkages for short-term PPAs, and permitting generators to terminate PPAs in case of a payment default. The recommendations were approved by the cabinet and are expected to be implemented soon.
  • The Reserve Bank of India’s new prudential framework for the resolution of stressed assets by banks wherein the implementation period for the resolution plan has been increased from 180 days to 365 days has also come as a big relief for TPP developers.

Focus on clean mobility

  • The overarching scheme for electric vehicle (EV) adoption – Faster Adoption and Manufacturing of Electric Vehicles II (FAME II) – announced this year, now has a wider scope as well as higher financial outlay over its predecessor (FAME I). Notably, the scheme, with an outlay of Rs 100 billion, lays emphasis on creating green mass transport systems with more than half the allocation earmarked for e-buses and e-three-wheelers.
  • On the EV charging front, the Ministry of Power (MoP) has issued guidelines allowing the setting up of public charging stations as a delicensed activity. Besides this, in a major push for the segment, the GST Council has lowered the GST on these vehicles from 12 per cent to 5 per cent.

Electrification drive 

  • The past year witnessed one of the biggest household electrification drives ever. The target under the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya) of 100 per cent electrification is close to being achieved. According to the Saubhagya dashboard, as of July 2019, 100 per cent household electrification has been achieved across all states except in 18,734 households in Chhattisgarh. This is expected to increase the power demand in the country as well as increase discom losses.

Equipment market trends

  • In the generation segment, the demand for equipment compliant with the MoP’s revised emission norms has opened new avenues for equipment manufacturers. Industry estimates suggest that so far flue gas desulphurisation (FGD) tenders for compliance of around 115 GW with sulphur oxide norms have been issued and  orders for around 34 GW have been placed.
  • In the transmission and distribution segment, the government’s thrust on 24×7 Power for All and last-mile connectivity through 100 per cent rural electrification is driving equipment demand growth.

Outlook

  • In the generation segment, with the integration of renewable energy into the grid, TPPs need to be flexible in their operations. As per a recent report by the Central Electricity Authority, the maximum power demand is expected to cross 225 GW and the quantum of renewable energy to be integrated will go up to 108 GW by 2021-22. This will require TPPs to operate at a minimum PLF of about 25.73 per cent.
  • Bringing much relief to independent power producers, the MoP recently introduced a new payment security mechanism wherein, from August 2019 onwards, the power supplied by the gencos will be conditional upon the discoms opening and maintaining a letter of credit for an amount equivalent to the latter’s monthly power purchase bills. While this is expected to address the issue of mounting discom debt, it will put additional burden on the already cash-strapped discoms.
  • Apart from this, in the distribution segment, the industry eagerly awaits concrete action on reforms such as UDAY 2.0, separation of carriage and content, and redesigning of the tariff structure
  • In the equipment manufacturing segment, going forward, annual FGD orders for 35-40 GW are expected in the next two to three years. Further, equipment manufacturers are exploring technology solutions that would minimise space requirement at power plants and ensure minimal shutdown periods.

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