Renewable energy capacity additions have dominated the country’s power sector in the past year given the growing attention to decarbonising the economy and fulfilling the commitments made at the COP26 summit, that is, to meet 50 per cent of energy requirements from renewable sources by 2030 and achieve the net zero target by 2070, among other things. Apart from this, the Ministry of Power has launched the result-oriented Revamped Distribution Sector Scheme (RDSS) with the aim of turning around the distribution segment through network strengthening, loss reduction and smart metering. Indian Infrastructure invited industry experts to share their views on the power sector’s progress, challenges and outlook…
What has been the progress in the power sector over the past year?
Power is among the most critical components of infrastructure, crucial for the economic growth and welfare of nations. Despite the projection of a slight growth deceleration, the gap between India’s per capita power consumption (1,208 kWh) and the global average implies that demand growth is poised to accelerate in the medium to long term. In fact, 2022-23 is expected to be the second consecutive year in which power demand is likely to grow at over 6 per cent. The current fiscal will also be the second year of power demand exceeding pre-pandemic levels and the long-period average of 5 per cent.
In order to meet the increasing demand for electricity in the country, significant generation capacity addition is required along with robust transmission and distribution infrastructure. In 2021-22, India added 13.5 GW of renewable energy capacity. Further, it added 16,750 ckt. km of transmission lines and 57,575 MVA of transformation capacity.
The previous financial year also saw increased government focus on renewables to accelerate the energy transition. An emerging challenge in this regard is that huge generation capacities are being added much faster than evacuation systems can be built. Transmission systems need to come up within a stringent time frame of 18-24 months to meet the pace of renewable energy generation. The challenge is to build transmission lines that consume the least right of way (RoW) and are commissioned in matching time frames of renewable energy projects, with efficient capital availability to ensure the least cost of supply. Here, I would like to applaud the Ministry of Power’s (MoP) direction to consider the construction period of interstate transmission system (ISTS) projects based on distance, voltage and difficulty levels in implementation including the type of terrain and different clearances to be obtained.
Alternatively, solutions are available to build lines with higher capacities, at higher voltages and with less RoW requirement for enabling faster execution of projects. New-age technologies such as high performance conductors (HPC) with carbon composite core can transfer more than double the power from the same line to meet the future requirement. Further, technologies such as gas-insulated substations are an attractive solution in space-constrained areas with high land costs. A thrust on high voltage direct current systems will also enable utilities to move more power further, efficiently integrate renewables, interconnect grids, and improve network performance.
Lastly, the MoP’s decision on planning transmission facilities for offshore wind energy projects in India is another welcome move.
“Considering India’s strong focus on renewables, a robust interconnected grid is extremely important to deal with the intermittency of renewable energy generation. The transmission sector will drive theenergy transition in the country.”Manish Agarwal
Ujjwal Kanti Bhattacharya
The thermal power sector in India is going through a critical transition phase. The world and the country want to move away from thermal, but they have little choice. In fact, India has no choice but to go for a graded transition. It is essential for the energy security and the economy of the country that we continue with thermal generation for some decades till we achieve net zero in 2070. The intensity of thermal power will have to go down progressively.
For a country like India, where per capita energy consumption is very low, ensuring energy security is an equally important aspect. Meeting the energy needs of underserved populations, and improving safe and sustainable energy access for the poorest and most vulnerable groups, are the primary considerations in India. This is the classic “energy trilemma”.
According to a Central Electricity Authority report, in 2021-22, the share of coal, lignite and gas power plants in the total installed capacity stood at about 59 per cent. In terms of electricity generated, about 70 per cent was generated from these plants. The total investments in coal power plants were around Rs 10 trillion. In my opinion, the thermal power sector is still a major contributor and will remain, if not a major, at least a significant contributor to energy security and the future growth of the country.
Although India has announced its intentions to cut down carbon emissions through its Nationally Determined Contributions and the Glasgow Declaration, and achieve the target of net zero emissions by 2070, the exact methods of achieving these targets are still under development. The thermal sector is and will be the major source of power in the country in the coming few decades. The thermal power sector as well as the thermal power plant (TPP) manufacturing sector need to be supported in order to maintain the fleet of thermal projects. The entire ecosystem – regulators, bankers and investors, insurers, manufacturers and consumers – has to keep this in mind.
