The predominant trends in the generation segment in the past year were the low plant load factor (PLF) of conventional power projects and the lack of new long-term power purchase agreements (PPAs). As the sector awaits a turnaround in the distribution segment and an uptick in power demand, it is coming to grips with other challenges such as the influx of renewables, renegotiation of existing contracts and flexibilisation requirements. Leading power developers share their views on the key achievements and challenges in the sector…
What have been the most noteworthy achievements of the power sector in the past one year?
In consonance with the global electricity scenario, the Indian power sector too is witnessing a rapid change in the business environment. The government is leading this change by way of promulgation of various policies, regulations and schemes. In the past few years, undertaking rural electrification, meeting electricity demand, catering to fuel requirements, improving transmission infrastructure, adding renewable power capacity and the turnaround of discoms have been some of the focus areas of the government.
In my opinion, the most noteworthy achievement of the power sector was the improvement of India’s rank under the World Bank’s Ease of Getting Electricity Index from 99 in 2015 to 26 in 2017. This has been largely driven by regulatory and administrative easing measures. “Getting electricity” is one of the 10 parameters used by the World Bank for the “Ease of Doing Business” ranking. I am hopeful that the power sector will bloom and I look forward to seeing India leapfrog to become one of the most stable yet vibrant electricity markets in the world.
The most noteworthy achievements of the power sector in the past year have been the continued pace of solar power development and the record low tariffs achieved for the same. In fact, the performance has been so spectacular on this front that natural caution should lead us to question if this pace of development and these tariffs are sustainable.
Some of the key achievements of the power sector in the last one year are:
- Achieving the lowest tariffs in the solar and wind power segments.
- Distribution of LEDs.
- Issue of the revised Tariff Policy, 2016.
- Strong focus on the development of solar power by giving several subsidies.
- Giving assurances on all forums to bring out a new hydropower policy in order to boost and revive the ailing hydropower sector.
- Giving a rosy picture to the world that India has become power surplus.
One of the key highlights of 2017 has been capacity addition in the renewable energy segment, which has surpassed the capacity addition in the conventional energy segment. Where fuel is concerned, it has been a positive year for coal. Although still in its early days, initiatives such as independent third-party sampling have begun to show positive results. Coal companies have started despatching better quality coal; rather, better-sized coal. Barring the last few months, we have seen a spike in Coal India’s production. The company has been able to ramp up production by almost 20 per cent in the last three years. However, there will be periods this year where we will struggle for coal availability, as has happened in the recent past. In a way, this is good news as it indicates that plant load factors (PLFs) are increasing.
Another key achievement is the positive impact of UDAY. Although the scheme is still in its early days, I think, there have been improvements in many states. Some states have seen more improvement as compared to others. Karnataka and Gujarat have performed well; however, we still have issues including large transmission and distribution losses in states such as Bihar, which will improve with time. Overall, things have improved after the introduction of UDAY. The gap between the cost of supply and revenue generated has narrowed. The interest burden has also come down with the issuance of bonds and debt takeover. Furthermore, the majority of the states that have signed up for UDAY have issued tariff orders.
Undoubtedly, the roll-out of UDAY has been the most noteworthy development in the past one year. Early results have been encouraging and I hope the objectives are met. Other major developments have been the implementation of the Scheme to Harness and Allocate Koyla Transparently in India (SHAKTI) and the flexible utilisation of domestic coal. Despite some shortcomings, SHAKTI is likely to bridge the demand–supply gap faced by some of the starving plants. The flexible utilisation policy is yet to pick up, but it is expected to make an impact if allowed to create a win-win situation for both discoms and independent power producers (IPPs).
During the year, the third-party sampling and testing mechanism was institutionalised. With the Central Institute of Mining and Fuel Research coming into the picture, the grave problem of grade slippage is finally getting addressed. This has come as a big relief to generators.
What are the biggest unresolved issues and challenges in the power sector?
