The power sector has undergone a transformation over the past year, driven by the increasing integration of renewables, the emergence of new sources of clean energy and a more mature electricity grid. The sector has shown resilience in the face of challenges such as soaring prices of imported fuels (including coal and gas) and increasing power demand. The power distribution segment has also witnessed a reduction in aggregate technical and commercial (AT&C) losses, along with notable improvements in financial discipline. Power Line invited industry experts to discuss the sector’s progress over the past year and share their views on the challenges and the way forward…
What is your assessment of the power sector’s performance in the past one year or so?
The power sector has shown excellent performance in spite of the challenges brought on by the high fuel prices of imported coal and gas. The willingness of state distribution utilities to procure marginal power at high prices from power exchanges to mitigate their shortages reflects the states’ understanding of the importance of this infrastructure in enabling progress. The power sector is now rightfully occupying its place of importance. The Ministry of Power (MoP) mandated the purchase of imported coal, amounting to 10 per cent of the requirement for coal-based power stations relying on domestic coal, for blending. This decision was made under the emergency provision, Section 11 of the Electricity Act, 2003, due to the rising demand. This directive was initially valid till March 31, 2023, and it was extended till September 2023 at a reduced level of 6 per cent. It has now been further extended, at a reduced level of 4 per cent, till March 31, 2024. The MoP further mandated all imported-coal-based power stations to run at full capacity to tide over the shortage of power. The government has also introduced a high-price option in the day-ahead market (DAM) at the power exchange for those buyers willing to purchase high-cost power.
Energy storage will play a major role in the future. It is expected that the first production-linked incentive (PLI) scheme for advanced cell chemistry (ACC) battery storage will see commercial production, starting January 2024.
It is the distribution sector that needs the most improvement. The central government has made some progress in enhancing the efficiency of the distribution system, which is largely under the purview of state governments, through incentivising efficiency by giving grants to state governments based on performance. This has led to the reduction of state discoms’ outstanding dues towards generating and transmission companies, their AT&C losses, as well as the gap between average revenue realised and the average cost of supply. However, some systems still need to be put in place, such as accurate demand forecasting and efficient power procurement, which can save discoms a significant amount of money.
Dr Somit Dasgupta
The power sector, during the past one year or so, has done reasonably well. We have been able to meet the load that had touched an all-time high of about 240 GW. The plant load factor of our thermal stations has gone up with the increase in demand. The total capacity installed during April-July 2023 stood at 7,300 MW, whereas for the corresponding period in 2022, it was 4,672 MW. Renewable capacity addition during the same period in 2023 was also higher at 5,726 MW compared to 4,552 MW in the previous year. As far as generation is concerned, during April-July 2023, the figure stood at 585 BUs compared to 570 BUs in the corresponding period in 2022. Only hydro generation was lower than last year, possibly due to low reservoir levels. Regarding the loss levels of our discoms, the AT&C losses have reduced to 17 per cent from 22 per cent in 2021-22. In any case, AT&C loss levels are highly volatile and one needs to wait and see if this positive tempo will be maintained in the future.
The Indian power sector is on the cusp of an energy transition, as the share of renewable energy in the country’s power generation rises rapidly. Aligned with the nation’s decarbonisation and net-zero targets, industrial and commercial consumers are increasingly shifting towards renewable energy sources to fulfil energy requirements. Moreover, alongside the increasing share of short-term trading volumes, energy markets in the country are evolving to facilitate greater adoption of renewable energy. This is exemplified by the emergence of innovative products such as the green DAM, the green term-ahead market, the real-time market and market-based ancillary services. These developments are anticipated to facilitate the large-scale capacity addition of renewable energy while reducing the costs of integration.
We have had the benefit of a highly dynamic and progressive policy environment, where multiple issues related to payment security mechanisms, payment delays, coal availability, power transactions and the development of markets have been quickly redressed.
Longer-term goals related to sectoral efficiencies such as the notification of the Energy Conservation (Amendment) Act, 2022 and the proposed Electricity Amendment (Bill), 2022 have also been taken up. In addition, the regulatory framework in our country has continued to evolve at a rapid pace with several key regulations being implemented/ updated in the past one year. These include the General Network Access Regulations, the Renewable Energy Certificates Regulation, the Indian Energy Grid Code Regulations, 2023, the market-based Dispute Settlement Mechanism Regulations, 2022, and regulations related to the ancillary services market with the implementation of tertiary reserve ancillary services through power exchange platform.
