The sector appears to be consolidating the gains from recent reforms. Demand, which had been playing spoilsport, is now showing signs of recovery. Also, helped by the Ujwal Discom Assurance Yojana (UDAY), the aggregate technical and commercial (AT&C) losses, and the average cost of supply-average revenue realised (ARR) gap have reduced. More encouraging is that nearly 15 years after the path-breaking Electricity Act, 2003 was enacted, the power sector is now being prepared for a policy reboot with a slew of reforms on the cards, including amendments to the Electricity Act and the Tariff Policy. From fixing the onus on discoms to supply 24×7 power, these reforms lay the groundwork for the separation of content and carriage, a proposal that has been on the backburner for quite some time, besides penalising faulty distributors and ensuring subsidy disbursals through direct benefit transfers, among other things.
However, significant headwinds still exist with the sector hit by a number of challenges in the last couple of years: a rescue plan for stressed power assets totalling as much as 40 GW is awaited; private power projects continue to struggle for want of power purchase agreements (PPAs) as well as coal and gas; a sizeable chunk of India’s thermal capacity continues to operate below optimum capacity; while the cancellation of tenders by states, payment security issues and transmission infrastructure constraints are causing renewable energy investors worry. These issues, if allowed to continue to linger, can reduce the reform momentum and result in slippages in some of the government’s big promises in this fiscal – AT&C losses to be reduced to 15 per cent under UDAY and complete household electrification.
Power Line takes stock of the key trends and developments in the past one year…
Demand growth picks up
In the last 12 months, from September 2017 to August 2018, there has been a sustained improvement in electricity demand with a growth of nearly 6 per cent year on year in this period. During 2018-19 (April-August), electricity demand growth has been 5.6 per cent, driven by a significant pick-up in demand in key states like Uttar Pradesh, Telangana, Gujarat, Chhattisgarh, Andhra Pradesh and Maharashtra, among others.
Falling share of coal in the fuel mix
Of the country’s total installed capacity of 345 GW as of July 2018, the share of coal has come down to around 57 per cent, compared to 59 per cent in July 2017. Grid-connected installed renewable capacity at over 70 GW represents a share of 20.4 per cent of the fuel mix, up from 17 per cent last year. Hydropower, at over 45 GW, still accounts for a share of about 13 per cent.
Power generation remains robust
During 2017-18, power generation remained robust with a 5.4 per cent year-on-year increase over the previous year and stood at 1,303 billion units (BUs) (including renewables). Thermal power, which accounted for 80 per cent of the generation, grew by 4 per cent. Hydro, the second largest source, accounting for 10 per cent share, grew by 3 per cent. Renewables, which accounted for an 8 per cent share, recorded a massive 25 per cent jump.
PLFs show some recovery
Coal-based power plant load factors (PLFs) improved by almost 100 basis points, climbing to 60.52 per cent in 2017-18 over 2016-17. The improvement in PLFs was contributed by the central and state sector-owned coal-based plants, whose PLFs touched 72.38 per cent and 57.17 per cent respectively, during 2017-18. While state sector-owned plants’ PLFs climbed up by an impressive 259 basis points, central sector plants showed an improvement of 126 basis points. However, private independent power producers’ (IPP) PLFs failed to cross even the 60 per cent mark and were lower than those in the previous year at 54.69 per cent.
Contraction in energy and peak deficit levels
The energy and peak surpluses reported in 2017-18 were 0.7 per cent and 2 per cent respectively, compared to a surplus of 0.7 per cent and a deficit of 1.6 per cent in the previous fiscal. This year too, the Central Electricity Authority has projected an energy surplus of 5 per cent and a peak surplus of 2.5 per cent.
Renewables’ capacity addition outpaces conventional
In a first, the renewable energy segment posted an impressive addition of nearly 11.78 GW during 2017-18, surpassing the 9.5 GW of additions recorded in the thermal, nuclear and hydro power segments. Growth in the renewable energy segment has been led by solar. In fact, in 2017-18, the solar segment recorded the highest capacity addition at 9.3 GW among all power generation sources, surpassing thermal capacity addition for the first time.
