The power sector is growing steadily with rapid renewable energy capacity addition and increasing electricity demand. Thermal power continues to be the dominant contributor to the country’s energy mix and is likely to remain so in the foreseeable future. However, coal-based plants will need to transition their operation regimes from baseload to cyclic as more renewables are integrated into the grid. Leading power developers share their views on the sector’s progress, key challenges and future outlook…
What is your assessment of the power sector’s progress during the past year?
The Indian power sector’s journey in the recent past has been very exciting and full of innovative ways of deploying greener technologies for capacity addition and making system improvements. The country has significant potential for renewable energy generation. The government has made many efforts to harness this potential. The implementation of competitive bidding guidelines for procurement of power from solar and wind power projects has provided a structured way of procurement of renewable energy power by distribution companies.
India achieved an installed capacity of 399.5 GW on March 31, 2022 with the major capacity additions coming through the deployment of renewable energy sources (156.6 GW). Renewables accounted for around 39 per cent of the total installed power generation capacity. The peak deficit and energy deficit declined substantially to 2,475 MW (1.2 per cent) and 5,787 MUs (0.4 per cent) respectively by the end of 2021-22.
The country recently witnessed an enthusiastic response to one of the largest battery energy storage system (BESS) tenders invited by the Solar Energy Corporation of India. This clearly indicates that the future of the Indian power sector belongs to storage technology-based solutions such as BESS and pumped hydro storage. The government has also extended the waiver on interstate transmission charges on the electricity supplied by pumped storage plants (PSPs) and BESSs till June 2025. Besides, it has introduced the trajectory of hydro purchase obligation (HPO) for promoting hydro-based generation projects as well as introduced new stringent late payment surcharge (LPS) rules to bring more discipline in discoms and ensure timely payment to generators.
Vijay V. Namjoshi
The power sector is undergoing a sea change and this will be a decade of transition and transformation. The government’s Make in India programme has spurred incremental industrialisation, urbanisation and sustained economic growth that will continue to drive the electricity demand in India. The nation’s focus on attaining “Power for All” has also accelerated capacity addition and now we are the third-largest producer and second-largest consumer of electricity worldwide. As of June 2022, the country’s installed power capacity stood at 403.76 GW.
Another big trend is the transition towards solar power. Over the past few years, India has made substantial progress in the renewable energy sector on the back of a conducive policy environment, government support, steady inflow of capital, the introduction of latest technologies and several fiscal policy incentives.
Recent efforts, including the draft National Electricity Policy, 2021, the announcement of the Ancillary Services Market Regulation and the Market-Based Economic Dispatch (MBED), offer promise. Once implemented, these developments will allow new assets such as batteries, pumped storage and demand response to participate in providing grid services, and transition power procurement to a market-based mechanism that enables least-cost clean energy generation.
Suresh Kumar Narang
Overall, 2021-22 was a difficult year for businesses across sectors. It was even more so for the energy sector due to reasons such as elevated commodity prices, bottlenecks in the supply chain, and an unpredictable and volatile power demand scenario. However, the government took timely action by way of multiple initiatives such as introduction of the Revamped Distribution Sector Scheme, launch of the green day-ahead market (GDAM), implementation of the production-linked incentive (PLI) scheme to enhance India’s manufacturing capabilities, increased focus on hydro pumped storage projects and BESSs, sanctioned smart meters on a large scale, discouraged import of solar panels through policy intervention, and notified green hydrogen and green ammonia policies. These initiatives have put India on the course of energy transition and have also unlocked multiple new opportunities in the marketplace.
During the year, we witnessed a coal crisis due to a surge in demand, which was further exacerbated by the flooding of coal mines. However, a high-level committee was formed by the government to address the concerns in the coal supply chain which helped power plants to sail through this critical situation. We also saw the revival of some stressed assets through mergers and acquisitions (M&As).
The major capacity addition and augmentation during the year was in the non-conventional sector. However, the thermal power sector continues to be a dominant contributor in our energy mix, and it will remain so in the foreseeable future, thereby ensuring energy security and contributing to the growth of the economy.