“The thermal sector is and will be the major source of power in the country in the coming few decades.” Ujjwal Kanti Bhattacharya
India, the world’s third largest producer and consumer of electricity with a generation capacity of approximately 400 GW as of March 2022, is on the brink of a major transition.
The installed renewable energy capacity increased by almost 15 GW (14 GW of new solar projects and 1.1 GW of new wind projects), from 94.4 GW in March 2021 to around 110 GW in March 2022. Of the 14 GW of solar capacity added in 2021-22, the utility-scale segment accounted for a share of 73 per cent, followed by the rooftop (16 per cent) and off-grid (11 per cent) segments.
Given the 55 GW under-construction pipeline along with multiple new tenders in the pipeline, the sector should see significant growth over the medium to long term. However, recent disruptions due to volatility in global commodity pricing, supply chain delays, imposition of basic customs duty (BCD) and the Approved List of Models and Manufacturers (ALMM), etc., may prove to be a dampener for new capacity addition in the short term.
“The constitution of the Green Hydrogen Mission and the release of the policy outline are very encouraging developments.” Srivatsan Iyer
Electricity demand in India remains buoyant in the current fiscal due to the recovery of economic activity and the severe heatwave in the northern and central parts of the country in the first quarter. The demand increased by 18.5 per cent in the first quarter of 2022-23 over the corresponding period in the previous year. The demand is likely to witness a year-on-year growth of 6.5-7 per cent at the end of this financial year. This follows a healthy demand growth of 8.2 per cent in 2021-22. The recovery in electricity demand is expected to improve the all-India average thermal plant load factor (PLF) level to 61-61.5 per cent in 2022-23 from 58.9 per cent in 2021-22.
Coal-based independent power producers (IPPs) benefited from the sharp increase in short-term tariffs in the first quarter of 2022-23 and despite the adverse impact of high coal prices. A sustained improvement in electricity demand growth and in turn the thermal PLF level remains a critical factor to improve the outlook for thermal generation.
The outlook for the renewable energy sector is favourable, led by the continued policy support from the Government of India, strong project pipeline and superior tariff competitiveness offered by wind and solar power projects – both in the utility and the open access segments. The installed capacity in the renewable energy segment has doubled over the past 5.5 years, led by strong policy support and tariff
competitiveness. Investment prospects are expected to remain strong over the next decade, with a target to reach 450 GW renewable energy capacity by 2029-30 from the current level of 114 GW.
The key challenges constraining the growth are on the execution front, mainly associated with land and transmission infrastructure, distribution utility finances and tariff viability concerns amid elevated module prices and hardening interest rates. The prices of mono PERC modules have increased by over 40 per cent to 27-28 cents per watt in the past 18 months due to a sharp increase in the price of polysilicon and supply chain issues in China amid Covid-19. While the supply chain challenges are showing signs of improvement, prices remain elevated amid continued higher prices for polysilicon. This, along with the imposition of customs duty from April 2022, has kept module prices relatively high in India. Notwithstanding these issues, the solar bid tariff rates continue to be highly competitive at less than Rs 2.4 per unit, as seen from the recent bids. While this is positive from the discoms’ perspective, the ability of the developers to make these projects viable remains to be seen.
“A major area of concern affecting discom finances is the significant delay in the process of tariff determination in many states.” Sabyasachi Majumdar
Professor S.L. Rao
It is very difficult to identify any single major element of progress in the past one year. There has been considerable improvement in the availability of power, but there are major weaknesses in the distribution and pricing of power, and these need to be dealt with.
“There has been considerable improvement in the availability of power, but there are major weaknesses in the distribution and pricing of power, and these need to be dealt with.” Professor S.L. Rao
What has been the impact of the key initiatives taken by the government?
A key achievement for the sector has been the successful implementation of the Saubhagya scheme, under which the government has electrified every village and every household in the country.
