What have been the key hits and misses of the power sector in the past year or so?
Anujesh Dwivedi
India’s power sector has seen rapid growth in recent years, with economic growth propelling power demand to record highs each year. The previous financial year witnessed demand growing by over 8 per cent to a record 1,622 BUs, while the summer demand peak hit 250 GW in 2024, up from 243 GW in 2023 and 216 GW in 2022.
India has seen a record addition of 18 GW of solar generation capacity in 2023-24, with the total installed solar generation capacity standing at 81 GW as of March 31, 2024 – accounting for approximately 20 per cent of India’s total power generation capacity. The government is now working to encourage rooftop solar through the PM Surya Ghar Muft Bijli Yojana, which provides budgetary assistance for up to 3 kW of solar power in each household.
The government’s focus on new energy interventions covering green hydrogen, rooftop solar, offshore wind, battery energy storage systems (BESS) and nuclear small module reactors, and the introduction of Resource Adequacy Guidelines have been noteworthy developments in the past year.
The power distribution sector continues to face chronic issues of poor financial health and operational inefficiencies. The accumulated losses of all state-owned discoms stood at Rs 6,760 billion at the end of 2022-23, up from Rs 6,090 billion in the previous year. To put this in perspective, the total bonds issued under the UDAY scheme for loss takeover of discoms was just Rs 2,350 billion. The debt levels of discoms have also been steadily increasing, with many discoms being unable to generate adequate cash flows to repay their debt obligations. The debt service coverage ratio of state-owned discoms was just 0.23 in 2022-23.
Sachin Gupta
The operational performance of the power sector has been robust during 2023-24, with a growth of around 7 per cent in generation and offtake. This growth has continued through the first four months of 2024-25. In 2023-24, the peak shortage was 1.4 per cent and the energy shortage was 0.3 per cent, compared to 4 per cent and 0.5 per cent, respectively, during the corresponding period in the previous year. During 2023-24, over 5 GW of thermal capacity was added. Coal allocation to the thermal power sector remained satisfactory, with dispatches to the thermal sector (including imports) growing by 10 per cent. This resulted in relatively healthy coal stocks at thermal power plants (TPPs), exceeding 50 mmt. There have been continual coal allocations through the Shakti schemes (five auctions with a total volume commitment of over 24 mmt) and increased production from captive coal mines. The allocation of coal mines through the auction route has also continued at a steady pace. In terms of renewable energy capacity, India has added nearly 18 GW, with the solar sector accounting for the majority. The government’s reaffirmation of the 500 GW by 2030 target bodes well for the growth of the renewable energy sector in the country. The Renewable Energy Investment Authority’s mandate to auction 50 GW lays out a roadmap for achieving this target. The transmission sector also saw progress, with the addition of 14,203 ckt km of transmission capacity and a transformation capacity of 70,708 MVA.
Some key reform measures initiated in 2023-24 were:
- Waiver of interstate transmission system (ISTS) charges for offshore wind projects to promote offshore wind generation.
- The waiver of ISTS charges for green hydrogen production to promote green hydrogen initiatives.
- The issuance of the Modified Revised Biomass Policy on 16 June 2023, which included price benchmarking of biomass pellets and the procurement process for these pellets.
- Notification of the Green Energy Open Access Rules by the majority of states.
- Viability Gap Funding (VGF) of Rs 37.6 billion as capital subsidy to create 4,000 MWh of BESS by 2027-28.
- Notification of the Energy Conservation Act, mandating a minimum share of non-fossil energy consumption for designated consumers, effective from 1 April 2024, to promote the use of renewable energy.
- Implementation of additional measures by the government to improve the financial health of discoms by streamlining the process of accounting, reporting, billing and payment of subsidies by states to discoms.
Girishkumar Kadam
The electricity demand growth has remained strong over the past three years with a CAGR of 8.4 per cent, supported by growth in economic activity along with factors such as a favourable base in 2021-22, a severe heat wave in 2022-23 and an unfavourable monsoon in 2023-24. The demand growth remained healthy at 6.5 per cent on a year-on-year basis in the first five months of 2024-25. While demand growth has slowed in the last few months, it is likely to remain comfortable at 6-6.5 per cent for the rest of 2024-25.
The growth in electricity demand has enabled an improvement in the all-India plant load factor (PLF) for thermal power stations to 69.1 per cent in 2023-24 and 71.4 per cent in the first five months of 2024-25 from the low of 54.5 per cent in 2020-21. The PLF is estimated to remain healthy at over 70 per cent in 2024-25. The growth in electricity demand has also improved the visibility of thermal power generators in new power purchase agreements. Moreover, tariffs in the short-term market continue to remain healthy and higher than the historical average, driven by the demand growth. All these factors have improved the outlook for thermal power generators.