Many new initiatives are being undertaken and many new frontiers are opening up. Further, the sector is undergoing technology disruption in areas like electricity storage, electric vehicles and renewable technologies. The government has set an ambitious target to install 175 GW of renewable energy capacity by 2022.
The sector, which is yet to cope with the past problems, needs to gear up to address the new and emerging issues simultaneously. Discoms, which historically have not been financially sound, are not doing well enough even today to draw fresh investments into the sector. Despite participation by states in UDAY, aggregate technical and commercial (AT&C) losses continue to remain high. Further, the PLF of power stations is on a downward slope. Additionally, issues such as fuel unavailability and absence of PPAs continue to plague not only the power sector but also the banking sector. Also, renewable energy capacity is increasing, but the generation from renewable energy sources is not increasing.
Some of the new challenges facing the power sector include ensuring grid integration and true grid parity of renewable energy capacity as well as obtaining an optimal fuel mix till 2030. New initiatives as well as old and new challenges must be assessed holistically in order to prepare a clear and comprehensive roadmap for businesses to move forward. What is most perturbing is the increasing trend of renegotiation of tariffs. A project is usually fraught with numerous risks. Developers invest in the project after assessing the risks. Setting up a project could be either favourable or unfavourable, but the sanctity of a legally binding document such as a PPA should be honoured and, more so, by the government entities. I hope the trend of reneging on PPAs does not take over in the sector as it may act as a deterrent for investment in the sector.
The biggest issues and challenges such as continued dismal operational performance and financial weakness of discoms unfortunately still persist. Discoms are unable to take advantage of the abundant availability of power and historically low merchant tariffs to serve their consumers better.
The biggest issue is the non-issuance of the new hydropower policy for the revival of the hydro power sector, which has been receiving stepmotherly treatment from the power minister. Other unresolved issues pertain to smart metering and implementation of smart grids, Also, there is a need for emphasis on the the development of pumped storage schemes as standalone solar projects will not survive for long.
Although there is significant renewable energy capacity addition, a few challenges remain. With tariffs continuing to fall, we anticipate that the bids that have been made are sustainable, especially considering recent developments such as panel prices going up and panel suppliers in some cases going back on contracts.
There have been issues regarding the operation of renewable energy plants. The backing down of wind projects has been a big concern and there have been instances of even solar plants being backed down. This is a result of the difficult financial position of the electricity board, which has led to the backing down of plants. There are concerns about the lack of evacuation infrastructure and transmission capacity constraints. However, lack of energy storage is a key challenge. We anticipate that until storage becomes commercially viable and there is a resolution to evacuation constraints, conventional power will remain the mainstay of the power sector for a while.
Renewable generation companies are also facing issues of delayed payments. This has been particularly prominent in two or three states. Gas-based generation capacity remains largely stranded. Delayed payments are quite painful, especially considering the time period for which they have been outstanding.
Discoms’ lack of interest in long-term PPAs continues to be the top challenge for generators. In addition, the power sector has been impacted by fuel shortages and adverse regulatory orders. Many baseload plants are running with critical stocks, posing a serious risk to the reliability of generation. There is a need to make adequate fuel available, particularly to plants that are higher up in the merit order and operating at high PLFs. Some discoms have piled up coal stocks and are unable to fully utilise their linkage allocations, while Case 2 plants and IPPs are facing grave shortages. The time has come to match the merit order for the despatch of power with the merit order for the allocation of coal. CIL continues to declare the gross calorific value (GCV) of coal on an equilibrated basis (E-GCV), which does not reflect the true thermal energy available for use in the boiler. The difference between E-GCV and GCV-as received has added to the commercial hardships of generating companies.
The non-payment of legitimate dues of generators by discoms has affected the financial viability of several projects and pushed them towards becoming non-performing assets. There is a great deal of concern among generators around compliance with the new environmental norms. Uncertainties regarding technology, feedstock and cost recovery pose significant risks to generators. The problem has been compounded by pushing unrealistic timelines set by the authorities.