India is also leading the dialogue and actions on climate change. The government is strong on its commitment towards renewable energy deployment with power generation capacity expected to hit 820 GW by 2030, over 500 GW of it from non-fossil fuel sources. Other notable initiatives include Gati Shakti, which outlines the vision for infrastructure development, including the power sector in general and transmission in particular.
The MoP has also shown a consistent commitment towards public-private partnership in different spheres of the power sector, tariff-based competitive bidding (TBCB) being one of them.
Discoms are the only piece that is still a cause for concern. The RDSS Scheme is a good attempt to revive the ailing state power distribution utilities.
India, with one of the largest renewable energy expansion plans globally, has set ambitious targets to reduce its total projected carbon emissions by 1 billion tonnes by 2030, reduce the carbon intensity of its economy by more than 45 per cent by the end of the decade, and achieve net zero carbon emissions by 2070.
In accordance with the prime minister’s announcement at COP26, India has increased its renewable energy targets to achieve 500 GW of installed electricity capacity from non-fossil fuel sources by 2030.
Government support and a favourable policy framework have been critical in developing the renewable energy sector up to this point, where it is now competitive. The government will continue to play an important role, providing support in the development and deployment of new-age technology solutions such as long-term energy storage and green hydrogen to address the more complicated problems of tomorrow, while providing a more even playing field and a free market for all players across the renewable energy value chain.
The need for development of a domestic manufacturing ecosystem to support this massive growth in renewables is being addressed through initiatives such as the manufacturing-linked tender and the production-linked incentive (PLI) scheme. However, the imposition of BCD on cells and modules will put a strain on developers and IPPs and this issue needs to be suitably addressed in the short term to avoid a slowdown in renewable energy deployment.
The Government of India is trying to boost renewable energy demand through revised renewable purchase obligation targets, support for open access, waiver of interstate transmission system charges, the CPSU scheme, the Kisan Urja Suraksha evamUtthaanMahabhiyan, a rooftop solar scheme and many such measures. Further, states such as Madhya Pradesh and Karnataka are finally coming out with aggressive renewable energy policies. These measures have been a source of encouragement for developers across the country.
The government has also recognised the impact of delayed payment by discoms to IPPs and has come up with various measures such as long-term financial assistance to some discoms, revision of rules regarding payment security mechanisms, etc. These actions are providing some long-awaited respite to IPPs.
We are also seeing a significant expansion of the transmission infrastructure and creation/announcement of new substation capacity under the Green Energy Corridor scheme for the evacuation of renewable energy power.
In addition, there has been an increased focus on new technology adoption and energy storage through new-age round-the-clock and dedicated battery energy storage system (BESS) tenders by both central and state agencies. In fact, Hero Future Energies has recently won one of India’s first standalone 20 MWh BESS tender by Kerala State Electricity Board Limited.
Also worth noting is the focus on the development of a green hydrogen ecosystem in the country. The constitution of the Green Hydrogen Mission and the release of the policy outline are very encouraging developments.
The demand outlook for domestic solar original equipment manufacturers (OEMs) remains favourable, with the strong policy support through imposition of customs duty on imported cells and modules, the notification of the PLI scheme and inclusion of only domestic manufacturers in the ALMM. The policy push is expected to improve the cost competitiveness of domestic OEMs and lead to large capacity announcements by various OEMs and entry of new players. The ability of the OEMs to achieve backward integration and build economies of scale would be important to remain competitive against overseas suppliers on a sustained basis. The share of domestic OEMs in solar power installations in the country is likely to witness a healthy growth led by these policy initiatives over the next three to five years.