Renewed hopes for hydro and gas
Even as the downturn in the hydro segment continued with capacity addition falling to less than 1 GW and missing the annual target by almost 40 per cent, a ray of hope was the recent announcement that the new hydropower policy is to be finalised soon. Among other things, it promises to offer incentives such as categorisation of hydro as a renewable energy source and waiver of restrictive clauses such as the sale of free power to the host state. In another positive development, hydro was recently brought under the fast response ancillary services ambit to handle the grid intermittency issues arising from growing renewable penetration. Also, gas-based power plants, which have been lying idle, are being proposed to be used as peaking plants that can switch on quickly when there is a high demand.
Coal availability takes a hit
With multiple issues such as an increase in generation, poor rake availability and logistical issues, coal stocks at power plants dwindled to 6-11 days in the past 12-month period. Despite the fact that coal supplies to the power sector have improved by 15 per cent in this fiscal (till June 2018) over those in the previous year, this largely benefited pithead plants, with other power stations still facing constraints. As a short-term fix, the power ministry recently issued an advisory to the state power utilities to resume imports. As per industry data, coal imports have already seen an increase in the first quarter of 2018-19, with many utilities in southern India initiating the procurement of imported coal. NTPC, which last imported coal in 2014, is also planning to issue a fresh tender for coal imports for a few of its plants.
Spot market prices firm
The price of electricity transacted through the power exchanges was 38 per cent higher in 2017-18 (at Rs 3.45 per unit) than that in the previous year. The early onset of summer and low coal availability led to spot power prices firming up in the first five months of the current fiscal. The average year-on-year increase in prices in the day-ahead market was close to 39 per cent (April-August), reaching Rs 3.34 per unit in August 2018. The market clearing price in fact crossed Rs 14 per unit recently in September for a short trading block. The spike, say analysts, should compel discoms, which had been shunning these contracts for cheaper spot prices in the last couple of years, to sign more PPAs.
Much ground to cover under UDAY
On the AT&C loss front, a 2 per cent reduction was achieved from 21 per cent in 2015-16 to 19 per cent in 2017-18. That said, the performance of the states is still far from the target of 15 per cent mandated for the current fiscal. Large states like Bihar, Uttar Pradesh, Madhya Pradesh and Jharkhand continue to report higher loss levels, in the range of 27 per cent to 33 per cent. Meanwhile, the revenue gap reduced by 63 per cent to Re 0.21 per unit at the national level during this period. States like Himachal Pradesh, Rajasthan Maharashtra, Gujarat and Puducherry have shown remarkable results by bringing the gap down to zero. Further, smart metering has remained slow with only 1.5 per cent of the target met so far.
Solar tariffs decline
Solar tariffs, which had hit an all-time low of Rs 2.44 per unit in May 2017, returned to this level once again in July 2018. Previously, these had risen to almost Rs 3.55 per unit in an auction in Uttar Pradesh. However, industry watchers note that future bids could see tariffs increase by about 50 paise with the government’s decision to impose safeguard duty on solar panels imported from China and Malaysia. Already, the lowest tariff discovered in an auction after the imposition of import duties has rallied to Rs 2.59 per unit. Another big worry for the industry is the recent proposal of the government to impose a cap on tariffs at Rs 2.50 per unit and Rs 2.68 per unit for developers using domestic and imported solar cells and modules respectively.
Sector witnessed further consolidation
The big-ticket merger and acquisition deals of the year were the completion of the sale of Reliance Infrastructure’s energy business to Adani Transmission; the sale of 40 per cent stake in one of India’s largest foreign investors, CLP India, to a Canadian pension fund; the acquisition of Ostro Energy by ReNew Power, which was touted as the biggest transaction so far in terms of deal and asset size in the renewables space; and NTPC Limited’s acquisition of three projects from Bihar’s power utilities. The other important deals in the pipeline included JSW Energy-Tata Power’s race to acquire debt-laden Prayagraj Power. Meanwhile, in the distribution space, Tata Power and India Power are currently in the race to acquire Odisha’s Central Electricity Supply Utility licence, which will also mark the privatisation of a discom after almost two decades of Delhi’s privatisation exercise.
