Indian power sector witnessed unprecedented exuberance in mid 2000s and up to early 2010 on account of a massive unserved demand, policy and regulatory reforms, investment conducive policies backed by financial and fiscal incentives. However, this was followed by a phase of rapid decline during 2012-2015, which saw a stagnation in reported demand, dwindling financial health of utilities, surging bad debts and stranded investments. All this left the sector with billions in non-performing assets, eroded investor confidence and investors struggling to meet operating costs, let alone service debt. The new government in 2014 acted fast, drawing up mission mode plans and execution of those plans. As a result, the sector is undergoing a revival phase and is likely to emerge more mature and stronger. Some of these initiatives include:
• The UDAY scheme aimed at a one-time clean-up of the balance sheets of the distribution utilities, coupled with a recovery plan, agreement on performance targets to be achieved, and with a constant monitoring framework;
• A insolvency and bankruptcy code to revive stagnated projects and support the banking sector;
• Massive thrust to add RE, coupled with transparent competition to discover competitive tariffs; and
• Initiating deliberations of decade old acts and policies including scrapping of financial incentives in viable sectors
Sustained efforts in improving country’s energy security, energy equity and environmental sustainability. As a result, India has improved its global position in key indicators (i) moving from 99th position (2014) to 26th position (2016) in ‘Getting Electricity’ indicator in the World Bank’s Doing Business 2017 Report and (ii) moving from 115th position (2011) to 91st position (2016) in the World Energy Council’s Energy Trilemma Index.
Trends defining Market scenario
Demand seems to stagnating but there is scope to increase demand
Demand growth over the last 5 years has not taken off as anticipated. Energy requirement in FY2016-17 grew ~ 3% against a projected 9%, while peak demand growth was half of the anticipated growth rate (pegged at 8%). While it has been reported that the country will experience peak (7%) and energy surplus (9%) first time in history; 240 million Indians do not have access to electricity (Bloomberg – January 2017) which is 17% of our population. On other hand, per-capita consumption of electricity is far lower than similar large emerging economies (BRICS) with ~ 240 million people without access to electricity.
Long term power sale opportunities have dried up leading to lower capacity utilizations of existing thermal power plants
In India, bulk of power is sold through long term contracts. With merchant prices lower than cost of generation, pure merchant power plants are unviable. The last long term procurement of power through competitive bidding (which allows private generators to sell power to distribution utilities) was ~ 3 years ago. No new long term power procurement bid has come up since then. This is partly owing to the falling prices of renewables, rock bottom prices of short term power on exchanges and cash crunch of the distribution utilities to commit payment for additional power in long run.
As a result, utilization of existing assets have come down and a large number of plants commissioned over last 5 years are stranded leading to financial troubles for investors and lenders. The stress on thermal power sector is compounded by lack of evacuation facilities especially in case of change in destination to sell power (our existing policies are quite stringent and flexibility is hard is achieve) and backing down of generation as distribution companies do not draw power due to low merchant tariffs and liquidity issues.
Renewable capacities will denominate in terms of new capacity additions
At 59 GW capacity additions in renewables has been strong – installed capacity of grid connected renewable energy is 59 GW (as of August 2017), tariffs are affordable – solar and wind is now cheaper than thermal power even without any financial incentives and investor confidence is strong – FDI of USD 1.8 billion in renewable energy sector in just over two years (April 2014 – September 2016).
Draft National Electricity Plan (2016) states that no thermal power capacity shall be added till 2027. Renewable energy growth, thus, will continue and this will lead to slowdown in thermal power sector.
Government’s Initiatives for Sector
Government has implemented (or in the process of implementing) some key policy and structural reforms. The initiatives were aimed at sustainable improvement of the overall sector, set a roadmap for next 15 years and enhance transparency in allocation and usage of national resources. Some of the initiatives include:
• Design and implementation of e-auction process for transparent allocation of coal blocks
• Implement policy to use of washed coal in power plants where coal is transported for more than 500 km as a climate change initiative.
• Implementing auction process for awarding long term fuel supply agreements to power, steel and cement industries.
• Clean Coal Tax (Carbon Tax) increased to INR 400 per tonne (2016) from INR 50/ tonne in 2014 which is used to promote renewable investments
• New flexible policy on FSA and coal swapping for state power utilities
• Improving productivity of Coal India, resulting in reduction in coal imports (savings of USD 4 billion)
• Investment into better and modern coal handling, evaluation and transportation facilities.
