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Reform moves begin to show results

The Ujwal Discom Assurance Yojana (UDAY) was launched as a panacea for the revival of the debt-stressed discoms. Nearly two years down the line, some positive results can be seen on the ground. The discoms’ balance sheets have been cleaned up and their financial and operational performance has started improving on an aggregate level. However, the biggest problem of low power demand from discoms remains unresolved.

This year, the government has attempted to fix just that. At the end of September 2017, it launched the Pradhan Mantri Sahaj Bijli Har Ghar Yojana, called Saubhagya, promising to provide electricity at every doorstep, nearly 40 million rural and urban households, by December 2018. Putting its fiscal discipline at stake, the government has pegged the outlay for this scheme at more than Rs 163 billion. The scheme marks a natural transition from village electrification (just 3,000 odd villages now remain to be electrified) to the electrification of households.

Observers say that Saubhagya is a welcome respite for the sector. The discoms will need to procure short- to medium-term power as more households are connected. Last mile connectivity promised under the scheme would kick-start power purchases, which have been virtually stagnant for the past two to three years. For gencos, which have been facing issues due to the partial offtake under their long-term PPAs, this spells good news. Even for transmission and distribution equipment players, the scheme is expected to generate significant growth opportunities and charge their order books. Having said that, the biggest concerns as per analysts would be implementation-related challenges, like meeting the deadline, and the possibility of further deterioration of discom finances in case of non-payment of electricity bills by consumers.

In recent years, the government has taken a number of progressive initiatives such as the Integrated Power Development Scheme (IPDS), the Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY), the Scheme for Harnessing and Allocating Koyla Transparently in India (SHAKTI).

Moreover, the country has seen a remarkable progress in renewables, with record additions during the past year. Yet, the power sector today faces a logjam caused by several issues and challenges. Investor confidence is shaking not just in thermal but also in renewables owing to recent actions of the discoms. There are some 40 GW of stressed assets that need to be revived, making up almost 12 per cent of India’s total installed capacity.

In this special story, we attempt to take stock of the biggest issues, trends and developments that shaped the power sector in the past year…

Key trends

Power demand begins to improve

The all-India power demand grew by 5.3 per cent year on year in August 2017, a significant improvement over the 2.5 per cent year-on-year growth recorded in 2016-17. Uttar Pradesh, which accounts for 11 per cent of the overall demand, reported a strong demand growth of 22.4 per cent in August 2017 over the previous year. Meanwhile, Rajasthan and Maharashtra exhibited an annual growth of 25.7 per cent and 9.3 per cent in August 2017. However, this growth needs to be sustained to cheer the sector say observers.

Energy deficits reach sub-1 per cent levels, outages continue

As per the Central Electricity Authority’s (CEA) reported data, energy and peak deficits continued to shrink, reaching almost 0.7 per cent and 1.6 per cent respectively in 2016-17. In fact, the CEA’s load generation balance report projects an energy surplus of around 8.8 per cent and a peak surplus of 6.8 per cent during the current fiscal. However, analysts disagree stating that these deductions of power surplus are based on power availability only and do not capture the latent demand and the sporadic outages that continue to affect several states, and thus divert attention from the many issues plaguing the sector.

Power generation improves

During April 2016-March 2017, the total power generation in the country (including generation from renewable sources) increased by 47 per cent over the corresponding period in the previous year. The total generation from conventional sources recorded a growth of 44.5 per cent, while renewable power generation increased by 24.46 per cent, albeit due to a low base effect.

Renewables lead capacity addition

As of August 2017, the country total installed renewable base stood at 329.22 GW (), with 25.5 GW added from conventional and renewable sources in 2016-17 and about 6 GW in 2017-18 (till August). Notably, for the first time in 2016-17, renewable capacity additions were on par with thermal additions. A significant renewable capacity of 11.3 GW was added in 2016-17 against 11.5 GW of thermal capacity addition during the same period. Another milestone was achieved as the total installed capacity in the renewable segment crossed the 50 GW mark, while cumulative wind and solar capacities crossed the 30 GW and 10 GW mark, respectively. Solar energy was a major contributor to the capacity addition at a record 5.5 GW, while wind power capacity increased by 5.4 GW, also a record in itself. However, after a strong showing in 2016-17, only about 2 GW of capacity has been added in the renewables segment during 2017-18 (till August).

