Some Steps Forward

In the past year, the power sector witnessed unprecedented capacity addition in the renewable energy segment. However, as the sector transitions to a low-carbon future, with greater contribution from renewables, a number of market design and technological challenges will have to be dealt with. Power Line invited sector experts to examine these challenges and provide a macro view of the top trends and developments in the sector in the past one year…

What, according to you, have been the most noteworthy achievements in the power sector in the past year?

Dr Pramod Deo

It is not just the performance of the past year or two, but the cumulative achievements of the past couple of years that have contributed to the present-day “surplus” power scenario. The installed capacity has really gone up over the past six years and stands at around 330 GW today. The share of the private sector in the total installed capacity has increased from about 11 per cent in 2007-08 to 43.9 per cent at present. This has been a big positive for the sector. We now have “surplus energy and capacity” while the price of electricity on the power exchanges has crashed, making this short-term purchase option more attractive than long-term (25 years) power purchase agreements (PPAs). Coal supply has also improved in recent years. Meanwhile, the Ujwal Discom Assurance Yojana (UDAY) has been a key positive for the discoms. The huge debt burden of state discoms has now been taken care of by passing it on to the respective state governments, which really control and manage these utilities. However, some basic problems continue to haunt this downstream section of the power sector: unmetered supply to agriculture, the high cross-subsidy burden of agriculture on industrial consumers, inefficient billing and collection, reluctance of state regulators to set cost-reflective tariffs, etc.

Rajesh K. Mediratta

The power sector witnessed several positive developments in the recent past including new capacity additions. Coal production improved and, generally, insignificant power shortages were faced by the discoms to meet their demand. This kept spot market prices low at Rs 2.80 per kWh. The government, moreover, pushed for the strengthening of the transmission corridors. A major high voltage direct current (HVDC) link, Champa-Kurukshetra, was added for west-north, and the 765 kV Wardha-Nizamabad line was added, facilitating cheaper power from the western region to the deficit southern region. The day-ahead market volume loss due to transmission congestion reduced to less than 1 per cent in the first half of 2017-18 against 4 per cent in the previous fiscal. This also facilitated cheaper power to the southern and northern regions as compared to that in the western region, with a much lower price differential of about 15 paise per unit. Village electrification was also pursued with rigour. More than 75 per cent of the 18,000 unelectrified villages have been electrified, taking us closer to the mission of Power for All.

The government’s philosophy to allow power procurement through competitive bidding has resulted in savings in the overall cost of power for end consumers. Competitive bidding for the procurement of wind power was tried for first time. Solar bidding continued to decline and touched another record low of Rs 2.44 per unit.

On the distribution side, the financial health of the discoms is expected to improve with UDAY, owing to a reduced interest burden following the transfer of debt to their respective state governments. The states have issued UDAY bonds worth approximately Rs 2.32 trillion, as of August 2017. The scheme envisages discoms to reduce their aggregate technical and commercial (AT&C) losses which is expected to ease the financial stress and improve power offtake ability.

Dr S.L. Rao

  • For the first time, we are surplus in power supply in relation to demand.
  • Renewable energy capacities and supplies have been at record levels, along with falling prices.
  • Power trading between states is on the rise.
  • Domestic coal supply is no more a constraint and has not hampered generation. Coal imports have also come down.
  • Power outages caused by technical factors have been less frequent.
  • The debt of discoms and state electricity boards has been reduced by transferring a large portion of their debt to the state governments.
  • Gaps in interstate transmission have been mostly filled, thereby facilitating power trading.
  • A very wise cabinet restructuring put electricity, renewable energy and coal under the same minister. It has given beneficial results. Nuclear energy should also be included in this portfolio.