What are some of the immediate interventions needed to address sector issues?
With a significant amount of proposed renewable energy development, the country has to prepare itself for balancing the grid. While the government’s efforts of introducing schemes such as making imported gas available at subsidised rates and conducting auctions like SHAKTI (for companies with no steady supply of coal) must be lauded, a lot needs to be done for balancing the grid.
Gas-based stations, which are internationally being used for balancing, must be utilised in the country wherever possible. Urgent steps need to be undertaken for determining the true potential of gas reserves and expediting the production of gas. This may require collaboration between the Ministry of Petroleum and Natural Gas and the Ministry of Power (MoP).
In addition, issues relating to fuel tie-up and absence of PPAs need to be resolved at the earliest to give comfort to investors. Also, a mechanism should be devised so that existing and new contracts are not renegotiated if the executed PPAs do not allow so.
The required interventions have been known for over 10 years. These include IT-enabled energy accounting, distribution transformer metering, pinpointing of loss and theft, and physical elimination of this menace, and system strengthening for reducing technical losses. Funding for these activities is also available from the government schemes. Sadly, the will to do this is lacking.
Some of the steps required to address these issues are:
- All hydro projects should be brought under the renewable energy category.
- As discoms are not signing PPAs for hydropower, hydropower purchase obligations should be mandated.
- As hydropower is generally peaking power, it needs to be incentivised by installing time-of-day metering.
- Free power deferment till the entire discom loan is repaid.
- Bringing hydropower at par with solar power by waiving transmission charges, subsidising lending rates, interest rate subvention, and providing relief in infrastructure, environmental and social development cost.
- To save downstream areas from flood fury, upper area projects need to be planned with large storage dams.
- Special emphasis on hydropower by declaring hydroelectric projects as national importance projects.
Quite a few interventions are required. Unfortunately, the government has not been able to articulate much on the future of gas-based generation. Clearly, gas is a cleaner fuel while certainly being more expensive than coal if you consider the economic cost and ignore the environment and other costs. Moreover, gas-based power generation complements renewable energy sources, delivering satisfactory results vis-à-vis flexibility through quick ramping up and down. Gas, therefore, has a key role to play going forward and has a future.
As a country, we have made commitments towards carbon emission reductions. We need to come up with a policy for augmenting gas-based power generation. Besides, there is a lot of stranded capacity in the gas segment and we are talking about serious money being at stake, where stranded capacity in the gas segment is concerned.
We anticipate that the issues of stranded capacity in coal will hopefully get resolved over a period of time with the increase in demand, while no new capacity additions are expected over the next few years. The Central Electricity Authority (CEA) has already raised questions regarding the completion of some under-construction plants aggregating 14,000-15,000 MW of capacity. On the other hand, as far as gas is concerned, at this point of time, we see no imminent resolution.
Another area that requires immediate attention is the low per capita power consumption in India. According to CLP India, the need of the hour is to look at ways in which we can improve and increase power consumption in the country. Another area that requires intervention is the regulatory framework. The functioning of the regulatory commissions and the appellate tribunal is being discussed for a while now. The pendency of cases, going on for years, is a case of justice being denied. Another concern is their reluctance in passing “change in law” orders. A lot of money is blocked in change in law matters. If you ask for a long-term bid, invocation of change in law provisions is unavoidable and should be expeditiously taken care of.
A greater push for reforms in the distribution sector, allowing realistic power tariffs to discoms that permit cost recovery and aggressive reduction of AT&C losses will eventually pave the way for greater offtake through medium/long-term PPAs. In the absence of concrete steps, the true demand for power would never be met, leaving quite a bit of generating capacity stranded.
For India to become truly power surplus, we need adequate coal for thermal power plants. Restricted supply of coal under fuel supply agreements and ad hoc allocations are coming in the way of ensuring reliable power supply.
