The power sector is growing steadily with rapid renewable energy addition and increasing electricity demand backed by the government’s Saubhagya scheme. However, the distribution segment continues to weigh down the sector with large outstanding dues to gencos, operational inefficiency and financial imprudence. Industry experts comment on the sector’s achievements, challenges and the way forward…
What is your assessment of the power sector’s progress during the past year?
The power sector continued to progress quite rapidly, on the back of new initiatives of the government. For example, the Saubhagya scheme for last-mile connectivity has been successfully implemented, although there are some apprehensions expressed by the critics. I think this is a remarkable feat. I am aware that there could be some hiccups at the ground level. But that happens to any scheme that is implemented on such a large scale. Then there are some issues that need to be tackled at the root. The poor financial health of the state distribution companies is the bane of the power sector. If discoms are making losses, it reflects on the entire power sector, in terms of payments to generators that supply power to discoms, transmission companies that transmit the power, the financing institutions that finance their projects. In light of this, the decision that the distribution companies have to open a letter of credit (LC) as a payment security mechanism if they want power to be supplied to them by the generators and transmission companies is very courageous. This is already a part of their power purchase agreements (PPAs) and is also mentioned in the Central Electricity Regulatory Commission’s (CERC) regulations for interstate generating companies. The payment of direct subsidy instead of cross-subsidy is another bold but correct step. I feel that just like direct gas subsidy is given from the government coffers, rather than cross-subsidy, direct subsidy should be given for electricity. If a family is under-privileged, it needs to be supported in all respects. In fact, there could be a comprehensive subsidy for all utilities, rather than separate subsidies, and the consumer should pay the full tariff. That way, competition, which is the hallmark of the Electricity Act, 2003, will not be undermined. Also, if the tariff for industrial customers reduces because of this, the industry will become more competitive internationally, giving a boost to the Make in India initiative.
The move towards electric vehicles (EVs) is also a remarkable step, not only for the utilisation of the stranded generating capacity, but also for reducing our import bill of petroleum products. We kill two birds with one stone. Things are slowly taking off, with a number of PSUs tasked with creating charging infrastructure, which would encourage people to own EVs. Its effects would be seen in the coming years. However, the government has to face a trilemma – whether to reduce emissions, use the stranded generating capacity, or support the business of fossil fuel-based vehicles. The government has taken steps in the past year to promote trading in South Asia, including electricity trading, to derive mutual benefits. Bhutan and Nepal have predominantly hydro resources, whereas India and Bangladesh have predominantly thermal generation resources. This makes for an ideal generation mix in South Asia. Owing to their complementary peak demand, both over a day and over seasons, all countries in South Asia stand to gain from power trading. There are occasions when water in hydropower plants in Nepal is spilling over, when it could be exported to India or Bangladesh. That is free energy getting wasted. In India also the states sometimes curtail renewable energy generation as it far exceeds the requirement. This could be exported to other South Asian countries. Therefore, the policy of the Indian government of allowing cross-border power trading through the power exchanges is a great step. Countries can buy and sell power in as little as 15-minute blocks. The growth in the renewables segment, in spite of the best efforts of the government, has slowed down. One of the reasons is the uncertainty pertaining to the evacuation system and power offtake by the states. If sites are facilitated by the government, private investors would be more forthcoming.
Nothing seems to be moving ahead in the power sector, especially in the distribution segment. The sector’s biggest achievement is the Saubhagya scheme, under which all the willing households have been given electricity connections. While universal electrification has been achieved in India and nearly 30 million customers have been added in the past 18 months, a large number of households still don’t receive 24×7 power supply. That latent demand is not part of any “surplus” calculus. That is why when measuring power sector growth and planning to scale up for the future, the yardstick of “adequate availability of electricity” will be inaccurate. A truer, holistic gauge would be 24×7 reliable power supply to all at an affordable price. As the health of discoms has become worse, the central government is now planning to launch UDAY II, which will be a performance-based scheme. This is something that should have been done in the beginning. Most importantly, when we talk about the performance of utilities, we rely on the data provided by discoms, which is often manipulated. There is no third-party verification of the data. For instance, in Maharashtra, where agricultural feeders have been separated, meter reading is still undertaken by conventional means such as photo meter reading, which leaves scope for tampering. While the government is talking about smart metering, it will take a long time to be implemented. Till then, the Central Electricity Authority (CEA), which has a statutory mandate, needs to undertake statistical sampling based verification to improve the accountability of discoms. As the financial position of discoms is not improving, they cannot buy enough power to meet the objective of 24×7 power for all. We can keep having UDAY-II, III or IV but nothing will change unless the state governments can be brought on board to improve the distribution segment.
