The Electricity Act, 2003 opened up the generation segment for private players, leading to sizable capacity addition and improved availability of power. Further, in the recent past, there has been a notable improvement in fuel availability at thermal power plants. However, the poor financial health of the discoms continues to adversely affect power generation. Leading power developers share their views on the key achievements and challenges facing the sector…
What, in your view, have been the three most noteworthy achievements in the sector over the past two decades?
The major achievements in the power sector are:
- The restructuring of the state electricity boards (SEBs) – unbundling of the SEBs for effective functioning.
- Electricity Act, 2003 – Delicensing of power generation and opening up the sector to private participation.
- Creation of a national grid – Integration of the regional power grids into one national grid and creating independent load despatch centres.
- Government thrust on renewables.
In my opinion, the most noteworthy achievement in the past two decades has been the threefold rise in per capita consumption of electricity, from 334 kWh in 1996-97 to about 1,000 kWh now. However, we need to bear in mind that during the same period China has gone from 719 kWh to over 3,000 kWh. This has, of course, been possible
due to the spurt in generation capacity from 85,800 MW in 1996-97 to about 300,000 MW now. The most notable contribution has been made by the private sector, whose share now stands at 40 per cent, followed by the state sector at 34 per cent and the central sector at 26 per cent.
The peak and energy deficits in 1996-97 at 18 per cent and 11.5 per cent respectively have been virtually wiped out.
On the institutional side too, there has been a sea change in the past two decades. Regulators have come into being and are now well established, and the old vertically integrated electricity boards have been replaced by corporatised unbundled entities for generation, transmission and distribution.
Lastly, through centrally sponsored programmes, huge progress has been made in rural electrification. The definition and figures will always be debated, but it appears that almost all villages have been electrified.
- A major achievement has been the phenomenal increase in power gener-ation capacity in the last two plan periods. Capacity addition in the Eleventh Plan period was more than the capacity addition in the Eighth, Ninth and Tenth Plan periods put together. The huge capacity addition target of 88,500 MW during the Twelfth Plan period has already been achieved. However, such tremendous progress in generation has created imbalances in other segments of the value chain – coal production, transmission and the absorption capacity of distribution utilities. This has, in turn, led to unutilised generation capacities and stress in the sector. However, steps are being taken to meet the challenges and put other segments of the value chain in sync with the generation capacity addition.
- Getting the states’ buy-in for the Ujwal Discom Assurance Yojana (UDAY) was a landmark achievement as it seeks to improve the sector’s fundamental cause of distress – the poor financial health of distribution utilities. The scheme has been put together in a balanced manner and provides a good example of centre-state cooperation. While emphasising on regular tariff revisions, the scheme protects consumers by specifying that the aggregate technical and commercial (AT&C) loss burden (if not improved as per the target level) will be passed on to the state budget. UDAY provides a lot of head room to the states for managing their fiscal budget and offers many opportunities such as priority funding for central schemes, additional coal at notified prices, allocation of mines, low-cost power, etc. if the targets are successfully met. The scheme is a positive move but proverbially, one can only lead a horse to the water. It is for the states to do the last-mile work.
- Even a few years ago, the majority of plants were struggling to maintain coal stocks above critical levels. Now, we are in a completely opposite situation with more coal being produced than power plants can utilise. The government has done a fantastic job in improving coal production from Coal India Limited (CIL). A growth of almost 9 per cent during 2015-16 was a commendable achievement. Unfortunately, the weak demand from discoms has resulted in a scenario where coal demand has not been able to keep pace with increased coal production, leading to higher pithead and mine stocks. We hope that this will be rectified soon, once the benefits from UDAY start kicking in.
- In the past few years, significant investments have been made for improving wire connectivity both at the distribution and transmission levels. Out of around 580,000 villages in the country, only about 7,800 villages remain to be electrified. Noteworthy progress has also been made in feeder monitoring and segregation, which will help identify specific areas of high AT&C losses. Congestion in the transmission of power over interregional links had been a major bottleneck in power supply. Recently, the government took steps to address the issue, following which the power transmission capacity grew to 129,000 ckt. km in 2016.
