The year 2021 was a mixed bag of challenges and achievements for the power sector. While the renewable energy sector witnessed rapid growth, power distribution continued to be an area of concern. Industry experts share their views on the key successes and failures in the sector, and the outlook for the next year…
What were the key hits and misses in the power sector in 2021?
The power sector performance over the past one year has been a mixed one. On the one hand, the renewables and transmission sector continued to see relatively better performance and investor interest, while on the other, the thermal power sector (coal and gas) witnessed an average to below average performance. The energy demand improved and increased by around 9 per cent during April-November 2021 over the corresponding period last year and around 3 per cent as compared with the corresponding pre-Covid times in 2019. Also, the peak power demand touched an all-time high of 200 GW in July 2021, thus, indicating a strong revival in the power demand.
Among the positives for the renewable power sector, the extension of ISTS waiver by two years provided the much-needed succour to renewable energy developers dealing with Covid-related implementation challenges. Further, recent government notifications regarding compensation for change in law events and for curtailment of power from “must-run” plants are likely to favourably benefit renewable energy developers in the long run. In terms of power curtailment, the rules allow generators to sell power on exchanges in case their supply is curtailed by designated buyers due to technical constraints. In change in law cases, the new rules lay out the formula for calculating compensation and more importantly, settle the issue around carrying cost, which was ignored by various tribunals and commissions in the past. Both these rules provided clarity and are a significant step towards uniform application of law for all players.
To take distribution sector reforms further, the government announced the Revamped Reforms Based and Results Linked Distribution Sector Scheme, with an outlay of Rs 3,037.58 billion. The scheme significantly aims to address the need for funds for the installation of smart and prepaid meters by discoms apart from the implementation of distribution infrastructure-related projects.
In terms of key misses of 2021, the primary contender will be coal shortage. While coal shortage is a recurring phenomenon post-monsoon each year, it assumed greater severity this year with many of the plants having critical stock levels only for a few days. The coal shortage was largely attributed to the sudden surge in power demand, which, coupled with exorbitant imported coal prices, (which otherwise make up for any shortfall in domestic production) flared up coal paucity. Another major miss this year was accumulation of overdues by discoms. With the extension of Power Finance Corporation/ REC Limited funding to discoms under the Atmanirbhar Bharat package, it was expected that discom overdues-related issues shall subside for a while. However, it appears from recent reporting on the PRAAPTI portal that discom overdues have again shot up to Rs 1,021 billion as against Rs 827 billion in April 2021.
Finally, pending resolution of the Andhra Pradesh matter and tariff renegotiation-related steps being undertaken by other states are affecting investor sentiment in the power sector in general and renewable power sector in particular.
The criticality of a robust power sector for India’s post-Covid journey of economic revival with climate consciousness cannot be overemphasised. Several recent policy initiatives are expected to go a long way in strengthening the Indian power sector. These include increased electrification due to schemes such as the Deen Dayal Upadhyaya Gram Jyoti Yojana, the Ujwal Discom Assurance Yojana, the Integrated Power Development Scheme and the Revamped Distribution Sector Scheme (RDSS). To this end, India has a project investment of around Rs 335 billion (24 per cent) in the power sector as part of the National Infrastructure Pipeline and allocations are made in the Union Budget 2021-22 of Rs 3,030 billion for the reforms-based RDSS over the next five years; and Rs 40 billion to invest in wind energy, solar energy and the green energy transmission corridor.
However, significant structural challenges threaten to derail these. There are imperatives of changing our consumption and production pattern to mitigate the climate crisis, by accelerating our transition from thermal to renewable energy, with its attendant costs and stranded asset implications. India is decisively fast-tracking the transition of its energy sources to renewables – seeking to install 500 GW by 2030. The Covid crisis exacerbated the financial health of the sector, which must be addressed with urgency.
Meanwhile, there are headwinds driven by aggregate technical and commercial losses plateauing at 21 per cent. The gap between the average tariff and the average cost of supply remains stubbornly above Re 1 per unit (if all subsidies are counted transparently). The unpaid subsidy by the state governments and unpaid dues owed by governmental entities to discoms had risen to Rs 1,300 billion by June 2021. Taken together, tariff distribution comes to around Rs 2 per unit for around 1.3 trillion units of electricity supplied annually. The plant load factor of our thermal plants hovers at an unhealthy 55-58 per cent, leaving an idle capacity of 25-30 per cent, which only exacerbates the economics of generating electricity. In the context of the annual turnover of Rs 7.28 trillion (Rs 7,280 billion) of all discoms with accumulated debt of Rs 514 trillion (Rs 5,140 billion) for 1.284 trillion units available for supply in the financial year 2019-20, overdues owed by discoms to gencos are at an all-time high of Rs 1.56 trillion. All this has accumulated despite the special liquidity infusion scheme for discoms announced in June 2020, culminating in the overall disbursal of Rs 1.25 trillion. The accumulated losses of all discoms had risen to Rs 5,074.16 billion by 2019-20.
