The power sector is evolving rapidly to align with emerging trends and requirements. The past year witnessed increased transmission network additions, a greater emphasis on emission control and an uptick in renewable energy capacity. The distribution segment also showed early signs of improvement, with reductions in aggregate technical and commercial (AT&C) losses and better financial discipline. Power Line presents the views of leading consultants on the sector’s growth, market trends and government priorities…
What have been the key hits and misses of the power sector in the past year or so?
India has become one of the largest interconnected power systems in the world (One Nation, One Grid), having high-voltage interconnections with the neighbouring countries of Nepal, Bhutan and Bangladesh, as well as a low voltage interconnection with Myanmar. The pace of renewable energy generation capacity addition in the country has accelerated to approximately 15 GW in financial year 2022-23, and needs to further ramp up to about 50 GW per annum to reach the target of 500 GW of non-fossil fuel installed capacity by 2030.
The Revamped Distribution Sector Scheme (RDSS), coupled with other recent initiatives such as the Late Payment Surcharge (LPS) Rules, prudential lending norms, the Ministry of Finance’s additional borrowing scheme and corporate governance guidelines have put in place a mechanism that is aimed at comprehensively addressing the core issues plaguing discoms.
The advancement of power market reforms is another area that has witnessed remarkable developments in the past few years, substantially moving the needle for mainstreaming renewable energy into the grid. A recently issued report by the group constituted by the Ministry of Power (MoP) under the power secretary provides a comprehensive view of the major changes that can be expected in the power market in the short to medium term.
Under the National Monetisation Pipeline, central agencies have successfully monetised select assets using models such as infrastructure investment trusts and securitisation of revenues. The government further encourages states to consider the monetisation of intra-state transmission assets and has issued guidelines for the same, based on the acquire-operate-maintain-transfer model.
Over the past year, the power sector has exhibited notable achievements in areas that warrant attention. Notably, the sector’s performance has been largely positive. Amidst the escalating dues from discoms, particularly in the wake of the Covid-19 outbreak, the implementation of the Electricity (Late Payment Surcharge LPS and Related Matters) Rules, 2022, has instilled a sense of financial discipline within the sector. This discipline is reflected in the substantial reduction in of outstanding dues, which decreased from Rs 1,380 billion (as of June 3, 2022) to Rs 820 billion (as of August 17, 2023). This development is poised to significantly bolster investor confidence.
Additionally, there has been a resurgence in global investor confidence in the sector, evidenced by the surge in foreign direct investments (FDIs) to a historic high of $3.19 billion in financial year 2023, following a low of $1.17 billion in financial year 2021. Notably, a monumental $2.5 billion of FDI was directed towards the non-conventional energy segment in financial year 2023.
Moreover, the thermal plant load factor (PLF) has risen to 63.8 per cent in financial year 2023, compared to 58.9 per cent in the previous fiscal year, and it is anticipated to maintain this upward trajectory, hovering at around 66 per cent in financial year 2024. The confluence of strong demands and delayed energy transition has created opportunities for the revival of approximately 23 GW of stressed thermal power plants.
However, on the flip side, India’s capacity to add renewable energy during financial year 2022 and financial year 2023 remained limited, with just about 15 GW of capacity added. The abrupt imposition of basic customs duty and the introduction of non-tariff barriers such as the Approved List of Models and Manufacturers introduced uncertainties among developers and offtakers, leading to a dampening effect on solar bids. To realign the trajectory of renewable energy implementation, the establishment of renewable energy implementing agencies (REIAs), which will be responsible for rolling out 50 GW of renewable energy tenders annually, represents a welcome initiative.
Furthermore, while there has been commendable improvement in the operational efficiency of discoms, characterised by the reduction in AT&C losses from 22.32 per cent in financial year 2021 to 13.5 per cent in financial year 2023, the financial health of discoms remains a cause for concern due to sustained high leverage. Additionally, the escalating power purchase costs have not been adequately reflected in the overall tariff structure for discoms, raising questions regarding their profitability.
The Government of India has undertaken several significant initiatives and policy measures to enhance the power sector’s performance and ensure the provision of reliable and affordable electricity to all citizens. It includes strengthening the distribution system, implementing a statutory mechanism of timely payment, promoting decarbonisation in the commercial and industrial (C&I) segment simplifying the open access and general network access rules, promoting the adoption of storage-based systems/solutions for developing an optimal generation mix while also allowing more renewable energy penetration in the grid, introducing amendments to the Electricity (Rights of Consumers) Amendment Rules, 2020, and focusing on the decarbonisation of coal-fired units in India.