Recently, the Appellate Tribunal for Electricity has passed an order asking state regulators to report about delays in tariff revisions which affect viability of the distribution segment. The order is on similar lines to the one passed in 2011, wherein APTEL had directed the state electricity regulatory commissions (SERCs) to initiate suo-motu proceedings for tariff determination. Now, SERCs have been asked to provide relevant information by October 2019 to the Forum of Regulators (FOR). Again, the ball is in the states’ court. The state governments have two options either continue levying high tariffs on the industry for cross subsidising agriculture and small consumers or bridge the gap between rational tariff- based revenue of discoms and adequate subsidy to meet its social objectives. If the former option is chosen, we cannot expect the government’s Make in India programme to succeed.
Rajesh K. Mediratta
The power sector has seen a major shift in the energy mix during the past year, with greater renewable energy capacity addition as compared to conventional capacity. The 175 GW by 2022 target has given a major impetus to renewable capacity addition. Of the total 13 GW capacity added during the past year, almost 9 GW came from renewables and 4 GW from coal-based power. This included 6.5 GW of solar and 1.9 GW of wind capacity. This confirms that solar is the most preferred source. Conventional generation has grown only 3.6 per cent while renewable energy has grown 24 per cent, constituting 9 per cent of the generation mix, up 1.2 per cent from the previous year. An overall increase of 5 per cent was witnessed in energy generation. With 356 GW of installed generation capacity, we are the third largest country in terms of both electricity production and consumption. We touched a peak demand of 177 GW in September 2018, an 8 per cent increase over the previous year. The government’s Power for All mission created major demand in the states with lower electricity access. For example, Bihar, Jharkhand and Odisha reported a 16 per cent, 12 per cent and 16 per cent increase in demand respectively.
On the supply side, coal supplies were constrained. The major reason was the frequent shutdown of Adani’s Mundra power plant and Essar’s power plant owing to a compensatory tariff dispute with their beneficiaries. As a result, the beneficiaries (especially Gujarat) bought power from the market. While the overall coal production increased by 6.6 per cent to 671 million tonnes (mt), it fell short since many discoms could not import coal due to restrictions. The increased demand (by over 6 per cent) could not be met with domestic coal despite growth in renewable energy generation by 24 per cent. Further, coal prices discovered in the e-auction were almost double of the notified prices. The increase in demand at the exchanges to 10,700 MW round the clock in September 2018, and a similar increase in October 2018 pushed the prices to Rs 4.69 per unit and Rs 5.93 per unit respectively, among the highest in almost a decade. Instantaneous prices touched a high of Rs 18 per unit for a few time blocks in October 2018. Overall, the average price in the past year stood at Rs 3.86 per unit, 18 per cent higher than the previous year.
An improved transmission network across the West-South corridor kept the congestion low. However, one-grid, one-price days were 214 in 2018-19, lower than the 268 days in 2017-18. On the market side, a lot of new ideas and thoughts came from the CERC and many of them were found favourable by market participants. These include the Cross-Border Electricity Trade Guidelines released by the Ministry of Power (MoP) in December 2018, regulations to link the deviation settlement mechanism (DSM) prices with the average clearing price of the day-ahead market at the power exchanges (November 2018), proposed implementation of the National Open Access Registry (NOAR) in January 2019, and implementation of the Security Constrained Economic Despatch pilot in April 2019. A few discussions papers also found favour with market participants. These were on the real-time market (RTM), ancillary market and market-based economic despatch. Exchange volumes were up by 13 per cent, whereas due to higher prices and higher open access charges and other non-tariff barriers, volumes from open access customers reduced by 24 per cent. However, the discoms purchased 29 per cent more than the previous year. Another significant impact of higher renewable energy in the generation mix and more rational DSM prices is that our term-ahead market grew by 52 per cent over the previous year to stand at 2 BUs while the intra-day market grew by 23 per cent.