The power sector has witnessed remarkable developments over the past year. In my view:
- While renewable energy as a percentage of capacity grew at a tremendous pace as power demand went up significantly post Covid, a tremendous need was felt for ramping up and restarting coal-based capacities. The government also realised that we need to optimally utilise a large capacity of thermal plants lying idle and maybe set up a few more thermal-based plants to support baseload demand.
- In the renewable space, while solar and wind have grown on the back of a policy stimulus, the government has now focused on hydrogen as a fuel. Moreover, through the PLI scheme, a domestic manufacturing base for renewable components is being built to enable demand fulfilment of large capacity being planned on the renewable energy front in addition to setting up base for exports.
- The per capita consumption of power is growing at a good pace as more and more people get connected to the grid and start recognising the benefits of power availability.
The government has taken positive steps to electrify all the remaining villages and facilitate the availability of adequate, quality and reliable power supply in rural areas. The Ministry of Power launched the Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) as well as the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya) in October 2017, to achieve universal household electrification by providing last-mile connectivity and electricity connections to all un-electrified households.
However, power distribution continues to be the weakest link in the power supply chain. Most distribution utilities are incurring heavy losses as a consequence of expensive long-term power purchase agreements (PPAs), poor infrastructure and inefficient operations, etc. These losses, in turn, prevent them from making investments for improving the quality of power supply and preparing for wider penetration of renewable energy.
The Indian power sector is one of the most diversified in the world, encompassing various sources of energy – conventional as well as renewable. Of this, the renewable energy segment is undergoing a significant transformation with rapid capacity addition, attractive investments and new industry players making a foray. The segment is expected to attract investments worth $120 billion-$140 billion between 2019 and 2023. This makes India a front runner in the renewable energy space.
The power industry is one of the major enablers and contributors to the economic growth of India. The government is taking steps in the right direction to scale up the renewable energy capacity, address bottlenecks and develop favourable policies to attract investment.
What are the biggest challenges for the sector?
- The biggest challenge that the industry is facing is pendency of PPAs post award of projects. Significant solar and wind capacities are awaiting PPAs to be executed with discoms which has resulted in project delays as well as affected project viability.
- Although the government has been taking several initiatives for promoting the renewable energy segment, the recent increase in goods and service tax (GST) on the supply of renewable energy components from 5 per cent to 12 per cent has added further uncertainty of materialisation of PPAs and will lead to additional tariff burden on end consumers. It would have been prudent to have a uniform GST slab of 5 per cent on various clean energy technologies across the country.
Vijay V. Namjoshi
The solar revolution will pose some obvious challenges that electric utilities must address to remain relevant in the rapidly evolving environment. The power sector is transitioning to a new era of “intermittent energy” in which coal-fired power plants are pushed to cyclic operating modes in terms of lower minimum loads, enhanced ramp rates, and fast start-ups and shutdown. This transition will result in increased forced outages and high operations and maintenance (O&M) costs, and reduce equipment life, besides causing poor heat rate and high auxiliary power consumption in the power plant. We need new capabilities to react to developments the sector and the world at large are going through.
Fuel availability is one of the major concerns for the thermal power sector. While a significant gas-based capacity of over 20,000 MW is lying idle due to non-availability of gas, coal-based thermal plants are grappling with coal supply issues, leading to increased dependence on imported coal with the cascading result of high power generation costs.
The business case for new coal power stations to provide baseload will be increasingly challenged in the coming decade. Asset quality deterioration and heightened risk of non-performing assets (NPAs)/stranded assets in the thermal power generation segment are likely to be intensified, especially in the renewable resource-rich states.
Suresh Kumar Narang
The thermal power generation and supply business, especially for private generators, has been under stress. The continuing deterioration in the financial health of discoms is a major cause for concern as this impacts the entire upstream business of power supply and generation.
The regulatory environment continues to be challenging with issues such as contractual logjams and disputes as well as delays in regulatory decision-making leading to stagnant investments in the sector. We need the regulatory commissions and the Appellate Tribunal for Electricity (APTEL) functioning at full strength to overcome this challenge and enable quick dispute resolution.
Fuel security continues to remain a big challenge with imported coal prices four to five times those in the pre-Covid year.
