Power Sector – A Glass Half Full

The sector is rightly poised to witness a strong growth subject to continued policy impetus. The tremors of the state’s unilateral action could jeopardise the bankability of projects and could risk the 175GW renewable plan of federal government, if left unchecked.

Transformation to Clean Energy Not Without Challenges Ahead

  Mixed trends are emerging in the power space with surging renewable capacity additions and plateauing thermal capacity installations, sudden spurt in spot prices and oscillating coal availability at the plants typical of an evolving sector. Power is a key ingredient for the success of ‘Make in India’ initiative and India’s chances of competing with international players will be determined by the seamless availability of power at economical rates. The sector is rightly poised to witness a strong growth subject to continued policy impetus. The tremors of the state’s unilateral action could jeopardise the bankability of projects and could risk the 175GW renewable plan of federal government, if left unchecked.

Power Surplus Riddle, Soaring Generation and Distribution Challenges

  Because of high thermal capacity addition in last five years and improvement in transmission system, power supply improved to match the demand. Present low PLFs indicate that the installed capacity can meet demand increase for next few years comfortably. Also, the pipeline of thermal plants at about 50 GW is not insignificant. Quality of supply and reach of power supply is not up to the mark and improvement in the same, like the ongoing effort in Uttar Pradesh, is likely to boost the demand. Uttar Pradesh recorded 16.5% increase in energy supply during April – August 2017 compared to the same period in last year. In FY17, renewable capacity addition (11.31GW) exceeded thermal additions (10.6 GW).

  Transmission projects have been awarded on the tariff based competitive bidding (TBCB) and the award of projects has slowed down as the pipeline is low. Given several villages is yet to be electrified and the need for 24×7 power for all, the transmission sector is in the path of strong growth. However, there is a greater need for the transmission project to be bid out by the states similar to the Centre TBCB model. Improving the transmission system at the state level would allow for seamless power transmission across regions.

  UDAY scheme launched in end 2015 is gradually making inroads and some early signs of revival are seen although premature to confirm the success. UDAY is likely to provide three fold benefits firstly the transfer of debt load to states to reduce the substantial interest burden leading to immediate release of liquidity for the discoms.

  Interest savings to the discoms are over INR 100 bn. States issued bonds of INR2321.63bn which is about 87% of the total bonds originally envisaged. Consequent to this, some states have exhibited marginal dip in payable days to generators. Secondly, the tariff hikes by states reduces the gap between ACS and ARR, the impact of this varied and is early to decide on the success. Thirdly, overall AT&C losses showed minor reduction, however, several states underperformed with respect to these targets.

a Awarded based on agreements different from those adopted from FY10                                      Source: CEA, Ind-Ra
b Till 30 November 2016

Debates Rage on PPA Renegotiation, New Litmus Test for Sector

  Increasingly, discoms succumbing to the power purchase renegotiation contagion and threatened to repudiate the contract. One of the thermal power plants received a notice of termination letter from UPPCL and the state utility stopped making payments to the generator. Earlier similar attempt from another state utility (GUVNL) to renegotiate was quashed by the order from APTEL. PPA is sacrosanct and the investor and lenders commit long term funds depending on the power purchase agreement. Wind projects are also facing threats akin to the solar and thermal portending risk to overall target of 175GW of renewable capacity by 2022 and more importantly the bond market. Several renewable players are embarking on capital market access, hence the recklessness of utilities to this could unsettle the nascent bond market. Indian Banks Association, Wind Associations and MNRE has emphasized the sanctity of the PPA and not to unilaterally cancel the power sale agreements.

Key Policy Implications

  Other policies actions like coal rationalization and energy efficiency measures (UJALA) are some of the impactful policies. Low hanging fruits of the coal rationalization policies impacted the cost of production for some of the central and state owned plants and the variable costs have nearly halved. Gradually, the impact would widen to other plants including private generators and would positively impact the margins.

  Scheduling and forecasting measures to tackle the renewable jump provides salutary effect for evacuation to power and timing the maintenance for the coal plants. National Institute of Wind Energy played a pivotal role in educating and undertaking this, resulting in increased evacuation of power supply from Tamil Nadu. Refurbishing the old coal power plants to leverage the space and created transmission network is likely to provide some visibility to the equipment manufactures like. The capacity under consideration is about 40GW.

  Extension of Mega Power Policy for 25 projects from March 2017 to March 2022 would reduce the interest burden for several sponsors which otherwise would have placed burden on developers and lenders.

Active Spot Market Phase Kicks on

  Green shoots of recovery are emerging in the power sector to boost the short-term power market. However, the sector’s growth is inhibited by impediments such as transmission constraints, opaque processes on open access within most states and steep cross-subsidy charges. Despite the imposition of surcharges, short-term power remains competitive to discom power for bulk consumers in the 10 states analysed by India Ratings & Research. To reduce overall losses and retain high-yield consumers, discoms levy excess charges and curb direct procurement from the short-term market. As a percentage of industrial tariff, cross-subsidy stands at 10%-50%.

  Momentary blips in the spot market like latest on 13 September were triggered by lower generations from renewable sources and back downs of nuclear power. These distortions are bound to happen unless the states implement forecasting and scheduling of demand and renewable generations.

Cracks in Façade

  The weakest link in the power sector value chain is discom, the facelift to the financials and operational performance is a long drawn process. State ownership, lack of political will to alter tariffs and embracement to the populist policies continues to hamper the progress. Privatization of part or some aspects of the distribution and collection functions could pave way for improvement in some key parameters.

  The solution is to take the business decisions out of the hands of politicians and devolve authority to lowest level. Creating distance between an elected official and an executive decision and creating transparency in the decision making process is a way to limit the impact of politics.

Outlook

  Although the sector in patches is performing reasonably well, signs of stress emanates often. Discoms would benefit from the low cost of power purchases and will increase the share of short-term purchases in the next two to three years gradually. Strengthening the payment mechanism for the power generators would go a long way in stabilizing the sector’s fortunes.


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