A decade ago, power supply was falling short of demand. Now, supply is surpassing demand, compelling utility majors to restrict generation to avoid wastage.
The situation has worsened this year. The deceleration in industrial activities has reduced industrial demand for power. India’s electricity demand fell by more than 13% last October, led by a sharp reduction in the off-take from industrialised states such as Gujarat and Maharashtra, following the industrial slowdown. More than two-fifths of the electricity generated is consumed by the industrial sector. Power demand last October was down to 98 billion units as against 113 billion units in the same month a year ago, according to the Central Electricity Authority (CEA) data. This was the third consecutive month of low power demand which has slowed down since August.
The Association of Power Producers have cautioned that the slowdown is indicative of a general economic slowdown and is bad for finances of power discoms as the off-take from subsiding customers has reduced. Large assets of the power sector are already stressed due to non-payment of dues by discoms, problems of fuel, financial stringency and lack of various regulatory approvals. Government data show that distribution companies’ dues to power generating companies have increased to Rs. 80,260 crore, of which Rs. 61,144 crore is overdue.
Installed capacity and generation rise
The Indian power sector has had eventful developments in recent years in not only generation and transmission capacity addition, but also from the distribution reforms aspect. The sector has seen a steady growth in capacity addition – total generation capacity in the decade has increased 2.25 times from 159.4 GW as on March 2010 to 360.4 GW last October.
Much of this growth has come through increasing capacity addition by the private sector. The Electricity Act 2003 created a conducive environment to promote private sector participation and competition in the sector by providing a level playing field. This has led to significant investment in generation, transmission and distribution network. The share of private sector in overall installed capacity has grown from 13% in March, 2007 to 46.5% in October, 2019.
India has traditionally been dependent on coal for its power generation. Much of this is because of the abundance of coal reserves in the country. This trend is continuing — since 2011, coal-based power plants have accounted for about two-thirds of capacity additions, and they now account for more than 60% of the country’s total power generation. Gas also has a role to play 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.
The equation is changing fast. With increasing awareness of the polluting effects of thermal power plants, the country began its search for alternative sources of power and has steadily moved towards renewable energy sources. It’s now the fourth-largest cumulative wind market globally and the country’s 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 has achieved its solar power target four-years ahead of its schedule. India 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 22.6% as on October, 2019. The share of thermal power at 63.2% was, of course, way ahead of others, but has stayed almost at the same place. With increasing protests and for potential environmental hazards, the share of hydro power has remained low at about 13%.
This is 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 modernising its power distribution and transmission networks and would also need to reform its policies. The government recognises the issue and is taking measures to improving its distribution network.
Power distribution is the crucial link and the weakest in the electricity supply chain. It assumes great significance as this segment has a direct impact on the sector’s commercial viability and ultimately on the consumers who pay for power services. High transmission and distribution (T&D) losses not only affect the power companies’ finances but also their pricing mechanism, impacting the consumers.
Given the impacts, the electricity regulatory commissions set targets for loss reduction. There is also a commitment to loss reduction under the Ujjwal Discom Assurance Yojana (UDAY), a bailout scheme worth Rs. 5 lakh crore, aimed at ensuring financial viability of discoms. Under this scheme, target specification and monitoring of losses take place on a division-wise basis. Loss reduction is also tracked under the Integrated Power Development Scheme, a central government programme worth Rs. 32,000 crore to strengthen network infrastructure. These schemes have brought down the T&D losses from as high as 31.25% in 2003-04 to about 22% last year. But at 22%, the T&D loss looks far higher when compared with other countries. The loss is only 8% in the US, 7% in Japan and 9% in Taiwan. In China, just about 6.2% of the overall power generation was lost in transmission and distribution in 2018.
Power sector woes
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.
India’s power sector is a study in contrast. It is undergoing transformation and disruption at the same time. A huge 55GW capacity was added in last three years from 305 GW in 2015-16 to 360 GW as on October, 2019; and yet the PLF fell drastically leading to a huge unused capacity – down from 77.5% in 2009-10 to an estimated 57.7% in 2019-20. India has the fifth largest power generation capacity in the world. The country is the world's third largest producer and the third largest consumer of electricity. The national grid in India has an installed capacity of over 360GW and yet the per capita consumption of power is just about a third of the world average.
Here lies the contrast. Reasons for low per capita consumption are diverse ranging from non-availability of quality power to lack of purchasing power. But that’s the story at the individual level. For the nation, low consumption is largely because of lack of new industrial projects and subdued investment in infrastructure. The power generation capacity has increased steadily over the past years but demand has not grown proportionately resulting in huge idle capacity. And thus, a large part of the investment has turned non-earner and has become stressed.
Lower off-take, low 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 service the debt incurred in erecting new units. Consequently, banks with rising bad loans are reluctant to lend towards working capital requirement of these companies. The thermal power sector is one such sector which has contributed the most to NPAs. Stressed assets include NPAs as well as those projects which have the potential to become NPAs.
One of the major reasons for stress was cited by the promoters of the stressed assets was the lack of adequate amount of fuel supply agreement. Another problem that promoters cited as the reason for making their projects stressed was 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 Standing Committee on Energy 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 when demand will surpass supply.
According to a recent research study by The Energy and Resources Institute (TERI) about Rs. 1.8 lakh crore worth of loans given to thermal power companies have gone bad accounting for about 18% of the total outstanding debt of the power sector. "The causes of these stranded assets were the imprudent capacity expansion that occurred in the period 2010-15; demand growth slowdown after 2012; and upstream (coal linkages) and downstream (Power purchase agreement tie-ups) challenges in the power sector value chain," the study has suggested.
The cases of as many as 34 financially stressed power projects, with a capacity of 40 GW and with bank exposure of over Rs. 1.8 lakh crore, were reportedly headed to the National Company Law Tribunal (NCLT) for resolution under the Bankruptcy Code early last year.
There are no easy solutions to the power sector’s woes as they are directly linked to general economic trends. The probable solution lies in higher industrial activities which will increase demand for power.
The government is reportedly working on a new scheme involving reforms, incentives and investment support for the power sector. This is good news but the bad news is that ratings agency ICRA has revised last December the outlook for the power sector from stable to negative following slowdown in energy demand growth, sluggish progress in resolution of stressed thermal assets and less than expected improvement in discom finances.