Interview with Deepak Amitabh: “The challenges in the distribution segment have impacted the power market”

“The challenges in the distribution segment have impacted the power market”

Deepak Amitabh, chairman and managing director, PTC India Limited, expects power demand to pick up in the medium term on the back of improvements in the macroeconomic environment, better discom health and government stimuli. Excerpts from a recent interview with Power Line…

What is your perspective on the current state of the power sector? What have been the major hits and misses in the past one year?

The power sector has made substantial progress with installed generation capacity reaching 329 GW. A substantial part of the growth came from the renewable energy segment, which clocked a growth number of 47 per cent and reached 58 GW capacity. More importantly, renewable energy capacity also achieved grid parity, with competitive bids leading to a price discovery of Rs 2.44 per unit for solar power and Rs 3.46 per unit for wind power. However, the reducing plant load factor (PLF) of thermal plants during the year exacerbated the situation of stranded capacity of about 25-30 GW. The resulting financial burden in the form of non–performing assets of the banking sector has been a sore point in an otherwise vibrant sector.

The major success during the year has been the start of distribution reforms under the Ujwal Discom Assurance Yojana (UDAY), which has resulted in discoms’ saving about Rs 120 billion with the issuance of bonds worth Rs 2.32 trillion. Besides, the new coal allocation scheme – Scheme to Harness and Allocate Koyla (Coal) Transparently in India (SHAKTI) – enhanced transparency in resource allocation. Further, the launch of various web/mobile applications for information dissemination and digitisation of competitive bidding through the Discovery of Efficient Electricity Price (DEEP) platform has put greater information in the public domain.

The level and quality of power supply have been a major disappointment; we are yet to address a significant quantum of suppressed and latent demand. The pace of investment in distribution, in spite of progressive policies, is slow. Ground-level changes for the end-consumer are still some distance away. Energy demand must fundamentally be assessed from reliable consumer data.

How would you assess the growth in the short-term power market in the past one year? Do you think that the trend of discoms increasingly opting for power from the short-term market over long-term contracts is desirable?

The volume of power traded increased to 96.01 billion units (BUs) in 2016-17 (excluding DSM volumes) compared to 94.48 BUs in 2015-16, recording a growth of 1.62 per cent as compared to a growth of 5 per cent in energy generation and 9.7 per cent in installed capacity. The challenges in the distribution segment have impacted the power market. However, going forward, while demand may stay suppressed in the near future, over the medium term, we expect a revival in demand through an improvement in the macroeconomic environment, better financial health of the discoms, creation of interstate trading of renewables and through state-level efforts to address the issue of stranded projects.

The trend of discoms opting for power from the short-term market over long-term contracts is unsustainable. It is against time-tested principles of a sound market design. We believe that the market should comprise a healthy mix of short, medium and long-term contracts, which can cater to the base load demand in the long term as well as to fluctuating demand in the short and medium terms. A short-term market of 10-15 per cent makes an optimal share in the overall power market.

What would be the most effective strategies to address the issues related to stressed assets?

Even as we speak, stakeholder discussions are on. Finding solutions for the revival of stressed assets is both difficult and easy. It is easy if we keep the fundamentals in focus – that the asset should not suffer and mothball is the primary objective. Keeping the interest of providers of debt and equity capital intact is at best a secondary objective. It would be unrealistic for banks and FIs, much less promoters of these projects, to expect target returns on the assumptions on which they may have taken the investment decisions initially.

It is also important to understand that there may not be, indeed cannot be, a single and effective “One Size Fits All” strategy. Risk-return-based discussions and computations, followed by market-based pricing calls may be the only approach to resolve the issue.

PTC is seriously looking at opportunities that will not only help in the revival of stressed assets but also bring cheaper power to consumers.

What are the steps needed to strengthen the open access framework? What are your views on the Ministry of Power’s (MoP) recently released consultation paper on open access?

The Electricity Act, 2003 is a landmark legislation that has enabled the power sector to be served by a number of public and private players by enacting provisions for a competitive power market. Open access, one of the pivotal provisions under the act, envisages an open market for bulk consumers for the procurement of power and provides for non-discriminatory access to transmission and distribution networks for wheeling electricity from suppliers of their choice, in preference to their incumbent discoms.

Nearly 15 years have passed since the enactment of the act, but open access has unfortunately not picked up pace due to several reasons. Thus, an analysis of the issues pertaining to open access was overdue. And so, pertinent issues have been touched upon in the MoP’s consultation paper. The paper brings out several key issues such as restrictions by discoms, denial by nodal agencies on unreasonable grounds, transmission constraints, high cross-subsidy surcharge and additional surcharge; all of which are impediments to the growth of open access. These issues are to be critically analysed and further dealt with by the MoP.

A judicious analysis of the issues pertaining to open access, considering the perspectives of all stakeholders and most importantly, the end-consumers for whom the provisions of open access were drafted, would lead us to deploying apt remedial measures required to address the impediments to its growth. Timely implementation of corrective actions for the promotion of open access would enable the adoption of a smooth and calibrated path for the separation of carriage and content.

How do you see the trading market evolve in the coming years with the introduction of ancillary services?

