The power sector witnessed significant developments and challenges during 2023, reflecting the dynamic nature of the industry. Achieving a peak demand of over 240 GW in September 2023 was a major accomplishment, although it intensified the demand for coal. Positive strides were made in reducing aggregate technical and commercial (AT&C) losses, and the Late Payment Surcharge [LPS] Rules played a vital role in improving financial discipline among the discoms. Moreover, the power markets witnessed increased digital transactions and the introduction of new contracts, deepening market dynamics. Industry stakeholders comment on the achievements and challenges during 2023…
What were the key hits and misses in the power sector in 2023?
Somit Dasgupta
Meeting the peak demand of 240 GW on September 1, 2023 was a big achievement. In fact, demand has been higher in 2023 than in 2022. This, of course, has led to an unprecedented demand for coal, creating a huge dip in coal stocks about two months ago. The government, however, was quick to point out that coal supply in 2023 was much higher, which is, in fact, correct. It’s just that the demand for coal also went up, leading to an increase in the contribution of coal-based plants to the electricity mix. The plant load factor (PLF) of coal plants also went up to about 64 per cent in 2023 from about 59 per cent in 2022. Part of the reason for this was the fall in hydro generation.
Another achievement of the power sector was reducing AT&C losses to about 13 per cent in 2023 from 22 per cent in the previous year. However, too much should not be read into this, because AT&C loss is a very transitory figure and can vary from year to year for a plethora of reasons. A higher-than-average collection of past dues in any one year can lead to a fall in AT&C losses. One would actually need to analyse the trend of AT&C figures over at least three to four years before making any definite inference.
Another commendable development is the improvement in the financial position of generators, transmission companies and traders due to the electricity LPS Rules. Government sources claim that the legacy dues of the generators, which were about Rs 830 billion in 2021, have fallen to Rs 610 billion as of July 2023. Legacy dues, however, do not include current dues. What is a matter of serious concern, however, is the erratic pace of installation of renewable capacity, especially wind. Further, open access remains an issue despite the framing of the Green Open Access Rules in 2022, the primary reason being that quite a few states are yet to adopt these rules.
Satyajit Ganguly
The vision of our policymakers as well as the intent of our regulators towards expanding the role of power markets in the country is very clear. This has also been made evident in the Ministry of Power (MoP) report titled “Development of Electricity Market in India”, which provides a roadmap for transforming the power market/transaction structure of the country.
India adopted the “multi-power exchange” model in 2008, with a view to encouraging competition among exchanges and catering to the growing and varying requirements of market participants. Over the past 15 years, the transacted volume in the power exchanges has increased manyfold, through the introduction of different contracts in multiple segments – day-ahead market (DAM), real-time market (RTM), contingency markets, term-ahead market, green day-ahead market (G-DAM), high-price day-ahead market (HP-DAM), renewable energy certificate (REC) market, energy savings certificate (ESCert) market, etc. – resulting in nearly 7 per cent of the country’s total electricity being transacted on the power exchange platform.
However, the “multi-power exchange” model has resulted in different prices being discovered in the same market due to varying order books at each power exchange. To overcome this situation, the commission introduced provisions of “market coupling” in the Central Electricity Regulatory Commission [CERC] (Power Market) Regulations, 2021, enabling uniform price discovery in DAM or RTM or any other contract operating on power exchanges.
The MoP, vide letter no. 14/01/2022-RCM-Part (1) dated June 2, 2023, regarding the “Implementation of Market Coupling by CERC Regulations”, urged the CERC to take suitable action to expedite the process of consultation and finalisation of the construct for its implementation. Later, CERC, vide public notice no. Eco-14/1/2023-CERC, dated August 21, 2023, invited stakeholders to submit their comments and suggestions on the “Staff Paper on Market Coupling”. Based on comments and suggestions submitted by stakeholders, the CERC will initiate the “construct-process” through the issuance of regulations as prescribed in PMR 2021. Longer-term goals related to improving sectoral efficiencies such as the Electricity Amendment Act and the Energy Conservation Amendment Act have been taken up, with the latter having been notified a time-bound programme for introducing carbon markets being one of the goals. With various initiatives in the pipeline, the breadth and depth of the markets are expected to increase manyfold over the next few years.
