Growing Funding Needs

Financiers’ opinion

Substantial investment is envisaged in the power sector to achieve India’s ambitious target of becoming a $5 trillion economy. The key focus areas will be the renewable energy sector and distribution segment strengthening. In addition, with power demand showing an increasing trend, significant investments are expected across the power sector value chain. Leading financiers in the power sector share their views on its performance, key challenges and the future outlook…

What is your assessment of the power sector’s progress over the past year?

Parminder Chopra

During the pandemic, the entire economy was reeling under stress, and the power sector was not immune to this. The slowdown in economic activity led to a slump in power demand, which in turn affected the entire power sector value ch­a­in. However, in 2021, the economy be­gan reviving, as did the power sector. In April 2021, electricity generation rose by 42.5 per cent compared to April 2020. Fur­­ther, the first three months of 2021 (January-March) saw the fastest addition in solar capacity since 2019. Moreover, in November 2021, India achieved its target of sourcing 40 per cent of its generation capacity from non-fossil fuel-based sour­ces, nine years ahead of schedule. Thus, I feel that 2021 was a year of resurgence for the power sector. Throughout the pandemic, the Power Finance Corporation (PFC) lent its unbridled support to the power sector by extending funding of over Rs 1,300 billion over a span of two years – 2020-21 and 2021-22.

Dr Pawan Singh

The power sector, in the past one year, has seen continued focus on green and sustainable businesses, with wind and solar being at the forefront. India is fo­cusing on taking the renewable sector to the next level, and work on energy storage, green hydrogen and other green te­ch­nologies is at advanced stages. The­se steps will ensure next phase of growth in the power sector.

India is the third-largest producer and consumer of electricity worldwide, with an installed power capacity of 401.01 GW as of April 2022. Of this, the installed renewable energy capacity accounts for 39.43 per cent (158.12 GW). Solar energy is estimated to contribute 55.34 GW, followed by hydropower (46.72 GW), wind power (40.53 GW), biomass (10.68 GW) and small-hydro power (4.85 GW). Rene­wable energy capacity addition stood at 8.2 GW for the first eight months of 2021-22, against 3.4 GW for the first ei­ght mo­nths of 2020-21. With an electricity generation (including from rene­w­able sour­ces) of 1,490.27 BUs in 2021-22, the country witnessed an increase of 7.85 per cent over the previous fiscal year. The peak power demand in the country stood at 210.79 GW on June 9, 2022.

The government’s initiative of allowing 100 per cent foreign direct investment (FDI) in the power sector has boosted FDI inflows and augurs well for this sector. The total FDI inflow in the power sector grew to $15.89 billion between April 2000 and March 2022, accounting for 2.77 per cent of India’s total FDI inflow.

PASF team, SBI Capital Markets Limited

The power sector in the country is going through transformative changes and every year we are witnessing gradual structural and technological changes in all areas. The country’s generation capa­city increased from 384.1 GW in June 2021 to 403.8 GW in June 2022. In line with the commitments for sustainable de­­velopment, most of this growth (arou­nd 17 GW) has come from renewable so­ur­ces. Solar capacity addition was arou­nd 15.4 GW during this period. The addition in solar generation capacity is in line with the government’s target of achieving 450 GW of renewable capacity by 2030. The FDI in India’s renewable energy sector stood at around Rs 127.85 billion in 2021-22, a 101 per cent year-on-year increase from around Rs 63.69 billion in 2020-21. Going forward, fresh investments/financing in the power sector are expected to be largely in the re­newable energy and transmission space. We may also witness substantial growth and investments in electricity transmission (green corridors, system augmentation, etc.) and distribution (regular ca­pex, smart meters, etc.).

One of the significant developments in the power sector was the resurgence of coal-based power plants in the country. Due to unprecedented growth in electricity demand after the lifting of Covid restrictions, coal-based power plants we­re back in contention. Suddenly, the­re was renewed focus on the availability and reliability of coal-based capacity. The Ministry of Power (MoP) has been putting in efforts to revive stranded capacities.