Dr S.L. Rao
The power sector has progressed well in the past year. The country has surplus generation now and gencos are looking for markets to sell power. Although all the states are not in the same position, the country as a whole is doing better in terms of generation and supply. The recent LC mechanism introduced by the MoP is a positive step even though it demonstrates the poor financial status of discoms. The government is trying to ensure that the generators are paid at all costs.
There has been significant progress across the sector this year. This has led to the continued growth, progress and evolution of the power sector. On the generation side, the speedy resolution of stressed assets and their revival was taken up through multi-streamed efforts. A medium-term power purchase auction was successfully conducted for 3,000 MW of capacity by providing fuel to stranded IPPs. The MoP issued flexible coal usage guidelines for providing coal to IPPs that do not have long-term PPAs with discoms. On the distribution side, the Saubhagya scheme implemented by the MoP contributed to the electrification of rural households in a big way. A notable achievement was the 99.9 per cent electrification of households in the country. This has also contributed positively to the continued demand growth of electricity despite a general economic slowdown.
In the renewable energy segment, multiple auctions were conducted by SECI during the year with the aim of achieving 175 GW of renewable energy capacity by 2022. Steps have been taken to interact with the industry and evaluate the steps needed to enhance investor interest and drive capacity addition in line with the national clean energy objectives. For developing an ecosystem for EVs, “Charging Infrastructure for Electric Vehicles – Guidelines and Standards” was issued that clarified the next steps for developing appropriate network infrastructure for charging EVs. During the year, the CERC took major initiatives to strengthen the power markets. Staff papers on market-based economic despatch (MBED) and RTM were issued. The MBED paper has a very progressive thought process, which will have a far-reaching and positive impact on the entire power sector. Its implementation would lead to the optimisation of all generation assets, thereby reducing the tariffs for consumers and creating significant economic benefits for the country. It will also positively impact investor sentiment, create a competitive market and allow efficient resource allocation. In the power sector, the exchange-based market now contributes nearly 12 per cent of the total electricity generation. Power Exchange India Limited has a market share of around 40 per cent in the term-ahead market and has progressively helped market participants plan for and manage their demand-supply needs in an efficient manner.
What are some of the biggest unresolved challenges in the sector?
The single biggest bane of the power sector is, as I mentioned earlier, the distribution sector. If we address its problem, the problems of the power sector would get resolved. Power is an essential commodity and it is about time everyone realised this. If we bring efficiency in the distribution sector, which also means increased profitability, the productivity of the entire country will improve. Governance of the state power sector should be improved at all levels, from the government to the regulator to the utilities.
Today, the biggest unresolved challenge for the sector is how to integrate the growing quantum of renewable energy into the grid. The government has committed to double the existing renewable energy capacity in a few years. However, even if we have 175 GW of renewable energy capacity by 2022, it does not translate into much ‘capacity’ in real time (owing to a low capacity utilisation factor). Also, a significant amount of funds are required for strengthening intra-state transmission lines to integrate renewable energy into the grid. The central government is already working on expanding the interstate lines, but the states utilities do not have funds for intra-state transmission infrastructure. The central government needs to consider viability gap funding for states to bridge this gap. Further, when renewable energy is not available, we need ‘peakers’ that can be brought online immediately. Pumped storage hydropower plants are an ideal solution in this case. But we do not have many such plants available. Much of the existing gas-based capacity is in closed cycle mode and stranded. This capacity could be used in open cycle mode as ancillary/ peaking services. This would no doubt have a high cost of Rs 9-10 per unit, but it is essential for system balancing. Eventually, we are going to end up with a lot of green energy. Hence, balancing the grid needs to be prioritised. In this context, the CERC’s new regulations for ancillary services and proposed framework for real-time market are commendable.
