The power sector witnessed significant progress on various fronts, including a revival in demand growth, competitive tariffs being discovered for wind and solar projects as well as improved fuel security for power projects under the Scheme for Harnessing and Allocating Koyla (Coal) Transparently in India (SHAKTI) scheme. That said, the high level of stressed assets and the lack of fresh power purchase agreements (PPAs) being signed by discoms remained two key areas of concern. Power Line presents the views of leading industry consultants on the state of the sector and its future outlook…
How has been the sector’s progress over the past year? What were the major positive and negative developments?
The major positive development has been the resolve of the Reserve Bank of India (RBI) to address the insolvency issues in the sector. While there are short-term pains in this, there are clear long-term gains. On the negative side, there has been no success in addressing PPAs and fuel linkage issues. The lack of ability/willingness of the government to create a level playing field for the private sector remains a key concern.
A key positive development in the power sector over the past one year has been the recovery in demand growth, wherein the monthly electricity demand growth has largely remained at more than 5 per cent. This, in turn, resulted in improvement in the thermal plant load factor (PLF) in 2018, for the first time in eight years. However, the extent of improvement was moderated by the higher share of renewable energy in the generation mix. Also, the signing of fuel supply agreements (FSAs) with the winning bidders (about 9 GW) under the SHAKTI policy has improved fuel security to these projects. Another positive development is the significant reduction in wind power tariffs in line with the trend seen in solar power tariffs, which improves the cost competitiveness of the wind-based generation against conventional sources. The highly competitive rates for wind and solar power projects would enable an increase in the share of renewable energy in the overall generation mix, going forward.
On the other hand, the sector witnessed challenges on the fuel front, with domestic coal availability not keeping pace with the growing demand, leading to an increased dependence on coal imports in 2018. Non-coking coal imports increased by 8 per cent to 161 million tonnes (mt) in 2018 from 149 million mt in 2017, reversing the decline in imports over the past two years. More importantly, stressed assets in the power generation segment affected by issues such as the lack of new PPAs, unviable tariffs and cost escalation are yet to achieve any concrete resolution. Following the February 12, 2018 circular of the RBI, lenders to these projects have initiated resolution plans for these assets through sale to asset reconstruction companies, change in management with restructuring/debt haircut, etc. However, the resolution process could not be concluded for the majority of the stressed assets within the 180-day timeline (from March 1, 2018) approved by the RBI. As a result, lenders were required to file insolvency petitions under the Insolvency and Bankruptcy Code within 15 days from the completion of the 180-day timeline. However, based on the petition filed by some of the affected parties, the Supreme Court of India, on September 11, 2018, provided relief to the stressed power companies by ordering status quo on the implementation of this circular. The resolution of these stressed assets remains crucial to revive investments in the sector. On the Ujwal Discom Assurance Yojana (UDAY) front, while the progress on discom debt refinancing was satisfactory, the progress in reducing the gap between the average tariff and average cost of supply (ACS) and in reducing aggregate technical and commercial (AT&C) losses remains slow. Many of the discoms significantly lag behind the 15 per cent target set by the Ministry of Power (MoP) for 2019.
The power sector performance over the past one year has been mixed. While the renewables and transmission segments continued to see steady growth and significant investor interest, the thermal power segment (coal and gas) witnessed average to below-average performance. Fuel availability continued to plague generation companies (gencos) and a large part of that was attributable to lower availability of railway rakes.
With the implementation of UDAY, a few states have displayed improvement in AT&C losses along with a reduction in the average rate of return (ARR)-ACS gap. This has also led to a slight improvement in the liquidity position of discoms (distribution companies), leading to an improved collection efficiency of several gencos.
On the front of better governance and move towards digitalisation, the MoP has brought higher transparency by making available more information through various apps. This has enabled real-time tracking of the performance of the entities in the value chain.
Further down the supply chain, the MoP, through the Bureau of Energy Efficiency, has continued various energy efficiency measures, which are expected to yield positive results with respect to energy efficiency/demand-side management in the long term.