Thermal power additions slip to five-year low, PLFs plummet further

Not only did India add more renewables in the past year, thermal capacity addition in 2016-17 was just 11.55 GW. This was nearly 51 per cent lower than the thermal capacity addition in the previous year, and the lowest since 2012-13. The main reason for this was the decline in capacity addition in the private sector. Against some 11-12 GW added rapidly by the private sector in the five-year period till 2015-16, its contribution during the past year was 4.7 GW only. In Q1 of 2017-18, however, the thermal segment has fared well, with around 3.8 GW of capacity added so far.

Meanwhile, in the coal-based power segment, plant load factors (PLFs) dropped by 2.44 percentage points to stand at 59.64 per cent due to sluggish industrial demand, significant thermal capacity additions during the past few years, and the impact of renewables.

Coal production volumes grow, imported coal prices double

Coal India Limited reported strong numbers in 2016-17 ending the year with a production of 554.14 million tonnes (mt) of coal, a growth of nearly 3 per cent over the previous fiscal. During the past five years, coal production has taken a quantum jump of over 100 mt from 2012-13 levels. The country’s total coal production reached 659.27 mt, clocking a 3.1 per cent growth. Coal despatches to the power sector remained flat in 2016-17 at only 2 per cent owing to the destocking of coal, efficiency gains and a pickup in renewable power generation. Meanwhile, after a decline for five consecutive years, international steam coal prices soared in the second half of 2016, from about $50 per tonne in January 2016 to $100 in November 2016 owing to China’s increased appetite for imported coal.

UDAY benefits trickle in

While still some states are lagging, the national aggregate technical and commercial (AT&C) losses came down to 20.2 per cent in 2016-17, a decline of 1 per cent over the previous year. Meanwhile, the gap between the average cost of supply and the average revenue requirement reduced to 14 paise. Billing efficiency also increased by 2 per cent to 83 per cent. Gujarat, Haryana and Chhattisgarh have shown positive profit trends during the first three quarters of 2016-17. Nine discoms reported reduced subsidy dependence. Since the introduction of UDAY, 15 states have issued revised tariffs, however, in states with high losses such as Rajasthan, Tamil Nadu, Jharkhand, Madhya Pradesh and Uttar Pradesh, the per unit tariffs are lower than the average cost of supply. The discoms achieved an estimated savings of Rs 119.80 billion till December 2016 by lowering their interest costs.

Growth in short-term market, prices spike in September

During 2016-17, short-term power market volumes recorded a year-on-year growth of only 3.4 per cent. Meanwhile, at 41 BUs, the growth in volumes traded at the power exchanges was over 17 per cent. Open access industrial consumers bought 60 per cent of the total volume traded through the power exchanges. The price of power traded through the exchanges declined further to Rs 2.5 per kWh in 2016-17 from Rs 2.72 per unit in the previous year. In 2017-18, however, the prices witnessed a sharp rise, climbing to Rs 3.12 per unit in August and 4.11 per unit in September, and even touched a record high of Rs 9.9 per unit in September, thereby greatly benefitting merchant players such as JSW Energy and Jaiprakash Power Ventures. However, analysts say that the surge is not likely to continue for long given the surplus capacity in the market.

PPAs cancelled, discoms opt for short-term market

Discoms continued to be in wait and watch mode with respect to the signing of costly fresh long-term PPAs. Rather, with spot prices hitting rock-bottom levels they seemed to resort to short-term transactions to lower their procurement costs. A case in point is the Uttar Pradesh government’s recent cancellation of the bids conducted in 2016 for the procurement of 3,800 MW through long-term PPAs in favour of cheaper short-term power.

