Over the past one year, the power sector has witnessed some positive developments such as improvement in payment security, approval of recommendations of the High Level Empowered Committee (HLEC) and the new hydro policy. In spite of these developments, the power generation segment continued to face several issues such as the poor health of discoms, fuel deficits and safeguard duty issues for solar, among others. Leading power developers share their views with Power Line on the key achievements and the challenges that need to be addressed in the sector…
What is your assessment of the power sector’s progress during the past year?
The power sector in India has seen a transformational change with progressive reforms and their effective implementation in recent years. In the past few years renewable energy capacity has expanded globally but this does not yet mark a shift away from fossil fuels. Recent trends have shown that energy use from carbon dioxide-emitting fuels will continue to rise in the future. Solar energy has taken centre stage in the Indian power sector in the past few years; however, the solar segment is still in the growing stage and continues to face many challenges. The energy transition has been limited in the power sector even after the impressive expansion in recent years. India’s total installed utility-scale solar capacity more than tripled, from 9 GW to 28 GW, in the past one year. There is a vital need for addressing some of the serious issues afflicting the sector. In addition to the growing competition from wind and hydro resources, India’s coal-fired power plants have witnessed tough competition from solar throughout the year.
There has been a good and steady progress during the past year, even though not spectacular. The committee under the cabinet secretary has taken a number of much-needed decisions to remove many pain points. There has been all-round progress on matters such as increasing access to electricity, enhanced flexibility in coal supply, improved payment security and resolution of some stressed power projects. A lot of commendable work has gone into it with meticulous attention to detail, as some of these issues were considered non-tractable. Although capacity addition has slowed down, this was only to be expected, given the issues faced by plants that have come on-stream. The slight slowdown in renewable capacity addition, however, is a negative that needs to be addressed. The issue of safeguard duty, and reopening of power purchase agreements (PPAs) in some states are some of the challenges that have come up.
Ashok Kumar Khurana
The year 2018-19 was a tumultuous one for the stressed private power producers. The circular notified by the Reserve Bank of India (RBI) on February 12, 2018 pushed the stressed projects further to the brink of bankruptcy with its stringent and impractical provisions. After a sustained legal challenge, this circular was finally quashed by the Supreme Court, which paved the way for RBI to notify a new framework for the bank-led resolution of stressed assets, mitigating the threat of en masse proceedings under the Insolvency and Bankruptcy Code. A positive effect from this entire process of litigation and numerous representations at various government levels was that the issue of stressed thermal power projects was given due importance by the government, which put in place an HLEC to look into the causes of stress and resolve the same. Many of the HLEC’s recommendations were accepted by the government and we have seen many of these recommendations grounded by the Ministry of Power (MoP) and the Ministry of Coal through cabinet decisions. Stressed projects with signed PPAs but no coal supply were given a helping hand with two rounds of coal linkage auctions under the Scheme for Harnessing and Allocating Koyala Transparently in India (SHAKTI). At the same time, projects with coal source but without PPAs were also able to secure contracts for a total of 1,900 MW through the first pilot scheme for aggregated power procurement by five states. The recent measure by the MoP to link power despatch to the availability of sufficient payment security against all power procured by discoms with effect from August 1, 2019 is likely to be a potential game changer, once the entire process gets streamlined across all states uniformly. Many states have complied with this payment security mechanism, which has reduced the risk of payment defaults/delays against monthly energy bills. Some states are still reluctant to fall in line, especially for renewable energy projects, but the MoP is apprised of the situation and the remaining issues will get sorted out soon.
Of the total energy requirement of 1,478,083 MUs of during 2018-19, hydropower has contributed 160,854 MUs, which is almost 10.88 per cent of the total requirement. For the year 2019-20, while the total energy required is 1,567,239 MUs, hydropower is estimated to contribute 167,000 MUs, which amounts to 10.65 per cent of the total requirement. It has been accepted all over the world that hydropower’s contribution to the energy mix is important for grid balancing. However, in India, this has not been taken seriously for the past many years and the contribution of hydropower to the energy mix has been reducing drastically. Of the hydropower target of 795 MW, only 140 MW was installed during 2018-19. Up to March 31, 2019, of the total installed capacity of 356,100 MW, hydropower’s contribution was only 45,399 MW, which constitutes 12.75 per cent of the total installed capacity.