Amit Kapur, Megha Arora and Akshat Jain
Twenty years after the Electricity Act was enacted to consolidate reforms, the Indian power sector is undergoing a fundamental transition on multiple fronts. The fuel mix and market design are metamorphosing. The “Panchamrit” (renewable energy targets set at the 26th Conference of the Parties in November 2021) targets 500 GW of non-fossil-fuel-based installed capacity by 2030; reduction of 1 billion tonnes of carbon emissions by 2030; generation of 50 per cent of the country’s energy requirements from renewable energy by 2050; reduction in the economy’s carbon intensity by 45 per cent by 2030 over the 2005 levels; and net-zero emissions by 2070.
Noteworthy efforts have been made to improve the operational efficiencies and financial sustainability of discoms. The MoP’s Revamped Distribution Sector Scheme envisages an investment of Rs 3,037.58 billion during April 2021-March 2026.
The Mission on Advanced and High-Impact Research seeks to facilitate indigenous research, development and demonstration of emerging technologies in the power sector to transform the country into a manufacturing hub.
Several recent legal and regulatory reforms have started making a positive impact on the power sector. The Energy Conservation (Amendment) Act, 2022 has laid the legislative foundation to develop carbon markets. The Change in Law Rules, 2021 and the Late Payment Surcharge Rules, 2022 have enforced fiscal discipline on discoms. The Green Open Access Rules, 2022 seek to promote renewables development. The CERC’s General Network Access Regulations, 2022; the Grid Code, 2023; and market regulations have created a robust pathway for market development and optimal utilisation of the national grid.
India is now well on its way to realising its ambitious energy transition goals. As per the directions of the Supreme Court, the government is making efforts to minimise avoidable repetitive litigation.
Dr Rahul Tongia
The Indian power sector has performed remarkably well, considering the unprecedented increase in demand. August 2023 saw a record-high peak demand of 240 GW, and we managed to meet it, primarily thanks to coal and hydro. There have also been several positive developments aimed at increasing liquidity to pay generators. By some measures, the deployment of new capacity, especially in renewable energy, lagged behind in achieving targets, but the achievements are still remarkable.
One area of concern remains the discoms, and recent political trends towards free power as an electoral plank seem to have gone too far. Supporting the poor is always important, but the thresholds for free power are set so high that this not only creates fiscal challenges for states but also reduces consumers’ incentive to save energy. Further, discoms are struggling due to the much higher cost structures of power procurement, especially for power plants that need imported fuel, whether for everything or just for blending.
What is your view on the future energy mix in the country? What should be the key focus areas to achieve the desired energy mix?
The future energy mix in the country should be towards utilising renewable sources of energy, primarily solar, wind and hydro. Additionally, to ensure zero waste, waste should be converted to either energy or manure. Coal-based power plants should be allowed to run till their end of life so that capital investment is not stranded. An alternative approach to meet the energy needs of the country is through variable renewable generation, coupled with energy storage. The MoP has recently notified the guidelines for pumped storage plants on existing reservoirs of power projects and off-river pumped hydropower projects, providing certain exemptions in taxes/duties, obtaining approvals and offering incentives in capital costs. Given that these projects have a comparatively longer gestation period as compared to electrochemical batteries, the impacts of these guidelines will be evident after approximately five years. Since water usage is higher in coal-based plants than in renewable power plants, renewable power plants with storage should be preferred for conserving water, which is a critical resource. Besides, establishing interconnections with other countries in the region, and eventually extending these connections to other regions in line with the prime minister’s proposed “One Sun, One World, One Grid” would reduce the quantum of storage requirements. These should be pursued more aggressively.
Dr Somit Dasgupta
Our future energy mix in the near to medium term will be dominated by coal. Though we are adding to renewable capacity every year, we cannot dispense with coal until more storage capacity is available. Further, to reach our target of 500 GW of non-fossil fuel capacity by 2030, we would need to add about 40 GW of renewable capacity from now until 2030. In the past couple of years, we have only added somewhere between 6 and 8 GW per year. If there is any shortfall, we will have to rely on our coal-based stations. To balance our grid, we need to develop hydro and pumped storage units since batteries are unlikely to be economically viable in the near future. Operating gas stations is also not economical, and international gas prices, in any case, are volatile. Moreover, the availability of domestic gas is abysmal. From the climate perspective, gas is not a clean fuel as it is half as polluting as coal. We could, however, consider setting up small modular nuclear reactors that have the capacity to ramp up/ down, though this technology is still at an infant stage.
