Having witnessed major challenges in the past year, the industry is now looking to the new government for steps to overcome these. Power Line invited industry experts to share their views on the top power sector issues that the government should focus on…
What are the top three issues in the power sector that you would like the new government to focus on?
The government has promised to increase the renewable energy capacity to 175 GW, provide 24×7 power for all and ensure higher economic growth by resolving non-performing asset (NPA)-related issues. To achieve these goals, we expect the government to take the following steps:
- Promote hydropower generation by implementing the steps cleared during the last cabinet meeting of the previous government. In addition, allowing the same GST rates and transmission charges as those applicable to solar power can help hydro generation become cost competitive. Hydropower can balance the intermittent generation from solar and wind. This will allow renewables, on an overall basis, to provide baseload power and also become despatchable.
- Conventional power plants have a long development and construction period. Owing to excess capacity reducing energy prices, existing plants are facing strong headwinds. As a result, greenfield development in the coal-based and hydropower sectors has totally stopped. As India grows and power demand increases, we expect the current excess capacity to be absorbed over the next two to three years. Thus, the government needs to take steps to encourage greenfield coal and hydro power development to avoid facing power shortages from 2022 onwards.
- Resolve the difficulties being faced by existing power plants by addressing their coal supply issues, bringing new tenders of long- and medium-term power purchase agreements (PPAs), providing directives to regulators to take a balanced view on issues faced by investors and ensuring faster resolution through the Insolvency and Bankruptcy Code process, which will help free up the much-needed bank capital. The same can then be made available for additional capacity creation in the power or other sectors.
Ashok Kumar Khurana
- Ensuring sustainability of power supply – A basic requirement for any generator to continue supplying in a sustainable manner is to receive regular payments for the power generated and sold. However, recovery of dues for the power sold and delayed payments for incontestable “change in law” items on account of regulatory delays are an increasing cause for concern, with the total amount of receivables from discoms having crossed Rs 477 billion on both counts.
This is the single most important issue that needs to be resolved on an urgent basis as many of the causes of stress in the power sector are directly linked to delayed payments from discoms. The delays being faced by generators in receiving payments lead to severe cash flow issues for generating companies. This impacts their ability to service debt and severely restricts their working capital liquidity. This difficulty in tying up working capital leads to a significant domino effect on independent power producers as it impairs their ability to pay for coal and evacuation, impacts interest rates adversely, leads to low credit ratings by credit rating agencies and results in the non-compliance of financial covenants under loan agreements, leading to the imposition of penal interest.
Institutionalising a rigorous payment security mechanism is imperative, without which all private investment in the conventional and renewable energy space will be under default threat, as no developer will be able to meet the perpetual and progressively increasing operational cash deficit by borrowing.
The High Level Empowered Committee (HLEC) constituted to look into the causes of stress for thermal power projects has recommended that public financial institutions (FIs) such as the Power Finance Corporation and REC Limited can discount the receivables from discoms and make upfront payments to generators. The FIs can realise their dues from discoms subsequently and be covered under a tripartite agreement wherein, in case of a default in payment by the states, the Reserve Bank of India (RBI) may recover the dues from the states’ account and pay the FIs. Such a mechanism or any similar alternative need to be put in place at the earliest.
- Reducing the regulatory delays associated with the recovery of “change in law” items – In addition to putting in place a payment security mechanism, there is a pressing need to reduce the pendency of appeals related to various “change in law” items such as changes in taxes, duties and cess levied by government instrumentalities, cost of additional coal (through imports or e-auctions) to meet the domestic coal supply shortfall, etc. Despite the Ministry of Power’s (MoP) directive to the Central Electricity Regulatory Commission (CERC) that an order by the CERC in case of a change in law will apply ipso facto to all similar cases as a generic order without needing case-by-case filing/orders, this could not be implemented due to the legal issues involved and the affected power producers still have to go through the entire process of filing petitions individually.