Amit Kapur and Akshat Jain
India is well on its way to achieving its ambitious “Panchamrit” targets: 500 GW of non-fossil fuel-based installed capacity by 2030, reduction of one 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 carbon intensity of the economy by 45 per cent over 2005 levels by 2030, and net zero emissions by 2070. The energy transition vector received an impetus at the recently concluded COP28 in Dubai, where nearly 200 countries agreed to “transition away from fossil fuels”. However, the commitment lacks firmed up timelines and concerns exist with respect to ambiguity in the terminology used. It remains to be seen how the developing and developed nations take steps to transition their energy mix and accelerate their transition from fossil fuels. India has abiding concerns of energy security in the context of its financial and natural resources (predominantly coal reserves, with low hydrocarbon reserves).
Alongside this, dependence on fossil fuels remains high. As per the projections of the National Electricity Plan for 2022-32, the required coal- and lignite-based installed capacity will be 283 GW by 2031-32, as against the present installed capacity of 214 GW. The recent press release by the MoP contemplates a thermal capacity addition of 55-60 GW, in addition to the 27 GW already under construction.
The major lack in all these developments is our inability to comprehensively amend the Electricity Act to address a lot of legacy issues and structural bottlenecks in market design, regulatory mechanisms and distribution reforms. The Electricity Amendment Bill has been under consideration for a long time, but it has not seen the light of day. Had those reforms been implemented, they would have been a game changer for the economy.
Girish kumar Kadam
The all-India electricity demand continued to witness a healthy growth, driven by the resilient economic activity. Following a growth of 8.2 per cent and 9.6 per cent in 2021-22 and 2022-23 respectively, the all-India electricity demand increased by 8.6 per cent in the first seven months of 2023-24 on a year-on-year (yoy) basis, supported by a recovery in demand since June 2023 with the delayed onset of the monsoons, uneven rainfall across the country and resilient economic activity. This followed subdued growth in the first two months of 2023-24. Moreover, the all-India peak demand reached an all-time high of 243 GW in September 2023, against 216 GW in 2022-23, increasing by 12.7 per cent. This, in turn, improved the all-India average thermal PLF to 68.8 per cent in the first seven months of 2023-24 from 62.8 per cent in the first seven months of 2022-23. A sustained demand growth is likely to improve the visibility of new power purchase agreements for thermal projects.
The sharp growth in electricity demand along with a subdued increase in coal supply from domestic sources in the first few months of 2023-24 led to a decline in coal stock levels at the power plants. In this context, the government has issued a directive to domestic coal-based projects to blend imported coal to the extent of 4 per cent in the second half of 2023-24, and to run imported coal-based projects under Section 11. Moreover, a scale-up in supply from domestic sources remains important. The gross capacity addition in the power sector remained flat at 9.3 GW in the first seven months of 2023-24, largely similar to the corresponding period of 2022-23. While the capacity addition has remained modest so far, the capacity addition for the full year is expected to be higher at around 26-27 GW in 2023-24, against 16.9 GW in 2022-23, led by improvements in capacity addition in the renewable and thermal segments.
The LPS Rules have played an important role in lowering discom dues to generation companies over the past 18 months, along with improving payment discipline for ongoing bills. The sustainability of this remains to be seen.
What are the biggest issues facing the power sector? How can these be addressed?
Somit Dasgupta
The biggest issue facing the power sector is the erratic growth of our renewable generating capacity. We have been adding about 9-10 GW on average every year for the last five to six years, but we need to add about 45 GW every year from now till 2030 if we want to attain the capacities mentioned in the optimal mix report of the Central Electricity Authority. The challenge is climbing to 45 GW every year from about 10 GW currently, in the face of increasing adversity. Some of these adverse factors are the imposition of basic customs duty, insistence on adhering to the Approved List of Models and Manufacturers (although it has been kept in abeyance for a limited time period), the complex land acquisition process, difficulty in obtaining grid connectivity, and irregular payments by discoms. Basically, there is no risk sharing, and the entire burden is being borne by the developers. If we don’t add to the renewable capacity as projected, the shortfall will have to be filled up primarily by coal-based generation, which will adversely affect our target of achieving net zero by 2070. Our carbon emissions need to peak by 2040 if we want to achieve net zero by 2070. However, if we are forced to add fresh coal capacity today because of inadequate renewable growth, they will either become stressed assets, or we will not be able to achieve net zero by 2070.
