The Indian power sector is at the cusp of a new era, as renewable energy grows and the role of thermal power evolves to meet emerging requirements. Undoubtedly, thermal power remains imperative to meet the growing power demand in the country, at least until energy storage becomes affordable. This has been underscored by the crucial role played by thermal power in meeting the surge in power demand witnessed in the recent past.
The focus of policymakers and industry stakeholders is to facilitate energy transition in the best possible manner. To this end, they are tapping into newer renewable energy sources, focusing on round-the-clock (RTC) power supply, and revamping transmission system planning. The power distribution segment has also been at the centre stage of government policies and reform measures. Supported by the Rs 3 trillion Revamped Distribution Sector Scheme (RDSS) and the Late Payment Surcharge (LPS) Rules, the segment is witnessing declining aggregate technical and commercial (AT&C) losses and improvements in financial performance.
Power Line analyses the performance of the power sector, the key trends and major developments in the past one year…
Power demand surges
Continuing the growth momentum, India’s peak power demand hit a new milestone of 240 GW on September 1, 2023. During 2023-24 (April to August), the energy met stood at 684 BUs, 4 per cent higher than in the corresponding period of the previous year. Notably, August 2023 recorded the highest-ever monthly power generation of 137 BUs – an increase of 13 per cent over the previous year. The burgeoning power demand in the country is due to increased economic activity, leading to an uptick in demand from the industrial and manufacturing sectors, as well as extended summers and monsoon deficits. Moreover, emerging segments such as electric mobility, cooling and data centres are adding to the demand surge.
Thermal outlook improves
In the past one year or so, the performance of thermal power plants (TPPs) has improved. Thermal plant load factors (PLFs) have been rising, with 64.15 per cent achieved in 2022-23 as against 58.91 per cent in the previous year. Due to rising power demand and limited capacity addition, the increasing trend in PLFs is expected to continue, reaching a thermal PLF of 65 per cent in 2023-24.
With this, coal demand from the power sector has been rising. During 2022-23, coal consumption from the power sector was 777 million tonnes (mt), an increase of 11 per cent over the previous year. Additionally, in 2023-24 (April to August), coal despatch of 324.5 mt to the power sector was 5.8 per cent higher than in the corresponding period of the previous year. During August 2023, the gap between coal consumption and receipt at domestic coal-based plants reached 200,000 tonnes per day. In order to meet the growing power demand and facilitate 100 per cent utilisation of TPPs, the Ministry of Power (MoP) extended the mandatory blending of imported coal in TPPs at 4 per cent (by weight) until March 2024. In January 2023, the MoP had introduced a mandate for imported coal blending in TPPs at 6 per cent (by weight) until September 2023.
Efforts are under way to reduce the harmful emissions from TPPs. One such initiative is biomass co-firing in TPPs. As of May 2023, approximately 164,976 metric tonnes of agricultural residue-based biomass has been co-fired in 47 coal-based TPPs. Besides, the MoP has mandated TPPs to implement 5 per cent biomass co-firing, starting from 2024-25. This obligation will increase to 7 per cent from 2025-26.
Renewables grow, RTC gains traction
Capacity additions in the renewable energy space continue to grow. In 2022-23, 15,402 MW of renewable energy capacity was added. Industry experts believe that capacity additions in the renewable segment would have been higher had it not been for disruptions such as the imposition of basic customs duty and the introduction of non-tariff barriers such as the Approved List of Models and Manufacturers (ALMM), which led to uncertainties among developers and offtakers. During FY2024, it is expected that renewable energy capacity additions will be higher than in the past, at around 20 GW. This is likely to be supported by recent developments such as the time extension granted by the Ministry of New and Renewable Energy for the completion of solar and solar-wind hybrid power projects that were bid out on and after April 10, 2021, until March 2024; the move to keep the ALMM for solar PV modules in abeyance till FY2024; and the prices of solar modules and cells falling as seen in recent months.
With regard to discovered tariffs in recent solar tenders, in the past 12 months, the tariffs have been in the range of Rs 2.50 to Rs 3 per unit, except for the recent 300 MW Rewa Ultra Mega Solar Limited II (Omkareshwar) floating solar project, which witnessed a winning tariff of Rs 3.79 per unit. Meanwhile, in the wind energy segment, the tariffs ranged from Rs 2.90 per kWh to Rs 3.18 per kWh.