Professor S.L. Rao
Over the years, the government has done a few things, which might make the situation of energy suppliers a little better in terms of payment, etc. However, coal has not benefitted a great deal from this. I am not too happy with the existing situation. It has something to do with the fundamentals of the system. First, the most important part of the system is the fact that India is a federation. Electricity, being a concurrent subject, states have their own policies. My problem has been that there is no compulsion on state-owned electricity distribution companies to produce a surplus in their operations and this has been a problem for the past so many years. This is due to the fact that the state governments, being close to the voting population, are inclined to offer subsidies. These subsidies are not reimbursed in time and sometimes not at all, leaving electricity distribution companies in a bad shape in terms of their ability to pay. There must be a compulsion for the state electricity regulatory commissions to oversee that the distribution companies are run either with a surplus, or are reimbursed without delay with respect to any action that they undertake due to government directives, which results in them losing money. The situation has not changed. Unfortunately, the appellate tribunal created in 2003 also does not seem to have the authority to change this situation.
What are the key challenges that remain unaddressed?
Considering India’s strong focus on renewables, a robust interconnected grid with the ability to carry power from any point to any point, and often in both directions, is extremely important to deal with the intermittency of renewable energy generation. Hence, the transmission sector will drive the energy transition in the country. It must facilitate the twin objectives of 24×7 energy access and affordability. To attain its true potential in the next decade, the power sector will have to move towards flexible transmission network planning, freedom of design to promote innovation, greenfield projects together with capacity augmentation of existing transmission infrastructure, and energy storage solutions.
An emerging challenge from renewable energy integration into the grid is that huge generation capacities are being added much faster than evacuation systems can be built. Further, renewable energy-rich zones, with high solar insolation and wind speeds and abundant and economical land parcels, are all located away from the load centres. The challenge is to build transmission lines that have the least RoW and are commissioned in matching time frames of renewable energy projects.
Moreover, to expedite transmission projects, we need a conducive policy and regulatory framework that is open to new technology adoption. Efforts are also needed to hasten forest/wildlife approvals and RoW clearances. To fast-track RoW approvals, clear land compensation guidelines have been issued by the MoP and efforts need to be made to ensure implementation by the state government and the local administration so that the projects are not delayed.
Finally, retrofitting the existing transmission infrastructure and augmenting capacities is an environmentally friendly solution that can be adopted in a timely and cost-effective manner as these do not require additional/RoW. The MoP is working on a revised power transmission plan, which is a welcome move.
Ujjwal Kanti Bhattacharya
Coal is the only source of baseload power generation in India due to the dearth of domestic gas, the limited potential of hydro, and India not being a member of the Nuclear Suppliers Group. Other technologies such as hydrogen and fuel cells are still under development for use on a commercial/megawatt scale. Carbon capture and carbon sequestration/utilisation technologies are also at the research and development stage.
The efficient utilisation of TPPs is another challenge in the transition phase. The annual plant load factor (PLF) of TPPs has fallen in recent years with the growth of renewable energy, which is a concern for thermal power generators. There is a lack of clarity regarding the future of thermal power in the market. So, investors are very cautious about investing in the thermal power sector.
The economy of India in general and of some states such as Jharkhand, Madhya Pradesh, Chhattisgarh and Odisha, in particular, is critically dependent on coal mining. Coal mining and coal-based power plants generate a large quantum of direct and indirect investments and employment. Foreign banks and reinsurers must not shy away from coal, at least till the country achieves net zero.
India has announced a massive capacity addition programme for renewable energy, and is aiming for a reduction in the emission intensity of its GDP. But the import dependency of the country’s solar power sector on modules and silicon feedstock is the biggest hurdle in achieving India’s ambitious target of capacity addition in the renewable power sector.
The decarbonisation of the energy sector is a complex and multifaceted issue as the existing energy production and consumption systems are among the largest human enterprises in the world, and large technological, social and economic assemblages are built around these systems.
Some of these challenges and some possible solutions are:
- Technical challenges: These can be addressed with the integration of thermal power with renewables, which have flexible generation schedules and large seasonal and diurnal variations; flexibilisation of TPPs; improving the energy efficiency and reliability of TPPs during part-load operations; investments in technology required for energy storage, etc.
- Financial challenges: Huge investments have been made in coal mines, TPPs and systems to satisfy the new emission norms. Further, there is a risk of creating stranded/ stressed assets due to uncertainty in the financial and political environment.