The power sector, while making significant strides, has encountered several critical challenges that have hindered the nation’s growth and sustainability. Some of the vital problems that need to be addressed are missed solar installation targets, the slow decline in AT&C losses, increasing borrowings by state-owned discoms and the inadequacy of the Electricity Amendment Bill, 2022.
Addressing these issues is critical for the Indian power sector to thrive and meet the nation’s energy needs. This requires a multi-pronged approach, including accelerating solar capacity expansion, improving the efficiency of power generation, reducing AT&C losses, and implementing reforms to strengthen the financial health of discoms. Additionally, careful consideration of policy amendments and their potential consequences on legacy players is essential to ensure a smooth transition towards a more competitive and sustainable power sector in India.
In the past one year, one of the key developments that had a huge impact on the power sector was the submission of the updated Nationally Determined Contributions (NDCs) to the United Nations Framework Convention on Climate Change (UNFCCC) by India. The two key updates to the NDC were: reducing its GDP emissions intensity by 45 per cent by 2030 from 2005 levels; and achieving about 50 per cent cumulative electric power installed capacity from non-fossil fuel energy resources by 2030.
These NDCs are not only ambitious but propel the sector in the right direction to ultimately achieve the larger objective of net zero by 2070. However, having such a large capacity of non-fossil fuel energy sources within the power system comes with its own challenges. Schedulable renewable energy capacity provides a key option for integrating renewables into our large power system. In the past year, 6.5 GW of despatchable renewable energy capacity has been tendered out. This is encouraging, as it supports the achievement of sustainability targets without exacerbating grid reliability challenges. The discovered tariffs have also been reasonable, with hybrid renewable energy ranging from Rs 3 to Rs 3.27 per kWh, round-the-clock tariffs below Rs 4 per kWh and peak tariffs ranging from Rs 6.68 to Rs 9 per kWh (respective state bids), indicating that the market is moving towards maturity for these kinds of products.
Another hit during the past one year has been the launch of the LPS scheme. As per the PRAAPTI portal, total discom dues have halved over the 12-month period, with current dues at Rs 701.4 billion (as of August 2023), down from Rs 1,390 billion in June 2022. This has been a welcome change in the sector, considering discoms with high debts were the norm. The past year has also had its share of misses. While we saw an uptick in despatchable renewable energy bids, there has been significant underachievement in the overall renewable energy bidding. The Ministry of New and Renewable Energy identified central PSUs such as the Solar Energy Corporation of India (SECI), NTPC Limited, SJVN and NHPC Limited as the REIAs for the yearly bidding of 50 GW. However, only 4.4 GW has been bid out so far, since the target does not address the procurement issue of already backlogged SECI power sale agreements. Another key miss during the past year has been the tardy progress in market development. The right policy direction and a conducive regulatory environment are essential for market creation, as this is critical for managing large renewable energy capacity, addressing grid challenges and creating a market for storage investments.
What are the top trends that will shape the power sector in the next 12 months?
India recorded its highest-ever peak demand of 234 GW on August 17, 2023. Meeting the peak demand, which has grown rapidly over the past few years, will be an important aspect driving the sector in the immediate future. It will require the careful management of all sources of power, including underutilised imported coal- and natural gas-based capacities, in the short run. The country is in the midst of an energy transition phase, where the further development of renewable energy should go hand in hand with the rapid modernisation of the network, investments in balancing capacities and digitalisation to manage higher levels of renewable energy integration into the grid.
The implementation of the resource adequacy framework, recently introduced by the Central Electricity Authority (CEA), should encourage discoms to initiate the procurement process for the right mix of capacities in the future. This is important for accelerating the pace of generation capacity addition in order to achieve 500 GW of installed renewable energy generation capacity by 2030.
The government introduced a national framework for promoting ESS in August 2023, and the energy storage obligation (ESO) was notified by the MoP in July 2022. Further, a production-linked incentive (PLI) scheme has also been introduced for Advanced Chemistry Cells (ACC). With these enabling frameworks in place, it is expected that investments in ESS (including pumped storage plants) will witness a sharp increase.
Another trend that will take shape in the next 12 months is linked to demand-side measures for enabling the integration of a higher share of renewable energy into the grid. Time-of-day tariffs, as envisaged under the Electricity (Rights of Consumers) Amendment Rules, 2023, (dated June 14, 2023), are intended to encourage a reduction in consumption during peak hours when solar power is not available.
The installation of renewable energy capacity is poised to remain above 20 GW over the next two years. This growth is driven by a favourable policy environment that promotes clean and sustainable energy solutions. Additionally, the development of a high quality and competitive supply chain ecosystem, along with more accessible financing options, will contribute to this expansion. To meet the increasing demand for continuous and reliable renewable energy, there is a need for accelerated technology adoption in the medium term.