One of the prominent trends in the renewable segment is the growing interest in hybrid renewable energy, including wind-solar projects or renewable energy with energy storage solutions such as battery energy storage systems (BESSs). Notably, the tariff discovered in recent tenders for hybrid projects has been competitive with standalone renewable energy projects. For wind-solar hybrid, the lowest tariff discovered was Rs 3.07 per kWh was Rs 3.07 per kWh in CESC’s 150 MW hybrid auction in May 2023. Meanwhile, the tariff discovered under tenders for renewable energy with energy storage ranged from Rs 6.68 to Rs 9 per unit. Given that grid tariffs for commercial and industrial customers are higher than RTC renewable costs across most states, it makes economic sense for this segment to invest in RTC renewables.
Green hydrogen gets a fillip
In order to achieve the clean energy targets and facilitate energy transition, new and emerging clean energy sources are being tapped. One such technology at the fore is green hydrogen, which holds the potential to decarbonise hard-to-abate end-use segments. The National Green Hydrogen Mission that was launched earlier this year aims to make India a leading producer and exporter of green hydrogen, with an annual production of 5 million metric tonnes by 2030. Additionally, for the sector to take off, a favourable ecosystem is being created through measures such as the complete waiver of ISTS charges for green hydrogen/ammonia production units (commissioned on or before December 31, 2030), as well as a massive financial outlay for incentivising the manufacture of electrolysers and the production of green hydrogen. Furthermore, states such as Gujarat, Andhra Pradesh and Maharashtra have announced green hydrogen policies, offering incentives (over and above those offered by the central government) such as land allocation at predefined/concessional rates, state goods and services tax reimbursements and electricity duty exemptions/ concessions.
Various private sector players have announced investment commitments for the segment, including Ocior Energy, which plans to invest Rs 400 billion in green hydrogen and ammonia in Gujarat; the Jakson Group, with plans to set up 365,000 tonnes per annum of green hydrogen and green ammonia plants at Rs 224 billion in Rajasthan; Reliance Industries Limited, which has committed $10 billion over the next three years to develop low-cost electrolysers with the aim of reducing green hydrogen production costs to around $1 per kg; and Adani New Industries Limited, with plans to invest over $50 billion over the next 10 years in green hydrogen and its associated ecosystem.
There are exciting times ahead for the power sector as India’s energy transition initiatives gain momentum – renewable capacity is growing, new sources of clean energy are becoming mature, and the electricity grid is evolving to meet the emerging requirements.
Impetus to energy storage
In order to achieve net zero by 2070, the need for RTC power is essential and energy storage is imperative. Pumped storage projects are currently one of the most affordable sources of energy storage, with prices ranging from Rs 5 to 6 per kWh, while the cost of BESSs remains the highest, at Rs 10 per kWh. Pumped storage projects are garnering increased interest from developers as well as support from policy and regulatory bodies. Several private players have announced plans for the segment. These upcoming projects include Tata Power’s two PSPs aggregating 2,800 MW in Maharashtra; Torrent Power’s three PSPs aggregating 5,700 MW in Maharashtra; and Adani Green Energy Limited’s PSPs aggregating 1,600 MW.
In order to give a fillip to BESSs, the union cabinet has approved a viability gap funding (VGF) of Rs 37.6 billion for a total capacity of 4,000 MWh. With the VGF, the government intends to reduce the cost of battery storage from the current Rs 10 per kWh to Rs 5.50-Rs 6.60 per kWh by 2030-31. With the VGF announcement, an investment of Rs 95 billion is expected in the segment. Notably, since 85 per cent of the BESS project capacity under the VGF will be set up at the discom level, it will enhance the integration of renewable energy into the electricity grid while optimising the utilisation of transmission networks.
Discoms make a recovery
Supported by policy reforms and government schemes and programmes, the distribution segment is beginning to show green shoots of recovery. The initial outcome of the results-oriented RDSS, which targets system strengthening and loss reduction, and promotes smart metering, have been encouraging.