The gross power capacity addition stood at 25.4 GW in 2023-24, improving from the 16.9 GW added in 2022-23, led by capacity addition in the renewable energy and thermal segments. The capacity addition is expected to improve to over 30 GW in 2024-25, led by the increase in renewable energy capacity. This will be supported by the scaling up of the project pipeline, low solar photovoltaic module prices and the impending expiry of exemption from ISTS charges in June 2025.
The performance of state-owned discoms remains constrained by inadequate tariffs relative to the cost of supply, higher-than-regulator-approved AT&C losses and a considerable debt burden.
Mohammad Saif
India’s power sector has been on a continuous upward trend with a steady growth in electricity demand post the Covid era. On the supply side, there has been an exponential rise in renewable capacities, which is expected to reach 200 GW by the end of calendar year 2024. Continuous additions to transmission capacities have complemented the rising demand and the growing generation capacities. Green hydrogen has started gaining momentum with pilot projects being initiated to test various technologies, which in turn will help greening the hard-to-abate industrial sectors. The renewed focus on nuclear energy, with the recent budget announcing the government’s intention to partner with the private sector to establish small modular reactors, will definitely help in diversifying India’s non-fossil generation portfolio.
The progress on the Revamped Distribution Sector Scheme (RDSS) is still slow, reflecting the operational efficiency challenges at the distribution and retail ends. While there has been a reduction in AT&C losses, the financial losses are still a critical area of concern for most discoms. At the supply end, energy storage needs a stronger drive as there have been limited initiatives from states on both battery as well as pumped hydro. Also, offshore wind is yet to take off, because of which the country missing out on significant untapped renewable energy potential.
What should be the government’s topmost policy priorities for addressing the sector’s challenges?
Anujesh Dwivedi
Going forward, India is poised to be one of the fastest growing economies in the world. To fuel this growing economy, energy and peak electricity demand are expected to grow annually at approximately 6 per cent. To meet this growing demand in the immediate future, it is essential to ramp up the annual power generation capacity addition, with solar as the mainstay. This will also help the country in achieving 500 GW of installed non-fossil fuel-based generation capacity by 2030.
Notwithstanding the focus on renewable energy, the sharper-than-anticipated rise in peak demand is likely to remain in focus over the next five to ten years. The announcements regarding 80 GW of thermal power generation capacity addition may need to be augmented with a push for investments in pumped storage projects, BESS facilities, and the introduction of technology-enabled DSM measures such as automated demand response/dynamic tariffs.
Further, while developing low-carbon assets for the future is important, scaling the decarbonisation of existing infrastructure, especially in transport, buildings and industries, also needs to be prioritised. Government budgetary support towards carbon capture and storage demonstration projects for hard-to-abate industries would be welcome.
Green financing to fund India’s energy transition in the coming years will be one of the top priorities for the sector. Close collaboration will be required for this, with financial service providers and technology partners leading the charge on sustainable progress. Defining areas or projects that may qualify for use of proceeds from green financing, and establishing a risk evaluation process and standardised reporting mechanisms may be considered for the sector. Tax incentives may also be provided for green bonds to help bring down the cost of financing and encourage investments in energy transition initiatives.
Building local supply chains for new green technologies is likely to remain a priority for the government over the next few years. The production-linked incentive (PLI) schemes for solar module manufacturing and green hydrogen are meant to serve this purpose. The extension of PLI to solar cell manufacturing is another welcome move, furthering the agenda.
Girishkumar Kadam
The renewable energy (including large hydro) capacity required to meet the Ministry of Power’s renewable purchase obligation trajectory of 43.33 per cent by 2029-30 is estimated to be over 440 GW, considering the annual demand growth of 6 per cent till 2030. Given the installed renewable energy (including large hydro) capacity of 200 GW as of August 2024, the incremental capacity requirement over the next five-and-a-half years is high at over 240 GW, translating into an annual capacity addition of about 44 GW. However, the actual capacity addition was lower at 18.5 GW in 2023-24. While this is likely to increase to 25 GW in 2024-25, it will remain lower than the required addition. Despite the large project pipeline, capacity addition is constrained by challenges in securing land, delays in augmenting transmission infrastructure and supply chain challenges for renewable energy equipment. Resolving these challenges remains key to augmenting renewable energy capacity addition and meeting the growing demand.
The government is looking to encourage investments in new thermal power projects due to the sharp growth in electricity demand, with a target of adding 80 GW by 2032. Given the long gestation period of over five years for 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. Moreover, effective power procurement planning is required on the part of discoms to ensure round-the-clock power availability at an optimal cost.
The distribution segment continues to remain the weakest link in the power sector value chain, with limited progress in improving discom finances. Reforms are under way to address the challenges faced by the distribution segment, including the RDSS to reduce AT&C losses, late payment surcharge rules to ensure timely payments from discoms to generators, and the fuel and power procurement adjustment surcharge (FPPAS) to ensure the regular pass-through of variations in power purchase cost. However, there has been mixed progress in the implementation of the FPPAS rules. The gap between the average cost of supply and the average revenue realised per unit of power sold by state-owned discoms was high at 73 paise per unit in 2022-23. The hike required to reduce this gap to zero is close to 10 per cent and varies across the states. Besides, discoms will need to resolve their large regulatory asset position, which necessitates support from state governments.