- Social challenges: These can be addressed by supporting communities and individuals who might be affected directly and indirectly by decarbonisation; research and development of new, indigenous technologies to suit the requirements of the clean energy transition with a strong potential to address the social challenges of providing jobs; investments in multidimensional factors such as education and human capital.
The sector has seen significant growth in the past couple of years, especially in the renewable energy space with almost 110 GW of renewable energy generation assets in operation, 55 GW under deployment and another 33 GW under bidding, but there is a long way to go to meet the 500 GW renewable energy goal. The sector needs to address some long-standing structural issues to ensure renewable energy growth is in line with these targets.
- Module and other RM availability and price uncertainty: The implementation of 40 per cent BCD on modules and 25 per cent on cells is expected to hamper renewable energy growth in the short term. This, along with ALMM and global supply chain disruptions, has increased module prices to historic highs. We expect these prices and higher international volatility to lead to an increase in discovered tariffs over the next few months.
- Fragile financial health of discoms: The poor financial health of discoms and associated payment delays to renewable energy developers are causing a multitude of issues such as requirement of working capital financing, reduction in return expectations and low investor interest in such projects. Until solutions are found through discom restructuring, regulatory reforms, operational reforms and technology adoption, state power projects will continue to underperform expectations.
- Transmission and distribution infrastructure expansion: With the current pace of demand growth and renewable energy deployment, grid expansion needs to be expedited. To ensure readiness for accelerated growth in the future, dedicated green energy corridors, renewable energy management centres, competitive bidding for transmission infrastructure and private sector involvement should be promoted.
- High cross-subsidy charges and wheeling charges: High cross-subsidy and other wheeling charges imposed on commercial and industrial (C&I) consumers are hampering the growth of open access power across states. Long-term policy visibility, reduction of additional transmission charges and cross-subsidy on C&I consumers will help promote investment in open access capacities, which will be critical for the growth and decarbonisation of the C&I sector.
- Policy variations at the state level: Variations in state-wise policies and regulations has led to confusion among prospective investors and lack of long-term policy visibility in some states has somewhat depressed the investment sentiment in power generation projects in states. There should be long-term policy stability in states and the central government should evolve mechanisms to streamline the state policies and regulations.
The thermal segment continues to face challenges owing to the lack of meaningful progress in signing of new long-term/medium-term power purchase agreements (PPAs), delays in payments from discoms, inadequacy of domestic coal availability and a sharp increase in international coal prices in the recent past. Moreover, the tighter environmental compliance requirement remains a key challenge for this segment.
Further, state-owned distribution utilities continue to be in fragile financial health, due to the high level of aggregate technical and commercial (AT&C) losses, inadequate tariffs in relation to the cost of power supply, delays in subsidy support from the state governments and delays in receiving payments from state government bodies. Their overall debt burden, despite the implementation of the UDAY, is estimated to have increased to over Rs 6 trillion in 2021-22. Considering the highly subsidised nature of power tariffs for agriculture and certain sections of residential consumers, the overall subsidy dependence is estimated to remain high at about Rs 1.5 trillion this year at an all-India level. As a result, the discoms in key states continue to report losses, leading to delays in payments to power generating companies and impacting the quality of supply to consumers.
A major area of concern affecting discom finances is the significant delay in the process of tariff determination in many states. The tariff determination process for discoms for 2022-23 remains sluggish, with tariff petitions for 2022-23 being filed by 24 out of 29 states and tariff orders being issued only for 18 states. While the median tariff hike is higher in 2022-23 compared to the past two years, this is
likely to remain inadequate considering the expected increase in the power purchase cost for the discoms in 2022-23 due to the rising dependency on costlier imported coal.
Professor S.L. Rao
One of the important challenges in my view is the selection of regulators. I think we do not have a proper system where the people who are selected as regulators are truly independent of the government and are able function in a clear, autonomous and independent manner. This is important and must be done. I do not know how this can be ensured by the state governments and whether the central government has any authority to decide that regulators must be selected by independent bodies.
I would also say that we need a review mechanism to assess the performance of the regulatory bodies. The matter has been left to each local government and this is quite unsatisfactory because there is a much closer relationship between the selected regulators and the concerned state governments.
