The year 2018 saw the power sector delivering a fairly good performance on the back of the achievement of village electrification targets, a revival in power demand, significant growth in renewable energy and the signing of power purchase agreements (PPAs) under the government’s aggregate power procurement scheme. On the policy front, the resolution of stressed assets remained a high priority. Power Line invited industry experts to comment on the performance of the power sector in 2018 and the outlook for the next year…
How would you rate the power sector’s progress in 2018? What were the major hits and misses?
Stressed assets in the power sector dominated the mind space and narrative for a large part of the year. On the positive side, the power sector witnessed a reversal in the declining demand growth trend as electricity demand started to pick up. This was aided by the growing household demand and the phenomenal work done by the government in the electrification of villages and then households under the Saubhagya scheme. 21 million households have already been electrified under Saubhagya and government estimates a demand accretion of 28,000 MW. In my view, an achievement of this scale is hard to recollect in recent times. Discoms are back in the conventional power procurement market; PTC-PFC was able to aggregate demand and enter into power purchase agreements (PPAs) for 1,900 MW. More such aggregated power procurement schemes are in the offing.
Meanwhile, the picture of conventional stressed assets is not so positive. Prolonged legal uncertainty and the risk-averse attitude of banks have delayed a meaningful resolution of the 40-50 GW of capacity under stress. Arguably, the resolution of stressed assets is rooted in the resolution of various sectoral issues such as coal supply augmentation, opening up of policy bottlenecks for coal supply to assets without PPAs, gas supply from domestic sources, resolution of PPA disputes and timely payments of dues by discoms. While banks led by the State Bank of India (SBI) tried their best to resolve quite a few assets, some other banks/financial institutions did not come on board in such situations. The sector witnessed coal shortages, and discom reforms still remain a work in progress, as they have been for decades now.
The renewable energy sector continued to attract interest. However, it faced headwinds due to low tariffs in reverse auctions. The government needs to revisit the idea of putting tariff caps, and think of ways to sustain investor interest to put up large capacities in order to meet its ambitious targets for the sector.
The High Level Empowered Committee (HLEC) constituted by the government under directions of the Allahabad High Court has made far-reaching recommendations. A time-bound implementation of these should go a long way in resolving the stressed capacity and bringing these national assets with locked public money to their targeted economic use.
India needs every fuel type to achieve its vision of comprehensive energy security rather then a single fuel type that will replace everything else. Therefore, policymakers and key stakeholders should work together to come up with a comprehensive energy policy for the sector.
India’s power sector has made rapid progress and currently ranks fifth globally in terms of overall installed renewable energy capacity. After a slow growth for two to three years, electricity demand has increased rapidly this year with a large number of new connections being issued. Despite the per capita consumption of electricity growing by 37 per cent from 818.70 kWh in 2011 to 1,122 kWh in 2017, we are far behind other countries. The market size in terms of electricity demand in the coming fiscal years is bound to grow at a fast pace. The government has also set an ambitious target of achieving 175 GW of installed renewable energy capacity by 2022 and active steps are being taken to achieve the same.
A successful medium-term tender for thermal power, the launch of the Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India (SHAKTI) for coal allocation, the award of new renewable capacity etc. have been noteworthy developments in the power sector. The high-powered committee report, once implemented, should also relieve the stress in the sector.
Going ahead, we look forward to additional steps towards commercial mining, availability of long-term PPAs, new hydro power policy, approval of the revised tariff policy, development of greenfield thermal capacity, etc.
Dr Rajib K. Mishra
2018 will always be remembered for 100 per cent village electrification. The government under Saubhagya has been electrifying 700,000 villages each day and will connect 30 million electrified households by the end of 2018. Renewable capacity addition is on track; solar capacity touched 24 GW in December 2018. Stressed thermal assets remained a concern for banks, investors and independent power producers. The government came out with a 2,500 MW aggregation model for thermal plants to de-stress plants. However, considering the quantum of unutilised stressed projects, more such initiatives are required.
On the transmission front, the completion of last mile connectivity for renewable generation in Gujarat and Tamil Nadu will take another 10-12 months. The year 2018 saw the revival of the exchange market, lending much needed optimism to the merchant capacity. The distribution reforms are expected to take off with amendments to the Electricity Act, 2003, and carriage and content separation, which would allow real competition at the supplier level. A milestone year for 100 per cent household electrification and 100 per cent village electrification in the country, 2018 will be remembered for Saubhagya. The list of desirables includes the availability of adequate coal for the sector, optimal grid operation, and the efficient utilisation of plants. The real commercial benefits of the power sector reforms would be harnessed if the carriage and content separation is made a reality and there are multiple suppliers as service provider at the retail level.
The power sector has witnessed a 5 per cent growth in the past year. Merchant tariffs have also crept up during 2018.
The year 2018 saw some positive developments with emphasis on strengthening India’s renewable generation and transmission capacities. The government’s strong push towards renewable is the highlight of the year. The renewable sector now accounts for about one-fifth of the country’s overall installed power capacity. Further, policies such as Saubhagya and the Ujwal Discom Assurance Yojana (UDAY) have showcased the government’s resolve to look at solutions that not only benefit the retail consumers at large, but also help create a healthier, more profitable industry value chain. However, on-the-ground implementation of distribution reforms at the state level remains the “elephant in the room”! The government’s directions to the Central Electricity Regulatory Commission to allow the pass-through of costs on account of changes in duties, taxes, cess, etc., to tariffs was also a positive step. The clarification that electrical vehicle (EV) charging does not require a licence was another welcome move.