Rajesh K. Mediratta
In 2018-19, the overall exchange volume was 4.2 per cent of the total conventional generation and 3.8 per cent of the total generation. To manage stressed assets, the government has launched pilot schemes for facilitating medium-term PPAs for these assets – 1,900 MW of capacity in the first phase and 2,500 MW in the second phase. Around 2,900 MW of capacity has already been tied up and PPAs for another 1,000 MW will be signed. However, such schemes are sucking liquidity from markets. Already, markets are thin with 10 GW-15 GW on the sale side, a withdrawal of 4.4 GW may reduce the exchange-based market size. The government should frame policies to enhance exchange-based markets and make them more competitive. This, in turn, will help discoms overcome the issues of renewable energy intermittency and lower the prices for end consumers.
Another unresolved challenge is AT&C losses, which are affecting the cash flows of utilities. This should be handled through privatisation and franchising of distribution in mission-critical mode. We have handled the challenge of electricity access and now we should gear up for handling the bigger challenge of AT&C loss reduction.
Dr S.L. Rao
One of the biggest unresolved challenges in the sector is inadequate tariffs. Agricultural consumers in many states are used to receiving power free of cost. Other categories of consumers are also subsidised in many states. This is a major drain on the discoms’ finances. Further, the subsidised or free electricity supplied to agricultural consumers is used to run inefficient pump sets, which consume more power than required. To curb inefficient consumption of power, the state governments need to promote the sale of energy efficient pump sets.
Another issue is incomplete metering, which hinders energy accounting and encourages power thefts. State discoms need to take steps to prevent theft and pilferage of power. Further, distribution infrastructure in many states is weak and dilapidated, and needs a major overhaul. There are several inefficient thermal power plants, especially state owned, which results in frequent shutdowns. The main problem is that much of transmission and almost all of distribution is controlled by the state governments as electricity is a concurrent subject in the constitution. State governments tend to take decisions electorally and not from the point of view of the economy of the power sector. Any compulsion by the centre such as demanding an LC will not solve the problem. There is a need to ensure that the state governments control distribution in such a manner that the discoms are not rendered unprofitable and short of cash. One way is for the state governments to reimburse the subsidies that discoms are asked to give. Also, the efficiency of discoms must improve universally. This might happen if bankers demand better governance. Discoms could also ask for more remunerative tariffs to improve operations.
The biggest challenge for the country has been the accumulated losses of discoms. This has been affecting the overall growth of the power sector. Since discoms play the crucial role of meeting the power requirements of consumers, their financial turnaround is essential for attracting investments in the sector and improving consumer services. The sector can be sustained only if discoms remain viable. This can be achieved with a reduction of losses, improvement in collection efficiency and elimination of commercial losses, shift to prepaid metering and energy accounting. The commercial viability of discoms is essential for attracting future investments in the sector.
Since distribution is the consumer-facing wing of the sector, discoms need to have adequate resources to meet the expectations of consumers. The non-availability of adequate fuel for coal- and gas-based plants has limited the trading avenues for stressed generating stations. A solution needs to be identified for reviving such stranded plants. The number and tenor of contracts listed on the power exchange platform need to be increased. Currently, the deliverable products are available on a power exchange for a maximum of 11 days. This restricts the role of a transparent platform like a power exchange for meeting the trading requirements of market participants.
Where do you see the sector in five years?
I feel there will be significant changes in the power sector, which have already been initiated by the government. I see more and more of renewable sources of energy supplying our electricity needs, with more energy storage devices in the grid. I see IT playing a big role in optimising and therefore reducing the cost of supply, and increasing supply reliability. I see more EVs on the country’s roads. I see a South Asian grid operating with free flow of power across countries. I also see the distribution segment becoming viable. I do see things improving in the sector, not only due to the hard efforts of the government, but because our dynamic youth will not take anything but the best. I have great hope for the sector. Let us review what I have said after five years!
Since we ‘appear’ to have adequate generation capacity at present, there seems no room for conventional capacity addition in immediate future. However, in near future, when we will need new capacity from coal-based power plants, the private sector will not have the appetite to invest. We will have to depend on state-run firms like NTPC for investment in coal-based power. And then, bringing back the private sector will be a challenge because unless favourable conditions are created, private players will refrain from investing in power generation projects.