A combination of factors, including strong electricity demand, limited hydro and wind power generation, delayed implementation of thermal projects and a moderate increase in renewable energy capacity is expected to maintain the peak demand deficit by about 2-3 per cent over the next two to three years. Consequently, the merchant market is likely to remain strong, with tariffs remaining higher than the long-term average of Rs 3.25 per unit.
Ensuring the smooth functioning and financial viability of discoms will be pivotal. Key initiatives include the timely release of tariff subsidies, the implementation of prepaid metering to mitigate losses and receivables, precise energy accounting in cross-subsidised tariff segments, the prompt filing of tariff petitions and the timely receipt of tariff orders. Additionally, compliance with renewable purchase obligation (RPO) targets will play a vital role in improving discoms’ operational efficiency and sustainability.
These anticipated trends underscore the evolving landscape of the power sector, highlighting the importance of fostering sustainable energy practices, addressing supply-demand dynamics and enhancing the viability of discoms to effectively meet the nation’s growing energy needs.
The Union Cabinet cleared the PLI scheme for incentivising the manufacturing of domestic solar cells and modules in September 2022. The PLI scheme will result in the construction of approximately 48 GW of domestic module manufacturing capacity by 2026. This domestic manufacturing capacity will support capacity additions of 30-40 GW annual solar PV installations in the country.
India has set ambitious targets for renewable energy capacity addition (500 GW by 2030), with a focus on achieving a cleaner energy mix. Further advancements in ESS, including larger-scale installations and improved battery technologies, are anticipated to bolster the reliability of renewable energy sources.
In 2022, the MoP issued guidelines under Section 63 of the Electricity Act to procure and utilise BESSs in generation, transmission and distribution infrastructure. Further, to promote storage solutions, MoP has adopted the ESO as a part of its new renewable obligation.
Storage systems services are now delicensed, and furthermore, energy storage has been included in the “Harmonised Master List of Infrastructure”, providing support for its growth.
Upgrading ageing infrastructure and incorporating smart grid technologies can lead to improved energy management and reduced transmission losses. Decentralisation, characterised by the integration of distributed energy resources, is expected to gain momentum. India is witnessing a growing interest in EVs to reduce air pollution and dependence on fossil fuels. Utilities and governments are likely to focus on addressing key challenges related to EV adoption. Further, the exploration of hydrogen is gaining traction in India’s power sector. Hydrogen has several potential applications, from clean energy storage to industrial usage and transportation.
In summary, these trends reflect India’s commitment to transitioning to a more sustainable and efficient power sector. They align with the nation’s goals to reduce carbon emissions, enhance energy security and provide reliable electricity access to all citizens. By embracing these trends and actively pursuing innovation and investment, India is positioning itself for a greener and more resilient energy future.
On the distribution side, as RDSS investments take root, there has been a positive change in discom operations, with AT&C losses reducing by 1.5 per cent in the first quarter of financial year 2024 (as compared to the previous year). There have also been considerable reductions in payable days of over 30 days, and the creation of physical infrastructure under the scheme is yielding results, with over 7 million smart meters already being deployed. Going forward, as the digital immersion of discoms improves, we will see a significant emphasis on data analytics for customer service, loss reduction and intelligent scheduling operations.
Energy transition will remain at the heart of new investments in the sector. The past year saw investments touching a record $14.5 billion, with over 17 GW of new capacity addition (92 per cent coming from renewables). In the coming years, we will see a significant increase in investments, especially with the manufacturing space taking ground as targets under PLI schemes (specifically on PV modules and ACC) draw closer. Further, new technologies such as green hydrogen, biofuels, and carbon capture and utilisation (CCU)/carbon capture and storage (CCS) are approaching market maturity, as several prominent players have already committed large investments in these areas.
The MoP issued the Carbon Credit Trading Scheme this year, with the aim of creating a domestic carbon market. In the coming year, we will see further development of this market through defined procedures and eligibility criteria. Carbon markets will facilitate the creation of a competitive market, incentivising climate players to adopt low-cost solutions by attracting technology and financial resources towards sustainable projects that generate carbon credits. Carbon markets are not only important for the government to mobilise low-cost finance but also for C&I consumers, specifically RE 100 companies, who need options to reach their sustainability targets.
What, according to you, should be top priority areas for the government over the next few years?
The power sector is at the forefront of the energy transition agenda, necessitating significant investments to augment network infrastructure and digitise utilities. The entire planning framework, which was primarily concerned with improving access and concentrated fossil fuel-based capacity additions, needs a pivot to address challenges that will emerge from the higher penetration of decentralised energy resources (renewable energy, BESS, EVs, etc.) into the grid.
