The government began its new term on the front foot, raising the bar on the goals to be delivered this time.
A new tariff policy is on the anvil and is expected to include measures for penalising load-shedding, introducing direct benefit transfers and phasing out cross-subsidies; a sequel to the UDAY scheme, UDAY II, which will now be performance linked; unbundling of distribution companies into the wires and supply business; and more than doubling renewable energy targets to 450 GW from 175 GW set earlier are some of the bold strategic moves outlined by the government for the sector.
However, delivering on these goals is more difficult than ever. By all accounts, the past year had been fraught with challenges. Payment delays by discoms continued to hurt the sector. Discoms (read Andhra Pradesh) renegotiating tariffs went against the sanctity of signed contracts. And then there were issues of lack of PPA availability for existing plants. The lack of grid connectivity, availability of debt financing and land acquisition issues impacted renewable energy project execution and led to a poor response to auctions. Coal imports were back and were not far from their peak levels.
In these challenging times, the industry is wondering if the government can move fast enough to deliver on its promises.
Power Line analyses the performance of the power sector, the key trends and major developments in the past one year…
Demand recovery: During financial year 2019, power demand grew year on year by over 5 per cent to reach 1,274.6 BUs. The key states that drove this demand were Rajasthan, Telangana, Bihar, Madhya Pradesh and Odisha. The trend continued during the first quarter of financial year 2020, with the growth being even higher at 7.4 per cent.
Transition to renewables: As of August 2019, the country’s total installed capacity stood at 361.4 GW, of which renewables accounted for more than 80 GW, more than double the base of around 35 GW in 2014. Globally, India now stands fourth in wind power, fifth in solar power and fifth in terms of the overall renewable power capacity, according to this year’s Economic Survey. Among renewable sources, while wind dominates the market, solar is driving the majority of the addition. During the year, around 1.4 GW of wind energy was added and around 6.5 GW of solar capacity was added, taking the cumulative solar installations to more than 30 GW. Meanwhile, the share of coal-based power in the overall installed capacity declined from a peak of 61 per cent in March 2016 to 56 per cent in August 2019.
Steady power generation performance: The total power generated (including renewables) recorded an increase of over 5 per cent to reach 1,371 BUs in financial year 2019. The growth in renewable energy generation surpassed all other forms of generation with an increase of over 24 per cent. Hydropower generation came next at 7 per cent, followed by thermal power at 3.4 per cent. Nuclear power generation declined by 1.4 per cent.
Weak capacity addition: In financial year 2019, net capacity additions slowed down to 12.1 GW, compared to 17.1 GW in financial year 2018. Source-wise, renewables accounted for the highest capacity addition at 8.6 GW, though this was significantly lower than the highs of 11-12 GW recorded by the segment in previous years. Capacity additions in the coal and hydro segments were also lower than those in previous years at 3.5 GW (versus 5 GW in financial year 2018) and 105 MW (versus 815 MW) respectively.
PLFs remain low: The PLFs of coal-based power plants improved by only 119 basis points to 60.91 per cent in 2018-19 over 59.72 per cent in 2017-18. The improvement was attributable to central and state sector plants, which improved their PLFs to 72.8 per cent and 58.1 per cent respectively in financial year 2019 (compared to 71.46 per cent and 55.62 per cent in financial year 2018). For IPPs, the PLFs remained depressed at 54.5 per cent, 10 basis points lower than that in financial year 2018.
Energy and peak power deficits: In contrast to the Central Electricity Authority’s (CEA) forecasts in the Load Generation Balance Report 2018-19, which had projected peak and energy surpluses of 2.5 per cent and 4.6 per cent respectively in financial year 2019, the sector continued to report deficits as discoms were unable to buy power. Peak power deficit stood at 0.8 per cent against 2 per cent in financial year 2018 while the energy deficit was 0.6 per cent compared to 0.7 per cent in financial year 2018.