One of the most important achievements in the past two decades has been the passage of the Electricity Act, 2003. This led to the unbundling of the sector. The introduction of the competitive bidding regime and the participation of the private sector have led to large capacity additions by the private sector. Much work, however, remains to be done on open access, which was one of the key “mantras” of the Electricity Act.
Another notable achievement has been the introduction of regulatory bodies both at the federal and state levels; their evolution to where we have gotten is a key milestone. While we are moving in the right direction, a lot more remains to be done. A number of cases have been outstanding for a long period of time, at various levels of the dispute resolution process. Further, the state regulatory commissions have tended to be biased in favour of state-owned utilities and public interest has sometimes taken precedence. As far as tariff determination is concerned, there is the unfinished agenda of timely and adequate revisions.
The third key achievement is the evolution and progress of the renewable energy sector over the past five to six years. The solar power segment has been the show-stealer over the past two to three years. The industry has also received an impetus through policy initiatives including renewable energy certificates, and renewable purchase and generation obligations. Notably, the tariffs from renewable energy sources have actually evolved and are beginning to converge with those from conventional sources.
What are the key challenges facing power producers?
K. Raja Gopal
The major issue concerning the power sector today is to provide relief to stressed assets as investments of lakhs of crores are under the threat of turning into non-performing assets (NPAs) because of various reasons.
The government should also focus on the following areas:
- Improving the financial health of discoms.
- Fuel linkages.
- Tying up of untied capacities.
- Grid stability with a certain percentage of renewables that are available seasonally or during a part of the day.
Overcapacity is the biggest challenge facing power producers right now. This manifests itself in multiple ways – a large number of projects are without long-term power purchase agreements (PPAs), an even larger number of projects with PPAs are running at low plant load factors (PLFs), and there are very low rates in the merchant markets (sometimes not enough to cover energy charges).
Low PLFs, of about 60 per cent, are now more for commercial reasons than for technical reasons, as was the case in the past. Many states are surplus in power, more specifically in baseload power. Currently, neither transmission infrastructure nor institutional mechanisms are adequate to divert surplus power to deficit regions on a commercially sustainable basis.
At 1,000 kWh per capita, electricity consumption in the country is still low compared to other countries, and yet there is a near-surplus situation. This anomaly needs to be addressed by meeting the suppressed demand, which certainly exists in the system as a large number of captive generating sets are in operation.
The financial capacity of off-takers is the other important challenge facing power producers. Distribution utilities are perpetually short of cash and unable to pay generators on time, if at all. This, in turn, is subjecting generators to financial stress for no fault of theirs.
After having been rather indiscriminate in lending to the power sector in the past, lenders as a group have become extra-cautious now and are sometimes even irrationally so. They are even reluctant to sanction working capital for projects that they have financed.
Issues of coal supply are largely on the way to getting resolved. The supply from CIL has improved dramatically. However, the issue of coal quality and grade slippages remains to be addressed, although a beginning has been made with third-party sampling. The legacy issue of under-recovery on account of imported coal still remains mired in legal cases.
The most critical issue facing power producers is unquestionably the stagnant growth in electricity demand. Overburdened with continual losses made with every unit of electricity sold, the discoms are unable to purchase sufficient power to cater to all their consumers and are resorting to load shedding to artificially supress demand. The inability of discoms to cater to consumers is leading to a vicious cycle where industrial and commercial consumers, who need reliable access to power in order to sustain their businesses, opt for captive generation or purchase power through open access.