In order to avoid the long-drawn-out process of regulatory approval, where orders take two to three years to be issued at the Appellate Tribunal for Electricity/CERC and at least a year in the case of state electricity regulatory commissions, we have requested the MoP to incorporate two critical provisions in the pending revision of the Tariff Policy, which will help in reducing regulatory delays:
- Incorporate incontestable change in law items as a deemed change in law in order to ensure automatic pass-through of such change in law items with a truing-up mechanism through the regulator.
- Introduce an enabling provision to ensure a pass-through of the additional cost of coal required to meet the deficit in the annual contracted quantity.
- Improve power affordability by dismantling the cost-plus regime in the upstream value chain of the power sector – Past attempts on reforming the sector have been focused only on distribution – aggregate technical and commercial (AT&C) loss control and tariff rationalisation. These efforts have not been aimed at reforming the inefficiencies of the upstream segment pertaining to coal production and transportation, cost of power generation and evacuation.
With the increasing cost of coal, transmission and taxes/duties, AT&C loss control and tariff rationalisation have not had much of an impact on discom financials. For example, from 2009-10 to 2016-17, taxes and duties on coal showed a 207 per cent increase, while coal prices increased by 33 per cent. Coal transportation costs increased by 54 per cent while taxes on coal transportation increased by 300 per cent. Interstate transmission costs increased by 70 per cent and distribution costs by 190 per cent during the same period.
These inefficiencies are the result of the cost-plus regime prevailing in almost all upstream activities such as coal production and transportation, and power transmission. Even generation, which was delicensed by the Electricity Act, 2003 and opened up to competition, has done so only partially and the majority of thermal power plants (TPPs) (both central and state) still function on a cost-plus basis. The outcome of this is that public sector plants such as Solapur and Barh Stage II, with a tariff at Rs 5.30 and Rs 5.68 per unit respectively, have assured coal and PPAs, whereas privately owned plants willing to sell power between Rs 3 and Rs 3.25 per unit (at the busbar) on a long-term basis are struggling for want of PPAs as well as coal.
These distortions in the competitive power sector landscape are detrimental to consumer interests. Going forward, the implementation of emission control equipment for achieving the new TPP emission norms will result in an increase of 40-50 paise per kWh after accounting for transmission losses, increased auxiliary power consumption, etc. Similarly, the coming up of green transmission corridors will further increase transmission costs and thus, the cost of power by 35-45 paise per kWh. It is difficult for consumers to absorb these cost increases and, therefore, it is clear that the focus of reforms needs to be expanded beyond the discoms’ operational and commercial efficiency.
As documented in the Ministry of Finance’s July 2018 report on stressed thermal projects, even RBI has acknowledged that preferential treatment to central power companies is one of the causes for stress in the private generation segment.
Finally, an important pending agenda is the operationalisation of the various approvals granted by the Cabinet Committee on Economic Affairs (CCEA) on March 7, 2019 with regard to the recommendations of the group of ministers constituted to examine the specific recommendations of the HLEC constituted to address the issue of stressed thermal projects. Some of the CCEA approvals have been notified through circulars issued by the respective ministries/agencies, but their operationalisation has been subject to a mechanism to be formulated/modalities to be decided. Consequently, the benefit of those decisions has not yet reached the developers.
We have requested the government to take appropriate action to ensure that the intent of the CCEA for relieving stress in the sector is fruitfully realised through on-the-ground implementation of important recommendations such as non-lapsing of coal supply shortfall for three months, increase in coal quantities through e-auctions for the power sector, and allowing linkage coal-based power to be sold in the short-term market through the power exchanges and the DEEP portal.
The government should push with missionary zeal on several areas. It has been successful in electrifying villages and households, thus driving electricity demand growth. However, such increased supply, without plugging the leaks, would be detrimental to discom health and sustainable growth. Many states have started facing liquidity constraints in supplying power due to higher losses and lower revenue. The UDAY scheme, launched in 2015 to improve the financial health and operational efficiency of discoms, has given temporary relief, but the states’ losses have again gone up to Rs 350 billion. The scheme aimed to reduce AT&C losses to 15 per cent by March 2019. Of the 24 states participating in UDAY, only seven have achieved a target of 15 per cent or below, in terms of losses. The government should push the states to take all possible steps to reduce AT&C losses or force them to have franchisees or privatise major city pockets. This will improve operational efficiency in the last mile of the supply chain.