Though visibly many tenders were issued in the renewable power sector and PPAs were signed for the majority of them through central government agencies like the Solar Energy Corporation of India or NTPC, implementation of these projects has been quite dismal. This has been mainly due to the delay in coordination between various central and state government agencies on permits, approvals, regulatory mismatches and implementation hurdles, as there was no single-window clearance for projects won through the transparent bidding process. Once the single-window clearance process is put in place, various aspects of the project such as connectivity, long-term access and land acquisition get streamlined and then their implementation becomes easier.
Overall, the year started with a positive outlook for the renewable sector, slowly turning into a challenging scene with many decisions on various requests from developers and original equipment manufacturers pending to be cleared by government authorities. The industry is looking up to the nodal ministry, the Ministry of New and Renewable Energy (MNRE) to help coordinate and solve the proposed issues. As the sector was growing at a faster pace than expected, difficulties were inevitable, but the ability to learn from experiences and situations, quickly churn out solutions on bidding guidelines and create a single-window clearance process to ensure the financial viability of projects would be the key to a brighter future.
While India’s annual power demand showed a healthy increase of 5.15 per cent over the previous year, PLFs of IPPs remained stagnant at 55 per cent. The gap between the average cost of supply and the average revenue realised widened further and outstanding receivables from discoms ballooned significantly. Increasing addition of renewables has brought in new challenges of flexible operations for baseload thermal plants. The revised RBI guidelines, following a favourable order from the Supreme Court, gave the much-needed breather to distressed projects.
We saw some business-friendly changes to the SHAKTI policy, allocation of more quantity of coal for the power sector through e-auctions, steps to ensure non-lapsing of coal supplies and implementation of late payment surcharge on delays in payments from discoms. We were relieved to see the CERC leaving the return on equity unchanged in the tariff regulations for 2019-24 and ensuring capex incurred on meeting the new emission control norms is included in the tariff. Another positive was the allowance of 85 kCal between as-received and as-fired calorific values. On the regulatory front, favourable rulings providing restitution for higher fuel costs and carrying costs for regulatory claims will help improve the financial condition of various players. However, recent attempts to renegotiate PPAs have raised investor concerns globally. India cannot attract private sector investments in power if binding commercial agreements are reopened by government counterparties.
What are the sector’s biggest challenges that need policy attention?
The biggest challenges faced by the power sector are fuel supply uncertainty and deteriorating finances of the discoms. With coal being dominant in India’s fuel mix, its shortage can severely affect investments in the generation segment. Another challenge is the lack of action against power thefts and promise of free electricity supply used as an election gimmick. The solar segment is still in the growing stage and continues to face many challenges, and these need to be tackled soon. Addressing some of the critical issues plaguing the sector such as the lack of administrative and institutional readiness, complex land acquisition process, curtailment of power, readiness of timely power evacuation and long approval and clearance process which requires policy interventions. Scheduling and forecasting, and change in taxes and duties are the new bottlenecks in the growth of the sector. The government’s fiscal support to renewable energy companies is minimal in India. Thus, to diversify resource-based risks, more investment from the government is required to fund more projects across regions and asset classes. The resource potential of the country has also been recognised as substantially higher. New initiatives exploring offshore wind, provision of solar parks or construction of a transmission corridor for green energy can also help support rapid market development in India. It is imperative to begin the trend of tariff cuts in order to ensure that power sector reforms are not disrupted. Also, investments in capacity building and modernisation are key fundamentals for improving the sector’s health.