While coal production has increased significantly and CIL has been able to sell much higher quantities of coal through e-auctions, issues regarding the allocation of coal to power plants still remain. A restrictive coal usage policy, put in place in 2003, allows plants to use linkage coal only under long-term and medium-term PPAs, and has also reduced the quantity of coal assured under the contracts. About 10,000 MW of installed capacity with coal linkage commitments is unable to utilise coal due to the absence of PPAs. For similar reasons, about 3,000 MW of captive coal block-based plants are unable to mine coal to the full potential.
There are also more than 9,000 MW of operational plants that have signed PPAs but do not have a long-term coal source. Many of these projects had previously been granted tapering linkages in order to bridge the coal requirement during the development of captive coal blocks allocated earlier. Upon cancellation of these coal blocks, the tapering linkages were replaced with coal supply through the MoU route. CIL also supplied coal through MoUs to projects covered under the June 2013 decision of the Cabinet Committee on Economic Affairs. However, coal supplies under MoUs have been discontinued with effect from July 1, 2016. The Ministry of Coal has issued an advisory to these plants to shift their procurement of coal to special forward e-auction. However, it must be kept in mind that these projects supply power under long-term contracts of 25 years and cannot depend on the short-term quantum and price volatility of the e-auction markets.
Another key challenge facing power producers is the continuous increase in the cost of coal-based power generation. The clean environment cess introduced in 2014 at a rate of Rs 50 per tonne has been increased every year and now stands at Rs 400 per tonne. Further, CIL has recently increased the notified price for coal, effective June 2016. The coal grades being used by the power sector (G10-G12) have seen a 15 per cent increase in price. Railway freight, a major component of the landed cost of coal, has increased by 8-14 per cent for coal moved between 100 km and 700 km. As a result of these, the cost of coal-based power generation has gone up by around 10 per cent in the past six months, while the demand has shown a declining trend.
Further, while fixing the multi-year tariff increase targets under UDAY, these cost increases were not kept in mind. Going forward, another factor that will inflate the cost of coal-based power generation is the need for compliance with the new emission norms notified by the Ministry of Environment, Forest and Climate Change. Existing plants will have to undertake significant capital expenditure in order to retrofit emission control equipment in their existing layouts. The expected impact of new emission norms on coal-based power tariffs could be anywhere between Re 0.50 and Re 1.25 per unit, depending on plant-specific parameters.
Another aspect leading to increases in power tariffs is the intent to socialise the cost of green energy corridors across the grid without levying the same on renewable power. This will push up transmission costs by 45-60 paise per unit. The green energy corridor is meant only for renewables and the cost should not be loaded on to the entire system and should be collected through the green energy cess.
Power producers face a number of challenges and the biggest one is the financial health of discoms with years of populist policies and tariff schemes, as well as high AT&C losses. Most discoms are bleeding and have accumulated losses of Rs 4 trillion-Rs 5 trillion. A back-of-the-envelope calculation on a trillion units generated last year with losses close to 70 paise for every unit sold would show an annual loss of about Rs 700 billion.
There is a lot of work being done on this front under UDAY. It may, however, be noted that there have been two to three previous rounds of such restructuring packages for discoms in the past as well; the federal government can only do so much and at the end of the day, roll-out has to happen at the state level.
The biggest issue in the power sector is that power is on the concurrent list. While the federal government may be very focused, things will not change much on the ground unless the state governments fall in line.
We recognise that certain sections of society viz. farmers and the underprivileged, need support through subsidies. However, subsidies need to be targeted very carefully in the form of direct benefit transfers to the intended beneficiaries.
Despite more than 300 GW of installed capacity, peak generation has not exceeded 150 GW due to the poor health of the distribution utilities. This means that a lot of plants are struggling to generate at beyond 50-55 per cent PLF. A large amount of the installed power capacity is stranded as long-term PPAs are not being signed and power is being sold at the exchanges at very low prices. Unfortunately, all this has led to a very unusual situation where the distribution companies mistakenly believe that this access to short-term power will continue for all times to come and they will not need to contract for purchase of power on a long-term basis going forward. If this situation continues, no new capacity is going to come up and we could be looking at a power crisis in some years.