To improve efficiency in the upstream supply chain, power procurement needs to be improved by introducing good practices and operational tools for optimised power procurement. The exchanges provide a cost-effective pool of resources from all parts of the country. They give flexibility to buy power in very fine granularity of 15 minutes, depending on the exact estimated demand. The discoms must arbitrage their portfolio generation with the common pool. Such optimisation has the potential to reduce power procurement costs by 10-20 per cent depending on market prices and the marginal cost of their own power portfolio. Such power optimisation tools cost nothing as compared to the savings potential. Over-the-counter transactions and bilateral trades beyond a season generally put a burden on discoms because they do not need a fixed power quantity across all hours through all seasons. Therefore, for off-peak periods – such as weekends, night time or off season – they pay a penalty for non-drawal.
The short-term market has not expanded in the past five years. The coal linkage policy has been one of the contributors to the shrinkage of the short-term markets, which, world over, have shown that they bring competitive advantages in terms of improving economic efficiency in both power generation and consumption. We find that the coal allocation policy is not encouraging the expansion of short-term markets. Coal linkages for only PPA-based plants have been a key contributory factor. We need to allow cheaper coal linkages to merchant plants selling in the short term. Cheap linkage coal should be allocated pro rata of heat rates of the plant. The government should work out a formula for coal supplies, both long term and short term.
There is also a need to push for demand creation through electric mobility. All economic and climate change wisdom points to electric mobility. This includes foreign exchange savings, cheaper transport costs (which reduce input costs for all other sectors), achievement of carbon targets, increased mobility, increased power demand and relief to stressed assets. The government should mandate a compulsory ban on new vehicles based on fossil fuels by 2030 so as to push all vehicle manufacturers to move to electric vehicles and accelerate the creation of the necessary infrastructure.
Another issue is the separation of content and carriage through amendments to the Electricity Act, 2003. Competition will result in a huge reduction in power prices to end consumers without seeking subsidies from the government. Economic benefits from competition in the telecom and aviation sectors are well known and the government should, as a first step, make suitable amendments to the Electricity Act.
Over the past years, the power sector has undergone massive transformation, both at the policy level and in on-the-ground implementation of government reforms. These actions have helped tremendously in removing system-related inefficiencies. The progress has been impressive, although challenges like uncertain fuel supply, power plant emissions, higher operational costs and baseload requirements to support the growing renewable base in the grid still bedevil the sector.
According to a recent World Bank report, India alone is expected to account for 30 per cent growth in global energy demand between now and 2040. To meet such a humongous power demand in the future, the government should take a cue from global case studies to arrive at a sustainable energy mix, ensuring clean, reliable and 24×7 electricity for all. Reviving the already installed gas-based power plants can help the country move up the energy value chain, adding more electrons to the grid and protecting the environment from emissions. Gas-based power is among the most flexible forms of electricity generation available today, powering many developed nations that rely heavily on renewable energy.
Moving towards establishing an economical fuel supply regime must be among the top priorities for policymakers. In line with this, acting simultaneously on multiple facets like a rationalised gas allocation mechanism based on spot pricing, reviving and boosting domestic gas exploration and production activities, speedy activation of the upcoming liquefied natural gas import terminals, and widening of the gas pipeline infrastructure across the country can ensure extensive gas usage at an economical price point. Such progressive steps, backed by a robust growth curve of the Indian economy over the next decade, can give a breather to the stressed gas-based power assets.
At a holistic level, the gas-based power sector needs to be liberalised, instilling excellence in both upstream and downstream operations and helping the sector move towards risk-averse and swift decision-making. It will truly empower all stakeholders in the segment, eventually contributing towards enhancing the per capita energy consumption.
