In the past year, the power sector has witnessed significant growth, including the achievement of 100 per cent village electrification and an improvement in power supply. However, it continues to face several challenges such as high aggregate technical and commercial (AT&C) losses, weak discom health and low plant load factors (PLFs). Industry experts comment on the recent developments and ways to resolve sector challenges…
How has been the sector’s progress over the past year? What were the major positive and negative developments?
Dr Rajib Kumar Mishra
The power sector has progressed well in terms of capacity addition, managing grid congestion, cross-border transmission capacity, enhanced market participation, supply of electricity to consumers – both in the urban and rural areas – and reaching out to customers with better last-mile connectivity through Saubhagya. A major positive has been improvement in the availability of power in most of the states and the creation of infrastructure under Saubhagya to reach all households. Policymakers have shown clear intent to resolve the issues being faced by stressed thermal assets. Serious efforts were made to provide power purchase agreements (PPAs) and fuel supply agreements to the stressed assets so that the assets can be utilised and the debt can be paid back to the lender institution. Other notable positives for the sector have been energy efficiency, deployment of energy-efficient LED bulbs, and efforts towards developing electric vehicles and promoting storage batteries. The work done for renewable energy promotion, both solar and wind, under the central and state policies, is also noteworthy. The stressed thermal assets in terms of completed projects, aggregating 34,000 MW, is painful for the banking sector. Despite the best efforts, the resolution plan for these stressed assets is under progress.
Dr S.L. Rao
The sector obviously made considerable progress last year, resulting in surplus power. The government also claims that all the villages are now electrified. There has also been considerable progress in setting up new transmission lines. However, a number of weaknesses still persist. The financial position of many electricity boards continues to be dismal. After showing some progress in availability, the supply of domestic coal has again become short, leading to increase in the use of imported coal or reduction in power generation. The railways charge inordinately high rates for transporting coal. Rural electrification is good in theory but almost 300 billion households continue to be unelectrified. The definition of a village being electrified when 10 households are connected is dismissive of the reality that the majority of households in that village is unelectrified.
The past year has been a mixed bag of progress and distress for the power and allied sectors. There have been a series of good, bold and rational declarations of intent and proposed policies, although implementation is awaited in a number of cases. Village and household electrification has moved at a good pace. Rural electrification has been an ongoing challenge for decades, largely owing to tardy progress by the states, and the non-commercial history of village electrification. May be progress in technology at the distribution end will break the jinx. The government took up the challenge on a war footing, a little over a decade back, with the target of electrifying over 125,000 unelectrified census villages, along with household electrification. The last two years have seen a dogged determination on the part of the government to complete the task at the earliest. With the last census village electrified and household electrification in full swing, hopefully the task of covering the unelectrified hamlets/Dhanis will be completed soon through grid connection, or distributed generation, along with prepaid or smart metering enabled with remote disconnection.
The progress in energy efficiency and energy saving has been commendable and is well on track, particularly in the field of LEDs in domestic and street lighting. A palpable transformation in lighting technology and consumer awareness about energy efficient appliances has taken place. A critical mass has been created. The real impact will be felt when agriculture, municipal and domestic pumps are replaced, and building design and materials are made climate friendly.
Capacity addition in the conventional fossil fuel, nuclear and hydro sectors has been extremely muted. However, capacity addition in solar and wind power has been robust and is well on track. The tariffs too have been very encouraging. The heavy dependence on imported components for solar power continues and is a matter of concern. The reported progress on meeting energy and peak electricity demand has been good, though the quality of supply at the distribution end is a continuing problem. There is no word on the development of pumped hydro or battery storage. Both will be extremely vital with the rapid addition of intermittent wind and solar power. PLFs of coal and gas-based power plants have declined over the last five years. The PLF of coal-based plants has been stagnant at about 60.5 per cent, with the PLF of plants under the central sector at 72.4 per cent and the private sector at 55.30 per cent. Coal availability at non-pithead power stations continues to be critical. Despite the hype over the production of 1 billion mt made a few years ago, the aspirational target for Coal India is only 652 mt for 2018-19, and the official target is much lower. Coal imports continue to be essential. Gas availability and prices remain a cause of distress. The PLF of gas-based power stations was 67 per cent in 2009-10. It fell to 23 per cent in 2017-18, which is indicative of the state of the segment.