Over the past few years, the power generation segment, has largely been facing the twin issues of the lack of PPAs and FSAs. During the past one year, the government has taken several steps to address these concerns, notably the allocation of long-term coal linkages to power producers with an aggregate capacity of about 9,000 MW under SHAKTI auction and the launch of a pilot scheme for the procurement of 2,500 MW power from plants with untied capacity at a fixed tariff for three years. These positive steps are presumably small compared to the overall magnitude of the problem, yet they present modest attempts at reviving the power sector.
Among the negative developments, given the higher level of non-performing assets in the thermal power segment, there is a dampened sentiment among the lenders to finance renewable projects. This diminished willingness to fund renewable projects was also attributable to falling tariffs and issues related to grid curtailment and power evacuation.
Also, among other negatives is the continued reluctance by power discoms to sign long-term PPAs with generation companies. The absence of long-term PPAs precludes the gencos to tie up FSAs, thus leading to continued stress in the thermal power segment.
The sector has taken key steps in areas that will spur growth. On the positive side, the progress in rural electrification is impressive, with over a million households added each month this year. The growth in the consumer base drives a much stronger increase in demand as newly connected users switch to electricity.
The recent policy for wind-solar storage hybrids is another progressive step that allows the transition to the target energy mix of 40 per cent from non-fossil fuels. Renewable energy producers and utilities are currently facing challenges from loss due to intermittency and high balancing costs respectively, even at a far lower level of renewable energy penetration. The hybrid policy with storage, such as pumped hydro, is key to this transition.
On the negative side, the continued impasse on dealing with distressed assets is hurting the sector. The causes are external to the projects, namely, development risks, fuel supply and contracting sales, and need for a more general resolution.
The slow progress in the regulatory reforms, such as to enhance competition, reduce cross-subsidies and improve supply standards is another negative. India is now the world’s third largest power market and has to adopt a more progressive regulatory mindset with consumers’ interest in mind.
What should be the government’s topmost policy priorities for addressing the sector’s challenges?
Addressing the issue of stressed assets should be the top priority. However, for this, the government needs to look beyond the insolvency processes underway and create conditions for long-term viability, which will include market access and fuel access. Given the challenge of long-term PPAs, the priority should be to create more robust trading markets including intra-day/real-time markets, ancillary services markets and capacity markets. Fuel market reforms should be a priority. However, the biggest reforms should be targeted towards the distribution sector, where splitting the wires and supply businesses has become a priority for the survival of the sector.
One of the key challenges for the sector was the slow demand growth and paying capacity of the discoms, which resulted in a lack of signing of new LT PPAs. This has adversely affected many thermal power projects in the sector. However, demand growth is now on an uptrend. Further, there is a strong focus on improving household electrification and providing 24×7 power supply to all consumers. In view of this, the central government must work towards state governments to encourage the state discoms to sign new PPAs. Moreover, the state governments must be encouraged to make use of the existing thermal power capacities in the private sector by procuring power from these projects under the competitive bidding route, rather than setting up new capacities under the state sector.
On the fuel front, the government must take measures to commence production from new coal mines and encourage private investments in the coal mining sector, given the fact that domestic production is not keeping pace with the rising demand for coal. Also, the augmentation of the rail infrastructure for coal must be given top priority. With respect to the renewable energy segment, augmentation of interstate transmission infrastructure must be given a high priority to enable timely commissioning of projects bid out by the Solar Energy Corporation of India (SECI)/NTPC Limited. The non-availability of adequate transmission infrastructure is a key challenge for this segment and would derail the ability of the sector to achieve the 175 GW renewable energy capacity target set by the government. Lastly, the progress on improving discoms’ operating efficiencies under UDAY should be reviewed and remedial actions must be initiated, given that AT&C loss levels in many of the states remain much higher than the set targets.
As it is said, in India the problem is not policy formulation but its effective implementation. Thus the topmost priority for the government should be to closely monitor the implementation of existing key schemes such as UDAY and Power for All. UDAY is a comprehensive scheme, which aims at the operational and financial turnaround of the discoms, with clearly defined and monitorable parameters. On the other hand, the Power for All and Saubhagya schemes aim at providing power supply to all households. The implementation of UDAY will strengthen discom financials, thus improving their ability to buy more power, which will help the completed power plants operating at below par PLFs for want of PPAs. On the other hand, the electrification of all willing households under the Saubhagya scheme is likely to boost the power demand.