Quite apart from ancillary services, the trading market will grow and evolve for two primary reasons. First, we envisage that the latent demand in the system will increasingly be met by discoms. And this would happen with the tightening of service obligations. Second, more of the stranded capacity will be despatched and this would progressively replace ageing plants.

From the current buying practices, where discoms work themselves into positions of at best short-run optimising (as we have seen in the tendency to buy one-day power from the exchanges for extended periods), we envisage a scenario of optimising over short, medium and long-run periods. That is when the market for OTC purchases on DEEP becomes the primary market, and exchanges fill in as the support for standard products. It will, however, take some time yet for the market to provide sustainable products for hedging price, and the current focus on hedging of volume (physical delivery) risks will continue in at least the medium run.

Coming to ancillary services, currently the opportunity to provide these services is restricted only to the central sector generating stations. We feel that the same needs to be opened for other generating stations including independent power producers for transparent and competitive bidding for services. Going forward, we expect new products to be introduced; products such as aggregation and disaggregation of contracts for which the CERC has already issued a staff paper for providing a platform for a customised solution. Promotion of open access for industrial consumers, improvement in generation utilisation and mixing of different fuel types are degrees of freedom. The introduction of a capacity market for electricity at some stage would also help in providing reliable electricity supply at stable and affordable prices.

What is your outlook for traded volumes and prices in the short to medium term?

On the volume front, the outlook is positive due to the emphasis by the government on providing electricity through various schemes such as 24×7 Power for All, the Deendayal Upadhyaya Gram Jyoti Yojana, and the recently announced Sahaj Bijli Har Ghar Yojana (Saubhagya) for the electrification of all households by December 31, 2018. In order to provide power to all consumers, the discoms’ buying intent will be strong, for both short and medium-term products. This will help demand pick up (helping the utilisation of stranded capacity of around 20-25 GW) and PLFs to increase from the present levels of around 60 per cent to the normative levels earlier witnessed at 80-85 per cent.

The prices of short-term power went up in the recent couple of months; however, prior to that, we witnessed an extended period of low prices on the exchanges. These variations, or price volatility, is to be expected in an under-penetrated market such as ours.

Going forward, prices should stabilise at levels at which the producers are at least able to provide output on a sustainable basis. This would mean a hardening of prices, but not necessarily to dramatic levels. Whether the current hardening of prices is the inflection point, or whether it will occur anytime in the next 12 months is a difficult call to make. However, over the medium run, prices will be more cost-reflective than they have been over the past two years or so.

What were PTC India’s key accomplishments over the past year?

PTC India maintained its leadership position with a market share of around 38 per cent, and an all-time high trading volume of about 48.5 BUs, or an increase of 14 per cent. Of the total volume traded, cross-border transactions with Nepal, Bhutan and Bangladesh accounted for a 14 per cent share. More important than the growth numbers, PTC’s business portfolio demonstrated the balance that insulates the company’s business model from short-run spikes and volatility. It has been a year of validation of the company’s business model.

The government recently concluded the first ever auction of wind power for 1,050 MW of capacity. PTC has been selected as the trading partner for the same. We have executed power sale arrangements for the entire quantum. With the installation of 239 MW of wind power projects during 2016-17, the wind power portfolio of PTC’s wholly owned subsidiary, PTC Energy Limited, has reached 289 MW.

PTC Retail, set up to facilitate power supply to industrial and commercial consumers, has seen a growth of about 38 per cent this year. Some of the major clients we served during the year are Tata Consultancy Services, Ultratech Cement, Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL) and Petronet LNG Limited.

PTC is managing the power portfolio of the New Delhi Municipal Council, Himachal Pradesh, Tripura, Chhattisgarh, Dadra and Nagar Haveli and Indian Railways. In the energy efficiency space also, PTC had provided services for energy audits to various clients including SEZs, EPZs and airports, and currently work for the energy audit of 138 railway stations across states is under way.

What is PTC’s growth strategy for the next two to three years?

PTC will continue to consolidate its core business, which is power trading. Our plans and programmes are focused on a sustainable development of the power market. In addition, PTC will continue to expand its footprint in the electricity industry through power portfolio management and consultancy services such as technical advisory, energy audits, network maintenance and regulatory compliance advisory.

What is your outlook for the power sector for the next few years? What is your wishlist for the new power minister?

Measures for the revival of stressed assets are an urgent need for the sector and the power ministry is endeavouring to find a medium to long-term solution to this issue. We must appreciate that the power sector is driven by three variables on the supply side (available capacity, equity finance and coal) and at least three variables on the demand side (investment in distribution infrastructure, financial health of the discoms and industrial consumer need). The interplay of all these variables alone can help us arrive at a sustainable solution in the long run.

The revival of stressed assets and the tapping of latent demand in the system need to be the key objectives, as addressing these alone can provide relief to industry stakeholders, including generating companies, banks and consumers. Increased demand from the states, including serving of latent demand under a tight service obligation regime, is the answer.

My wishlist begins with measures to stimulate demand that is latent in the distribution system, starting with ensuring that such demand gets sufficient connectivity to the grid. A second item on the list would be promoting a change in usage patterns that increase consumption of electricity, beginning with basic movements like conversion from LPG to electric induction-based cooking in our household kitchens.

Overall, I would look forward to seeing market-based reforms in all segments of power to increase efficiency and, importantly, to meet the objectives of the Electricity Act.