The biggest challenge remains the health of the distribution companies. In spite of the success of privatisation in places such as Delhi and of “creeping privatisation” through the franchise model in places such as Bhiwandi, these models are not being replicated in any significant way in the country. The periodic injections of liquidity, the latest in the form of the Ujwal Discom Assurance Yojana (UDAY), have not led to any lasting improvement in the operational performance of distribution companies. In states where this problem is chronic, discoms continue to bleed, making the overall improvement in the performance of the power sector very difficult. Unfortunately, in my opinion, the policy prescription that seems to find favour, such as the separation of carriage and content, would also not succeed where open access has not succeeded. These measures are seen by states as an erosion in the ability of discoms to cross-subsidise favoured sections of consumers such as agriculturists, and, therefore, necessary to defeat at all costs. Just as open access has been defeated by states, separation of carriage and content will also be defeated, as they fundamentally do not want to do away with cross-subsidy.
Ashok Kumar Khurana
As mentioned above, while the government has initiated many welcome steps to turn around the sector and put it back on a sustainable growth path, some critical challenges remain to be addressed, which are listed below.
- Formulating a credible financing arrangement for liquidating the legacy payment dues prior to August 1, 2019: As per the PRAAPTI portal, the total outstanding amount as of July 31, 2019 is Rs 746.55 billion, while the outstanding amount is Rs 550.68 billion, of which IPP’s share is Rs 154.9 billion However, PRAAPTI figures do not include receivables data of back-to-back contracts signed with PTC for state discoms (around Rs 48 billion) and receivables for short-term power sale. Further, receivables due to change in law items stand close to Rs 170 billion.
- Dismantling the cost-plus regime in the power sector and ensuring that all policies and regulations are ownership-neutral and efficiency-centric: Various inefficiencies have seeped into the entire value chain as a result of the cost-plus regime prevalent in almost all the upstream activities such as coal production, coal transportation, transmission of power, etc. The National Tariff Policy (NTP) decreed that all future requirements of power shall be procured competitively by the distribution licensees. It said that even for public sector projects, tariff of all new generation and transmission projects should be decided on the basis of competitive bidding after January 6, 2011. However, even eight years past this deadline, we are yet to see NTPC or any state-owned generating company take part in a competitive process for power procurement. The power sector is also besieged with examples of discriminatory practices, which have put private sector projects at a disadvantage. Such examples of discrimination are rampant in the case of coal allocations and supply to power plants. The PSUs receive coal linkage on an allocation basis, preferential offering by Coal India Limited (CIL), priority in coal evacuation, permission to pool and divert coal and preference in payment terms. It is worth noting that in the Ministry of Finance report on stressed thermal projects dated July 2018, the RBI has acknowledged that preferential treatment to central power companies is causing stress in the private sector.
The New Coal Distribution Policy, 2007 did not outline any differential treatment in coal pricing and allocation framework between PSUs and IPPs. However, SHAKTI, in 2015, while leaving the same linkage allocation process at notified price unchanged for PSUs, has introduced multiple variants of the auction process for IPPs with different sub-variants, resulting in discrimination and confusion. In addition to the coal allocation policy framework, further discrimination is faced by IPPs at the ground level. For example, on analysis of data pertaining to total coal despatched by CIL during financial year 2018-19, it can be seen that coal-based IPPs received just 21 per cent of the total coal despatched, while having a share of 38 per cent in terms of the installed capacity (MW). Central generating stations, on the other hand, despite having a similar share of 29 per cent of the installed capacity, enjoyed a whopping 42 per cent of the total coal despatches. PSU generators also receive preferential treatment by the coal companies when it comes to commercial terms, such as continuation of coal supplies even with intermittent payments or with outstanding dues for more than 90 days of the equivalent coal value. Further, PSU generators do not face any regulatory delay/denial with their change in law claims and any increase in the cost is an automatic pass-through.
Going forward, there needs to be a complete removal of all discriminatory provisions on the basis of ownership. For sustainable long-term growth of the sector, it is imperative to institute an equitable and transparent coal allocation process, which would be applicable in a similar manner to all the players – private and public.
