Indian energy sector is a study in contrast. It is undergoing transformation and disruption at the same time. A record capacity of over 75 GW was added in the last three years and yet, the PLF fell drastically leading to a huge unused capacity. India has the fifth largest power generation capacity in the world. The country ranks third globally in terms of electricity production. In May 2018, India ranked 4th in the Asia Pacific region out of 25 nations on an index that measures their overall power. And yet, the per capita consumption of power is just about a third of the world average. If the per capita consumption has increased over the years, many houses are still without power. Every Indian village has power connection now, yet an estimated 16.3 crore Indians are still without power. Since a village is considered electrified if 10% of its households have an electricity connection, there is fear that many families may not have electricity despite living in an electrified village. As per data on Pradhan Mantri Sahaj Bijli Har Ghar Yojana — Saubhagya — 17.4% rural households are yet to be electrified despite the achievement of 100% village electrification. Installed capacity and generation rise
The Indian power sector has had eventful developments in not only generation and transmission capacity addition, but also in distribution reforms. The sector has seen tremendous growth in capacity addition during the last few years. During the Twelfth Plan period, cumulative capacity addition of 99,209.5 MW was achieved against a target of 88,537 MW.
Much of this growth has come through increasing capacity addition by the private sector. The Electricity Act 2003 created conducive environment to promote private sector participation and competition in the sector by providing a level playing field. This has led to a significant investment in generation, transmission, and distribution areas. The share of private sector in overall installed capacity has grown from 13% in March, 2007 to 45% in March, 2018. During the last ten years till 2017, the public sector (both central and states combined) contributed 73,402 MW while private sector alone contributed 77,891 MW capacity addition.
India has traditionally been dependent on coal for its power generation. Much of this is because of an abundance coal reserves in the country. This trend is continuing — since 2011, coal power plants have accounted for more than two-thirds of capacity additions, and thermal plants now account for about two-thirds of the country’s total power generation. Gas also plays a part in flexibly expanding power supply, and India’s Hydrocarbon Exploration Licensing Policy is an important step to encourage necessary investment in energy exploration and production.
Things have, however, started changing and the country has steadily moved towards renewable energy sources. It’s now the fourth-largest cumulative wind market globally and its progress is also particularly impressive in the solar sector, where it was the fourth-largest country in terms of new installed solar PV (photovoltaic) capacity in 2017. India is quickly closing in on its ambitious target to install 100GW of solar power capacity by 2022. It is also leading the global effort, through the International Solar Alliance, to lower solar technology costs and attract $1 trillion investment in sunshine countries between the tropics, a goal that International Energy Agency (IEA) strongly supports.
This is reflected in the changing equation of different power sources. The share of Renewable Energy Sources (RES) in the total installed capacity has increased sharply to 20.1% at the end of the last fiscal. The share of thermal power at 64.8% was, of course, way ahead others. With increasing protests and for potential environmental hazards the share of hydro power has remained low at about 13%. The share of nuclear was 2% as on March 31, 2018.
This is all good news and a positive sign for the future of India’s electricity sector. However, to take advantage of these new technologies the country will require to modernise the power distribution and transmission networks, and to improve policies. The government of India is recognising and tackling the issue. Recent improvements to support the financial health of state-owned distribution companies that take off electricity from renewable producers have been made, supported by the central government’s Ujwal Discom Assurance Yojana programme.
The story so far was encouraging, but the problem started with the sharp growth in capacity addition and in turn, increasing generation that has created mismatch between supply and demand. This has led to a less than average generation growth target for the current year. The generation target from conventional sources has been fixed at 1265 Billion Unit (BU) for 2018-19 – 4.87% higher than actual conventional generation of 1206.306 BU for 2017-18. The conventional generation was 1160.141 BU in 2016-17, representing a growth of about 3.98% in 2017-18.
The long-term average demand growth rate is expected to remain in the single-digit growth levels given the much lower per capita power consumption in India as compared to the global average. Not only this, the poor financial state of SEBs could possibly lead to lower demand for power going ahead.
The low demand scenario is still a concern with plant load factors (PLFs) reducing to 60.7% in 2017-18 from over 75% at the beginning of the present decade leading to piling up of stranded capacity of around 25-30 GW, which was due to various reasons including the low paying capacity of financially distressed discoms and last mile connectivity to all consumers yet to be achieved. This has, in turn, led to a heavy financial burden in the form of NPAs to the banking sector.