Discom fundamentals a concern: AT&C losses fell by 43 basis points in financial year 2019 to stand at 18.29 per cent and by 245 basis points since financial year 2016. These were targeted to reach 15 per cent by financial year 2019, however, only 11 states were able to do so. The revenue gap, which was targeted to be brought down to nil, was hovering at Re 0.37 per unit according to latest data on the UDAY portal. This led to large overdues with power generators. The discoms’ dues at the end of July 2019 were close to Rs 565.56 billion. Power tariff revisions were also not in sync with UDAY targets. The median tariff hike was a paltry 3 per cent and 1 per cent in financial years 2018 and 2019. Load shedding by discoms continued. The average duration of power cuts as of July 2019 stood at 10.14 hours and the average frequency of power cuts was around 12.9 times.
Higher volumes in power trading: With long-term PPAs drying up, the share of the short-term power market continued to climb. Short-term transactions accounted for 12 per cent of power generation during financial year 20. The volumes transacted through traders and power exchanges were 100.84 BUs, up 16 per cent over the previous year. The electricity transacted through the exchanges accounted for 53 per cent share in total volumes, while traders accounted for the rest. The weighted average price of power transacted through the exchanges and traders in financial year 2019 was also higher by 24 per cent and 19 per cent respectively at Rs 4.26 and Rs 4.28 per unit.
Coal production and supply: Domestic coal production by Coal India Limited (CIL) increased by 7 per cent on a year-on-year basis in financial year 2019. Coal supply by CIL sources to the thermal power segment stood at 488 mt as against 454 mt in 2017-18. However, the dependence on coal imports continued. On a year-on-year basis, coal imports grew by 13 per cent during 2018-19. The import of non-coking coal stood at 183 mt, 14 per cent higher than the previous year. The total imported coal used by TPPs during April-June 2019 stood at 18.4 mt, marking an increase of around 40 per cent over the corresponding period in the previous year. As on September 25, 2019, the coal stock at TPPs was enough to run power plants for 11 days; however, it remained much below the normative requirement. Although the government recently approved 100 per cent FDI in commercial coal mining in an attempt to augment domestic production, analysts say that it may be a while before new domestic production through this route kicks off owing to inadequate infrastructure and issues regarding land availability.
Robust grid expansion: Transmission grid expansion remained robust with a 6 per cent increase in line length and a 4 per cent increase in substation capacity in financial year 2019 over the previous fiscal. Around 12,600 MW of interregional capacity was added to the grid, taking the total interregional capacity to 99,050 MW. Another major trend in the sector is the impetus to renewable energy evacuation. While green energy corridors are being developed along with renewable energy resource management centres, new schemes are also being taken up that will cater to the tail-end of the grid. In July this year, the government approved transmission schemes for renewable energy zones with a potential capacity of 66.5 GW to be achieved by 2022.
Slow FGD tendering: So far till June 2019, bids have been awarded for only 13.86 GW of capacity for flue-gas desulphurisation (FGD) installations, or 8 per cent of the 166 GW of capacity that is required to install FGD systems. However, tenders for 57 per cent of this capacity (95.23 GW) have been issued to meet the compliance deadline of financial year 2022. An area of concern for the industry remains FGD financing by private IPPs, which have sizeable stressed assets, and by state utilities given their weak financial health. That said, NTPC Limited is taking the lead in compliance. It has already commissioned an FGD unit, and has systems under implementation for about 47 GW of capacity and under tendering for 17 GW of capacity.
Uptick in smart metering: In line with the government’s target of installing 250 million smart meters over the next three years, efforts to install smart meters were ramped up. Public sector undertaking Energy Efficiency Services Limited (EESL), which is implementing the ambitious Smart Meter National Programme, is now installing close to 100,000 meters a month. So far, over 0.5 million smart meters have been installed in cities across states, with Uttar Pradesh accounting for the majority installations (almost 0.4 million). Further, while contracts for the procurement of 10 million smart meters and system integrators have been awarded, EESL has recently floated another tender for 5 million smart meters.
LC mechanism for greater financial discipline
A key priority on the new government’s to-do list is addressing payment security-related concerns. To this end, it issued an order making it mandatory for discoms to provide a letter of credit (LC) for receiving power from August 1 this year. The load despatch centres will limit the flow of power to the quantum and period covered by the LC. According to experts, the power market has over the years become a buyers’ market, with power generation far exceeding demand. The move will help ensure timely collections for generators. In another initiative to address payment security concerns, a CEA panel has suggested setting up an e-platform for bill discounting for IPPs along the lines of the system being used by micro, small and medium enterprises.