Another issue linked to the health of the discoms is the fact that while renewable energy projects are supposed to have a must-run status, they are being backed down on several occasions, especially in states such as Tamil Nadu. Meanwhile, there are delays in payments to renewable energy projects while cheaper thermal generation projects are paid earlier.
There are many issues on the fuel front, especially natural gas. Large investments have been made in gas-based generation projects that have been stranded for a period of time due to the non-availability of reasonably priced domestic gas. The government is providing limited support from the Power System Development Fund for the utilisation of imported re-gasified liquefied natural gas (R-LNG). This, however, needs to be fine-tuned further for greater impact.
On the renewable energy front, we are talking about a large capacity of 175 GW. However, renewable energy generation is unable to cater to the morning and evening peaks and, given the very limited options in storage, it still has some way to go. Notably, gas is the most flexible fuel and gas-based stations work well in conjunction with renewable energy. From a portfolio perspective too, we cannot entirely depend on coal-based power generation. Equally, from an environmental perspective, gas is much less polluting. around 60 per cent less polluting than coal. Therefore, from all these perspectives, natural gas, I believe, has a major role to play and the government needs to enunciate a clear policy on gas. Further, on the coal supply front, the government has done a great job in making more coal available, much more than CIL used to produce. Today, while no power plant is facing coal shortages, there clearly remain major issues with coal quality, coal pricing and coal sampling, and much work remains to be done.
What kind of policies and strategies are needed to overcome these issues?
K. Raja Gopal
Some of the major issues currently being faced by project developers are as below:
- Project lenders’ non-compliance with the decisions of the joint lenders’ forum.
- Delay in the sanctioning of facilities by lenders.
- Sanctions by some lenders are not in line with the lead bank’s sanction.
- Delay in the disbursement of sanctioned facilities.
- Variations between financial institutions (Power Finance Corporation Limited, Rural Electrification Corporation Limited, Life Insurance Corporation of India Limited, Housing and Urban Development Corporation Limited) and other project lenders (banks) with respect to loan sanctions and certain terms as compared to Reserve Bank of India’s guidelines/norms.
- Lack of time extensions/waivers on pre-disbursement conditions that are beyond the developer’s control.
Going forward, in the true spirit of consortium, all existing consortium members including financial institutions must be asked to comply with the decisions taken at consortium meetings. The Ministry of Power may look into the matter and prevail upon banks to not insist on compliance of conditions beyond the control of the company/ borrower in order to facilitate timely disbursements of funds by banks.
Projects with linkage/mines but no PPA: Many projects with assured coal linkage or with mines won through auctions are unable to utilise the coal for want of PPAs in the market, leaving the project stranded. In the past two years, only Kerala, Andhra Pradesh and Bihar have completed bidding for an aggregate capacity of about 3,500 MW. There is no visibility of any more long-term PPAs in the near future. If this situation is not corrected, these projects will turn into NPAs very soon.
The government should exclude the following projects from the forthcoming linkage e-auction:
- Projects with a valid letter of assurance from coal companies (and not a part of the 78 GW list).
- Projects commissioned with firm PPAs and no linkages.
- Projects having a long-term PPA and no linkage due to the cancellation of coal blocks.
Power sale tie up: The MoP should direct state discoms to tie up for their long-term power requirements from commissioned/under-construction projects on priority. Untied capacities can be pooled together and apportioned for procurement by different states through competitive bidding, or at tariffs as per Central Electricity Regulatory Commission norms. Instead of matching tariffs with the L1 bid, discoms should use the average cost of supply prevailing in the state as the benchmark for power procurement.