Rajesh K. Mediratta
I see the power sector making a successful transition from carbon to carbon-free markets. Of the four Ds of transition – decarbonisation, digitalisation, decentralisation and democratisation – three Ds will have a major impact on the sector, with renewable capacity surpassing conventional generating capacity and consumers turning into prosumers. This will lead to major changes in hard and soft infrastructure. Content and carriage separation will bring more competition. Further, we expect wholesale markets to shift to near-real-time transactions. Currently, we are operating intra-day markets with 2.5-hour gate closure. From the next year, we will move to RTM with one-hour gate closure. Over the next five years, we should aim towards zero gate closure, which is the case today in Norwegian and a few European markets. We will have ancillary markets very close to real time, providing secondary and tertiary balancing reserves. Electric mobility will play an important role in merging the transportation and electricity sectors. Our energy sector will have more electricity, the most convenient form of energy. EVs’ load will provide another chunk of demand.
Dr S.L. Rao
First, inefficient generating plants should be shut down if they cannot be improved. Second, the coal supply situation should improve. India has one of the largest coal reserves in the world yet we face coal shortages. This needs to change. Third, as India has international commitments to reduce greenhouse gas (GHG) emissions, either the usage of coal should go down or we need to invest in technologies to mitigate GHG emissions from power plants. I feel power from renewables, especially solar and wind, will increase significantly in the future. With expanding renewables, we would need to find ways to store power in order to deal with the variability and intermittency of renewable energy. Energy storage technologies are already available; we just need to exploit them responsibly.
The MoP has prepared a five-year vision document for the holistic development of the power and renewables sector. The vision document provides for sustainable development of the sector, which is vital for the economic growth of the country. The parameters to identify self-sustainability are:
- Recovery of cost based on the tariff levied on consumers
- Elimination of commercial losses incurred by discoms
- Reduction in technical losses to less than 15 per cent, by investing in developing distribution infrastructure
- Complete utilisation of generating assets, adequate availability of fuel for operating conventional plants and development of renewable assets to their full potential in each region/state.
Over the next five-year period, the following transformational changes are expected:
- A smarter electricity grid with large-scale usage of IT-based tools across generation, transmission, distribution and consumer-facing functions. The widespread usage of data analytics will enable functionalities such as preventive maintenance, demand forecasting, weather forecasting and analysis of the consumption pattern.
- With adequate availability of fuel, all coal- and gas-based plants will be allowed to choose a market to sell their power.
- Adequate flexible generation capacity is made available to meet the challenges associated with large-scale renewable capacity addition. Given the rapid increase in infirm generation capacity such as wind and solar, a robust grid is required that can support flexible generation and respond to energy injection fluctuations due to wind- and solar-based plants. The combination of renewable energy sources with storage will play a key role in providing robustness to the grid.
- Market-based economic despatch to facilitate the optimal utilisation of generation capacity by extending the price discovery mechanism offered by the power exchanges. This methodology will help in realising the principles of optimum scheduling and despatch of electricity across the country.
- The segregation of the wires and supply business in distribution. With multiple supply licensees operating in an area, consumers can have a supplier of their choice. Consumers exercising their choice leads to an increase in competition and enhances the services provided by such suppliers. Multiple supply licensees will require new power contract structures for meeting their requirements.
- New products will be launched by power exchanges to meet the requirements of market participants.
- RTM products: These will provide an opportunity to discoms and generators to meet their near- to real-time power trading requirements instead of relying on the DSM.
- Longer-term products: These will enable trading under monthly/yearly contracts to meet their mid/long-term power trading requirements.
By launching these new products, neutral and transparent platforms like power exchanges will evolve into market infrastructure institutions in the immediate future.
- Cross-border trading in electricity on the power exchange platform. With ease of participation and a zero default/delay culture in financial settlements on the power exchanges, the services of the exchange platform can easily be extended to neighbouring countries. This will result in the expansion of the participant base and lead to optimal utilisation of assets across countries.
- Introduction of financial products such as derivatives in electricity for hedging and improving liquidity.
- Deepening of the energy efficiency market due to enhanced coverage of energy-intensive segments and increasing number of participating entities within each segment. Addition of new sectors and consumers for energy saving certificates under the ambit of energy conservation will promote the cost-effective utilisation of energy sources and improve productivity.
In all the above developments, the exchanges will play the role of a market infrastructure institution with an array of products. These will vary depending on the type, tenor and nature of contracts, and geographical reach including the cross-border feature.