Anil Razdan

In the past one year, the most noteworthy achievements of the power sector have been:

  • Sustained improvement in generation capacity addition.
  • Marked surge in new renewables, solar PV and wind capacity, and a sharp drop in their tariffs.
  • Significant breakthrough in the energy efficient lighting programme through installation of LEDs in streets as well as for domestic and commercial lighting. Energy Efficiency Services Limited has succeeded in mobilising a critical mass for the programme, to make it self-sustaining.
  • The development of various power-related apps by the ministry has helped promote greater transparency and awareness about power flow, availability and pricing.
  • The power ministry has kept the states engaged in a dialogue on various critical issues.
  • Through better connectivity and corridors, cheaper power has become available across the country.

What are the steps needed to ensure a transition to a low-carbon regime with improved flexibility in the Indian power system?

Dr Pramod Deo

When we talk of achieving 175 GW of installed renewable capacity and reducing the carbon footprint, we must not forget that there is a heavy cost involved for the states, that is, for state discoms, in reaching this goal. A recent study by CRISIL Advisory Services estimates that this additional cost of procuring green energy for discoms to be between 6 paise and 90 paise per kWh. This does not include the cost of building intra-state transmission lines and additional inter-state transmission charges. Promoting renewables demands progressively increasing the renewable purchase obligation (RPO) targets for state discoms. However, state regulators would not increase the RPO targets of the discoms without compensating them for that. One of the mistakes in this regard has been the setting of higher RPO targets for wind-rich states by the centre, thereby putting a greater burden on consumers in these states. Therefore, there is a need to enable interstate transfer of wind power to states that do not have much renewable-based capacity in order to reduce the burden on wind-rich states.

Rajesh K. Mediratta

The energy transition to sustainability requires changes in the generation mix and better transmission infrastructure along with a change in some systems and processes so that intermittency can be managed with the available resources.

Thermal power plants (TPPs) that are over 25 years old should be phased out. At present, this capacity stands at over 40 GW. Apart from posing an environmental threat, these plants impose a cost burden on the discoms. Many plants of less than 250 MW unit size have a very high heat rate and are inefficient. Operating these plants not only leads to inefficient fuel utilisation, but also distresses the finances of discoms and leads to a high carbon footprint. Even if the discoms are not scheduling such plants, they continue to pay fixed charges for these plants. A policy should be formulated against renewing power purchase agreements (PPAs) beyond 25 years for any TPP.

On the resource side, there is a need to make the existing resources more flexible. To this end, a key initiative in the past year has been the change in the grid code, whereby the technical minimum at which coal generators can operate has been reduced to 55 per cent.  Further, there is a need for more units of gas-based or hydro plants to meet the peaking requirements. Pumped hydro is the most viable energy storage option for a country like ours; however, their deployment without causing any rehabilitation issues remains a challenge.

For the smooth operation of power systems, we need automatic generation control (AGC), advanced wind and solar forecasting tools, and a process for scheduling and settlement of these wind and solar generators. It is also important that we consider implementing the German market model, wherein all renewable energy generation is bid for in day-ahead markets and scheduled in the same manner as conventional generation. The difference between the market price and the feed-in tariff of renewable energy generators is compensated separately through a fund collected from all renewable obligated entities. This model will provide must-run status to renewable power plants, and also ensure scheduling and payments to these generators.

The first step towards scheduling and settlement was taken by the Central Electricity Regulatory Commission (CERC) for mandating forecasting and scheduling of all renewable energy generators connected at the interstate network. A similar model needs to be adopted at the state level too. The CERC may also mandate the scheduling and forecasting of all renewable energy generators with fixed threshold sizes of, say, 100 MW connected at 132 kV/220 kV substations.

Further, renewable energy management centres (REMCs) are an essential infrastructure for all states with significant renewable energy-based generation capacity (at least 10 per cent or 500 MW, whichever is lower). These REMCs should be responsible for forecasting renewable energy generation and scheduling conventional power in order to reduce deviations/imbalances. Further, regional REMCs should be set up that would be responsible for forecasting all renewable energy generation within their regions and advising states to operate securely.

In order to provide closer-to-real-time markets, the gate closure time (time for transacting on the power exchange) should be reduced to one hour from the current gate closure time of three to four hours. The process for checking transmission capacity at the state and interregional levels needs to be automated. Currently, generators cannot correct their deviations (particularly under-generation) by buying power from the market. The necessary regulatory provisions need to be created to this end.

