The power sector’s progress is crucial to the country’s target of becoming a $5 trillion economy. The sector accounts for the largest share in infrastructure investments. Between 2012-13 and 2018-19, the share of power sector investment in total infrastructure investment varied from 20 per cent to 44 per cent. The share has declined in recent years mainly owing to mounting stress in the generation segment and the financial weakness of the distribution segment.
However, with increasing urbanisation and economic development, power demand is expected to grow considerably. This requires huge investments in new capacity development and upgradation of existing infrastructure. As per the final National Infrastructure Pipeline (NIP) submitted by the task force to the finance ministry in April 2020, the total capex expected to be incurred by the power sector (including conventional, renewable and nuclear power) stands at Rs 25 trillion for the 2020-25 period. This accounts for a major share of 22.5 per cent in the total investment of Rs 111.30 trillion in the infrastructure sector. The summary report of the Task Force on National Infrastructure Pipeline for 2019-2025 was earlier released in December 2019. In its latest report, the task force has also outlined various reforms for the power sector to accelerate growth. A look at the report’s key findings…
The NIP envisions that 24×7 clean and affordable power will be available to meet the household, industries, commercial and agricultural requirements in all states and union territories. The installed generation capacity is estimated to reach 583 GW by 2025 vis-à-vis 370 GW as of March 2020. Of the total installed capacity, 50 per cent will be based on coal, 39 per cent on renewables, 9 per cent on hydro and 2 per cent on nuclear. The per capita electricity consumption is projected to increase from 1,181 kWh in 2018-19 to 1,616 kWh in 2024-25.
On the e-mobility front, public charging infrastructure will be set up within a radius of 3 km as well as in all commercial and multi-storey buildings in urban areas. By 2025, about 5 per cent of private cars, 11 per cent of buses, 25 per cent of commercial cars, 32 per cent of two-wheelers and 48 per cent of three-wheelers will be electric.
The NIP task force outlines segment-specific reforms for the power sector to reach the Vision 2025.
- Conventional power: Stressed thermal power generation assets are on the rise in the private sector due to the non-availability of long-term power purchase agreements (PPAs), lack of credit from banks and inadequate tariffs. It is, therefore, crucial to improve the financial and operational health of discoms so that they can procure power from gencos and pay their dues on time. Further, the need to ensure adequate quantity and quality of coal to gencos is crucial. In this context, the recent policy change allowing 100 per cent FDI in coal mining is expected to provide an impetus to foreign mining companies, bring in superior mining technology, increase competition in the domestic market and help reduce coal shortage. Furthermore, the existing thermal generation fleet is required to be made more flexible to deal with steep ramp rates and shorter peaks in order to account for a greater share of fluctuating renewable generation in the energy mix.
- Renewable energy: A key area of concern for renewable energy developers is reneging of PPAs by state governments. In the recent past, some state governments have attempted to re-negotiate PPAs after citing discoms’ inability to pay high tariffs for wind and solar discovered in earlier auctions. However, the sanctity of contracts and timely dispute resolution are the key to retaining and attracting private sector participation. Another important requirement to facilitate renewables is an effective scheduling and forecasting mechanism. Further, there is a need to introduce the bill discounting facility to developers to counter the delays in the receipt of payments from the utilities. The facility will provide liquidity respite to developers as they will be able to raise upfront cash against receivables from discoms. Lastly, there is a need to have a strong domestic manufacturing base of solar PV modules given that India currently imports around 85 per cent of solar PV modules and cells from countries like China, Taiwan, Vietnam and Malaysia as they are cheaper.
- Transmission and distribution: The NIP task force advocates asset monetisation of seasoned transmission assets to finance new transmission infrastructure. Also, the current environment, with adequate installed power generation capacity, low renewable energy prices and increased competition in the market, makes medium-term PPAs (three to five years) more attractive than long-term ones. Other proposed reforms include adoption of smart metering to reduce AT&C losses, implementation of time-of-day tariffs, direct benefit transfer of subsidies, timely tariff revisions, and increased private participation in distribution.
- Power storage infrastructure: It has been estimated that over 70 GW and 200 GWh of energy storage would be required in India by 2022. There is a need to build battery storage manufacturing capacity to meet this demand. Battery manufacturing facilities may be set up in existing solar parks, making them eligible for benefits associated with “infrastructure” status. The need of the hour is a policy on grid-connected storage with viability gap funding. Pumped storage plants and hydropower with pondage can also help in effectively balancing the grid and must be promoted.
Expected capex up to 2025
The NIP has estimated a capital expenditure of about Rs 14.10 trillion for the power sector between 2020 and 2025 for projects identified by public and private sectors. Of the total capex, about Rs 3,268 billion will be for the generation segment, Rs 3,230 billion for distribution and Rs 3,040 billion will be for the transmission segment. The remaining will be contributed by the states. NTPC is likely to spearhead investment in the generation segment with a capex of about 1,200 billion lined up while state transmission utilities will lead the transmission segment with a projected capex of Rs 1,900 billion.
In the nuclear power segment, around seven projects have been identified by Nuclear Power Corporation of India Limited to be implemented at a capex of Rs 1,555 billion. In the renewable energy segment, an investment of Rs 9,295 billion is projected during the five-year period to reach an installed capacity of 265.73 GW by December 2025 from 86.7 GW as of March 2020. Of the total projected investment, over 50 per cent will be made in the solar segment and over 45 per cent in wind, while biopower and small hydro power will account for the remaining share.
The way forward
The NIP is a first-of-its-kind government exercise to provide world-class infrastructure across the country aimed, improve project preparation and attract investments (both domestic and foreign) in infrastructure.
Considerable investments are lined up in the power sector for the next five years. Thus, there is a need to unlock new financing models to fund the capex requirements. The task force has suggested ways and means of financing the NIP such as deepening corporate bond markets, including those of municipal bonds, setting up development financial institutions for the infrastructure sector, accelerating the monetisation of infrastructure assets and land monetisation. The task force has also recommended that three committees be set up – a committee to monitor NIP progress and eliminate delays; a steering committee each infrastructure ministry for following up implementation; and a steering committee in the Department of Economic Affairs for raising financial resources for the NIP.
Further, the task force is enabling marketing of a project pipeline that requires investment through the India Investment Grid (IIG) portal. A list of 264 energy sector projects showcasing opportunities worth over Rs 1,373 billion is posted on the India Investment Grid website (accessed on May 26, 2020). Of these, nearly 40 per cent of projects (109 projects) are in the solar power segment, followed by T&D (75 projects), hydro (56 projects) and thermal power (12 projects). The remaining are based on biopower (nine projects) and wind (three projects). In terms of investment, thermal projects entail opportunities worth Rs 525 billion, followed by solar power (Rs 365.87 billion), hydro (Rs 350 billion) and T&D (Rs 115 billion). Assam, Ladakh, West Bengal, Madhya Pradesh, Jharkhand and Andhra Pradesh have maximum investments lined up in energy sector projects. There are also around 61 stressed assets in the energy sector that have been listed on IIG as viable opportunities for potential investors.
To conclude, the NIP is a notable initiative taken by the government to provide visibility to upcoming projects and help potential investors and stakeholders identify opportunities in the infrastructure sector.