- Simple mechanism for recovery of incontestable change in law items: As per data collected from our members, the outstanding amount due to IPPs under change in law events as of July 31, 2019 is Rs 170 billion. These dues have remained unpaid for several years due to the extremely long process of litigation and appeals in every single case. In many instances, legal proceedings have been ongoing for more than five years while payments remain withheld.
The present system of regulatory approval for incontestable change in law factors needs a complete overhaul. We have suggested that it is high time to adopt an automatic pass-through mechanism for these statutory increases in quoted tariffs to avoid the long and torturous regulatory approval process, which is resulting in piling up of significant receivables. In order to avoid any misuse of such a provision, a common list of statutory incontestable items can be compiled by the regulators/Appellate Tribunal for Electricity, with a provision to add new items as and when they are levied by statutory bodies. Any request for pass-through of the cost due to items appearing in the list should not be challenged, but can be subject to subsequent true-up by the regulator.
- State-specific operational and financial turnaround plan for seven to eight laggard states: There have been many attempts made in the past to turn around distribution utilities – Montek Singh Ahluwalia Committee, V.K. Shunglu Committee and the latest being UDAY in 2015. However, these recommendations/measures did not achieve their objective as they were overly focused on financial engineering. Financial engineering cannot help unless it is preceded by operational improvements. In this context, the following may be considered:
- Targeted reforms: It is time for a focused approach that targets seven or eight specific states with the poorest record of payment defaults.
- Reforming the inefficiencies of the upstream segment: A critical component of reform, one which has often been overlooked in the past, is to remove the inefficiencies of the upstream segment – coal production and transportation, cost of power generation and evacuation.
- New thermal power capacity hiatus: Imposing a hiatus on building of new thermal power plant capacity to avoid progressively increasing fixed cost payments for unrequisitioned capacity.
- Time extension for FGD installation for stressed projects: At present, there are many stressed projects in the power sector whose cash flows are barely enough, or even insufficient, to support their debt servicing. For these projects, no bank is willing to come forward with fresh funding for flue gas desulphurisation (FGD). Neither do these developers have their own resources for contributing 30 per cent equity for FGD financing in view of their stressed condition. If these projects are unable to comply with the installation of FGD within the stipulated timeline, they may face shut down, which would only lead to bankruptcy and loss of funds already sunk into the projects. Therefore, timelines for FGD installation for stressed projects need to be adjusted.
After great efforts by eminent hydropower engineers through various forums especially through ASSOCHAM, the MoP issued an office memorandum dated March 8, 2019 on measures to promote hydropower. The much-awaited policy will provide a fillip to hydropower as also aid in the financial closures of several stranded hydropower projects. A snapshot of the proposed measures and their benefits are:
- All hydropower is renewable.
- All states/discoms have to mandatorily buy hydropower per year to fulfil the hydropower obligation (HPO) notified by the MoP, thereby solving the biggest issue of non-signing of PPAs by the discoms.
- Every hydro project will generate hydro energy certificates (HECs) wherein 1 HEC = 1 MWh.
- When the hydro project ties up with a discom, then the discom will be entitled to HECs to the extent of tied capacity, which will be used to offset its HPO obligation for the duration of the PPA.
- The generator can get HECs for the balance untied capacity, which will be sold to other discoms/generators through exchange at a price ranging from floor to forbearance (anticipated between Re 1 per kWh to Rs 2.50 per kWh), thereby generating extra income apart from selling power.
- Tariff rationalisation by providing flexibility to developers to determine tariff by back loading of tariff after increasing the project life to 40 years, increasing debt repayment period to 18 years and introducing escalating tariff or equated monthly instalment or both, depending upon the loan repayment plan, cash flows or debt service coverage ratio, etc.
- The cost of enabling infrastructure and flood moderation shall be given as grant by the MoP.