Although India has announced its intentions to cut carbon emissions and achieve a target of net zero emissions by 2070, the policy framework to achieve this is still evolving.
Thermal power is, and will be, the major source of power in the country in the coming decades and hence needs to be supported. All this requires long-term planning and support from the government along with alignment of all stakeholders.
Let me give an example here. In 2010, the government had introduced clean energy cess on coal (now GST compensation cess) for enabling and funding clean energy projects; it was extended till March 2026. Now the objective of implementation of flue gas desulphurisation (FGD) projects, in line with new environmental norms, is completely aligned to the larger agenda of reducing the carbon footprint. Therefore, the GST compensation cess on coal should be waived for thermal power plants (TPPs) which are installing FGD in compliance with the Ministry of Environment, Forest and Climate Change (MoEFCC) notification. The waiver of this compensation cess would act as an added incentive for TPPs to expedite the installation of FGDs as currently very few TPPs in the country have done so. This will help in offsetting the cost of FGD installation and operation thus ensuring affordable power to end consumers.
The power sector has undergone considerable stress in the past year. Some of the issues leading to the power-deficit situation in the country include shortage of fuel, high aggregate technical and commercial (AT&C) losses, a differential tariff structure, and delays in tariff revisions. High AT&C losses and losses arising due to tariff issues affect discoms’ ability to buy power for supply.
Over the past few years, the electricity generation capacity has increased; however, actual electricity generation has not been commensurate with this increased capacity. Some of the key reasons for the low utilisation of generation capacity include shortage of fuel, especially domestic coal, unprecedented increase in imported coal prices and unviable PPAs. To address the immediate challenges, stranded capacities must be utilised to meet the demand required by the nation. Several initiatives have been taken to address these challenges in the power sector.
While the Indian power sector is on a steady growth path, there are still several structural issues that need resolution in order to fast-track growth. For years we have been dealing with populist tariff schemes, mounting AT&C losses and operational inefficiencies. These have resulted in the poor financial position of discoms. This has led to delays in servicing of overdues and a huge backlog of receivables adversely affecting the financing capacity of new projects.
Another pain point has been land acquisition or right of way (RoW) for power projects. In both cases, projects suffer, either due to delay in the case of land acquisition or in terms of maintaining the project infrastructure when it comes to disputes arising due to RoW implementation.
The central and the state governments must depoliticise retail tariff-setting to improve the financial condition of discoms. Moving to a direct benefit transfer (DBT) accompanied by commensurate allocations within the state budgets for vulnerable consumer sections will help. Another area that needs to be addressed is fast-tracking court processes. The capacity in the system needs to be expanded, and the layers in the system and the rights of appeal need to be limited to speed up resolution.
A robust and sustainable credit enhancement mechanism needs to be put in place to meet the required funding needs of the sector through increased participation by global funding agencies across the value chain. There is a need to push for wider-scale implementation of public-private partnership models. The private sector has been playing a vital role in generating power and an enhanced supportive environment will help in bridging the energy shortage in the country.
It is hoped that the implementation of the Electricity (Amendment) Bill, 2022 will galvanise the sector and provide the necessary legislative support to the payment security mechanism and the enforcement of contracts. The bill, if passed, will bring in new investments into the sector as well as hope for a sustainable and competitive power sector in the country.
What is your outlook for the segment in the near to medium term?
The near- to medium-term power sector outlook would be dominated by renewable technology (including hydroelectric generation) supported by innovative storage technologies such as BESS and PSPs. The sector will also witness the growth of clean energy sources based on green hydrogen, green ammonia, etc. Future demand for power would likely get a boost by the maturity of the electric vehicle industry.
Vijay V. Namjoshi
The energy transition in India is at various stages of transformation driven by 3 Ds – decarbonisation, decentralisation and digitalisation. The countdown for decarbonisation has started and the power sector is leading the ongoing energy transition driven by a rapid decline in renewable electricity costs, particularly those of wind and solar power. Together with cost-effective energy storage solutions (ESSs) such as batteries and pumped storage, solar power will displace coal-based generation and dominate the power supply mix through 2050.
