Overall installed power generation capacity on all India basis has increased by CAGR of 10 per cent i.e. from 159 GW as on March 31, 2010 to 344 GW as on March 31, 2018, mainly led by investments in the private sector in thermal segment during the 11th Plan period (2007-2012) and 12th Plan period (2012-2017). This is also supported by the enactment of Electricity Act, 2003 which encouraged the investments in the power sector. The share of private sector in the overall installed power generation capacity has thus increased and now accounts for the highest share i.e. 45 per cent in the ownership mix of installed generation capacity followed by 30 per cent share by state sector and 25 per cent with central sector. In our view, the capacity addition from the thermal segment would continue to remain subdued and will be mainly driven by the Central and state sector – going forward. Thermal segment remained the key driver in the generation capacity addition till FY2016. Thereafter, there has been a slowdown in thermal capacity addition owing to several issues adversely impacting credit profile of private sector IPPs arising out of significant cost over-run with delays in land acquisition and approvals, no progress in signing of new power purchase agreements, an inadequate fuel (coal and gas) availability and PPA tariff viability etc.
Long-term energy demand outlook for electricity in India remains strong, given the still low per capita electricity consumption at 1,100 kWh during FY2017. This is also much lower as compared against the average per capita electricity consumption in developed countries as well as the world average. Further the latent demand potential is significant in India, given that a large section of population is without access to electricity. In the past, average energy demand growth (as also co-related with the performance of the overall economy) has remained at about 5.5-6 per cent in last 10-year period. In September 2017, the Government of India has launched the “Saubhagya Scheme” with an objective of providing household electrification, especially in rural areas. Even assuming the consumption of 50 units per family per month for 40 million households, which are currently without access to power, incremental energy demand improvement is estimated to about 24 billion units, which after adjusting for distribution losses, correspond to about 2.5 per cent increase in the all India energy requirement over the next 2-3 year period.
Renewable remains a key driver for the capacity addition
With a strong policy focus on renewable energy sector, supportive regulatory framework and an improving tariff competitiveness of renewables, the renewable energy capacity addition has been significant especially in wind and solar segments in last 3-4 year period and thus remains a key driver for the capacity addition, going forward. While the long term demand drivers for both wind and solar energy segments remain intact, there have been regulatory headwinds and policy uncertainties for the segments impacting the capacity addition for wind energy as well as the bidding activity for solar energy in last CY. In case of wind energy sector, the capacity addition in FY2018 significantly dropped to 1.7 GW from the 5.5 GW in FY2017 mainly due to the transition from feed-in tariff-based PPAs to competitive bid-based PPAs in the wind energy sector, following the large reduction in tariffs discovered through the competitive bidding route against the earlier feed-in tariff regime. The Ministry of New and Renewable Energy (MNRE), Government of India announced the trajectory for award of wind power projects through competitive bidding to achieve the cumulative wind capacity target of 60 GW by FY2022. Solar Energy Corporation of India Limited (SECI) and NTPC along with distribution utilities in Gujarat, Maharashtra and Tamil Nadu have issued bids for a wind-power capacity of 8.7 GW over the past 18 months. As a result, capacity addition in the wind power sector is expected to improve to about 3 GW in FY2019 backed by the project awards by SECI and state distribution utilities. In case of solar sector, ICRA expects about 4.5 GW of solar capacity to be added (mainly, comprising of the projects having PPAs with utilities) in FY2019 as against 9GW added in FY 2018. The estimated fall in capacity addition in FY2019 is mainly because of subdued trend in tendering of solar projects mainly in H2-CY2017 in the midst of several factors such as a) GST roll out in July 2017, b) upward pressure on PV module price levels internationally between May 2017 till Dec 2018 and c) uncertainty on safeguard duty.
Improved tariff competitiveness
While the improved tariff competitiveness of both i.e. wind and solar energy remains favourable for the off-takers being the state-owned distribution utilities, project viability from the IPP’s perspective remains critically dependent upon a) capital cost, b) PLF and c) debt structuring (i.e. leveraging levels, debt tenure and interest rate).