As per the latest Power Finance Corporation report on the performance of power utilities, discoms’ AT&C losses have improved from 22.25 per cent in 2020-21 to 16.42 per cent in 2021-22. Further, as per the provisional data, in 2022-23, AT&C losses have reduced to 13.5 per cent. At the same time, aggregate losses on tariff subsidy received, excluding regulatory income and revenue grant under UDAY for loan takeover, fell sharply from Rs 846.83 billion in 2020-21 to Rs 207.1 billion in 2021-22. Furthermore, as per the 11th Integrated Ratings Report, in FY2022, the distribution segment’s financial deficit nearly halved compared to FY2020, with the absolute cash-adjusted gap declining by 46 per cent to Rs 530 billion. The shortfall in cash collection, that is, the cash adjustment in the absolute gap on account of gross trade receivables, also improved. In FY2020, the cash-adjusted revenue was Rs 380 billion lower than the accrued revenue, compared with Rs 240 billion in FY2022.
Apart from this, the LPS Rules introduced by the MoP in May 2022 have tackled the issue of overdues to gencos by discoms to a large extent. As of October 4, 2023, discom dues to gencos stood at Rs 716 billion, nearly half of the Rs 1.39 trillion owed at the time of launch of the scheme. By inculcating the financial discipline among discoms, the scheme has improved the financial viability and sustainability of the power sector value chain.
Notwithstanding the improvements in discoms in the recent past, challenges remain in the distribution segment. These primarily pertain to non-cost-reflective tariffs, subsidy payment delays by the state governments and pending government dues.
To improve the financial performance of discoms and enhance consumer satisfaction, policy focus on the distribution segment is continuing. In order to streamline accounting, billing and payment of subsidies, the government has recently amended the electricity rules, mandating discoms to submit quarterly reports on the subsidy demand raised across various subsidised categories. The ministry has also mandated the introduction of time-of-day tariffs for all consumer categories by 2025. Further, smart meters are increasingly empowering consumers with greater control over their energy consumption and energy bills, as well as enhancing the billing and collection efficiency of discoms.
Power transmission plans
Recent policy efforts have been directed to expedite project development and improve transmission system planning. The PM Gati Shakti initiative is expected to streamline project development and reduce time and cost overruns for all infrastructure projects, including transmission, to help address right-of-way issues. Meanwhile, to mobilise investments through the asset monetisation route, the MoP has recently issued guidelines under the acquire-operate-maintain-transfer public-private partnership model. Further, the notification of the General Network Access Regulations in the past year is expected to improve network planning and the development of new transmission corridors.
In order to provide adequate evacuation infrastructure for renewable energy projects, the transmission system is being planned in advance because the gestation period of wind and solar-based generation projects is typically shorter than that of the associated transmission system. The Central Electricity Authority’s plan, titled “Transmission System for the Integration of over 500 GW RE Capacity by 2030”, outlines the transmission system for major renewable energy potential zones. Some parts of the transmission system have been commissioned, and the rest are at various stages of construction, tendering and planning.
Electricity market reforms on the anvil
The short-term trading market is gaining ground, facilitating the integration of larger volumes of renewable energy and addressing new and emerging requirements of electricity buyers and sellers. The rising power demand has caused electricity prices on the exchanges to hit the ceiling. Subsequently, the Central Electricity Regulatory Commission (CERC) has permitted the introduction of a new price segment called the high price day-ahead market, which will allow the sale of high-cost power from energy storage projects and gas-based power stations.
Efforts are under way to enhance the power market to meet the emerging power sector requirements. A recent MoP report on the “Development of Electricity Market in India” has identified key areas for implementation, including resource adequacy and capacity contracting, transitioning to market-based economic despatch to enhance the efficacy of the day-ahead market (DAM), and participation of renewable energy in DAM. Moreover, the CERC has initiated consultations for market coupling, which is expected to include the discovery of a uniform market clearing price, optimal use of transmission infrastructure, and maximisation of economic surplus.
In sum, there are exciting times ahead for the power sector as India’s energy transition initiatives gain momentum – renewable capacity is growing, new sources of clean energy are becoming mature and viable, and the electricity grid is evolving to meet the emerging requirements.