Despatchable renewables, especially solar photovoltaic (PV) integrated with ESS at the generation site, are expected to become competitive with new coal power stations (non-pithead) before 2030 and pithead stations before 2035.
The rise of utility-scale renewable energy projects is underpinned by some innovative regulatory approaches that encourage pairing solar with other generation technologies and with different storage solutions, to offer round-the-clock supply.
The power generation ecosystem will be increasingly distributed and closer to the end-consumer. Consumers with appetite for self-production of clean renewable electricity will migrate from centralised power supply/grid supply.
As India transitions to renewables, solutions that add flexibility and efficiency to coal power plants along with emission control systems and renewable energy bundling must be adopted to accelerate the integration of renewables effectively and lead the way to a lower-emission future.
Turning disruptive threats into growth opportunities, testing new and innovative business models along with green hydrogen option, initiating reforms and restructuring are the key imperatives.
The power sector is approaching an important crossroads, and the clean energy transitional challenges are diverse and cannot be addressed by discrete efforts at the individual stakeholder level. Long-term integrated planning is more cost effective than reacting to the challenges that can arise from clean energy transition.
Suresh Kumar Narang
India’s per capita energy consumption is still very low compared to the global average and power demand is expected to grow to about 1,874 billion units (BUs) by 2026-27 and about 2,538 BUs by 2031-32 as per the recently published National Electricity Plan (NEP), pointing to a robust long-term demand trend. This would require capacity addition at a mega scale, both in the renewable energy and conventional sectors. We will see an accelerated growth in capacity addition in renewables as well as in the green hydrogen area, as massive investments have been committed by leading corporates of the country.
While the country plans to move towards decarbonisation, this would have to be a graded transition as thermal continues to form the baseload, essential for the energy security and economy of the country. The recently published NEP has indicated that apart from 25 GW of coal capacity which is under construction, another 17 to 28 GW of capacity will be needed by 2031-32. We expect that some new coal-based projects will be taken up in pursuance of this projection.
We will also see a lot of policy action and intervention by the government to encourage and promote new initiatives in the energy sector. It has already undertaken a major step towards reforming the sector through the introduction of the electricity amendment bill, which I expect will act as a catalyst to improve the overall commercial viability of the sector.
The announcement of the Green Hydrogen Policy is a welcome move, but the government needs to focus on developing domestic capabilities across the clean energy value chain through policy initiatives like PLI. It should also promote new and proven storage technologies while focusing on hydro PSP and BESS.
Strengthening of the regulatory framework and alignment of stakeholders coupled with long-term planning can provide an immense investment opportunity and create value for all stakeholders, thus guiding India successfully through this energy transition.
India’s current goals for the power sector are in line with global trends of adopting cleaner and more sustainable energy sources. The efforts undertaken in reducing emissions to achieve cleaner power generation include the deployment of renewable energy systems such as solar and wind, implementation of the supercritical, integrated gasification combined cycle (IGCC), and carbon capture. This also involves the increased use of natural gas for gas-based power generation.
During the past decade, the pace of growth for renewables, specifically solar and wind, has been remarkable. With this increase in the share of renewable energy, India should achieve a 30-35 per cent reduction in GDP emissions intensity by 2030.
The country’s energy consumption is expected to nearly double by 2040. At present, it is the fourth-largest global energy consumer and is expected to make up the biggest share of global energy demand growth at 25 per cent over the next two decades. India stands at the cusp of a solar-powered revolution; it is expected to be the dominant source of power generation in the next few decades. However, fossil fuels will continue to play a significant role in the country’s primary energy requirements. There is a need to create a favourable ecosystem for developing in-house technologies for the effective utilisation of the abundantly available domestic renewable and hydrocarbon resources, efficient carbon capture, and safe carbon sequestration.
Despite its inherent challenges, the outlook for the Indian power sector remains positive because of its immense potential. The country’s installed power generation capacity is projected to grow to 620 GW by 2026-27 and 44 per cent of it is likely to be supplied by renewable energy sources. This growth will be driven by expansion in industrial activity, increasing investments and projects across the value chain, as well as a rise in the urban and rural population, further creating demand. The energy sector is also set to receive momentum through increasing per capita power usage.