June 2022

Power demand is intimately associated with economic activity and slated to grow steadily. The post-Covid rebound, alongside extreme summer temperatures, has led to record peak demand in June.

Alongside expanding its generation capacity, India must pay attention to the urgent needs of energy security and environmental sustainability. Fossil fuels are expensive and emissions-heavy, and events such as the Ukraine War cause supply disruption and price escalation. This leads naturally into the concept of energy transition, reorganising the generation mix. The target is a total capacity of 800 GW by 2030 (from 400 GW in April 2022) and at least 500 GW from non-fossil sources. Given the current hydro capacity of 46 GW and renewables capacity of 112 GW, this implies 40-45 GW of annual renewables addition. In addition, India aims to cut emissions intensity by 45 per cent from 2005 levels.

Obviously, this is a massive investment opportunity, but it is also a big ask to fulfil these targets. It needs many things to fall in place. One is enabling policy, across transmission and distribution, and open access, as well as an acceleration of the pace of project clearances and development.

So, generation capacity has to double by 2030; transmission capacity has to grow appropriately; the energy mix has to change to lower emissions; distribution must become more efficient and more financially stable.  All this is on a tight time-schedule.

Currently, around 74 per cent of power units are thermally generated. This should reduce as renewables capacity builds up. It is clear from the past and current trends that lenders as well as equity investors, including PE and VC investors, are much more comfortable with renewables. If green hydrogen can reduce the current production and storage costs, this would be a huge boost.

India already has a large and complex national grid with a lot of interregional and some international capacity. There is need for continued expansion as well as the induction of new, smarter grid management technologies.

The enthusiastic market response to the IPO of Power Grid’s Infrastructure Investment Trust is a good signal. The IPO raised over Rs 77 billion and given that it was oversubscribed by nearly 5x, Powergrid sho­uld be able to comfortably monetise its asset base of Rs 452 billion of transmission assets by 2024-25.

In terms of open access and power trading, there has been progress. The third power exchange – Hindustan Power Exchange – is scheduled to go online soon. The the National Open Access Registry has launched. The new Green Access Rules, 2022, lend policy support to green power.

Given the very slow capacity accretion in the past three years, tax breaks for mega projects under construction have been extended by 36 months. PPA players will also be heartened by a recent court ruling that discoms cannot unilaterally renegotiate the terms and tariffs of PPAs.

The biggest question mark concerns the financial viability of distribution – the last mile. T&C losses have decreased but still average at above 20 per cent. Certain states have losses that are more than twice that.

The discoms have huge accumulated losses and continue to register big operational losses. As of May 2022, discoms owed more than Rs 200 billion to developers. In turn, generators have issues paying suppliers and this leads to stresses across the value chain. Policymakers have to find ways to put discoms on a more sustainable footing. It can only be hoped discom privatisation and the new RDSS will prove effective.

Can the power sector meet these targets and overcome these challenges? The most intractable issue is that of the financial viability of discoms. If that can be tackled, the rest can be done.


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