The 2002 mechanism of tripartite agreements with the RBI guaranteeing payment of dues from the planned fund allocations was limited to payment of dues by state discoms to central public sector undertakings. When the policy introduced competitive procurement in 2006, public sector generators were exempt from competitive procurement. All this manifests in the fact that while the private sector installed capacity is around 48 per cent, the unpaid overdues owed to them are over 72 per cent. Certain structural reforms were being contemplated with the proposed amendment to the Electricity Act, as also the revised tariff policy. These now seem to be getting shelved in the aftermath of the farm laws fiasco. NTPC has announced that it is reversing its much-lauded decision of 2017 to phase out old and inefficient thermal plants.
India’s commitment to energy transition is based on building strong domestic manufacturing capacity through the following:
- Solar PV projects, solar thermal projects and solar parks have been exempted from requiring environmental clearances.
- A Rs 181 billion production-linked incentive (PLI) scheme was launched to incentivise battery makers to manufacture advanced chemistry cell battery storage locally, reducing import dependence while giving a boost to electric vehicles (EVs). This is expected to generate net savings of Rs 2 trillion-Rs 2.5 trillion by oil import substitution.
- Another PLI scheme of Rs 45 billion was launched to support about 21 GW of module supplies from domestic manufacturers, reducing import dependence.
- Measures such as basic customs duty imposition on solar cells, anti-dumping and countervailing duties on other raw materials (for example, ethylene vinyl acetate sheets, glass, etc.) imported from various countries such as China, Malaysia, Thailand, etc.
- Thrust on promotion of green hydrogen with the National Hydrogen Mission and considerable investments announced by a couple of industrial houses are slated to make India a global hub for hydrogen production.
The structural challenges, if not addressed in national mission mode, shall create a hurdle in the effort to revive and restore economic growth post-Covid.
“The Covid crisis exacerbated the financial health of the sector, which must be addressed with urgency.”
The answer lies in building and enforcing a national consensus as seen in Vajpayee’s reform initiatives in 1996 and 2001, balancing the social (welfare), economic and environmental needs. To achieve these goals, certain issues must be addressed urgently:
- Effective and timely implementation of projects, salvaging stranded capital and stalled projects, mitigating delays in adjudicating regulatory and contractual disputes have exacerbated the situation.
- Addressing large unpaid dues owed to discoms, causing a spiral in the entire value chain, besides banks not being paid in time.
- Enforcement of contracts to instil investor confidence with regulatory certainty by implementing the Specific Relief (Amendment) Act, 2018.
- Implementing a comprehensive market design that has been in the making for over four years with ancillary services and market-based economic desptach not yet fully functional.
- Bailout packages, such as Atmanirbhar Bharat, with an infusion of Rs 1,250 billion for discoms to clear their outstanding dues need to be calibrated with strict enforcement.
- Open access and market access are increasingly blunted by protective cross-subsidy surcharge and additional surcharge barriers, averaging at Rs 2.10 per unit.
- Retiring all old, derated and inefficient coal plants of over 25 years of life and substituting them with more efficient, less polluting supercritical plants.
- For existing coal-based plants, the entire value chain from coal companies to railways for transportation of such coal ought to be streamlined to ensure minimal dependence on imported coal, to reduce the foreign exchange rate variation exposure and increase India’s GDP.
- States producing solar and wind energy more often do not have the demand estimates for the entire production, making energy transportation and storage a very critical issue in the supply chain. Policymakers must look at accelerating the implementation of the green corridor for the evacuation of surplus power generated.
- The privatisation of ailing discoms must be undertaken on priority.
While 2021 has been a mixed bag wherein the government has propounded a slew of measures for the sector’s development, the outlook for 2022 remains hopeful and positive. The path ahead is both exciting and challenging and will require a well-calibrated and balanced approach to ensure the power sector’s development.
The highlight of the year certainly has been the total installed renewable energy capacity in India, excluding large hydro, crossing the milestone of 100 GW. India today stands at fourth position in the world in terms of installed renewable energy capacity, fifth in solar and fourth in wind in terms of installed capacity. This is a commendable achievement as the country aims to have 450 GW of renewable energy capacity by 2030. Having said that, integrating renewables in a cost-effective manner is an area that needs attention.
Through the year, we conducted multiple modelling studies, which further reinforced the need for flexibility in the system and highlighted accomplishments and areas that need immediate focus.