A mechanism needs to be developed wherein surplus coal linkages available with state discoms (not operating due to the high cost of generation) can be utilised by plants that are higher up in the merit order. The Ministry of Coal and the MoP should frame a suitable policy to facilitate implementation of the merit order for the allocation of coal in every state, similar to the merit order for the despatch of power. This will allow coal to flow to the most efficient plants and also help improve the financial health of discoms.
The CEA needs to fast-track the identification of the most appropriate technology for flue gas desulphurisation and selective catalytic reduction/selective non-catalytic reduction for emission control suitable for Indian conditions. It may be worthwhile to develop normative costs to avoid long-winding processes of regulatory approval on a case-to-case basis.
What is your overall outlook on power demand, PLFs, generation costs and tariffs for the next one to two years?
Discoms being the major buyers of power would have to purchase power to meet the demand for electricity. But with most discoms in a financially poor position, there may be reluctance to increase purchases. Further, India’s slowing economic expansion may lead to a slack in demand. The situation doesn’t augur well for generating stations, especially for thermal power stations that are already reeling under low PLFs.
With insignificant thermal power capacity addition in the coming years, thermal power tariffs may not see much of a change. At the same time, coal-based power stations may be levied additional cess due to environmental concerns, which may lead to an increase in tariff. Yet again, what is needed is to ring-fence investors from the regulatory risk of frequent changes in policies and regulations.
In terms of prices on power exchanges, we may see some variation but since they are not reflective of the entire sector, they may be considered for only purchase requirements in the short term where power offtake guarantee is not required.
As I write this, there is a sudden surge in demand, and merchant tariffs have hit Rs 9. This, however, is also not a very healthy sign because it shows how shallow the power market is and how much it can fluctuate. In my assessment, the worst in terms of demand may be over and we may now look at better PLFs, but only the most courageous should bet on this.
Power demand is already there; it is a fictitious notion that we are surplus. As discoms are not buying costly power, they are not signing PPAs. Since there are no PPAs, it is very easy to declare that we are power surplus. Second, remote villages are not getting power because they are not connected. For example, Haryana is charging almost Rs 8 per unit from domestic consumers and it is not ready to sign PPAs at Rs 4 per unit. As a result, the PLF of thermal projects has gone down drastically. If generation cost has gone down to Rs 2-Rs 3 per unit, then why are discoms charging Rs 8 per unit. The time is not far when the whole power supply system will collapse. Therefore, the MoP should direct discoms to stop creating false notions about surplus availability. Further, since the PLF of solar is only 18 per cent, it has to be supported by hydropower and pumped storage plants.
We believe that in the coal-based power generation segment, PLFs are only likely to go north from here and they will continue to steadily increase between now and 2022. As per independent projections of credible investment banks and others, coal PLFs are projected to be in the range of 75 per cent in 2021-22. With regard to power demand, there has been some improvement. However, we need some out-of-the-box thinking to get to the next level; increasing demand by 6 to 7 per cent every year won’t get us there. The per capita energy consumption in India is close to a fourth of that in China. And, as compared to countries like the US, we consume close to about 10 per cent.
In the larger scheme of things, we anticipate that the current efforts in the coal segment, the implementation of the goods and services tax on coal, and the rationalisation of linkages will see a reduction in the variable charges for coal. However, if we look back three to five years, variable charges have gone up sharply because of increasing coal prices, clean energy and other levies, and railway transportation charges. Meanwhile, renewable energy generation has enjoyed, as it should, a level of subsidy, which ultimately gets loaded on to conventional power.
I am positive about growth in power demand. A lot would, however, depend on the work done by the discoms and the support given by the state governments. I don’t foresee any major change in the thermal PLF in the next year or two. If the experience of the current year is taken into consideration, we should continue to see decent PLFs in the coal thermal segment.
CIL may increase prices pursuant to wage revision. International prices of coal have also firmed up significantly. This will impact generation costs. Retrofitting projects to meet the new environmental norms would also start impacting costs in the next three to four years.