What are some of the biggest unresolved challenges for the sector?
Dr Rajib Kumar Mishra
The financial health of the distribution companies is still the weakest link in the entire value chain. The losses in recent years have shown declining trends in many states but revenue realisation is still a challenge. Further, if the financial health of discoms does not improve, the efficiency gain both at the generation and transmission end would not reach the end consumers.
Dr S.L. Rao
The biggest problem for the electricity sector in India continues to be the state ownership of most electricity distribution companies, resulting in populist pricing, free supply to electorally important sectors, collusion of electricity board employees in permitting, and relative inefficiency. Hence, the first priority has to be dispensation of the government from responsibilities relating to electricity distribution. This can happen only if electricity ceases to be a concurrent subject in the constitution or there is severe financial pressure from the central government. As far as generation is concerned, we continue to operate generating plants that are over 25 of years of age. These adversely affect costs. While renewable energy capacity has increased substantially, we still have to develop methods for dealing with the variability in supply. Transmission has been a relatively positive area but with very little private investment. In summary, while power availability has improved, we are yet to find ways to deal with the surplus, and to improve profitability and cash reserves in the sector.
The biggest cause of worry in the power sector is the huge financial distress in the thermal generation segment, with reports of 70 to 92 per cent “haircut” for the stressed assets, a misnomer for an amputation or a body blow. The total stressed assets in the power sector have been reported to be as high as 51.8 GW of the installed capacity, of which 68 per cent is owned by the private sector, and 23.09 GW is still under construction. The financial implication of this distress is humongous, and the psychological implications would be debilitating.
AT&C losses of discoms continue to be a nagging concern. AT&C losses for the first quarter of 2018-19 stood at 23 per cent, as of June 2018, from a level of 19.1 per cent during the same period in 2017-18. This is despite the ultimatum given by the MoP that AT&C losses above 15 per cent will not be compensated through tariffs. Obviously, this threat will not work in a situation of monopoly discoms. The AT&C loss problem could get aggravated in states like Uttar Pradesh (37.9 per cent), Bihar (39 per cent,) Jharkhand (37 per cent) and Chhattisgarh (31 per cent), with massive household electrification planned under Saubhagya. It is also to be ensured that while trying to project lower AT&C losses, discoms do not hold back payments to power generators, whose outstanding dues surged 150 per cent to Rs 320 billion in 2017-18. While CPSUs can take recourse to the payment security mechanism, private gencos have no such relief. Another major issue the power sector will face is the muted increase in power demand, which has largely remained flat in relation to the gross domestic product, and well below the projections of the Central Electricity Authority. This concern should never be mistaken for a suggestion to go slow on energy efficiency or demand side management measures. Demand has to be raised by increasing the industrial manufacturing activity in the country and aligning it, besides capacity addition, with the laudable Make in India initiative.
An immediate agenda facing the existing thermal power generating stations, particularly the older ones in the public sector, is the implementation of the newly notified norms and standards for SOx and NOx emissions and lower water utilisation. The modification will need capital expenditure, which should be absorbed in the tariff of public and private units alike, in case they are not funded through the clean energy cess on coal. The governments could think of imposing an inefficiency tax on the less efficient thermal plants to check emissions. Meanwhile, transmission expenditure and tariffs are going up and causing pain. Right of way is also posing serious problems.
What should be the government’s topmost priorities for addressing these challenges?
Dr Rajib Kumar Mishra
Of the two major challenges at this point of time, one is destressing the thermal assets and avoiding the referral of good assets to the National Company Law Tribunal for resolution. The second should be to make the power distribution business viable by bringing necessary amendments to the Electricity Act, 2003, and introducing carriage and content separation, thereby increasing competition at the distribution level. This would bring the much-desired efficiency at the distribution level.
Dr S.L. Rao
The top most priority obviously is to make state governments more efficient in electricity distribution, which demands removing the interference of politicians and bureaucrats and also appointing well-paid experts, specials and professionals to run the sector. There is no reason why India should not be able to generate sufficient surplus power, once these questions of ownership and management are resolved.