Pilot Scheme 2 for alleviating stress
Stressed projects received a leg-up with the second round of auctions being concluded under the second phase of the Pilot Power Procurement scheme. While under the first pilot, auctions for which were conducted in 2018, contracts were secured for about 1,900 MW of capacity, in the second phase in September 2019, contracts have been secured for 1,000 MW of capacity so far. A tariff of Rs 4.41 per kWh has been discovered through e–reverse auctions in the second phase. Under the scheme, NHPC Limited, the aggregator under Phase II, is supposed to tie up 2,500 MW of supply by September 30, 2019.
Cabinet approval for HLEC recommendations
On March 7, 2019, the Cabinet Committee on Economic Affairs granted approval to the recommendations of the group of ministers constituted to examine the specific recommendations of the High Level Empowered Committee (HLEC) formed to address the issue of stressed thermal projects. Most of the approvals were notified through circulars issued by the respective ministries/agencies. Among the recommendations approved was the grant of linkage coal for short-term PPAs, a major departure from the current coal allocation policy, which requires plants that supply power to short-term competitive markets to procure coal from e-auctions or global markets.
New hydro policy
A big announcement for the sector was cabinet clearance for a slew of measures for the hydropower segment, including the decision to give large hydropower projects the renewable energy tag. The power ministry also stated that hydro power obligations (HPOs) would be notified separately within non-solar RPOs. According to industry observers, this will promote the market for operational hydro projects with uncontracted capacity and will facilitate the signing of PPAs and enable financial closure for upcoming projects. However, there were not any announcements for interest subvention for stalled projects, a measure that the industry was awaiting.
States renege on renewable PPAs
In a move that significantly dented investor confidence in the renewable energy industry, the Andhra Pradesh government announced its decision, in July 2019, to review and renegotiate PPAs signed during the previous government’s regime under the feed-in tariff (FiT) mechanism. The state government sought to withdraw 21 PPAs with renewable energy companies and form a high-level negotiation committee. In September 2019 however, the Andhra Pradesh High Court struck down the controversial decision that had put nearly Rs 210 billion of debt of renewable energy companies at risk of default. Amidst these developments, the prime minister recently announced at the UN Climate Summit that India would double its renewable energy target to 450 GW, which has been cautiously welcomed by the industry.
Supreme Court breather for stressed assets
Power firms welcomed the Supreme Court decision in April this year, striking down the Reserve Bank of India’s February 12, 2018 circular on the resolution of stressed assets. Subsequently, on June 7, 2019, the central bank issued a “prudential framework for the resolution of stressed assets by banks”. The fresh guidelines have done away with the clause that mandated lenders to start the resolution process even if there was a one-day default. Under the new norms, defaults are to be recognised within 30 days. As per industry estimates, about 40 GW of coal-based capacity has been stressed owing to a mix of issues, including the absence of long-term PPAs, unviable tariffs in PPAs, an absence of coal linkages, delays in project implementation and the inability of promoters to secure funding for completing projects. In addition, about 12 GW of gas-based capacity in the private sector is stranded or under-utilised due to the lack of availability of domestic natural gas and the high cost of generation using imported R-LNG.
Mega merger of PFC and REC
In a significant development, the Power Finance Corporation (PFC) acquired 52.63 per cent stake in REC Limited for Rs 145 billion. PFC and REC had reported assets of Rs 2.86 trillion ($43 billion) and Rs 2.46 trillion ($37 billion) respectively, as of March 2019. According to Moody’s, PFC’s strategic importance to the government will increase further upon completion of the acquisition, as the combined entity will become the biggest non-banking financial institution in which the government holds a controlling stake. Meanwhile, the government is reportedly mulling other mergers and acquisitions to boost revenue flow to its disinvestment corpus. Reportedly, the government is considering merging THDC, SJVN Limited and NEEPCO with NTPC or NHPC.