Our joint study with the Finnish Lappeenranta-Lahti University of Technology (LUT University) emphasised the need for investments in flexible generation technologies for India’s energy transition towards 100 per cent renewables. This study analysed the development of the power system in the best policy scenario, in which greenhouse gas emissions reach zero across the power sector. India stands to gain economically and environmentally by completely shifting to a renewable-powered electricity mix, with flexible technologies providing system reliability. Moreover, the study underscores the importance of strengthening regional and interstate grids, mainly to reduce renewable curtailment and improve power exchange across the country.
As per this modelling done with LUT University, India can cut its overall cost of electricity by half and reach net zero by developing 100 per cent renewable energy power system. The modelling makes a clear case for immediate action to accelerate the development of a 100 per cent renewable energy system in India. By combining variable renewable power with energy storage and thermal balancing power plants capable of using carbon-neutral sustainable fuels in the coming decade, India can dramatically cut its carbon emissions and halve the overall electricity cost.
Our joint study with KPMG on “Electricity market reforms for the procurement of ancillary services” unveiled the current status of the ancillary services market in India, along with recommendations. It demonstrates that supply-side flexibility is needed at the pan-India level for an efficient and cost-effective integration of 450 GW of renewables by 2030. However, a step change is required in the way ancillary services markets are procured and markets are structured in India. Moreover, the pricing of ancillary services should encourage investments in the desired flexible generation technologies. India’s power grid could benefit immensely by jointly procuring energy and ancillary services (co-optimised) in the same day-ahead and real-time markets, while tightening resource adequacy rules. The state-level analysis of renewable energy rich states included in modelling revealed that the addition of 1,000 MW of thermal balancing power plants, together with 500 MW 4-hour of battery storage in the electricity mix in each state, even in 2021. This optimises the existing power plants’ despatch for better efficiency, lowers O&M costs and reduces renewable curtailment and projects a cost savings of atleast Rs 32-70 million per day for each modelled state. Thermal balancing plants have the capability to achieve 100 per cent loading in less than five minutes.
Professor S.L. Rao
The power supply was available throughout the year. The year saw a further improvement in the generation and use of renewable energy, and the government has introduced a policy to become a major solar user. One of the misses was that the consumers are paying higher rates. Further, during the year, there was an attempt to reduce the use of coal, but in some places, coal was not available.
There is also an attempt to increase the use of gas, but gas for generation purposes was largely imported and it incurred cost problems. As far as solar is concerned, once the government came up with policies to encourage both businesses and households to use solar energy, the segment gained some momentum. India has a great deal of potential for solar as compared to what has been achieved. A part of the problem in solar was the non-availability and inadequacy of solar panels and other equipment. In the case of industries, there is a shortage of storage to generate the power during the day and store it for later use. This problem has been resolved and that is an achievement, but it is not enough of an achievement and it could have been a lot more.
The pandemic should have affected the economy adversely. I am quite puzzled at how that did not happen because suddenly there were a lot of people that were laid off as there was not enough work. Yet, if you look at the data, in terms of economic growth, we do not seem to have done that.
Decentralisation is a delicate issue. In the Indian constitution, and Indian law, distribution is entirely with the state government while generation and transmission can be done by both the centre and the state. In that process, what has happened is that the state government has always preferred local generation to power coming from outside even when power was less expensive and more easily available. However, the preference given by the state to its own generation cannot be given. I firmly urge the government to look at change in law so that distribution is not kept a monopoly of the state because the state governments tend to play politics. We need a change in the whole regulatory mechanism and for that we need coordination between the law and perhaps the constitution and that is going to be difficult.
The year 2021 has been a year on tenterhooks, ricocheting from hope to gloom to a flat wait-and-see state. Normalcy only emerged in pockets and a significant population continued to operate remotely, hopeful that the vital power infrastructure would support in the new normal. The year 2021 saw fresh fervour toward sunrise sectors such as EVs, data centres and renewables from the government through PLI schemes and from corporates via investment in green businesses. The year 2022 beckons opportunities in the right direction. Covid-19-led unprecedented disruption has ushered in faster adoption of digital power technologies in sectors such as transmission works and rail. Hitachi Energy has had a strong play in metro and rail, power transmission and renewables this year. We advanced Indian Railways’ mission to achieve net-zero emissions via rail electrification solutions, India’s Power-for-All drive by commissioning one of India’s longest UHVDC transmission links from Raigarh to Pugalur, as well as provided our technology for a multitude of solar and hydro projects besides data centre players propelling India’s energy transition.
What is your outlook for the sector in 2022?
