Singapore-based Sembcorp entered the Indian power sector a decade ago. Today, its Indian arm, Sembcorp Energy India Limited (SEIL), is a leading genco with a balanced portfolio of renewable and thermal assets. The company has managed to weather the Covid-19 crisis through digital measures and is now gearing up for the next level of growth. In an exclusive interview with Power Line, Vipul Tuli, managing director, SEIL, shared his views on the state of the sector, the outlook for the future as well as the key issues. Excerpts…
What is your perspective on the current state of the power sector?
The power sector has been coping with the Covid challenges – fluctuating demand patterns, tight liquidity and working capital difficulties. As an essential service, the sector has the responsibility to continue generating uninterrupted power for the country. During the past few months, every player in the power value chain rose to the occasion – state discoms, grid operators, regulators, and the state and central governments have all gone out of their way to ensure uninterrupted power. The sector has shown remarkable resilience in the face of the Covid-19 pandemic, with supplies holding up admirably, despite the global turmoil in financial and commodity markets. However, this has come at a cost. As nearly one-third of the global population stayed indoors and thereafter gradually started returning to work, power demand fluctuated drastically. Supply, which had already been surpassing requirements and thereby putting pressure on prices, was deeply impacted by the demand fall-off. While the electricity sector has been comparatively insulated from oil price fluctuations, the sudden dip in revenue and cash collections has left a large section of energy companies financially stressed.
What steps have been taken by SEIL to mitigate the impact of Covid-19 on operations?
The pandemic has necessitated the introduction of new standard operating procedures (SOPs) and technological solutions. At Sembcorp, all our sites have been fully operational. The new SOPs were introduced in early March, even before the lockdown. A near-universal theme – globally and across all sectors – will be an acceleration in the adoption and integration of technology in the way we live, work and play post-Covid-19. Whether it is forecasting demand in the midst of volatility, managing supply chains, collecting dues efficiently, managing and maintaining critical assets or responding to rapidly evolving ground situations, all these aspects of day-to-day operations are swiftly incorporating the latest technological tools. Our Virtual Brain Renewables is one such advanced analytics-based digital asset management platform that provides real-time data and indicators on wind speed, temperature, power output, plant load factors, etc., as well as wind versus power generation efficiency curves. This helps our operations teams with insights for predictive maintenance by providing them real-time data of over 30 assets situated at remote locations.
What is your outlook on electricity demand in the short to medium term?
In 2019-20, under exceptional circumstances stemming from the pandemic, a strict lockdown was imposed in the country. This, coupled with slower economic growth in the previous quarters, resulted in electricity demand growth falling to 1.3 per cent, compared to the steady demand growth of 5 per cent over the previous five years till 2018-19. With the opening up of economic activity post-Covid-19, short-term demand growth is expected to recover from the second or third quarter onwards in 2020-21. Long-term demand growth is also expected to rebound, and this increase in demand is expected to be the result of two factors. First, urbanisation-led increase in domestic and commercial power demand and government policy initiatives that mandate providing uninterrupted electricity access to all are expected to increase per capita electricity consumption. The second factor is the electrification of the economy, that is, the shift from other fuels to electricity for standby power, agricultural applications, transportation and cooking, among others.
What are the key issues and challenges being faced by the sector?
One of the foremost issues facing the power sector is the frail financial health of discoms, which continues to cause liquidity risks and adversely impacts the return on equity of IPPs. Against the backdrop of a sharp reduction in electricity demand, a slowdown in receivable collections due to the lockdown and uncertainty regarding future economic recovery, a number of measures have been announced by the government to support the sector. The recently announced liquidity package for discoms is highly welcome. The introduction of the Draft Electricity Act (Amendment) Bill, 2020, proposing rationalisation of tariffs, obligation to supply, competition through open access and the setting up of the Electricity Contract Enforcement Authority is another crucial step taken to fundamentally reform the sector. This is the single most game-changing initiative in the sector, and we hope that it will be enacted at the earliest. A new national tariff policy is also in the final stages of approval. Further, liberalisation of coal mining and a set of promising reforms are encouraging measures that can unlock more value for the industry and the power sector in particular. Such measures to improve investor sentiment in coal mining and encourage competitiveness will translate into higher coal supply efficiencies, wider options for power generators to deliver sustainable, affordable energy to drive the economy, and precious forex savings from coal import bills. In pursuit of its long-term target of 450 GW, the renewable energy sector has today become one of the world’s largest, fastest growing and most competitive markets. The renewable energy sector has witnessed rapid growth in the past decade, today contributing 8-9 per cent of India’s electricity and steadily moving towards contributing 15-20 per cent in the next 10 years. The next level of renewable energy growth will require a fresh set of reforms. These will need to include recognition of the true cost of renewables by making subsidies explicit, since the policy of passing on the costs of renewable interstate transmission and intermittency on to conventional generators and discoms now appears to have run its course.