To fund India’s energy transition in the coming years, green financing will be one of the top priorities for the sector. As per the RBI’s report, “Green Finance in India: Progress and Challenges”, the cost of issuing green bonds has generally remained higher than for other bonds in India. Despite being relatively secure, the higher borrowing cost of green bonds in India could be due to asymmetric information, higher risk perceptions and other issues. With a consistent government focus, this is likely to change in the medium to long term, improving the attractiveness of renewable energy and other energy transition technologies.
Building local supply chains for new green technologies is a priority, which is expected to play out even more so over the next few years. PLI schemes for solar module manufacturing, green hydrogen (electrolysers), ACC, etc. are aimed at this purpose. Additionally, there will be an increased focus on transitioning India from being an energy importer to becoming an energy exporter.
Maintaining fiscal discipline in the management of state-owned utilities is likely to remain a priority. Listing state-owned utilities on stock exchanges (while retaining state ownership) or selling a majority stake to strategic investors would help in bringing in the much-needed autonomy and attracting the capital needed to support the significant scale of investments required in transmission and distribution network infrastructure.
As per the CEA, the country requires an annual investment of Rs 3,000 billion exclusively for power generation during financial years 2024-27 to realise the energy security and transition goals. To meet this ambitious target, it is imperative for global pension funds, sovereign wealth funds and large multinational corporations that have previously exhibited a substantial appetite for renewable energy investments in India to further augment their commitments. On the domestic front, fostering participation from home-grown fund houses has been hampered by constraints such as sectoral exposure restrictions, limited coverage of climate risk assessments and underdeveloped environmental, social, and governance investing principles. Facilitating an expansive and accommodating policy framework for investments from institutions such as the Life Insurance Corporation of India and the Employees Provident Fund Organisation is essential to catalyse investments in the sector.
The MoP has laid out ambitious RPO targets until financial year 2030. Given the current level of compliance among discoms in India, achieving these targets will necessitate stringent policy enforcement. This, in turn, will generate substantial demand for the renewable energy sector, propelling its growth and reinforcing India’s commitment to sustainable energy practices.
The RDSS offers a comprehensive framework for the operational turnaround of discoms. Its effective execution through the widespread installation of prepaid meters, technological advancements and rigorous monitoring of pre-committed performance indicators is pivotal. This will not only enhance the efficiency of discoms but also contribute to the overall health and sustainability of the power distribution sector.
Ensuring a stable and conducive policy environment for the auctioning and development of captive mines is critical. This can substantially boost fuel security by reducing reliance on imported coal and increasing domestic production from captive mines.
India stated its goal to attain net zero by 2070 at the 26th session of the UNFCCC (COP26) in November 2021. This goal reflects the changing landscape in the energy sector, driven by factors such as soaring coal prices/cess, challenges within distribution utilities, a growing emphasis on renewable energy, environmental sustainability concerns, the imperative of digital transformation for data utilisation, and reforms in energy trading via power exchange markets.
The country’s key priorities going forward will be to address those issues that could narrow the deficit to net zero while ensuring energy security and the sustainability and profitability of utilities. The priority for the Indian power sector is to reduce the debt level of distribution utilities to sustainable levels, which can be done through initiatives such as the mandatory infusion of equity by the state government. Along with this, the government should prioritise asset monetisation of generation and transmission assets, accelerate decarbonisation by creating a conducive policy and regulatory environment for renewable energy adoption, develop carbon-neutral green hydrogen fuels with CCUs and enhance grid infrastructure to reduce losses and build a more resilient grid.
Orderly energy transition: We have committed to an ambitious mandate under the NDCs by 2030. However, achieving the same will not only require the rapid implementation of renewable energy projects but also an unprecedented level of international cooperation to smoothen the supply chain and technological concerns. Currently, 25 per cent of our energy needs are fulfilled by electrons, while approximately 75 per cent remain dependent on molecules. A fast-paced energy transition would entail the replacement of these molecules by electrons, and this would necessitate government actions that are focused on the rapid electrification of all sectors. Additionally, it requires conducive policies with research and development at their core to send market signals that can unlock new business models and mobilise private investments, specifically in emerging technologies such as green hydrogen, biofuels and CCU/CCS.
Competitive distribution sector: With new investments in the last mile and technology for improving discom operations, the focus should shift towards creating a more competitive sector. This can be achieved through parallel license operations, separating content and carriage (as outlined in the Electricity Bill, 2022) and other public-private partnership models that will bring further investment and innovation within the distribution sector.
Consumer satisfaction: With power being now in the hands of consumers through behind-the-meter technologies such as storage and solar rooftops, suitable incentive mechanisms need to be created to utilise demand-side management and promote energy conservation. Consumer behaviour will play a significant role in facilitating an orderly energy transition. Thus, creating a conducive atmosphere for demand-side management will require attention from both utility companies and the government.