POWER GEN: Witnessing Surge

The total installed power generation capacity in the country as on March 2019 was 356 GW, of which approximately 111 GW of capacity was added over fiscals 2014-2019 on the back of demand growth of 5 per cent over the last five years.

Coal-based installed power generation capacity has maintained its dominant position over the years and accounts for 56 per cent as on March 2019. On the other hand, gas-based power generation has remained low over the years due to lack of domestic gas leading large gas-based capacity being stranded. Hydro and nuclear power generation accounted for ~11 per cent and 3 per cent respectively in fiscal 2019. However, renewable energy installations have more than doubled to ~78 GW capacity, compared to 32 GW as on fiscal 2014, constituting ~22 per cent of total installed generation capacity as of date. In particular, this growth has been led by solar power, which grew at a break-neck speed to ~28 GW from ~3 GW over the same period.

The Electricity Act, 2003 coupled with competitive bidding for power procurement, implemented in 2006, encouraged the participation of private players who had announced large capacity additions The share of the private sector in power generation increased rapidly to ~31 per cent in fiscal 2019 from 24 per cent in fiscal 2014 largely driven by significant capacity additions by private sector over the same period.

Solar Capacity additions of ~1.2 GW in Q1 FY’20; ~26.5 GW added between fiscals 2014 and 2019
Capacity additions in Q1 FY’20 have remained tepid at 1,229 MW, lower by 10 per cent y-o-y as 1,371 MW was added over the same period in the last fiscal. This slowdown continues from last fiscal where several policy issues had caused capacity additions to slow down.

In 2018-19, ~7.1 GW of solar power projects were commissioned, which was lower by ~24 per cent over FY 18 which had seen an increase of 69 per cent y-o-y. This was mainly due to additional taxation in the form of imposition of a safeguard duty, higher GST rate and other policy issues such as cancellations or renegotiation affecting developer sentiment. Further, implementation risks like lower tariff ceilings, in firm module prices have put elevated pressures on solar capital costs.

Wind Capacity additions reach ~14.5 GW between fiscals 2014 and 2019; slowdown in additions continue, down 11% y-o-y in FY’19, but Q1 of fiscal 2020 sees pickup
While, there are continued delays in terms of execution of allocated capacities, fiscal 2020 YTD (till July) saw a pickup in additions at ~1,060 MW compared to the 257 MW added over the same period last fiscal. Even though, there is a pickup, it can largely be attributed to the commissioning of delayed projects under SECI Tranche I and II as well as Tamil Nadu’s 500 MW wind tender auctioned previously.

Capacity additions has fallen 11 per cent y-o-y in fiscal 2019, with additions at 1.6 GW added compared to 1.8 GW in the previous fiscal. The sector continues to adjust to the significantly lower tariffs under competitive bidding as well as land availability and grid connectivity concerns, where developers are facing issues from delayed/congested infrastructure.
Capacity additions had also plummeted by 68 per cent in fiscal 2018 on account of multiple factors including unplanned phasing out of feed in tariff regime by government, delay in the issuance of bidding guidelines and tenders by the states and cancellations of allotted capacities (LOAs) to developers for setting up project capacities under the Feed-in-Tariff mode. Moreover, halving of accelerated depreciation benefit (from 80 per cent in fiscal 2017 to 40 per cent in fiscal 2018) and elimination of generation-based incentives (GBI) of Rs. 0.5/unit also reduced investments in the sector from non-IPPs players.

Conventional Capacity: 41 GW of conventional capacities to be added over next five years led by central and state sectors
CRISIL Research expects 41 GW of conventional capacities to be added between fiscals 2020 to 2024 due to oversupply situation leading to lack of fresh power purchase agreements, stretched financials of private players and delays in commissioning of large hydro and nuclear projects.

Power demand is expected to rise at CAGR of ~5.2 per cent over the next five years (fiscal 2020 to 2024). Despite gradual pick-up in GDP growth and infrastructure development (Smart Cities, Make in India, Dedicated Freight Corridors, and metro expansion), demand constraints emanating from energy efficiency measures, reduction in AT&C losses, higher off-grid generation will stagger cumulative power sales of ~750-800 billion units over the next five years.

Central sector to account for highest share (~54%) of the capacity additions on account of assured power purchase agreements. No new capacity announcements are expected as large quantum of under construction capacity is already under stress.

Stretched financials, delay in clearances and lack of PPAs to hamper capacity additions
While there is ~65 giga watt (GW) of thermal power generation capacities under construction as of March 2019, CRISIL Research expects only ~36 GW to commission between fiscals 2020 and 2024. In addition, ~4 GW of hydro and ~1.4 GW of nuclear capacities are expected to be added. Beyond fiscal 2019, yearly conventional capacity additions are expected to slow down gradually as against 23-24 GW witnessed between fiscals 2015 and 2016. The above view is driven by declining power deficit, completion of large announced projects, as well as delays in a few projects due to fund constraints. Moreover, bankers are also adopting a cautious approach given their high-power sector exposure.

NTPC will dominate the capacity additions backed by a strong execution track record, sound financial strength as well as assured power off-take by PPA holder discoms which insulates it from any downward risk for upcoming capacities.

On the other hand, capacity additions by private sector players are expected to taper owing to completion of their announced projects and acquisitions and lack of fresh PPAs. With high gearing and low coverage ratio, the private sector is expected to slow down their capacity addition from that planned earlier. The trend has already been visible over the last three years when the private sector capacity additions declined to 5 GW in fiscal 2017, 4 GW in fiscal 2018 further down to ~1 GW in fiscal 2019 compared with average 12 GW being added annually in the preceding five years.