The ancillary market for frequency regulation allows only regional entities to participate with their unutilised power. There are many merchant plants that have idle capacities but are not allowed to participate in the markets. We should move to the next phase where independent power producers should also be allowed to participate in the ancillary markets. Some of the merchant capacities not being utilised now can provide better ramp rates. Bid-based ancillary markets can help address the intermittency challenges through market-based mechanisms.

Dr S.L. Rao

  • The dependence on the national grid should be reduced. Rural areas should be made self-sufficient in power with renewable energy, some backup thermal and, in a few instances, an emergency connection to the national grid.
  • Electricity storage capacities should be developed as backup in minigrids.
  • Rooftop solar must be made mandatory for all roofs beyond a given size. These may also be connected to the national grid.
  • The use of electric cars must be encouraged.
  • All efforts must be made to minimise effluents from coal-based generation plants. Coal washing must be mandated.
  • Mini hydroelectric generation should be maximised.
  • Wind generation capacities must be enhanced by setting up offshore deep-sea wind generation plants.

Anil Razdan

The following steps are needed to ensure transition to a low-carbon regime with improved flexibility:

  • Carry out a demand-based spatial rationalisation of the power system into either a nationally connected state grid, or a local mini or microgrid system for geographies with lower loads or remote connectivity issues, which can be satisfied from locally planned and installed reliable energy sources.
  • Wherever new renewables are being added, energy storage or ready availability of hydro, gas, or quick ramping coal thermal balancing power should be taken into account. Hydro capacity addition is needed urgently for grid stability.
  • Energy management centres along with weather forecasting capabilities be developed along with new renewable injection clusters to ensure rational and robust scheduling of power.
  • Development of smart grids with synchrophasor technologies/phase measurement units, and other technologies to handle multiple sources of power injection.
  • Smart metering, particularly for consumers installing rooftop solar.
  • Continued strong focus on energy efficiency, particularly in rural areas, to moderate load spikes.
  • In essence, the transition to new renewables requires a holistic and comprehensive approach, and the focus should not be only on renewable capacity addition.

What are the key unresolved issues and challenges in the power sector?

Dr Pramod Deo

One of the challenges that remain to achieve the goal of 24×7 power for all consumers is addressing the curse of “load shedding”. As power purchase costs account for more than 70 per cent of the total cost of electricity supplied by a discom to its consumers, the only method available to a discom for balancing its balance sheet is to cut down on this cost. Hence, discoms will purchase less power and curtail supply to areas that do not pay regular bills or have high technical and commercial losses or are “politically less important”. This exercise goes under an elegant euphemism called “load shedding”.

Further, with the level of cross-subsidy to agriculture being very high, industrial and commercial consumers have to pay very high tariffs, making them non-competitive in the global market. For example, in Gujarat, the number of such consumers is less than 15,000 but they contribute around 44 per cent of the revenue. On the other hand, there are about 1.4 million agricultural consumers who have to contribute only 15 per cent of the revenue as per the rate fixed by the regulator. Similarly, in Maharashtra, 80,000 large industrial and commercial consumers are contributing 49 per cent of the revenue, and agricultural consumers are expected to pay only 14 per cent of the total revenue (MERC’s tariff for agriculture is only Rs 3.40 per unit as against the average cost of supply of Rs 6.50 per unit). But the Maharashtra government is already giving Rs 50 billion as direct subsidy to Maharashtra State Electricity Distribution Company Limited (MSEDCL to keep the rate for agriculturists at only Rs 1.20 per unit.

Lastly, the challenge the power sector faces today is that a huge installed thermal capacity is being backed down because of low demand from state-owned discoms due to load shedding and imperatives for integration of intermittent renewable energy. In addition, we have a large stranded capacity, which includes over 25,000 MW of coal-based capacity and 15,000 MW of gas-based plants. Since the share of the private sector in generation is approaching 45 per cent, public financial institutions that had funded 70-80 per cent of this investment are under stress.