Various schemes and regulations have been introduced by the government with the aim of boosting power sector growth, especially of the renewable segment, and also resolving the issues regarding the fin­ancial health of the discoms. A few of these initiatives and schemes:

  • In the Union Budget 2022-23, the government allocated Rs 195 billion ($2.57 billion) for a production-linked incentive scheme to boost manufacturing of high efficiency solar modules.
  • In order to meet India’s 500 GW rene­wable energy target and tackle the an­nual issue of coal demand-supply mis­match, the MoP has identified 81 thermal units that will replace coal with renewable energy ge­neration by 2026.
  • Electrification in the country is being increased with support from schemes such as Deendayal Upadhyaya Gram Jyoti Yojana, Ujwal Discom Assurance Yojana and the Integrated Power De­ve­lopment Scheme.
  • The Revamped Distribution Sector sc­heme (RDSS) has been launched with the aim to reduce the pan-India aggregate te­chnical and commercial (AT&C) loss levels to 12-15 per cent.
  • To tackle the high dues of the discoms, the government has come up with a scheme that enables discoms to pay off their outstanding dues in up to 48 equated monthly instalments (depen­ding upon the due amount). This will help power developers to start getting payments from discoms.
  • The increased power demand along with policy support has led to an inc­re­ase in investment in the power sector.

The government has also identified op­erating assets in the power sector for mo­netisation as part of the National Mo­­netisation Plan (NMP) for capital recycling. Power assets in the NMP in­clude power transmission assets spanning 28,608 ckt km (with an indicative monetisation value of around Rs 452 billion) and power generation assets totalling 6 GW of hydropower and rene­wable energy assets (with an indicative monetisation value of around Rs 398.32 billion). Three state-run power companies – NTPC Limited, NHPC Limited and Power Grid Corporation of India Limited (Po­wergrid) – have firmed up a mix of mo­dels to realise the maximum value from their hydropower and rene­wable en­ergy assets as well as transmission assets, as part of the NMP. These mo­dels include creating a holding company before divesting stake in it, cash flow monetisation, and setting up infrastructure in­vest­ment trusts (InvITs). The monetisation of Powergrid’s assets through the InvIT structure (about Rs 70 billion) was one of the key transactions in 2021-22.

What are the biggest unresolved issues facing the sector?

Parminder Chopra

The issues in the power sector can be an­alysed from two angles – demand and supply. On the demand side, I believe that India has a lot of untapped demand potential. As of financial year 2020, India has a considerably low per capita electricity consumption of 1,208 kWh, almost one-third of the world average of 3,200 kWh. Further, there is going to be a rapid increase in manufacturing activities due to various measures being rolled out by the Government of India to boost the sector, such as Make in India and the Pro­duction-Linked Incentive scheme. The ramp-up in manufacturing activities wo­uld further boost power demand. India has recently surpassed the UK as the fifth largest economy and, as per the United Nations’ Wor­ld Po­pu­lation Pros­pects, India will overtake Chi­na soon to be­come the world’s most popu­lous na­tion, with over 1.4 billion people. In 2050, the country is projected to have a population of 1.66 billion – way ahead of China’s 1.31 billion. Going forward, this in­crease will lead to an enhanced electricity re­quire­ment. Al­though there is significant dema­nd potential going forward, the current power infrastructure, including the transmission network, may not be adequate to meet such an exponential inc­re­ase in demand. Hence, to re­alise this future de­mand, there is a ne­ed to accelerate India’s pace of capacity addition along with massive infrastructure augmentation and upgradation.

On the supply side, distribution is the critical link in the entire power sector value chain. The operational and financial inefficiencies that discoms are facing today are the burning issue in the power sector. Some of the key concern areas are high AT&C losses, billing inefficiencies, delays in receiving subsidies and non-revision of tariffs in various states. This, in turn, widens the gap between the  ave­rage cost of supply and the average revenue realised and impacts the profitability of discoms. However, to handle these challenges, steps are being proactively taken. The government of India  is taking various initiatives to strengthen transmission and distribution, such as the RDSS, which encompasses smart metering, infrastructure upgradation and targeted reduction in AT&C losses. In addition, the government is taking various measures to bring in fiscal discipline and improve the payment cycle of discoms by imposing conditions for timely revision of tariffs, ensuring timely payment of subsidy, stipulating penalties for late payment of dues such as regulation of power by way of restricting access to the exchange for sale of power, etc. I feel that these actions by the government will change the landscape of the distribution sector in the coming years.  Further, to cater to future demand, there is a need to accelerate India’s pace of capacity addition along with massive infrastructure augmentation and upgradation and the planning for the same has already started. Under the Draft National Electricity Plan, 2022, around 229 GW of capacity addition has been envisaged between 2022 and 2027 and about 295 GW of ca­pacity addition is expected between 2027 and 2032. Thus, a total of 524 GW of capacity addition is being projected over the next 10 years.

