Transition Times: Recent developments and outlook for the generation segment

India’s power generation mix has been witnessing a major shift from fossil fuels to renewables over the past few years, a trend that is likely to continue in the future. As of May 2023, the country’s installed capacity stood at 418 GW, with conventional sources (thermal and nu­c­lear) and renewable energy sources (including large hydro) contributing to approximately 58 per cent and 42 per cent to the installed capacity mix, respectively. This is significant, given that just four years ago, in March 2019, the share of conventional sources in the installed capacity mix was 65 per cent and the share of renewables (including large hydro) was 35 per cent. India has been a front runner in renewable energy deployment owing to the implementation of effective policies and increased investment in this space. Given the central government’s stro­ng emphasis on achieving climate change mitigation goals, energy transition is expected to gain further momentum going forward.

An overview of the country’s power generation segment…

Segment growth and performance

As of May 2023, the total installed capacity in the power sector stood at 418 GW. Fuel-wise, coal- and lignite-based power held the highest share in the total installed power capacity at 51 per cent, followed by solar at 16 per cent. Large hydro contributed to 11 per cent of the capacity, followed by wind at 10 per cent, gas at 6 per cent, bioenergy at 3 per cent, nuclear at 2 per cent and small hydro at 1 per cent. The ins­tall­ed power capacity grew at a compound annual growth rate (CAGR) of 4 per cent between 2018-19 and 2022-23. While conventional po­wer capacity has grown a CAGR of 1.2 per cent during the past five years, re­newable energy has grown at a CAGR of 8.8 per cent. Con­ven­tional capacity addition has considerably slow­ed down in recent years, with generators as well as lenders moving away from coal/gas-based projects owing to environmental concerns. Meanwhile, renewable capa­city addition has continued to grow due to inc­reased tendering activity, reduced execution risks, and cost-reflective tariffs. In absolute te­rms, around 16,562 MW of net capacity was add­ed in 2022-23, of which 1,159 MW was based on thermal power sources and 15,402 MW on renewables (including large hydro).

Meanwhile, the total generation (including ge­neration from renewable energy sources) re­a­ched nearly 1,618 BUs in 2022-23. In terms of fuel sources, thermal power accounted for the largest share of 75 per cent in the generation mix, followed by renewable sources at 23 per cent, and nuclear power at approximately 3 per cent. The total generation witnessed a CAGR of 4.2 per cent between 2018-19 and 2022-23. While thermal generation grew at 3 per cent, renewable energy generation grew at 12.6 per cent during this period.

The thermal plant load factor (PLF) imp­roved to 64.15 per cent in 2022-23 from 58.87 per cent in 2021-22. This is mainly on account of he­althy demand growth and limited capacity addition, which has led to an improvement in the utilisation of thermal capacity. However, thermal PLF will remain under pressure over the long te­rm due to the increasing share of renewables.