A large number of people are sceptical about the eventual success of UDAY, the third bailout package for discoms in 10 years. If it does not solve the key issues of distribution, namely, high AT&C losses and tariffs that do not cover costs, discoms will continue to limp along. AT&C losses still remain at about 22 per cent and the gap between the cost of supply and average tariff still remains at about Rs 1.25 per kWh. The reduction in AT&C losses deserves an even sharper focus. It is not enough to take the stand that the state governments are now squarely responsible for the losses of distribution utilities.
Open access was the cornerstone of the Electricity Act, 2003, based on the belief that it would put competitive pressure on discoms when their prime customers start moving away. The success of open access, however, is at best mixed. The states try every trick in the book to thwart open access, thus frustrating the very purpose of unbundling the electricity boards. An amendment to the act for separation of carriage from content, in this context, is like running after a mirage.
The ever-increasing share of renewables is certainly welcome and needs to be pushed, but it is likely to create imbalances in the system due to the infirm nature of this energy source. The hydro segment, which has been languishing for lack of serious policy interventions, can provide a part of the answer by stabilising the grid. Not to forget, even large hydro is, and should be counted as, renewable energy.
The government has undertaken some key initiatives like UDAY to improve the financial health of discoms, which is likely to change the demand scenario by allowing utilities to purchase additional power for meeting the unmet consumer demand. The government has also proposed to extend financial support to the states to enable them to offer new electricity connections free of cost. At the same time, we need to ensure strict enforcement of the universal supply obligations provisions and the principles of open access as per the Electricity Act, 2003. We expect that the government’s target to provide electricity to all citizens by December 2018 along with the promise to make power available 24×7 will help boost the sagging demand.
Regarding coal supplies, we have requested that the restrictive frameworks imposed during the time of coal scarcity be removed and projects with coal linkages should not be restricted to access coal only under PPAs, and should be given the full quantum of coal as per the original letter of assurance issued to them. We have suggested that auctions be carried out for a period of four to five years in order to provide sufficient visibility in coal supplies to projects without linkages. Coal linkages should be extended to projects that were allocated coal mines prior to the cancellation of coal blocks by the Supreme Court and to the ones being supplied coal through the MoU route. We also request the government to extend commercial mining of coal to the private sector at the earliest as competition is bound to drive down prices, as has been seen in the telecom sector earlier.
Lastly, with regard to the new norms for emissions from coal-based power plants, it is imperative to relook at the timelines and come up with a phased implementation programme to be carried out over seven to eight years in order to ensure effective compliance with the new norms. Technical aspects also need to be relooked at, such as the requirement of cooling towers for seawater-based plants and the viability of such modifications for plants with less than 10 years of remaining operational life. We have suggested that such plants be exempted from meeting the norms and instead be phased out in a gradual manner. This will help avoid any wasteful expenditure. A guiding document encompassing a phased implementation programme along with a realistic time frame and enabling framework to manage technological, financial, regulatory and institutional issues needs to be prepared by the Central Electricity Authority in consultation with the industry, state governments, regulators, bankers and manufacturers of air pollution control equipment.
The government has already taken some steps to deal with the fundamental problems of state utilities. UDAY is a scheme for the financial turnaround of utilities, and a lot of progress is anticipated. Around 17 states have signed MoUs and some states have already issued bonds. However, all deliverables, that is, a reduction in AT&C losses, increase in tariffs and a reduction in debt will take time.
On the regulatory front, I believe we should have regional electricity regulatory commissions rather than SERCs. I would like to believe that regional electricity commissions would be less likely to be influenced by state dispensations. Besides, a coal regulator is the crying need of the hour. It has been in the works for years, but no major progress has been made.
Meanwhile, open access, one of the main focus areas of the Electricity Act, remains a key area that needs urgent attention. Utilities continue to increase open access charges, which makes bilateral power sales more difficult. A lot more work vis-à-vis timelines needs to be done insofar as dispute resolution is concerned. The risk allocation for developers needs to be relooked at. Besides, the transmission network has not developed in line with the build-up of the generation capacity and needs to be strengthened urgently.