To fulfil the growth needs of the sector, PFC, being the preferred financing partner of the power sector and the key catalyst for implementing sectoral reforms, will support the sector going forward.

Dr Pawan Singh

For various reasons, power is a very sensitive sector in India and at the forefront of infrastructure development. The weak financial health of the discoms is one of the biggest unresolved issues facing the sector today, and will remain a challenge for the renewable energy segment.

Delays in payments to power producing companies are common, leading to a build-up of receivables from offtakers and an increase in working capital debt for these companies. While renewable energy enjoys preferential despatch in In­dia, payments for electricity sold to discoms are usually delayed beyond the 60-day period specified in the power purchase agreements (PPAs). However, there is no history of discoms not making payments according to PPA tariffs (even if undisputed). The weak financials of discoms have led to delays in the signing of PPAs. This, in turn, has resulted in project delays or cancellations.

India aims to triple its renewable energy capacity to 500 GW by 2030 from 157 GW as of March 2022, and to generate 50 per cent of electricity from non-fossil fuel sources. The government recently ann­oun­ced a stimulus package to supp­ort discoms in the installation of smart and prepaid meters, to reduce losses as well as the revenue gap between the cost of power procurement and electricity tariffs. The government has also allowed state-ow­ned discoms to terminate their PPAs with coal-based plants that are over 25 years old, a step that will help reduce capacity payments and lead to more re­newable energy in the system.

The government, last month, tabled the Electricity (Amendment) Bill, 2022 in the Lok Sabha. Among the amendments proposed is a provision for consumers to be able to choose their power suppliers like with mobile and internet service pro­viders. There is also a provision for ti­mely and adequate tariff revisions, to help state utilities recover from losses and make payments for power in time. The bill comes at a time when there is a debate on whether the freebies being offered, among other things, have led to various discoms not being able to raise enough resources to make timely payments to power generating companies. While the government recognises this issue and is taking steps to mitigate it, the need of the hour is to take quick and effective steps to ensure that the sector thrives. The government is pushing for structural changes, to ensure that the in­frastructure sector continues to rema­in attractive to investors.

The other major challenge that the sector faces is the dearth of sufficient long-term, low-cost funding. In line with the country’s net zero vision, and in order to meet the financial needs of important projects and ensure their sustenance, it is vital to develop new financial instruments such as green bonds, create institutions such as green banks or lenders, and open up new avenues to attract global funds.

While the government has taken initiatives such as 100 per cent FDI, setting up the National Bank for Financing In­fra­­str­ucture and Development to fund $6 trillion of infrastructure assets, and in­fra­structure investment trusts to en­sure retail participation, more needs to be done to create a deeper financial mar­­­ket for infra-financing. Attracting funds for greenfield projects also re­mai­ns a challenge.

PASF team, SBI Capital Markets Limited

The key challenges that are being faced by the power sector are:

  • The health of some of the discoms has deteriorated in the last few years ow­ing to increased input costs and AT&C losses. The central and state electricity regulatory commissions have dela­y­ed tariff revisions meant to reflect the actual input costs for discoms. The lack of payment of grants/subsidies in time by government entities has led to further deterioration of the health of the discoms. This has had a cascading effect on the health of gencos and transcos.
  • The elevated debt levels among power entities, especially discoms, is weighing on their fundraising ability, and will thereby impact capital expenditure in distribution infrastructure in the coming years.
  • Thermal power plants are facing stress due to the additional requirement of complying with environmental norms (such as flue-gas desulphurisation system installations). Further, some stranded power plants are facing offtake issues due to the lack of PPAs, etc.
  • Adverse movement in imported coal prices has limited the operations of im­ported coal-based plants. Most of these projects are based on competitive bids, with a major part of the tariff being non-escalable, making the tariff unviable at current prices. A re­cent announ­cement by the government regarding adjustment/pass-th­rou­gh of imported coal charges sh­ou­ld help these plants mitigate the risk to a certain extent.
  • The renewable sector is also facing is­sues related to grid integration, curta­il­­ment by off-takers, elevated solar mo­­dule prices and duty imposed on im­port of solar modules, etc.