Dr S.L. Rao
The first and most important issue is to get consumer tariffs right. They are distorted because of the huge subsidies and free power given to agricultural consumers. This distortion is causing huge problems for the distribution segment. While the government introduced UDAY scheme in its last term to subsidise distribution and allow the state governments to put them into their own budgets, this is not a solution. The solution lies in correct tariffs so that consumers pay the right amount. If subsidies are to be provided, they should be provided separately and paid to the particular consumer directly.
The second major issue to be dealt with is the question of how to store renewable energy. There is an increasing amount of solar and wind power being generated, but very little is being done with regard to storage. The problem is that we are trying to supply this energy to the grid. Instead, I think it would have been much better if we had provided the renewable energy generated to a local group of consumers. Let us say you take a group of villages together and provide them the energy that is coming from solar and wind and by doing that, you are ensuring that these villages are managing their energy and also know who is consuming and how much. Also, consumers with higher consumption are going to pay more. Hence, people will be paying appropriately for their consumption. If we could do that we would have a much better supply system as far as rural consumers are concerned with renewable energy.
The third thing is with regard to ownership. I think the government ownership of power generation plants around the country is not a particularly desirable thing because it has not led to efficiency. Therefore, a considerable improvement in efficiency will certainly increase the amount of energy at no extra cost.
The new government at the centre has its task cut out in the power sector, with a few major areas to be addressed immediately.
The country is conscious about air pollution, but it is slow in retiring old and inefficient power plants that consume excess coal (only 6 GW of plants have been retired in the past two years). Old and inefficient power plants need to be replaced with supercritical and ultra-supercritical plants that will use less coal and have lower emissions compared to subcritical power plants. Since a power plant takes around four to five years to complete, it is for the government to act fast in rolling out tenders for setting up power plants to replace old ones. The new government needs to spend more on infrastructure to arrest the “slowdown” in the economy at present, and this increased spend will result in a rise in the power demand, which is already witnessing an uptick because of other schemes like Power for All.
The government’s commitment to controlling air pollution has opened up a new area of business in the power sector. The Central Electricity Authority (CEA) has mandated a phased implementation plan for the installation of flue gas desulphurisation (FGD) systems by financial year 2022. With power generation units of around 160 GW of capacity to be fitted with FGD systems, it gives the players business opportunities of Rs 700 billion-Rs 800 billion. So far, FGD tenders of around 115 GW has been issued; ordering of around 34 GW have been done. Most of the orders have been issued by NTPC. Other state utilities and private players need to catch up. For this, funding must be easily available. Banks and other financial institutions are reluctant to fund investments in pollution control equipment due to a high level of stress in the sector. The new government needs to look into this. Annual FGD ordering of 35-40 GW for the next two to three years is a must for achieving the CEA’s implementation plan. The power ministry has written to the CERC for treating FGD costs as pass-through under change in law. However, the CERC needs to accelerate the process of according approvals to utilities to this effect to ensure speedy implementation of FGD systems. The government should also stick to the Make in India policy and encourage indigenous manufacturing of components used in FGD systems.
Power distribution companies or discoms should be the major focus area for the government. UDAY was launched by the government in 2015 with a view to salvaging discoms from their financial mess and reducing their debt burden but it did not effectively yield the desired results. The discoms’ financial losses have started spiralling, reversing the declining trend since the launch of UDAY. Distribution firms deal with multiple challenges like supplying power to a very large number of connections with low individual loads, multiple tariff classes with cross-subsidies, power theft, etc. Revenue loss can be attributed to the accumulation of arrears in operational costs, arrears in payments to generation and transmission utilities and interest burden. A new scheme, UDAY II, will focus on loss reduction. One of the targets will be to reduce the gap between the average cost of supply and the average revenue requirement of discoms to zero. The government needs to work quickly on this count to make the discoms viable as otherwise the already stressed power sector will be stressed further.