SCED pilot project begins
The government’s Security Constrained Economic Despatch (SCED) pilot scheme for the supply of cheaper power based on merit order under a six-month pilot yielded promising results. As per latest data from POSOCO, during the four-month period (beginning April 2019) of the pilot being implemented, a total of 49 coal- and lignite-based interstate generating stations with 132 generating units and 55,940 MW of installed capacity participated in SCED. The post-SCED cost (total variable cost of generation after SCED) every day was about Rs 30 million less than the cost before SCED (variable generation cost of plants’ scheduled requisition). The cost reduction was achieved by reducing costly generation and increasing cheaper generation by 1,000-1,500 MW pan-India. Overall, a reduction of Rs 3.3 billion in system cost was achieved during the period.
National discom formed
Power Grid Corporation of India Limited (Powergrid) and NTPC came together to form a joint venture (JV) for undertaking distribution operations. The JV, National Electricity Distribution Company (NEDC), has been set up on a 50:50 equity participation basis. While its role is still under wraps, it is expected that NTPC and Powergrid will leverage their power sector expertise for NEDC. Reports indicate that instead of becoming a distribution utility, NEDC may have a character similar to EESL and will work as a contractor to help improve the performance of existing discoms.
Regulatory relief for gencos
The Central Electricity Regulatory Commission (CERC) approved a higher tariff for 2,000 MW of capacity of Adani Power’s 4,620 MW Mundra plant in Gujarat, a move, experts say, will set a precedent for raising electricity tariffs in the event of an unexpected increase in the price of imported coal. The relief for the power generator came after seven years of pleading for a pass-through of the increased cost of imported coal. The CERC approved the new terms of the PPA and the tariff structure for Adani Mundra, which was devised based on the recommendations of a high powered committee (HPC) constituted by the Gujarat government last year. Meanwhile, the CERC allowed GMR Warora Energy Limited (GWEL) compensation for the shortage of linkage coal beyond March 31, 2017. This is viewed as a landmark order as this is the first time that the regulator has approved compensation for the shortage of coal under the SHAKTI scheme and will enable timely recovery of the cost of alternative fuel by IPPs.
Clean mobility push
Giving an impetus to India’s e-mobility plans, the government, in March 2019, approved the Faster Adoption and Manufacturing of Electric Vehicles II (FAME II) initiative. FAME II, an extension of FAME I, entails a much larger financial outlay of Rs 100 billion. It proposes the establishment of 2,700 charging stations in the metros, smart cities, Tier II cities and hilly regions. Earlier, in December 2018, the Ministry of Power (MoP) released policy guidelines for electric vehicle (EV) public charging infrastructure. Recently, in view of the need to accelerate EV adoption, the GST on EVs and charging stations was reduced to 5 per cent, a move welcomed by the industry. A number of states drafted and notified their EV policies in the past one year including Tamil Nadu, Himachal Pradesh and Delhi.
Smart grid pilots reach completion
Almost seven years after smart grid demonstration projects were sanctioned by the MoP with 50 per cent government grant amounting to $29.56 million, all 11 smart grid pilot projects achieved completion. Almost 156,000 meters have been installed at these pilots and capabilities like peak load management tested. At present, five projects with an investment of almost Rs 7 billion are being taken up under the ambit of the National Smart Grid Mission, which was sanctioned in 2015.
Award of DFs
Maharashtra awarded two more distribution franchises (DFs) during the past year. In January 2019, Maharashtra State Electricity Distribution Company Limited (MSEDCL) appointed input-based distribution franchisees for two circles – Malegaon to CESC and Shil, Mumbra and Kalwa circle to Torrent Power Limited. Maharashtra had in 2006 awarded DF contracts for the Bhiwandi circle to Torrent (as well as for Jalgaon and Aurangabad circles, which were later annulled). Rajasthan has been another active state in awarding DFs. It has in the last couple of years awarded four circles (Kota, Bharatpur, Bikaner and Ajmer).
In sum, major efforts were made in the past year to address the issues of the sector through measures such as the introduction of the LC mechanism, approval of the HLEC recommendations, launch of the pilot power procurement scheme, recognition of hydro as a renewable source, and implementation of the Saubhagya scheme. Yet, the sustainability of discoms remains an elusive goal. The government’s new agenda seems to have all the right ingredients; the challenge lies in delivering a step change.