Rajesh K. Mediratta

The biggest unresolved issues are discussed below:

  • With a per capita consumption of about 1,075 kWh, India’s energy consumption is still one-third of the world average. Although there is surplus power in the system, load shedding is common in many parts of the country. Further, a third of the population is still without access to electricity.
  • Distribution is one of the biggest drags on the supply chain. Not enough revenues are being realised due to high aggregate technical and commercial (AT&C) losses. Other challenges include low per capita consumption of electricity, unmet demand, unviable power tariffs, non-payment of subsidies by the state governments to the discoms, high level of cross-subsidy, and creation of regulatory assets.
  • A large amount of merchant thermal capacity is currently stranded due to the lack of coal linkages. On the other side, there are coal-based plants located away from the pithead that are not operational as they entail high coal haulage costs.
  • The philosophy of transmission planning is based on a very old premise that a network should be created for supplying power by a producer to a buyer only if they have a long-term tie-up. Otherwise, the buyer has to procure power by using inherent margins in the network. No special margins are kept in the network for short- (less than one year) and medium-term (one to five years) needs. The philosophy needs to be changed so that capacities in major interregional corridors can be made available for short-term and exchange transactions. This will be required especially with the large-scale deployment of renewables, when power flows can reverse within short spans.
  • It is being observed that long-term PPAs are disputed by either the buyer or the seller due to changing market prices over the long period of the PPA. The exponential fall in solar prices has stirred old solar PPAs, and old high-price PPAs are being rejected by discoms in lieu of cheaper power. The long PPA periods have been a cause for concern in all high-price projects. Now is the time to switch to shorter-duration PPAs or consider establishing an electricity futures market through the exchanges.
  • Agricultural land in India is mainly irrigated through groundwater. Subsidies have enabled farmers to access electricity at prices below the marginal cost of supply, thereby lowering the cost of irrigation and groundwater extraction. There is a need to assess the real cost of energy and water consumption when calculating the electricity subsidies required to be provided by the government for agriculture.

Dr S.L. Rao

  • The most important challenge is the politicisation of electricity tariffs, keeping them below cost or even free for large voter blocks. Below-cost tariffs should be limited and metered, and the cost should be directly borne by the state governments.
  • Direct benefit transfer to customer bank accounts should replace free or below-cost supply of electricity.
  • State electricity regulatory bodies are not independent and at most times subservient to the concerned state governments. There must be bodies like the Union Public Service Commission in the power sector with independent experts in power, governance and management as its members. These should select regulators of less than 55 years of age, for five-year terms with no extensions.
  • Staff in regulatory commissions should be part of a service (preferably all India) and open to transfer to other commissions.
  • In all governments, electricity should ideally be under the same minister responsible for all types of energy.

Anil Razdan

The biggest unresolved issues and challenges in the power sector are:

  • The continuing unsatisfactory performance of many power distribution companies/entities and their continued inability to bring down AT&C losses to 15 per cent.
  • The lack of 24×7 power availability, with unscheduled outages in many areas including cities, without any penalty on the distribution entity.
  • Despite ample availability of power in the system, there is a continuing demand for diesel generators and inverters.
  • The persistent bad financial health of many distribution entities.
  • Poor skill development of the distribution sector workforce and the lack of a consumer-friendly orientation, perhaps arising out of the monopolistic nature of the business.
  • The low plant load factor of many thermal generation units and lack of domestic coal linkages, particularly of the newer ones.
  • Slow demand growth for power in the manufacturing sector.
  • Very limited hydro capacity addition, and slow development of indigenous storage technologies.
  • Stressed generation assets and the slow development of asset management companies linked to the financial sector.
  • Non-availability of PPAs for new thermal capacity.
  • Termination or non-operationalisation of valid PPAs, particularly, in the new renewable sector.
  • The urgent need to upgrade and retrofit new technologies to comply with the newly mandated environmental norms, in the existing thermal power units. The full funding should come from coal/environment cess to prevent avoidable hikes in tariffs or shutting down of plants.


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