Solar PV based IPPs remain exposed to near term headwinds
With the decline in module price level internationally and softening in the interest rate in CY 2016 and CY 2017, competitively bid solar tariffs declined sharply with the lowest bid tariff at Rs. 2.44/kwh so far. Nonetheless, the solar PV based IPPs remain exposed to near term headwinds arising from:
Likely imposition of safeguard duty as per Government of India’s notification in July 2018
Rising interest rate scenario, and
Steep INR depreciation against the USD in the current financial year by about 13 per cent.
As per ICRA estimates for solar PV project with tariff of Rs. 2.7/ unit, cumulative average DSCR is estimated at about 1.16 time based on prevailing PV module price level (~26 cents/watt and applicable safeguard duty), debt and equity ratio of 70:30, rupee dollar exchange rate of 73, cost of debt at 9.7 per cent post commissioning with debt repayment tenure of 18 years post CoD and plant load factor (PLF) level of 23 per cent (with DC-AC ratio of 1.3 times and degradation factor of 0.5 per cent per year). If the safeguard duty cost were to be passed on through change in law, cumulative average DSCR is estimated to improve to about 1.27 time.
Rising power discoms’ subsidy dependence
On policy front to improve the financial health of state owned distribution utilities, Ujwal DISCOM Assurance Yojana (UDAY) was launched in Nov 2015 as a financial rescue package by the central government. Under UDAY, the focus has been mainly on debt refinancing and dev-leveraging (through debt take over for 75 per cent of the debt liabilities and balance to be restructured backed by State Government Guarantee) as well as on the improving the operating efficiencies. Since the implementation of UDAY scheme, progress in debt refinancing and deleveraging has been quite good as there has been a significant reduction in interest cost for the utilities. As a result, the book losses of discoms is estimated to have reduced from Rs 600 billion in FY 2016 to about Rs. 180 billion in FY2018 (Source: MOP estimates). While these are welcome initiatives that will help in the emergence of a stronger domestic power sector, state-owned utilities continue to remain dependent on the subsidy support from their respective governments. The states have provided subsidies / concessional tariff rates to certain sections of the society like agriculture and other sections in the residential consumer category. These measures cannot be wished away, so to an extent, discoms dependence on subsidies is inevitable in the Indian power sector. Costs have also risen over a period with the rise in fuel and power purchase cost as well as inflationary impact on the cost overheads. Consequently, the subsidy dependence for the utilities has too increased considerably across the states. Discoms subsidy at an all-India level has been increasing year-onyear (Y-o-Y) at a moderate rate of 7-8 per cent annually. ICRA estimates the total subsidy bill at around Rs 850 billion in FY2019, as against around Rs. 720 billion in FY2016.
Further, the tariff hikes approved by the SERCs over the last 4-year period have witnessed a reducing trend over the years with the median tariff hike reducing from 8 per cent in FY2015 to 4 per cent in FY2017 and further to 2 per cent in FY2019. The same is not in accordance with UDAY scheme as hikes in many key states are lower than stipulated in the Memorandum of Understanding (MoU) signed for participation in the scheme and thus represent another deviation from the UDAY scheme. However, the relatively low tariff hike must be viewed in context of the declining interest burden of the state utilities; and even with such low tariff hikes, the net losses of the state utilities as an aggregate have come down. This apart, commercial loss or the AT&C loss remain high for discoms in several key states like Bihar, Jammu & Kashmir, Jharkhand, Madhya Pradesh and Uttar Pradesh as compared to the target fixed for FY2018. Improvement in AT&C losses for utilities in some states though a positive is still not in accordance with the UDAY scheme. Going forward, the ability of discoms to pare their AT&C losses and ensure that the same within the regulatory targets set by SERCs, coupled with tariff adequacy, remains critical for their sustained financial turnaround. Also, timely and adequate subsidy release from the state governments to the discoms is required. It is also important from the perspective of tariff adequacy, that implementation of the fuel and power purchase cost adjustment (FPPCA) framework is not delayed.