While ~23 GW of under-construction projects by private players are stalled due to lack of adequate fuel supply arrangements, absence of PPAs and stressed financials of promoters. Thus, private players would account for only ~1 GW (~3 per cent of capacity additions) between fiscals 2020 and 2024 compared with 49% share over the past five years.

Capacity additions by the state sector are expected to pick up over the next five years owing to large number of under-construction projects by major state gencos (~17-18 GW). In particular, states such as Uttar Pradesh, Telangana, Tamil Nadu, Jharkhand and Odisha would drive capacity additions.

Further, weak financials of state discoms (average AT&C losses for fiscal 2019 ~18.3 per cent, average ACS-ARR gap of Rs. 0.27/kWh) coupled with operational inefficiencies often lead to backing down of power despite underlying demand.

Coal-based capacities to account for 87 per cent of total additions
CRISIL Research expects ~36 GW of new coal-based capacities to commission between fiscals 2020 and 2024, led by large number of planned projects and the fact that coal continues to remain the most widely available and cheapest source of fuel. Moreover, the government’s policy for flexibility in utilisation of domestic coal, new linkage policy (SHAKTI) and increased domestic coal production would lead to significant improvement in coal availability over the next three-five years for power plants.

No further gas-based capacity additions expected until fiscal 2024 on account of limited availability of domestic gas.

With declining domestic gas production and power not being a priority sector any more for domestic gas, the generation from gas plants has become costlier owing to high prices of re-gasified liquid natural gas (RLNG). Close to 6.6 GW of private gas-based capacities continue to be stranded due to non-supplies on RLNG and unfavourable economics. Even after the government’s initiative to support RLNG-based power generation until March 2017, the average PLFs for gas-based plants remained low at about 22.5% over the last three years, with the private sector plants operating at even lower PLF of 14% in fiscal 2019.

Delayed commissioning of hydro projects owing to geographical and socio-economic challenges at project sites
CRISIL Research expects ~4 GW of hydro power capacities to commission (out of ~12 GW presently under construction) between fiscals 2020 and 2024 as against 4.8 GW added during fiscals 2015-2019. Geopolitical issues such as inter-state water sharing, difficult terrains, adverse weather conditions, frequent labour strikes, rehabilitation and resettlement and unrest over land acquisition would hamper execution of hydro projects. The Supreme Court had in 2013 stopped work on more than 24 hydroelectric power projects in Uttarakhand shortly after flash floods devastated portions of the state.

CRISIL Research further believes that central sector (NHPC, NEEPCO and NTPC) will lead capacity additions in hydro power followed by a few states such as Himachal Pradesh, Punjab, Telangana, Andhra Pradesh and Kerala. Several private projects that are in initial stages of construction are expected to get delayed due to lack of power off-take arrangements and funding constraints.

51-53 GW solar capacity to be added over next five years (fiscal 2020- 2024)
CRISIL Research expects solar power capacity additions of 51-53 GW over the next five years (FY 2020-24) as compared to ~26 GW over the last five years (FY 2015-19). However, the share of solar power in total units generated (MUs) is likely to remain between 6 – 7 per cent by 2024 as thermal based power would continue to be the dominant source of power. ~ 6 – 7 GW of solar PV projects are expected to be commissioned under the solar rooftop segment over the next five years (2020-2024), mainly led by capacities tendered by SECI capacities allocated by the state governments, commissioning by government institutions such as metro, railways and airports; and additions by industrial and commercial consumers under net/gross metering schemes. To fulfil their renewable purchase obligation (RPO) targets, as per respective trajectories, there has been increased tendering by states. Capacity additions of ~9.5 GW of solar projects are under construction from different state policies and ~4.2 GW is in tendering. However, uncertainties owing to offtake risk, counterparty risk will continue to impact the sector, albeit, the effects are expected to be more benign.

Wind: ~12-14 GW of capacities expected to be added over next five years (fiscal 2020- 2024)
With the FiT regime ceasing to exist, discovered prices for wind energy fell as low as Rs. 2.43/unit (in 500 MW wind energy auctions for GUVNL).

This has caused realisations to fall across the value chain with both developers and OEMs reeling under the increased pressure to execute projects at such tariffs. This is due to the fact that firstly, capital costs have seen a correction post a fall in FY’18 (which was due to an inventory build-up with OEMs). Secondly, developers are facing increasing difficulties in tying up adequate quality wind-sites with connectivity prior to bidding. CRISIL Research estimates that developers currently require tariffs near Rs 3 per unit as and PLFs in the range of 32-35 per cent for projects to be viable at current capital costs of Rs 68-70 million per MW. This should be in conjunction with developers tying up adequate land, with prior wind resource assessment, to ensure rationality while bidding.

Additionally, transmission constraints have hit the sector far more than solar, which has caused bid response to be lower for certain auctions (SECI and NTPC 2 GW). Adequate grid infrastructure remains a key monitorable for wind power.

However, on the plus side, SECI has already allocated 8.5 GW of ISTS connected wind capacities over past 2 years. With commissioning timelines of 18-24 months, capacities are now lined up for commissioning FY’20 onwards. Further, the Centre also has an ambitious tendering roadmap which will also support additions to an extent.

Based on project level analysis and industry outlook, CRISIL Research expects wind power capacity additions of ~12-14 GW over the next five years (FY’2020-24) similar to the run rate of ~15 GW over the last five years (fiscal 2015-19).

(Courtesy: CRISIL Research)