Industrial and commercial activities have rebounded post-lockdown following the Covid-19 outbreak. Besides this, other healthy macroeconomic indicators augur well for the electricity demand in 2022. Peak power demand is expected to witness growth because of higher consumption per capita and demand of power from customers, which have received new connections under previous government schemes.
As a result, thermal plants are expected to receive higher despatch schedule. Coal India Limited and its subsidiaries, along with Indian Railways are expected to play a critical role in the smooth production, despatch and transportation of coal for thermal plants. Merchant rates are expected to remain firm and thus, plants with untied capacity and efficient fuel tie-ups are expected to witness better realisation and margins.
The timeline for flue gas desulphurisation capex is gradually approaching. Progress in terms of financial closure and project implementation is expected to be led by central generating companies (gencos) with a few private power companies catching up with the pace.
“While coal shortage is a recurring phenomenon post-monsoon each year, it assumed gr eater severity this year.” Sachin Gupta
In terms of renewable capacity addition, 2021 would be among the best years in terms of implementation, owing to bunching of capacity, which faced execution-related challenges during the Covid period. The year 2022 is also expected to keep up the pace, given the introduction of basic customs duty from April 2022, coupled with the already existing pipeline of renewable energy developers, which would come up for implementation.
With Covid affecting the already battered operational and financial position of discoms, the receivables position for thermal and renewable gencos will inch up and continue to be challenging during 2022. Speedier implementation of the RDSS would thus hold the key for enduring operational improvement of state discoms.
In the current scenario, renewables are challenging thermal. The government has ambitious targets for renewables. Coal usage will become less in India in the future, but the focus will be on solar, as wind is not available all the time. Coal will continue to be the baseload for some time to come.
More focus is required on renewables and a clear policy on batteries for renewable energy with the exception of solar energy. Earlier, there were power shortages, but now that India has achieved near adequacy, there is a need to focus on the quality of reliable power. Batteries can be used in the transmitter for efficient distribution to achieve grid stability. They can also be used in another scenario, where there is no way to absorb power. Hence, battery manufacturing will play a crucial role, going ahead. We are also in discussion with various states, utilities and regulators regarding the role that renewables can play in meeting future electricity needs and strategies to efficiently integrate renewables into the grid. The industry should holistically look at the net cost of the system and not just at the variable cost.
“Coal usage will become less in India in the future, but the focus will be on solar, as wind is not available all the time.” Venkatesh R.
We have been promoting our vision of moving towards a 100 per cent renewable future and moving towards a more sustainable world. It is a transition with different paths for different countries, cities and companies. We are working with our partners to create fact-based proposals that utilities and customers can benefit from and use in their own planning.
In India too, we are directly engaging with stakeholders, be it states or utilities, to educate and help them bring clarity to their own planning processes and decision-making. We want to help them make the right decisions and prepare them for the future and will continue to do so.
Professor S.L. Rao
The outlook for the power sector seems positive because India is one of the fastest growing economies in the world and power is essential. The trouble here is that our choice of power generation sources in India ranges from coal, oil and gas, to renewables. The state government needs to put a lot more effort in renewables because that would be good for the users in terms of cost as well as control. As far as coal is concerned, it is going to be a serious problem because as a country we are part of this whole business of the environment, and coal is a major polluter. We will have to cut down sharply on the use of coal. We need the central and state governments to push for much greater use of renewable energy, but for that there is also a need to devise ways in which renewable energy can be stored and generated during the day and used at night. As far as wind energy is concerned, it is a good source and its stakes are increasing, but not enough. Meanwhile, green hydrogen is the cleanest fuel and a significant thrust is being given to it. We will see a greater use of renewable energy in the coming year, but it will not be enough.
“We need a change in the whole regulatory mechanism and for that we need coordination between the law and the constitution and that is going to be difficult.” Professor S.L. Rao
In 2022, we see green shoots of recovery in core sectors – mainly government-owned metals, and oil and gas industries. With India aiming to hit 500 GW in renewable energy by 2030, the pace of development in sunrise sectors will also pick up. We expect industrial capex to pick up only by the second half of 2022. Rail electrification, urban metro and regional transport systems will also drive growth, bringing in fresh opportunities for us. Likewise, as ESG gains spotlight, industrywide collaboration in greening the power infrastructure and investment in sustainable power solutions will help India make steady progress toward its energy goals. Yet challenges ranging from new variants of the Covid-19 virus such as Omicron, high commodity prices, material shortages, especially pertaining to semiconductors, will likely weigh on market recovery. We need greater support and stimulus in the power industry, including in EV charging infrastructure and faster decision-making on transformational projects.
“In 2022, we see green shoots of recovery in core sectors – mainly government owned metals, and oil and gas industries.” N. Venu