What is the investment outlook for the sector for the next one to two years?

Parminder Chopra

India is expecting its annual electricity demand to grow at an average of 7.2 per cent over the next five years, ending March 2027, as per the Central Electricity Authority’s draft National Electricity Plan 2022. This is nearly double the growth rate of around 4 per cent that has been seen over the past five years, up to March 2022. This rapid increase in demand will require a commensurate increase in capacity addition. Under the Draft Natio­nal Electricity Plan, 2022, a total of 524 GW of capacity addition is being projected over the next 10 years. To achieve the targeted capacity addition, a total fund requirement of Rs 31 trillion is forecasted from 2022 to 2032, out of which the fund requirement for the next five years is around Rs 14 trillion.

Moreover, under the Rs 111 trillion National Infrastructure Pipeline, an estimated total capital expenditure of Rs 14 trillion is expected to be incurred across the power sector value chain between 2020 and 2025. In addition, a capital ex­penditure of Rs 9 trillion has been envisaged towards renewable energy. In addition, under the RDSS, a massive investment of around Rs 3 trillion has been envisaged on the distribution front. To achieve India’s ambitious target of beco­ming a $5 trillion economy in the coming years, we will require significant in­vest­ment in the power sector.

Moving ahead, a lot of work has to be done in the green hydrogen and storage segments. In addition, in revamping the power sector, the distribution segment will play a critical role, such as through the installation of smart meters.

Thus, substantial investment is envisaged in the power sector in the next few years, and I believe that PFC will continue to be the leading financing partner in the investment cycle of the power sector and lead the Indian power sector to its growth pinnacle.

Dr Pawan Singh

In the current decade, the Indian electricity sector is likely to witness a major transformation with respect to demand growth, energy mix and market operations. The Central Electricity Authority estimates that India’s power requirement will reach 817 GW by 2030. The government plans to establish a renewable energy capacity of 500 GW by 2030. According to the Institute for Energy Economics and Financial Analysis, in­vestment in renewable energy hit record levels in India in financial year 2021-22. A total of $14.5 billion was in­vested in renewable energy, up by 125 per cent from financial year 2020-21, and by 72 per cent from the pre-pandemic period of financial year 2019-20. However, in­vestment in renewables will need to more than double to about $30 billion-40 billion per year for India to reach its target of 500 GW by 2030. A large part of the climate finance needed by India can come from sustainable finance markets, which have grown in leaps and bounds over the last couple of years.

PASF team, SBI Capital Markets Limited

Recovering from the tepid demand on account of Covid, power demand in India is expected to grow threefold by 2040. India is the third-largest consumer and producer of electricity in the world. However, the per capita consumption is less than a third of the global average, signalling huge untapped potential.

Overall investment in the power sector is expected to grow by 50-55 per cent bet­ween financial years 2023 and 2027, with renewable energy generation and distribution driving investment. The total in­vestment is expected to be in the range of Rs 15.5 trillion-16 trillion, with renewable en­ergy capacity accounting for 37 per cent and transmission and distribution ac­counting for 40 per cent. Sizeable inv­e­stments are expected in renewable ca­pa­city addition as well as energy storage solutions. Recently, JSW Energy has won the bid for 1 GWh battery energy storage system under the SECI.

There has not been any major investment in coal-based power capacity in the country during the last five years. As the construction of a new plant takes more than four to five years, the government will try to complete the projects that are stalled due to financial stress. This completion will also require significant funds.

Further, smart meters are being install­ed to replace conventional meters un­der the National Smart Grid Mission. Smart me­te­rs will help in reducing commercial losses and improving collection efficiency for discoms. It will also pave the way for time-of-day tariffs, which may help in demand management. We may see huge investments in the installation of smart meters during the next one to two years.


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