The most burning issue being faced is of review of PPAs in Andhra Pradesh, which is a dampener for future investments in the sector. Policy intervention to avoid this kind of problem is an absolute necessity. Confidence and trust of both domestic and foreign investors are lost when such issues surface, especially in the growth phase and when the central government is spearheading this as a national target. Owing to the non-existence of a single-window clearance process, various projects are stuck at different implementation stages due to problems in coordination between various government agencies for approvals or regulatory mismatches. Hence, this needs to be addressed by the MNRE and the MoP together and comprehensive policies and regulations to support growth in this sector need to be brought in. Land acquisition in India is challenging and it continues to be an impediment to timely and successful project implementation, which needs better coordination between states and the centre. Appropriate risk allocation among bidders and off-takers, and various nodal authorities needs to be structured in the upcoming bids (hybrid and storage). Wind projects require clearances from various authorities such as the Ministry of Defence, the Airports Authority of India, Indian Railways and the CEA, within a very short time frame to ensure successful implementation. There is stress in the banking system and the availability of debt funding is affected due to these issues. Equity and debt are both important for projects to be implemented and government support is required to ensure that banks and financial institutions are comfortable to make money available as debt.
The grave financial health of discoms is the biggest challenge facing the power sector. Such a critical sector of the economy cannot be subsidy-dependent in perpetuity. The need to rationalise tariffs, to reduce cross-subsidies and check losses has never been greater. In this context, the introduction of universal prepaid metering and separation of carriage and content need to be pursued aggressively. The recent directive by APTEL to SERCs regarding tariff revision is also a welcome step. Industry has been demanding a move towards regional regulators. This must be implemented to insulate energy regulatory commissions from political control.
Lack of coal availability, implementation of emission control measures and flexible operations in view of the rising share of renewables in the grid remain the key challenges for the thermal power sector. Even as CIL ramps up its output, captive coal blocks need to go full steam to meet the requirements. The policy announcement of allowing foreign direct investment into the sector is welcome, but it must be backed up by tangible action. Large-sized reserves should be offered to potential investors if we want a meaningful change in the status quo.
Regarding measures to implement the new emission norms, some of the discoms have taken a position that these costs are not pass-through in tariff. This is affecting timely implementation as banks are unwilling to lend if there is no certainty on the issue of tariffs. The increasing share of renewables is putting pressure on baseload thermal plants, which are dealing with the challenge of flexible operations. I think it is important for India to manage the transition well in a manner that is least disruptive. I have been enthused by the positive intent of the MoP to resolve critical issues affecting the sector with a sense of urgency.
Where do you see India’s power sector in the next five years?
With rising access to modern energy across the sector, the share of biomass, particularly non-commercial biomass, is expected to reduce rapidly in the coming years and will get swapped by other sources of modern and commercial energy. Coal will continue to remain a major component among all other commercial sources of energy in India until the predictable future because of its cost advantage over other sources.
Moreover, coal is available domestically in abundance as compared to other fuels like oil and natural gas, which are mainly imported due to limited domestic resource availability. Talking about renewables, India has a target of generating 175 GW of power from renewables by 2022. Owing to the plunging cost of solar and wind technologies as well as the anticipation of a more carbon-constrained future, the Indian renewable energy space is increasingly growing. India’s coal generating resources will witness tough competition from renewable energy in the next five years with the government pushing to meet its desired targets of adding 275 GW of new green generation to the grid and also likely to push hard for renewable generation storage to address the evening peak.
Power consumption will also witness an upward increase to 1,894.7 kWh in 2022, along with rising electrification and per capita usage. With all these current trends in the energy sector, the total electricity demand in India is expected to cross 950,000 MW by 2030. The total energy demand will double from almost 600 million tonnes of oil equivalent (mtoe) to about 1,200 mtoe in the next few decades. With rapid urbanisation, the transport and industry sector will account for the largest share of the total energy demand.
I see no fundamental change in the condition of discoms in the next five years. If, however, there is a modest and steady growth in demand, and capacity addition continues to stagnate as it has been, the operational performance of the existing plants would improve. The crucial question will be whether the coal sector will supply the required coal to take care of this increased demand.