Among others, the policy-related priorities could be:
- Segregation of content and carriage in power distribution;
- Introduction of better payment solutions including installation of prepaid meters;
Given the greater thrust on the renewable capacity, which exhibits variable generation patterns, battery storage- related power solutions need to be aided/developed; rationalisation of coal linkages among power plants needs to be explored to minimise transportation cost and increase the turnaround of rakes.
The financial health of the state-owned utilities and timely payments are critical for ensuring credit flow and investor interest in the sector. The current position is not promising because other than a slight reduction in financial losses, state utilities have not taken real actions to upgrade their in-house capabilities or outsource work to drive performance improvement.
The government’s proposal for a national discom or the Electricity Act amendment for bringing in competition in supply could be the catalyst to drive this change.
What is your outlook for the sector in the next one or two years?
A bit gloomy with elections round the corner and with the government yet to address some of the fundamental issues in the power sector even as it aims to forge ahead with renewables and smart grids. We can only hope that post elections we will have a stronger resolve from the government to fix the fundamentals.
The electricity demand growth is expected to remain in the range of 5-6 per cent over the next two years, given the strong focus of the central government on improving household electrification and the expected increase in demand from the industrial segment, following the uptrend in GDP growth. This, in turn, would enable an improvement in the thermal PLF level from 60.7 per cent in FY2018 to around 62-63 per cent by FY2020 on an all-India basis, although still at subdued levels.
On the generation capacity front, the capacity addition over the next two to three years is expected to be driven by the renewable energy segment, followed by the thermal segment. While investments in the renewable energy segment would be driven by the private sector, capacity addition in the thermal segment would largely be driven by central and state sector players. Going forward, the share of thermal generation in overall electricity generation would continue to remain the highest, although a gradual increase is expected to be seen in the share of renewable energy-based generation.
With respect to the distribution segment, losses for discoms are expected to come down with the debt takeover by state governments. However, the majority of the discoms would remain loss-making and would not be able to achieve the targets envisaged under UDAY, unless serious remedial measures are taken, given that the reduction in AT&C losses is lower than expected in many of the key states and the tariff hikes remain low.
The reforms proposed under amendments to the National Tariff Policy and the Electricity Act such as stricter operating norms, direct benefit transfer for subsidy and emphasis on the quality and reliability of supply by discoms, once implemented, would have a significant impact on the operations of discoms and would be positive for generators and consumers. In the long run, discoms’ ability to keep their operating efficiency within the targets specified by the regulator and to pass on the variations in power purchase costs to consumers in a timely manner would remain critical for the sustained improvement in their financial position.
The outlook for the solar, wind and transmission segments is stable on the expectation of a continued favourable environment, with bids driven by the central government agencies. These subsectors have seen investor interest, given the absence of fuel risk and less counter-party risk (SECI and NTPC in the case of solar projects and the presence of point-of-connection [PoC] mechanism for transmission projects).
The outlook for thermal power is negative. Subdued power demand, less visibility on new PPAs, less access to coal at reasonable prices and weak discoms shall continue to weigh on the credit profile of generation companies in the near to medium term. Long-term prospects of the thermal segment would be driven by an improvement in the power demand, availability of long-term PPAs and improvement in discoms’ financial and operational performance.
The outlook on the power distribution segment is also negative to stable. The government launched UDAY in November 2015 and the majority of states/UTs have signed MoUs with the MoP for UDAY. Post implementation of UDAY, there has been some improvement in the liquidity position of various discoms, largely driven by savings of interest cost (as the high-cost discom debt is replaced by low-cost state government debt to the discom).
Going forward, structural long-term improvement in discoms’ financial health would largely depend on the improvement in operating efficiency, (by reducing transmission and distribution losses and improving billing and collection efficiency) as defined in MoUs and robust regulatory environment backed by political will.
The outlook for the sector is highly positive and will be driven, at least in the medium term, by higher volumes. This will come from the overall economic growth, a large addition to the consumer base, and electrification of the infrastructure such as public and private transport. The current oversupply of generation capacity will abate soon and the distressed assets could become tomorrow’s saviours.