India is at the crossroads of a critical energy junction with the focus towards a “gas-based economy”, with the cleaner use of fossil fuels, rapidly scaling renewables, a shift towards emerging fuels including hydrogen and digital innovation across energy systems.
The country will chart its path towards growth in renewables with the heavy deployment of solar and wind in the coming decades. Wind and solar energy deployed in tandem yield zero carbon emissions and are beneficial for the country. At the same time, the hour-to-hour variation in wind and solar output places increasingly large demands on the rest of the power system to balance supply and demand.
This necessitates more effort towards the integration of renewables into the grid, while simultaneously ensuring grid stability and continued electricity supply, even during periods when generation from renewable capacities diminishes, during evenings and at night.
With commercially feasible battery energy storage systems, green hydrogen and a resurgence in hydro pumped storage, the issue of ensuring renewable energy availability during evening and night hours can also be solved. This would require substantial investments and policy support to scale up over the next few years.
To achieve the dual objectives of ensuring energy transition and energy security, it is crucial to create an ecosystem for the development of energy storage systems that is technically independent, based on requirements and financially feasible. This will guarantee affordable, clean, stable, flexible and secure power for everyone.
Amit Kapur, Megha Arora and Akshat Jain
There is a steady shift towards renewable energy. Yet there is a dependence on coal. The rapid growth in installed clean energy capacity brings variability challenges for the grid in meeting baseload when the sun has set, and wind is low. Thus, there is a push for storage options, battery storage and pumped storage. Faced with coal shortages, the government was forced to direct all generating companies to arrange for coal import through a transparent competitive procurement process for blending.
The availability of long-term low-cost finance is vital for scaling up renewable projects. Blended financing through a combination of various sources of funding can leverage the strengths of each funding source. The government has recently issued sovereign green bonds for financing public sector projects, which is a step in the right direction.
To achieve the desired level of the future energy mix, it is imperative to effectively address barriers such as land acquisition processes, obtaining necessary approvals, debt repayment and high interest rates that hinder the implementation of renewable energy projects.
Dr Rahul Tongia
The “desired” energy mix can be a bit of a misnomer because the optimal mix would evolve based on the future trends of demand, technology, prices, etc. Instead of guiding our system towards a particular mix, what we really need are proper frameworks that can enable us to reach an optimal mix. Certainly, this would require far greater renewable energy but we have to start acknowledging that cost, price and value are not the same. And these also vary significantly by time of day. In addition to worrying about total demand, a key planning requirement is to focus on “net demand”, which is the demand minus variable renewable energy, which has to be met by a firm supply.
To do this, we need to move away from levellised cost of energy (LCoE) calculations and instead examine the total portfolio costing. LCoE not only ignores system-level effects, such as on other generators or transmission, but it also makes an assumption about the notional duty cycle which may not match the value proposition at all time periods. For example, most calculations for the cost of storage assume a normative utilisation of perhaps 85 per cent or 90 per cent over the year for daily cycling. However, during certain periods of the year, the battery may not be needed for capacity value, since renewable energy combined with the required coal/existing plants can directly meet the load. In such cases, the value of the battery is equivalent to the avoided cost of displaced fossil fuels. Time-of-day signalling is important not only for wholesale power procurement but also for consumers, which requires overhauls of both the metering and regulatory frameworks. These are ongoing efforts but will take more time than originally envisaged.
What is your outlook for the power sector for the near to medium term?
The outlook for the power sector appears bright, with proactive steps taken by the government that are responsive to requirements. Renewables will continue to grow rapidly. Hydropower capacity additions are likely to continue due to various incentives offered by the government. Various types of energy storage will come up, driven by reduced costs from government incentives for local manufacturing of electrochemical batteries as well as pumped hydro storage power plants.
Interconnections with South Asian and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation countries should continue to be strengthened. Existing interconnections would increase in capacity. In the long term, these steps are bound to yield dividends, resulting in enhanced system efficiencies, improved balancing of intermittencies in demand and variable renewable generation, reduced supply costs for all interconnected countries, and accelerated energy access. Further, there are possibilities of interconnection with the eastern neighbour, Myanmar, and through Myanmar, with Thailand.
The CERC has introduced the Ancillary Service Regulations, which have been in effect since April 2023. However, demand response, where demand management has a hand in grid stability, still has to be implemented. This method would be the cheapest form of ancillary services and would be a radical change. Once successfully initiated, its huge potential would be groundbreaking.