The government should recalibrate capacity addition of any kind to match the growth in demand. The solar power capacity programme should be synchronised with the development of indigenous solar manufacturing capability. There is no tearing hurry to add more generating capacity when we are already in surplus. The only exception should be hydropower, pumped storage and any other storage device, including batteries, to meet the requirements of intermittent power inputs. The present level of safeguard duties may not be sufficient to promote or protect the domestic manufacture of solar equipment. Electricity can and should replace imported fuels in vehicles, railways and liquefied petroleum gas/kerosene in cooking. This should be easy after 100 per cent electrification of households. The recent decision of the Ministry of Railways to electrify all the broad gauge tracks is a laudable step. The large collection of Rs 400 per tonne of coal, mined or imported, is upwards of Rs 300 billion a year. This clean energy cess collection should be used to fund the mandatory cleanup of coal-fired power generation, the setting up of coal washeries, and the urgent diversification of our coal to greener coal through conversion to methanol. This will save precious foreign exchange by checking imports. With affordable and falling renewable power tariffs, minigrids and spatial planning of grids with a smaller command can be attempted. The era of subsidy or free ride for renewables should be called off, though a must-run status has to be granted.
There has been a curious float of a proposal for a national electricity distribution corporation. It does not seem a good idea at all. If some discoms are not performing well consistently, the regulatory apparatus should ensure their demise. There are numerous private and public sector discoms operating efficiently. They could easily replace them. A national discom without a territorial jurisdiction is entirely uncalled for. If it is meant to be a financing agency, the Power Finance Corporation or Rural Electrification Corporation or any financial institution can do the job more professionally. If it is meant to be a procurement agency, EESL can easily do the job at the central level. If it is to disseminate best practices in smart grid, the Smart Grid Forum, Powergrid Corporation of India, or any of the outstanding discoms can do the assignment in a more professional way. The floated idea of a national discom should not end up as a vehicle for the transfer of liabilities at the state level, or an aspirational scheme of a proponent. The answer to the problem may probably lie in separating carrier from content at the distribution level.
A level playing field for private and public sector power generators, transmitters and distributors is an imperative. To encourage true and fair competition and efficiency, the laws, regulations and their enforcement has to be uniform for the public and the private sector, with equal norms of transparency and probity. Power regulators will also have to give an even-handed treatment. The availability of coal, which is vital to power generation, has to be freed up, and the public-private discrimination discontinued. As promised, commercial coal mining has to be launched. Separation of carrier and content also has to be carried out in the railways. Freight costs are heavily burdened with funding passenger subsidy. The true commercial value of building new rail tracks can be realised only through a large increase in the availability of rakes for coal, which will again hinge on the separation of carrier and content. Both the coal and the railways sectors are awaiting the long-promised regulatory changes.
The power and allied sectors cannot move ahead without adequate availability of finance. It would be reasonable to expect an environment of “lender beware” in light of the contemporaneous cascade of non-performing assets and stressed assets in the power sector. We can avoid stress in future assets by ensuring that more due diligence is carried out by lenders during the investment phase, ensuring quality and efficiency control in respect of the equipment being installed, lifetime warranties of equipment, adequate and assured fuel supply, a close watch on the projected tariff, and its viability in the foreseeable future. The tenor of future PPAs is bound to be shorter. There has to be a more realistic assessment of demand. If the same precaution and diligence is not carried out as may be applicable, in the renewable solar power generation segment, the distress story of the thermal power sector could repeat itself in the solar power segment for the financial institutions, without the comfort of falling back on land, building and machinery assets.
The power sector has to win back the confidence of the financial sector. There will be little cause for worry if power supply moves in tandem with demand, equipment quality is ensured, time and cost overruns are avoided, fuel supply or conversion inputs are assured, power distribution is run as an efficient commercial business, technology is constantly upgraded, and a fair return assured for the investor in a level playing field and a truly competitive environment.
The power and allied energy sectors have to prepare themselves for robust energy transitions, in line with global movements and international obligations. But, this has to take place keeping in view our own compulsions, economic imperatives, employment opportunities and sagacity. We need to be developers and producers of energy technologies and devices, and not users or consumers.