Mohammad Saif
Improving the financial and operational efficiency of discoms needs to be a key area of focus, going forward. Fast-tracking RDSS implementation and focusing on strengthening the overall governance will be critical. Introducing competition at the retail end can bring in much-needed efficiencies. Also, with the rural electrification programmes coming to an end, there is now a need to focus on rural power sector reforms that bring the supply and customer service standards in these regions up to urban levels. In addition, regulatory assertiveness towards addressing long-pending regulatory assets in many states, and aligning tariffs with the cost of supply would surely support the financial turnaround of the discoms.
On the transmission side, apart from the thrust on increasing the interstate and intra-state transmission capacities, there is a need to strengthen grid management to integrate higher proportions of variable renewable energy. In addition, there are opportunities to explore possible long-distance interconnections to exchange green energy with renewable-rich countries in the Middle East and neighbouring regions.
It is also an opportune time for India to take the lead in creating a South Asian power market, similar to other regional markets in the world. It would not only support the “One Sun, One World, One Grid” agenda agenda, but also help tap cleaner energy available in neighbouring countries.
What is your outlook for the sector in the near to medium term?
Anujesh Dwivedi
The country needs to accelerate its pace of renewable energy capacity additions. To meet the target of 500 GW non-fossil fuel-based capacity by 2030, India needs to add approximately 50 GW of renewable energy capacity annually, which means nearly tripling the preceding year’s rate of capacity addition. While significant progress has been made in utility-scale renewable capacity additions, the sector now increasingly needs to focus on driving capacity addition through distributed energy resources and new technologies such as offshore wind or small nuclear reactors.
Performance improvement and modernisation of discoms is also a need of the hour. Transmission and distribution (T&D) networks need to be strengthened to integrate higher capacities of renewable power in the grid. Investments would be required for adoption of distribution grid automation technologies such as supervisory control and data acquisition, distribution management systems and outage management systems, as well as for capacity building of discoms to improve practices related to distribution system planning and integrated resource planning. The climate resilience of T&D infrastructure is likely to become a mainstream agenda with the increasing frequency of adverse weather events in recent times.
The CEA, in its report titled “Transmission System for Integration of over 500 GW RE Capacity by 2030”, estimates that to meet the target of 500 GW of renewable energy by 2030, an investment of approximately Rs 2,440 billion will be required in transmission networks. Further, as per its Draft Distribution Perspective Plan 2030, an investment of Rs 7,420 billion is required in power distribution systems by 2027. Finding the means to finance this required investment will be of utmost importance.
Sachin Gupta
CareEdge Ratings has a favourable outlook on the renewable energy sector. Adequate resource availability, buoyant investor interest and a healthy pipeline of projects under execution are expected to lead to incremental capacity installations. A highly supportive policy and regulatory framework, including the government’s target to achieve 500 GW of renewable energy capacity by 2029-30, along with the renewable purchase obligation and energy storage obligation frameworks, further bolster this outlook. The presence of central counterparties as off-takers also supports sector growth by addressing concerns related to receivables. However, challenges related to execution bottlenecks, the imposition of Basic Customs Duty, supply chain issues due to the implementation of the Approved List of Models and Manufacturers, and hardening yields remain. For the thermal sector, favourable demand-supply dynamics, improved domestic coal availability and softening international coal prices support a positive outlook.
Girishkumar Kadam
The demand growth is likely to remain healthy for the sector, putting the focus on scaling up the capacity addition and maintaining healthy coal stock levels at TPPs. In the renewable energy segment, firm and dispatchable renewable energy/round-the-clock projects are expected to drive tendering and capacity addition, given the assured supply and competitive tariffs seen recently in relation to conventional sources.
The pace of reform implementation remains key in the distribution segment, with a focus on reduction in AT&C losses and timely issuance of tariff orders with adequate tariffs to reduce the cash gap between tariff and cost of supply.
Mohammad Saif
In the near to medium term, the focus on renewables will continue through initiatives such as the PM Surya Ghar yojana, and those focused on green hydrogen and pumped hydro. Also, coal will continue to be an integral part of the supply mix owing to the high costs of storage-based green supply. States are expected to put a greater emphasis on medium- to long-term demand-supply planning, with robust resource adequacy plans gaining traction.
The discoms will be under pressure to demonstrate tangible results from RDSS and take further initiatives to complement the progress achieved. The focus on energy efficiency is expected to increase as a key means to manage the rising electricity demand with an aim to optimise.
Government schemes such as VGF for BESS will help drive the much-needed energy storage agenda and are a welcome initiative to complement the falling global cost of BESS. Moreover, tariff-based competitive bidding for pumped hydro will witness traction in order to utilise hydro as a key means to enhance renewable penetration.