Average PLFs declined for all thermal power generation utilities across sectors. Nevertheless, the Central Public Sector Undertakings continued to be the best performers, followed by private sector. Key reason for the declining PLFs was shortage of demand from the SEBs.
Energy deficit (difference between requirement and availability) was the lowest ever as numbers improved dramatically during the past years – from as high as -8.5% at the beginning of the decade to only -0.7% in 2017-18. Peak deficit has gone down from -9.8% to about -2.0% during the same period. Transmission and distribution network
As far as the transmission and distribution (T&D) space is concerned, there has been rapid growth in the transmission sector with over 70 circuit-kilometers (CKms) of transmission capacity being added daily against an addition of 46 CKms a day between 2012 and 2014. However, the financial health of state electricity utilities in retail distribution continues to remain the most critical issue for the sector’s viability. To resolve the challenge in the distribution business, the Government of India launched the Ujwal DISCOM Assurance Yojna (UDAY) to reduce the financial burden on state discoms by transferring 75% of accumulated losses/debts of the discoms to the state in a 2-step phased manner over financial years 2016-2018. Nevertheless, the country continues to reel under the pressure of higher T&D losses with the government going slow with the reforms process in these segments. Financial turnaround of the distribution sector is essential for commercial viability of the entire sector.
Maybe the growth in transmission & distribution space has helped improving the power network, but transmission & distribution has remained a big concern. According to the data provided by the government, as of December 2017, the AT&C losses in 24 of the UDAY states and union territories stood at 22.73%. The losses incurred by many of the participant states increased in the year 2017 when compared with 2016. In December 2016, these states reported cumulative AT&C losses of 20.3% -- some two percent lower than the 22.73% AT&C losses reported in December 2017.
Given the target to bring down the AT&C losses to 15% by March 2019, the losses incurred in the past year seem way off the set goal. Reportedly, the private sector power plans have significantly lower T&D losses.
But then high T&D losses form only a part of the power sector woes. First, the perceived low demand growth: it’s really a chimera because on the other side there is load-shedding by discoms. The truth is, discoms aren’t buying enough because of poor financials, and not because demand is low.
Discoms shied off power purchase agreements and preferred to buy power through short-term contracts or the open market, given subdued offtake and prices, and significant capacity addition in the past five years. As a result, many generators have been selling electricity at throwaway prices or have switched off plants, leading to defaults on financial covenants. And with the increasing thrust on renewable energy and clean energy, the procurement of thermal power has tapered.
The situation got further aggravated in the absence of fresh coal linkages (none since 2010); restrictions on the use of linkage fuel and cancellation of coal mines without alternative arrangements have hit thermal plants. Another fell blow—for private sector producers this time—is the rider that only long-term PPA holders can get linkage.
Rising stressed assets
Lower off-take, inferior prices of power and as a result, low capacity utilisation have all led to deterioration in the financial health of the sector. Companies are not earning enough to pay interest on loans from banks requiring banks to undertake corrective. Consequently, these companies are reluctant to invest in new capacities and the banks with bad loans are reluctant to lend. The thermal power sector is one such sector which has contributed most to NPAs. Stressed assets include NPAs as well as those projects which have the potential to become NPAs.
As of June 2017, NPAs in the electricity sector amounted to Rs. 37,941 crore. The Standing Committee on Energy looked at 34 thermal power projects that have turned into stressed assets. Their total debt amounted to Rs. 1.74 lakh crore that has been defined as stressed assets. They have a total capacity of 40 GW.
One of the major reasons for stress as cited by the promoters of the stressed assets was the lack of adequate amount of fuel supply agreement. Another problem that promoters cited for making their projects stressed was the lack of Power Purchase Agreements (PPA). They stated that discoms are either reluctant to enter into new PPA or not honouring the PPA done in the past, due to various reasons. “The increase in cost in the absence of PPA prima facie will make it difficult for the plant to service its debt obligations as operations of the plant may not be accompanied by commensurate revenue generation,” the Committee has observed.
Other reasons for increasing stressed assets as the Committee has found are: inability of the promoter to infuse equity and working capital, tariff related disputes, issues related to banks, and delays in project implementation leading to cost overruns.
The problems cited by the Committee will not only affect the companies involved in power generation and distribution, but the country in general. Electricity is the prime driver of growth and unless a favourable atmosphere is created to improve the financial health of the sector India may soon face a situation of demand surpassing supply.