Ashok Kumar Khurana
We are already witnessing a significant transition in the power sector landscape where conventional capacity addition has slowed down drastically with significant increase in renewable capacity. Five years down the line, the share of renewable energy will be much higher than that at present and with this, we can expect significant changes in grid operation. Integrating large amounts of decentralised renewable energy with the grid is not an easy task. Designing the grid for fast responses to unpredictable and variable renewable power would require upgrades to communications technology and grid operation protocols. It is very likely that the scheduling and despatch timelines will be shortened from the present 15-minute time blocks. This will also necessitate a shift in the transmission planning process, moving away from project-centric planning to a general network access model, which would provide flexibility to generators/ distribution utilities to transact (sell and buy power) with all grid-connected entities. Thermal power plants would require technical adaptation to shift from their role as baseload inflexible plants to display a certain amount of flexibility in terms of ramp-up and ramp-down rates and frequent starts/stops.
However, these changes will happen gradually and the country’s dependence on coal will continue till large-scale storage solutions reach truly affordable levels. Thermal power capacity addition, which has already slowed down, will reach an equilibrium level with the remaining under-construction plants coming up to cater to the additional demand expected from the additional last-mile connections provided under the Saubhagya scheme. In the near future, there are two main concerns – the ability of CIL to ensure sufficient coal for the plants on the ground and those that will be commissioned over the next few years, and the financial health of the state discoms. Much of the demand at present comes from the subsidised sector, which does not bode well for the financial health.
It has been planned to add 1,190 MW of hydropower capacity during the year 2019-20 and 13,239 MW of hydro during 2020-25. However, besides the suggested measures, the industry still feels that one of the most important parameters that contribute to an increase in the cost of power is giving out free power. Most of the hydro projects are liable to supply free power under the prevailing state hydro policies and provisions of implementation agreements signed with state governments. This results in low availability of saleable energy under the PPAs and hence, higher tariffs. It is suggested that free power supply obligations for all hydro projects may be deferred for the initial 25 years or a period by which debt repayment obligation is completed. The money can be recovered in the balance project life under a mutual agreement by assessing the project viability. In any case, after the concession period is over, the project is taken back by the state almost free of cost.
As per the deliberations with the CEA, it is expected that the detailed implementation guidelines will be issued soon by the MoP as it is part of the government’s 100 days programme. It is encouraging to see that works on some of the stranded projects in Arunachal Pradesh and Sikkim will start very soon, which will give enough push to the hydropower sector as it is essential to regain the confidence of the developers to restart hydro projects in a big way. With all these measures and support from the government, this is the time when all developers can come together and restart the development of hydro projects speedily.
We are positive about the power sector in India, especially the renewable space. Integrating renewable energy into the national grid by enhancing and strengthening the green energy corridors and transmission systems nearer to the source of renewable energy would be key elements in the growth story. Learning from hurdles in the implementation of initial projects and addressing the same for ensuring the viability of these projects through various policy and regulatory reforms would be a major change that we would see in the immediate future. A healthy mix of renewables, including hydro and thermal, would be possible once the government ensures the successful implementation of a framework, that is sustainable and viable, thus creating an investor-friendly environment.
Increasing urbanisation, changing lifestyles, greater industrialisation, climate change, extensive growth in coverage and the aspiration to provide 24×7 power to all and a big push for EVs will ensure continuous growth in power demand. I foresee an increase in thermal PLFs to meet these demands, even as India pursues an ambitious goal of a massive increase in renewable capacity. The pressure on CIL is likely to be immense and the need for imports is unlikely to go away soon. Transmission capacities are likely to be significantly better with some major projects being completed. This would facilitate large interstate transfers. A variety of sources with varying PLFs and the changing demand will bring strong focus on grid management and stability. I expect to see technology playing a major role in improving the operations and management of every aspect of the power sector. Implementation of FGDs in thermal power plants would help yield cleaner energy. I expect to see a roll-out of prepaid metering and some pilot projects on the basis of separation of carriage and content. I hope to see a financially self-sufficient power sector recovering its costs through tariffs alone and providing reliable power to all.