Satyajit Ganguly
The power sector needs to undertake two major transitions in the near future to act as a driver of India’s growth through the coming years. The first is the transition towards a more environmentally sustainable future, with greater integration of renewable energy in the grid. We now have a nationally determined contribution to achieve, of about 50 per cent cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030. This will require a lot more effort towards the integration of renewables into the grid, backed by energy storage systems, while at the same time, ensuring grid stability and continued availability of electricity even during periods when generation from renewable capacities diminishes – for example, during evenings and nights.
The second transition that we need to successfully navigate is towards a commercially viable power distribution sector across the states. Distribution continues to be the weakest link in the supply chain of the power sector. Most distribution utilities are financially distressed due to the burden of high-cost, rigid structure of long-term power purchase agreements, poor distribution network and leakages in metering, billing and collection (MBC), leading to high commercial losses and inability to recover the cost of power supply and service. The discoms’ inability to pay for purchased power endangers the financial health of the generators and their lenders, causing a negative domino effect on the economy.
Appropriate cost-reflective tariffs, payment of subsidies directly to consumers and substantially improving the MBC and overall operations are some of the essential next steps for the distribution segment to undertake.
In the power exchange space, in the foreseeable future, we expect a significant increase in digital transactions and the introduction of many new contracts deepening power markets. Power exchanges would be introducing new contracts related to capacity markets, market-based economic despatch (MBED), secondary reserves, ancillary services, carbon markets, etc., adding diversity and scale to its existing offerings. The expanding role of power markets will go a long way in addressing the issues of clean, reliable and quality supply to consumers at affordable costs.
Amit Kapur and Akshat Jain
A significant issue that is being addressed is the disputes and delays in the payment of dues by state discoms (which continue to be significant). Open access and market access are increasingly being blunted by the protective cross-subsidy surcharge and additional surcharge barriers. The roadmap for the next five to ten years is meant to instil confidence in investors regarding the sector, and ensure certainty of payment cycles. Effective and timely implementation of projects, salvaging stranded capital and stalled projects, and mitigating delays in adjudicating regulatory and contractual disputes are crucial.
States producing solar and wind energy often do not have the demand estimates for the entire production, making energy transportation and storage a very critical issue in the supply chain. Policymakers must look at accelerating the creation of green corridors for evacuation of the surplus power generated. Steps must be taken to effectively address barriers such as land acquisition processes, approvals, debt repayment and high interest rates.
Girishkumar Kadam
The healthy growth in electricity demand, especially peak demand, is necessitating a rethink from the government on thermal capacity addition. The government is looking to encourage investments in new thermal power projects, including by the private sector, with the target of adding 80 GW of new thermal power capacity by 2032 to meet the growing energy requirement. Given the long gestation period of over five years associated with these projects, it is imperative for power generation companies to initiate work on these projects over the next 18-24 months, so that the capacity is ready by 2032. Also, effective power procurement planning is required on the part of the discoms to ensure round-the-clock (RTC) power availability at an optimal cost.
India has set an ambitious target of meeting 50 per cent of its energy requirement through renewable sources by 2030, and increasing the non-fossil power capacity to 500 GW by 2030. While there has been an improvement in tendering activity in the recent past, a significant scale-up in annual capacity addition is required in the renewable energy segment to meet these targets. This requires easing of the challenges associated with land acquisition and improvement of transmission connectivity, along with ensuring the availability of adequate funding avenues.
The distribution segment continues to remain the weakest link in the power sector value chain, with slow progress in improving discom finances. The tariff hikes approved for 2023-24 remained modest across most states, with a median tariff hike of around 1 per cent across the 28 states. Moreover, progress in implementation of the Revamped Distribution Sector Scheme (RDSS), including replacement of conventional meters with smart meters, remains slower than expected. Timely implementation of reform measures such as the RDSS, timely pass-through of cost variations to discoms and the recovery of dues pending from various government agencies to the discoms remain key to improving discom finances.
What is the outlook for 2024?
Somit Dasgupta
The subject of storage is going to become a crucial factor in the years to come, and the problem may surface as early as 2024 if we are able to add substantial renewable capacity. Renewable capacity cannot be added beyond a point unless there is enough storage available to handle the intermittency. Equally important is the fact that a lack of storage will lead to a waste of solar energy, because coal-based capacity cannot be operated below the technical minimum. So far, we have been managing the intermittency problem of renewable generation by ramping our coal plants up/down. After a point of time, we will reach the end of the road.