While the conventional energy space still faces substantial challenges on the coal production and supply fronts, the SHAKTI scheme has shown promise. According to a recent study, coal linkages under the scheme have been able to increase utilisation and decrease the fuel cost for power plants. The government and the industry’s collective push to resolve the stressed assets situation should also be considered a good sign. The proposed amendments to the Electricity Act, 2003, have been a positive step by the government though the introduction of these amendments in Parliament remains uncertain. Safeguard duty on solar panels, especially with limited domestic capacity, may have its own repercussions.
Clarity is needed on PPAs. Discoms are still not looking at long-term procurement of power as they continue to buy power from the short-term market. There is a lack of balance in the system in terms of contracting long-term power capacity.
What are the key trends that are expected to shape the sector in the year to come?
- The decarbonisation of the energy sector is inevitable, which will give an impetus to renewable energy. The risk-return trade-off in the primary bids will need to be improved to drive capacity growth from the current rate. This would attract more long-term capital into the sector. Grid management and smart grid deployment will facilitate the greater absorption of renewable energy. Since poor discom finances are a hurdle to any major investment in such modernisation, the central government may have to play a larger role by financing key investment programmes.
- Electric mobility holds the biggest promise for the reduction of India’s energy imports. A fast-paced adoption of EVs for urban transport can help achieve the twin benefits of energy security and lowering city pollution levels.
- Discom financials have marginally improved under the UDAY scheme. Large discoms are still laggards and need substantial improvement. Significant reforms need to be implemented in the sector.
Based on the projected economic growth, we believe that in the medium term, power demand will continue to grow at 6-6.5 per cent annually with Coal India/ commercial mining providing the required coal supply. We believe that while the share of renewables will continue to increase with time, coal is likely to remain the main source of base load electricity at least for the next two to three decades. We also expect that as excess capacity in the system will be used to meet the ever-increasing power demand, power pricing will move up significantly in the next two to three years with pressure on utilities to tie up long-term PPAs.
Dr Rajib K. Mishra
The economy is growing and so is the demand for electricity. Since 2019 will be the year for the General Election, the demand is expected to increase. The price at the day-ahead market is currently higher than the average of the last five years. The coal shortage, resulting higher day-ahead market prices during the months of September and October, needs to be looked into more seriously. The possibility of adding more renewable capacity in some of the coastal states may require balancing power. The peaking power would be in demand for the next year as well, which may create a gap between the day-ahead prices in peaking and not peaking hours. The decline in imported coal prices has increased the viability of coastal imported coal-based plants.
India is experiencing economic growth with an increase in demand and consumption. The key trends that will define the power sector in 2019 are:
- The rise of renewables: The government is already working towards greater capacity building in both the solar and wind sectors. The targets have been outlined and the government is making all the efforts to empower industry players. India has already installed 73.35 GW of renewable generation capacity and projects aggregating 21.5 GW are under various stages of implementation. India’s first hybrid plant is already becoming a reality. The country is opening up as an exciting and promising market for EVs and its move towards energy efficiency and a sustainable energy portfolio will redefine the sector in the coming years.
- Boom in energy infrastructure: With the government already pushing infrastructural development across solar and wind, energy infrastructure is bound to see significant growth. From larger solar and wind farms to rooftop solar, there will be plenty of expansion opportunities for players. A stronger transmission and distribution infrastructure needs to be created to support the exponential growth in electricity demand.
What are your policy expectations for 2019?
- The Electricity Amendment Act is expected to come into effect over the course of the coming year. A salient feature of the amendments is separation of carriage and content. This would help achieve full disaggregation of the demand and supply market and a true open market at all levels of the value chain.
- The new hydro power policy is also expected to come into effect over the next couple of months. The policy is likely to unlock the unexploited hydropower potential through various incentives.
- Attractive incentives may need to be rolled out to establish EV charging infrastructure.
- The recommendations of the high-powered committee also need to be implemented through various policy measures.
As mentioned above, we look forward to steps towards commercial mining, availability of long-term PPAs, new hydro power policy, approval of revised tariff policy, development of greenfield thermal capacity, etc.
Currently, there is strong political commitment towards “24×7 Electricity for All”. The proposed electricity amendment bill, which provides for the separation of carriage and content and the direct benefit transfer of subsidy, is expected to be the next big move.
The country also seems closer to its goal of 175 GW of installed renewable energy capacity by 2022. The “Rent a Roof” policy currently under discussion, once put into effect, will facilitate the generation of 40 GW of power through the rooftop solar projects.
Dr Rajib K. Mishra
The major policy expectation is with regard to the de-stressing of thermal projects, which are already commissioned or are ready to be commissioned without adequate PPAs and fuel supply agreements. The hydro policy, which is in the last leg of finalisation, will come out shortly, paving the way for more investment in the hydropower sector. The policy related to carriage and content separation is under deliberation for quite some time. It is expected to get cleared in the new year at the apex level. The policy related to market design with newer products, facilitating better balancing and integration of renewable products for shorter duration, will also see the light of day.
There is definitely a need for a long-term policy framework in the power sector. The key is continued focus on distribution reforms, which, given power is on the concurrent list, is the key responsibility of the state governments, some of which have been dragging their feet.
The government is working towards creating more transparency and flexibility in the procurement of raw materials, especially with coal and gas. Central-eastern India accounts for about 80 per cent of India’s coal production. However, due to issues in coal production and transportation, coal supply for power plants remains a huge challenge.
A large part of gas-based generation capacity is stranded, and needs to be extricated from the mess it is in. Policy interventions are extremely critical since a lot of capital is at stake. Moreover, gas plants are more flexible and less carbon intense vis-à-vis coal. Suitable amendments to the Ancillary Service Regulation will help gas-based stranded power generators in reviving the plants. This will also contribute to peak load management and balancing of renewable generation. Clear action on proposed resolutions and policy amendments such as the Electricity Act, 2003, will help the sector going forward.