Recent developments

  • Strategy to meet power demand in the summer season of 2023-24: In March 2023, the Mini­s­try of Power (MoP) devised a multi-pronged st­ra­tegy to meet power demand during the summer season of 2023-24. Among other things, the ministry directed all imported coal-based pl­ants to run at full capacity from March 16, 2023 till September 30, 2023. The ministry also issued directions to central and state gencos as well as independent power producers to import coal for blending at the rate of 6 per cent by weight till September 2023. This was the second blending directive, with the first one being issued in April 2022, requiring TPPs to blend at 10 per cent of their coal requirement.
  • Meanwhile, in the gas-based power generation segment, the MoP revealed plans to utilise the country’s gas-based generation ca­pacity, which has been lying idle or operating at low capacity due to the non-availability of affordable fuel. It also directed NTPC Limi­ted to operationalise around 5,000 MW of its gas-based generation capacity. Further­more, for the first time, the government issu­ed a tender to procure gas-based power from state-owned and private stations.
  •  RGO: In February 2023, the MoP notified the renewable generation obligation (RGO), which mandates power generation companies with coal- and lignite-based plants that have a commercial operation date (COD) on or after April 1, 2023 to establish renewable power capacity equivalent to at least 40 per cent of their plant capacity or procure and su­pply equivalent renewable energy. For ge­nerating stations with a COD between April 1, 2023, and March 31, 2025, complian­ce with the RGO of 40 per cent is required by April 1, 2025. Plants with a COD after Ap­ril 1, 2025 will need to comply with the RGO starting from their COD.
  • Guidelines for PSPs: In April 2023, the MoP released guidelines to promote pumped storage projects (PSPs) in the country. The gui­de­lines propose market reforms to incentivi­se ancillary services provided by PSPs, exe­m­pt them from free power obligations, and str­eam­line environmental clearances for such projects. To facilitate the early development of projects, state governments have the option to directly award projects to hydro central or state PSUs on a nomination basis. Private developers can also be awarded PSP projects through a two-stage competitive bidding pro­cess. In addition, off-river PSP projects may be exempted from undergoing environmental impact assessments and public hearings.
  • Scheme for pooling of tariff: In April 2023, the MoP launched a scheme for the pooling of tariffs of efficient coal- and gas-based power generating stations whose power purchase agreements (PPAs) have expired. As per the scheme, which will be implemen­ted from July 1, 2023, a genco-wise comm­on pool of power from stations with a lifespan of 25 years or more will be created. In­te­­res­ted state governments or discoms can app­roach the genco with a letter of intent to requisition power from the common pool for a minimum period of five years. The stat­es/di­s­coms will be billed a uniform capacity char­ge based on the percentage of allocation and the total capacity charge of power from the common pool.
  • Update on emission norms: In September 2022, the Ministry of Environment, Forest and Climate Change extended the deadline for TPPs to reduce sulphur emissions by two years. For coal-based units that fall under Category A, the deadline for emission norm compliance has been extended till Decem­ber 31, 2024; for TPP units under Category B, the deadline has been pushed to Decem­ber 31, 2025; and for all other TPPs falling under Category C, the deadline has been extended till December 31, 2026. This is a major relief for thermal gencos because flue gas desulphurisation systems have been implemented only across 22 units aggregating 9,280 MW of the total of over 211.52 GW spread across 600 units, as of May 2023.

Issues and challenges

In order to integrate growing renewable energy capacity, coal-based TPPs need to flexibilise their operations, which can reduce ope­rational efficiency and increase the risk of failure owing to wear and tear. TPPs need to undergo retrofits in order to prepare for flexible operations. Another challenge facing the power generation segment is the shortage of fuel at power plants. While coal production has been increasing steadily to meet the growing de­ma­nd, logistical constraints often lead to coal shortage at power plants, particularly during peak power demand seasons. Apart from this, outstanding dues from discoms have hindered the growth of the generation segment. Alth­ough there has been some improvement with the im­plementation of late payment surcharge rules, there is a need to make the discoms financially sustainable. As per the PRAAPTI portal (acc­essed on June 7, 2023), the total outstanding dues of discoms stand at Rs 1,040.18 billion. Apart from this, the slow resolution of stressed thermal assets poses a significant challenge in the sector. It is estimated that coal-based capacity of about 41 GW is stressed owing to issues such as lack of long-term PPAs, insufficient coal linkages, and promoters’ inability to secure funding for project completion.

Future outlook

Recently, the CEA notified the National Elec­tricity Plan (NEP), Volume-I Generation, for the period 2022-32. As per the plan, the all-India installed capacity is likely to reach 900,422 MW by 2031-32. The NEP envisages that the share of non-fossil-based capacity is likely to increase to 68.4 per cent by 2031-32, from around 42.5 per cent as of April 2023. Notably, India will not add any new coal capacity in the next five years, except for plants already at various stages of planning. Meanwhile, renewable energy capacity is expected to double the current levels and surpass coal capacity by 2026-27. Overall, the projected total capacity addition aligns with the country’s target to achieve a non-fossil-based installed capacity of 500 GW by the year 2029-30. The total fund req­uire­ment for generation capacity addition is estimated to be Rs 14,541.88 billion for the period 2022-27 and Rs 19,064.06 billion for the period 2027-32.

Overall, there is a favourable outlook for the power generation segment owing to a healthy growth in electricity demand, improved visibility on new PPAs, and implementation of the late payment surcharge scheme enabling the recovery of overdues from discoms.