Dr Somit Dasgupta
What we need today is consistency in our policies. Erratic and overnight changes confuse stakeholders. Over the past few years, in various versions of amendments of the Electricity Act, 2003, we have drifted from retailers to multiple distribution licensees and delicensed distribution companies. We are still experimenting with what should be our distribution model. Secondly, take the case of market-based economic despatch (MBED). We have been going back and forth on this matter and the latest news is that the MBED has been put on hold for the time being. In the meantime, there was also news of appointing a market coupler. We had set up the power exchanges with a lot of fanfare about 15 years ago, and the third licence for a power exchange was given just recently. Such frequent changes in policy do not augur well for the sector. It is also evident that the government and the central regulator do not see eye to eye. We have witnessed various instances of this, and the delay in the operation of the MBED is just one of many examples. Another instance is the concept of tariff pooling once a generating unit reaches 25 years of age. To implement this, the CERC has to amend Section 17 of its tariff regulations but this has not been done yet. This gives the impression that the regulator may not be in agreement with this policy. Disagreements between the regulator and the government cause distress to other stakeholders who get sandwiched between the two.
We are at a very interesting stage right now, with significant policy initiatives being taken to drive forward the power sector in the country. Many power sector reforms are being introduced by the government to bring efficiency, promote de-carbonisation and ensure a 24×7 reliable and affordable power supply. In order to move towards a greener economy, the MoP has notified the Carbon Credit Trading Scheme with the objective of shifting from the energy saving certificate market to the carbon reduction certificate market. With the successful operation of REC and the energy saving certificates markets by power exchanges over the past 13 years, the exchanges are poised to play a significant role in the development of the carbon market.
In the power exchange space, in the foreseeable future, we expect a significant increase in digital transactions and the introduction of many new products with the deepening of power markets. The MoP’s report titled “Development of Electricity Market in India” has identified key areas for implementation, such as ensuring resource adequacy and capacity contracting, transitioning to MBED to enhance the efficacy of DAM, facilitating the participation of renewable energy in DAM, establishing market-based mechanisms for secondary reserves, enhancing market monitoring and surveillance and introducing financial products for electricity.
The CERC has initiated stakeholder consultations for implementing market coupling. As provided in the Power Market Regulations, 2021, market coupling involves combining bids received by multiple power exchanges on to a single platform. These bids are then cleared by a common algorithm, resulting in a single price discovery for the same delivery period in the same bid area, leading to system-wide social welfare maximisation and enhancing the competitive efficiencies of the power market.
We have a highly supportive policy and regulatory environment today, along with numerous opportunities to serve the marketplace through a wide variety of contracts with various tenures, catering to various segments of the market.
Amit Kapur, Megha Arora and Akshat Jain
The much-awaited amendments to the Electricity Act have been stalled due to a lack of consensus, leaving issues unaddressed. These include:
- Creating competition for distribution in the same area of supply, giving consumers choice and optimising the use of transmission and distribution networks.
- Effective enforcement of renewable purchase obligations.
- Securing payments as a condition precedent for scheduling power supply.
- Empowering electricity regulatory commissions and the Appellate Tribunal for Electricity to resolve disputes related to the performance of obligations under contracts for the sale of power.
India’s focus on electric vehicles (EVs) and green hydrogen will herald rapid expansion and investment in the renewables space. The National Smart Grid Mission aptly sums up the vision for India’s power sector: “Transform the Indian power sector into a secure, adaptive, sustainable and digitally-enabled ecosystem that provides reliable and quality energy for all, with active participation of stakeholders”. This is the way forward to achieve the government’s policy goal of “Access, Availability and Affordability of Quality Power for all”.
Dr Rahul Tongia
There has been recognition of the need for firm capacity to meet demand, and this will likely be a focus area for both the government and investors. Under-construction coal power plants will likely need to be completed, and there will be a renewed focus on scaling renewable energy capacity. The Make in India initiative could temporarily raise some costs but it would also reduce uncertainty and volatility. These could, hopefully, lower the costs over time.
While historically the problems in the power sector have been related to shortfalls in supply, simply adding more will not suffice, going forward. We need to figure out not only what supply forms are needed but also how to manage the trade-offs between cost (price), security and sustainability.
Technology changes and improvements will continue or accelerate for renewable energy, storage systems, EVs, etc., and these will force us to change the present equilibrium (costs-plus, centralised, high cross-subsidies) into more nimble, flexible and multi-stakeholder systems. The so-called “paying customers” (commercial and industrial) were the first ones to install rooftop solar and will be the first to add storage technologies to reduce their dependence on discoms. Some of the changes will extend to the regulatory and institutional frameworks of discoms, whether it’s through structural separation or retail competition. As the saying goes, “The only constant is change.”