Storage can primarily be in the form of batteries or pumped storage plants (PSPs). Though battery costs have come down substantially, it is still quite expensive at the levellised cost of about Rs 12 per unit. As far as PSPs are concerned, our performance is not really praiseworthy, as we only have about 4.5 GW functioning, though we have a potential capacity of about 100 GW. What the effect of the recently issued guidelines for PSPs will be, only time will tell. The levellised cost of operating PSPs, however, is about half the current levellised cost of batteries.
One final issue worth mentioning is the need to have a consistent set of policies. The problem is that we seem to waver, which confuses all the stakeholders, including developers. This is in reference to the statements given by the power minister, who in November 2023 stated that we need to add 80 GW of coal-based capacity in order to meet our peak demand of 335 GW by 2030. Not long ago, in September 2023, the figure quoted was about 30 GW of fresh capacity. Again, prior to this in May 2023, it was announced that no new coal power plants would be commissioned for the next five years, apart from those already under construction. Such diametrically opposite statements make one wonder what the policy of the government will be on a given date.
Satyajit Ganguly
We are at a very interesting time right now, with significant policy initiatives being taken to drive forward the power sector in the country. In addition to the series of steps being taken to drive the power sector forward, as we mentioned earlier, there is also a focused drive to enhance the efficiencies of the sector by utilising market frameworks. The power markets, especially power exchanges, are an important instrument in this drive towards enhancing efficiency for all consumers in the country.
Many power sector reforms are being introduced by the government to enhance efficiency, promote decarbonisation and ensure a 24×7 reliable and affordable power supply.
In order to move towards a greener economy, the Carbon Credit Trading Scheme (CCTS) was notified by the MoP in June 2022, with the objective to involve the corporate and private sectors in energy saving and carbon emission reduction. The CCTS will pave the way for large-scale promotion of clean energy technologies in India, leading to de-carbonisation of the Indian economy. With the successful operation of the REC and ESCert markets by the power exchanges over the past 13 years, the exchanges are poised to play a significant role in the development of the carbon market.
We have a highly supportive policy and regulatory environment today and a lot of opportunities to serve the marketplace through a wide variety of contracts of different tenors, catering to various segments of the market.
Furthermore, the MBED and regulatory provisions such as market coupling, once implemented, would further enhance the competitive efficiencies of the power market. Ultimately, the exchanges are marketplaces, where the buyer and seller can efficiently and transparently manage their portfolios. We, from Power Exchange India Limited, continue to strive to make that experience better for all our participants every day.
Amit Kapur and Akshat Jain
Having stood its ground for over 20 years, the Electricity Act, 2003, along with a slew of recent legal and regulatory reforms, has started making a positive impact on the power sector. The Energy Conservation (Amendment) Act, 2022 has laid the legislative foundation for the development of carbon markets. The Change in Law Rules, 2021 and the LPS Rules, 2022 have enforced fiscal discipline on discoms. The Green Open Access Rules, 2022 seek to promote the development of renewables. The CERC’s General Network Access Regulations, 2022; the Indian Electricity Grid Code, 2023; and market regulations have created a robust pathway for market development and optimal use of the national grid. While 2023 has been a mixed bag wherein the government has propounded a slew of measures for the sector’s development, the outlook for 2024 remains hopeful and positive. The path ahead is both exciting and challenging, and will require a well-calibrated and balanced approach to ensure the sector’s development.
Girishkumar Kadam
Demand growth is likely to remain healthy for the power sector, putting the focus on scaling up capacity addition and improving coal supply to meet the demand. Moreover, within the renewable energy segment, the focus will move towards RTC projects, given that these projects can enable effective integration of renewables with the grid and mitigate the intermittency risk associated with renewables. Apart from the scale-up in tendering from renewable energy RTC projects, discoms may also consider calling for tenders for sourcing power from thermal power projects.
The pace of reform implementation is likely to pick up in the distribution segment, especially after the general elections, with a focus on augmenting smart metering installations and implementing a fuel and power purchase adjustment framework for timely pass-through of cost variations to consumers.