What are some of the challenges facing gencos in implementing emission control solutions?
The installation of environmental control equipment to meet sulphur and nitrogen emission standards is a high priority for the country and represents an imminent investment opportunity. FGDs offer significant scope for indigenisation, which would give a welcome boost to the Make in India initiative. Moreover, the financial implications of these investments are modest, amounting to 5-10 paise per kWh across all power generated (around 25 paise per kWh for coal-based power). This is just 1-2 per cent of the average end-consumer tariffs of around Rs 5 per kWh. The primary obstacle in implementing emission control solutions is the high investment cost for each plant, amounting to Rs 50 million per MW or around Rs 10 billion for a 2,000 MW power plant. With neither stressed generators nor loss-making state discoms having the financial wherewithal to bear the additional costs, lenders understandably seek assurance as to how these costs would be recouped. Bringing regulatory clarity to enable financing of environmental investments is essential. It can almost immediately unlock Rs 800 billion of investment activity, with significant economic and health benefits and a pre-emptive solution for another looming NPA crisis.
What were SEIL’s key operational and financial highlights last year?
Economies around the world have been weighed down by a series of events since the beginning of 2019, which have dented the overall growth prospects in India as well. The situation has been further dampened by the pandemic. Yet, despite the lockdown and the associated socio-economic uncertainties, Sembcorp has ensured that all its generating assets have maintained electricity supply to its customers. Against the backdrop of a challenging market scenario, we registered a 141.7 per cent rise in profit after tax to Rs 3,082 million, while EBITDA stood at Rs 35,504 million, increasing by 9.1 per cent over the previous year. Our continued focus on strengthening the balance sheet has enabled us to reduce debt from 75 per cent of the total capital in 2018-19 to 72 per cent in 2019-20. During the same period, return on equity improved from 1.94 per cent to 4.13 per cent.
What are some of the recent key highlights of the company’s renewables business?
Our renewables business unit has successfully commissioned the entire 800 MW of generation capacity won in the first three wind auctions conducted by the Solar Energy Corporation of India (SECI). With this, SEIL now has the largest operational capacity among the SECI wind projects. For Sembcorp, this represents a promise fulfilled and a promise of things to come. We are a long-term investor, and we take pride in meeting our commitments. These projects have given us confidence in our capabilities, and we are now ready to move into the next phase of our growth journey and participate in future opportunities. Moreover, we have strengthened our in-house operations and maintenance (O&M) capabilities and processes, bringing 624 MW under self-O&M. We own the largest fleet of wind assets under self O&M among IPPs in India, which helps us drive cost benefits with high operational efficiencies.
What are Sembcorp’s key focus areas going forward?
The economy and businesses will be faced with multiple headwinds due to the Covid-19 outbreak. At SEIL, we will continue to focus on issues within our control. Our balanced portfolio provides us an edge in capturing the imminent rebound in the nation’s energy demand and contributing to a sustainable future. The power sector has witnessed a transition in the past two decades, with structural and regulatory policies across the value chain providing the necessary impetus for growth. With ambitious renewable energy targets and the transformation of thermal plants into environment-friendly units, the power infrastructure is set to witness a marked change. Having established capacities and capabilities, SEIL is well positioned to continue its steep trajectory of performance improvement and sustainable growth.