The next thing we need is coordination between regulatory bodies in different sectors. I hoped to achieve this in my time many years ago as the central regulator by creating a body called the Forum of Indian Regulators (FOIR). While FOIR has introduced some important changes within the electricity sector, I think it has not successfully been able to coordinate between regulatory bodies on several issues. For example, I would like to see a much greater degree of coordination between the Securities and Exchange Board of India and electricity regulatory bodies to ensure that electricity companies, whether private or public, function in an effective manner as far as their financial health is concerned.
What is the sector outlook for the next one to two years?
The outlook for India’s energy sector is positive, and we are very upbeat about contributing towards its energy security. India wants to generate 50 per cent of its electricity using renewables by 2030. This is massive and as a nation if we want to achieve this, funding for renewables as well as transmission infrastructure needs to go up in tandem.
As per the ISTS network expansion plan, projects worth Rs 1,250 billion have been identified and planned for execution till 2026-27. This amounts to new addition of around 32,000 ckt. km of line length and 217,000 MVA of ISTS transmission capacity by 2026-27.
For green energy corridor-2, an intra-state pipeline of around Rs 120.31 billion is identified to be implemented across the states of Gujarat, Himachal Pradesh, Karnataka, Kerala, Rajasthan, Tamil Nadu and Uttar Pradesh. The intra-state segment is also showing promising signs. Key states like Gujarat, Odisha, Meghalaya, Maharashtra, Madhya Pradesh and Uttar Pradesh are in the process of adopting the TBCB mode for bidding transmission projects. The intra-state transmission system pipeline is robust too, spelling an opportunity worth Rs 100 billion till 2023-24.
On the technical side, solutions to uprate and upgrade the existing infrastructure to enhance corridor capacities will go hand in hand. We expect the market to grow at a CAGR of about 35 per cent in this financial year. We aim to reap the benefits of being early pioneers in this business segment and others trying to replicate our model. In products, there is a huge opportunity in the form of upcoming TBCB bids with a strong demand forecast for HPC. We are focusing on technical innovation and engineering. When it comes to manufacturing, we are highly focused on high performance products with a view to lowering the carbon footprint.
Ujjwal Kanti Bhattacharya
The long-term outlook for the power sector is bright. However, in the near and medium term, it has to pass through a number of transitions, some of which may not be comfortable. The sector has to brace for these. We have to think of innovative solutions and ways to handle the transitions. Some of the innovations may be disruptive to existing systems, and we have to plan for that too.
In its budget 2021-22, the central government had announced the launch of a “reforms-based and results-linked” scheme for the distribution sector with the objective of improving the financial health and operational efficiency of discoms by reducing AT&C losses. Subsequently, the RDSS was notified in July with an overall outlay of Rs 3.03 trillion. This is inclusive of a budgetary grant/support of Rs 976.31 billion, spread over a five-year period. Under the scheme, AT&C losses are sought to be brought down to 12-15 per cent by 2025-26, through smart metering and upgradation of the distribution infrastructure, including the segregation of agricultural feeders. As of April 2022, the Government of India has approved proposals of 13 states under this scheme with a financial outlay of around Rs 1.62 trillion. The timely implementation of projects under the scheme including the smart metering programme remains key to improving the discom efficiencies.
On the whole, focus on improving operational efficiency, timely issuance of tariff orders with adequate tariff revisions and timely subsidy payouts are necessary to ensure the financial sustainability of discoms. A strong political will and support from the state governments is needed to achieve this objective.
Professor S.L. Rao
The sector is fundamental to the whole economy and there is no way it could be allowed to collapse or to do too badly. So, circumstances will compel the state governments to function in such a manner that the electricity sector performs well financially. What is required is a much more clear-headed way in which the regulatory bodies regulate power distribution and other companies under them. I do not think we have any satisfactory and clearly agreed method by which governments can regulate these bodies. In summary, I would argue that all distribution companies should be left free to function effectively so that they are financially sound at all times. For this, the regulator must be truly independent of the concerned government and take informed decisions for the health of the sector.