TPPs gear up to meet emission norms
In line with the revised emission norms, flue-gas desulphurisation (FGD) implementation was initiated with many utilities awarding bids or issuing tenders for the same. So far, three FGD units have been commissioned for 1.8 GW of capacity vis-à-vis a target of 160 GW by 2022. Tendering activity is expected to pick up pace as around 57 units (mostly owned by NTPC and the Damodar Valley Corporation) have been asked by the Supreme Court to advance the timeline for FGD implementation to 2021. Meanwhile, a major relief was the allowance of pass-through of emission control equipment costs given to thermal power producers by the central regulator.
Electricity Act amendments back on agenda
A revised proposal for amendment to the Electricity Act, 2003 was introduced by the government in September 2018. The draft Electricity Act Amendment Bill had been earlier tabled in 2014 but was referred to the standing committee. The revised bill has now been circulated on the basis of the recommendations of the panel and consultations. The revised proposal provides for more than one service operator to supply power to a consumer in one distribution area. Another major reform proposed is to ensure that subsidy disbursements by states are now only through direct benefit transfers. Further, it states that the supply company would have the obligation to supply 24×7 power to its consumers. Comments on the draft have been currently sought and, once final, would be placed before Parliament for approval.
High-level committee for resolution of stressed assets
After the Allahabad High Court refused to grant a reprieve, the Supreme Court, in September 2018, granted interim relief to stressed power firms. The court has directed lenders to maintain the status quo on the Reserve Bank of India’s (RBI) circular for banks to resolve these cases within 180 days. Another key development has been the setting up of a high-level empowered committee under the cabinet secretary to address the issues of stressed assets, which has already held two meetings so far with stakeholders.
Tariff policy amendments
In May this year, the government released draft amendments to the National Tariff Policy, 2016. One of the most crucial changes proposed is with regard to power procurement through competitive bidding. The draft amendments have sought to exempt central public sector undertakings from the requirement of carrying out the bid process, and have proposed to allow such entities to sell power by way of a cost-plus power supply arrangement, which is likely to be challenged by private players. Meanwhile, in a positive, the government has sought to make all consumer categories pay the same tariff for the same volume of electricity consumed, if they have the same load and voltage. Effectively, all consumer categories such as commercial, domestic, agricultural, industrial and institutional may be brought at par.
Village electrification milestone
In a symbolic milestone, in April this year, a small village in Manipur (Leisang) was the last village to be brought on the national power grid, thereby making all of India’s 597,464 villages electrified. At the onset of the Deendayal Upadhyaya Gram Jyoti Yojana in December 2014, village electrification had received renewed interest with the government announcing the 100 per cent village electrification target by connecting the remaining 18,452 unelectrified villages in the country. The focus has now shifted to household electrification under the Sahaj Bijli Har Ghar Yojana, in which almost 16.1 million households or 8 per cent of the total households still remain to be electrified and are targeted to be electrified by the end of 2018-19. Apart from a stringent timeline, on-the-ground challenges related to manpower and equipment make this a tough promise to fulfil.
Proposed national power distribution company
The central government has proposed the setting up of a national power distribution company (NPDC) that would streamline the ailing power distribution network in the country. Industry watchers have given the thumbs-up to the proposal as the NPDC’s scope may complement the technical and implementation capabilities of discoms, especially in implementing central government schemes in the power sector. Further, it could benefit discoms in cost-competitive power procurement.
Coal supply begins under SHAKTI
After the first round of auctions were concluded under SHAKTI back in September 2017, coal supply finally began for the auction winners this year in March. Coal India Limited plans to supply around 27 million tonnes to around ten plants including those of Adani Power, GMR Energy and KSK Energy. More rounds of auctions are expected to take place to ease fuel supply.