Free fall in tariffs

Exceeding industry expectations that solar tariffs have not only achieved grid parity before 2020, but have also fallen below the average purchase cost of thermal power. The newest low is a tariff of Rs 2.44 per kWh achieved in the auction for 500 MW of capacity at the Bhadla solar park in Rajasthan, against previous lows of Rs 2.62 per kWh, Rs 3.31 per kWh and Rs 3.15 per kWh discovered in earlier tenders. However, ever since the tariffs have started falling, there have been instances of discoms wavering from signing PPAs for projects awarded at higher tariffs. This has put investors in cautious mode. Also, questions are being raised about the long-term viability of projects at such low tariffs. In fact, the recently released Economic Survey 2016-17 points out that these low tariffs do not reflect the costs of grid integration, as well as  stranded assets and land opportunity costs, and that the social cost of renewables is about three times that of coal-based power at Rs 11 per unit.

Stressed assets pile up, woes continue

Further highlighting worrying signs for the sector, Credit Suisse estimates indicate that its share in the banking industry’s stressed assets surged to 17 per cent in the fourth quarter of 2016-17, from 14 per cent in the third quarter. Further, a number of lenders are struggling to offload their stakes and find suitable buyers for stressed power assets. Power majors Tata Power and Adani Power offered to sell stakes in their troubled Mundra power plant for a token value of Re 1, but found no takers. Meanwhile, in what might give some respite to the sector, the government is reportedly working on a fresh scheme to revive around 34 stressed thermal projects with a capacity of almost 40 GW, and is considering pooling electricity demand of various states and call tariff-based bids. The contracts will be passed on to the states later. A stressed asset equity fund and a stressed asset lending fund to be set up by state-run lenders, Power Finance Corporation and Rural Electrification Corporation (REC), are also in the offing.

LED drive continues to gain momentum

The government’s LED distribution scheme continued to gain momentum with more than 260 million LED bulbs distributed so far across India. The price of such bulbs has been brought down to Rs 70 per unit through bulk procurement. Buoyed by the scheme’s success in India, Energy Efficiency Services Limited launched the scheme in the UK and Malaysia this year.

Distribution franchise awards pick up

After two franchise bids were awarded in 2016, the distribution franchise space saw some more activity this year. Two franchises were awarded in 2017 to seasoned utilities, CESC Limited and Tata Power. While CESC won the Bikaner circle in Rajasthan, making this the third franchise to be won by the utility after Kota and Bharatpur in 2016. Tata Power won the other contract for the Ajmer circle in Rajasthan. While Rajasthan has made good efforts by awarding four circles to private players in the past two years, industry players are awaiting other high loss making states to follow suit.

Sector gears up for new emission norms

As the December 2017 deadline draws nearer, the market is witnessing a flurry of activity with tenders being issued by various utilities. Reportedly, major PSUs like NTPC are planning to come up with bulk tenders for flue gas desulphurisation (FGD) emission control systems, one of the key technologies for controlling air pollution, and others have issued consultancy tenders as well. Further, the CEA released a plan for country-wide FGD systems implementation by 2023 and also identified some 72 GW-odd, which would be shut down as there is no space to install FGDs.

Electric vehicle play by power majors

Enthused by the government’s electric vehicle (EV) plan by 2030, power sector majors are actively looking at market opportunities in this segment. Public sector majors like NTPC Limited, Power Grid Corporation of India, Bharat Heavy Electricals Limited as well as private majors JSW Energy, Tata Power, among others have announced plans confirming their interest in the EV charging segment. The country’s apex regulator, the Central Electricity Regulatory Commission, has also recently completed a study on EV charging infrastructure and is reportedly working on draft guidelines.

Conclusion

The next one to two years will be crucial for the sector as the biggest policy reforms would conclude during this period and that’s when their results can be fully assessed. These include Saubhagya to power all homes by December 2018 and UDAY to wipe out discom losses by 2019. For now, the sentiment is certainly positive in the industry with an emphasis on policy reform moves.

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