Increase in RPO targets
The power ministry increased the renewable purchase obligation (RPO) target to 21 per cent by 2022 from the current 17 per cent. As per the new norms, all entities that fall under the RPO would need to procure 10.5 per cent of their total electricity from solar sources, compared with the current 6.75 per cent, and another 10.5 per cent of their power from other non-solar renewable sources by 2022, compared with the current 10.25 per cent. This push came shortly after the power minister stated that the country should increase its renewable energy target to 227 GW by 2022, significantly higher than the current government’s initial goal of 175 GW.
New regulatory norms for 2019-24
The Central Electricity Regulatory Commission floated an approach paper recently to modify the tariff norms. The CERC paper has proposed to introduce a three-part tariff structure to replace the existing two-part tariff for thermal generation. The proposed design seeks to introduce a variable component in addition to the fixed and energy charges. The variable component could be linked to the difference between electricity availability and despatch. Meanwhile, the fixed component could be linked to target availability, and fuel or energy charges to despatch. The move is likely to be useful for coal-based stations that have been witnessing declining PLFs in recent years.
Pilot power procurement scheme takes off
The power ministry this year launched a pilot scheme for centralised procurement of 2,500 MW of coal-based capacity for a period of three years through the competitive bidding process. The scheme brought some relief to the financially distressed power generators that have commissioned their plants but have not been able to despatch power due to the non-availability of PPAs. So far, one round of auctions has been held and PPAs for 1.9 GW of capacity have been signed by PTC India and the proposal for initiating another round of bids is on the cards.
Cabinet nod for commercial mining
The central government gave approval for commercial mining by private players, which is likely to be a game changer for the sector. It should provide operational flexibility to coal consumers and a new market to private players, say analysts. It is also expected to lead to an increase in domestic coal output. That said, since the announcement of the decision, there has not been any policy move on this front. In fact, the move has drawn a backlash from labour unions.
Gujarat discoms emerge as top performers
Gujarat’s four state-owned discoms retained their leadership position for the sixth consecutive year in the latest discom ratings released this year. In addition to these, Uttarakhand Power Corporation Limited was also among the best performers this year. A key concern, however, that the report notes is that around eight discoms witnessed a decline in their ratings from the previous edition, while only seven discoms saw an improvement.
New rules for captive power plants
After the 2016 draft amendments failed to come into effect, a fresh set of draft amendments were introduced for CGPs. A number of changes have been proposed such as ownership by value and voting rights as opposed to the numerical value of shares. More significantly, the new rules restrict IPPs from converting into CGPs, which effectively disallows IPPs from keeping their loss-making units in running condition to avail of CGP benefits.
EV charging infrastructure clarification
Bringing in clarity to investors, the government, this year, announced that electric vehicles (EVs) will not need a separate licence under the Electricity Act. The absence of this notification had resulted in significant confusion among stakeholders as to whether charging a battery could be called an act of transmission, distribution or trading of electricity, which required a licence under the act. However, clarification over the standards for chargers is awaited, the lack of which recently led to the scrapping of the second tender for the procurement of about 10,000 EVs by Energy Efficiency Services Limited. What should, however, bring cheer is an e-vehicle policy on the cards wherein the government is considering providing subsidy for setting up charging infrastructure.
India ranks 29th in ease of getting electricity
In the 2018 edition of the World Bank’s Ease of Doing Business rankings, India ranked 29th in the ease of getting electricity parameters (same rank as the 2017 edition). India ranked 99 in the 2015 edition. Observers say that the positive performance is reflective of the various regulatory and administrative easing measures and initiatives taken by the discoms of Delhi and Mumbai, that have made electricity availability a less cumbersome process for users now as compared to earlier.
What all these trends and developments add up to is the need for swift policy action. Meaningful resolution of stressed power projects to prevent such assets from being mothballed is the unanimous industry concern. Closely linked is the need for fixing the distribution segment’s challenges. Progress in both these areas is imperative in order to get remove the sector’s growth inhibitors.