• New stringent climate change norms notified for thermal power plants SOx and NOx emissions and water usage. It is envisaged that plants would have to invest Rs. 0.5 – Rs. 0.75 lacs in order to meet the new standards.
• Zero import thrust for state power plants
• Notification of draft cross border electricity trade agreement to enhance energy cooperation within SAARC, ASEAN and BBIN nations
• Successful launch and implementation of UDAY Scheme to provide impetus to power sector
• Demand and consumer focussed programmes such as “24 x 7 Power for all” and Saubhagya Scheme aims at increasing the power demand by providing electricity access to all on a mission mode basis
• Initiatives (URJA, GARV, MITRA and Discovery of Efficient Electricity Prices) to promote infrastructure upgrade, technology adoption and digitization and IT enabled decision making in power distribution.
Distressed assets sale and resolution
Government of India notified the Bankruptcy Code to allow lenders to take over control and attempt to turnaround the assets through appointment of independent resolution professionals. In case, no turnaround plan is implemented within six months (extendable by additional three months), assets would be liquidated through a transparent auction process. This would offer PSUs or state utilities or financial institutions to take over generation assets at low valuation, turnaround the assets and thus, reviving the massive stressed assets.
R&M and replacement of old assets
Central Electricity Authority (CEA) had identified 72 units (16.5 GW) for Life Extension (LE) works and 23 units (4,971 MW) for R&M (FY2012 to FY 2017). A large number of them are almost 40 years old and approaching end of their useful technical life span. According to Association of Power Producers, 188 out of a total 396 TPPs in India (i.e. nearly 35%), are more than 25 years old (economic life span).
These plants are less efficient, consuming more coal, producing less power (operating PLFs of less than 40%) and are a major contributor to air pollution. However, little progress has been made with constraints of funding, time and cost overruns. Rehabilitation and replacement of these old power plants would save in cost of land and select balance of plant equipment and also reduce hassles of land acquisition and lengthy clearance processes.
Coal mining, benefaction and washing
In order to boost domestic coal mining, private sector participation is planned to be allowed in mine development, construction and transportation for commercial sale. However, the pricing and the cost of coal mining among other things are still under debate. Once draft guidelines are finalized it can open new doors of business for the investors. In addition to this, private mining companies have opportunities to participate in MDO bids awarded by states or PSU for newly awarded coal mines. New stringent coal norms have now been put into place, which includes:
• Use of beneficiated coals (with ash content < 34%) in power plants in urban and sensitive areas.
• Coal transported over 500 km distance to be washed prior to usage,
Both of these new norms offer new opportunities.
Sale and tariff
The challenge for thermal power plant is to sell power at cost reflective prices. This is not possible at the exchange where electricity is traded as low as 50% of the overall average cost of generation. The inability of the Discoms to sign new long-term PPAs has compounded the problem leading to loss of investor confidence in thermal power assets.
Stress assets in power sector (bulk of which is due to thermal power projects) contributes to around 17% of the overall lending of the banks. The industry has not seen any major deal activity in case of debt laden thermal power assets under cases of Strategic Debt Restructuring (SDR) and Corporate Debt Restructuring (CDR). Leading power players Tata Power and Adani Power have not been able to offload stakes in their troubled thermal power projects in Mundra. RBI in its Report forecasts a further rise of NPAs from 9.6% in March 2017 to 10.2% in March 2018. The Insolvency & Bankruptcy Code, 2016 aimed at improving the ease of doing Business by reducing not only NPAs but also delays in resolution of bankruptcy cases & recovery of debt. But nothing has been seen turning heads on the ground as of now.
Low domestic gas production
Out of ~24 GW gas-based power plants in India, 14.3 GW are stranded or partly inoperative because of paucity of gas. All India average PLF of gas based power plants is ~ 22.51% in FY 2017. The subsidized imported R-LNG available to these plants under PSDF Scheme through e-Auction route has been discontinued since April 2017. Petronet LNG and RasGas Co. Ltd. are in talks to create a SPV that will provide gas to revive these distressed units. If not resolved, this might result in a further investment of INR 60,000 crore turning NPAs.
Additionally, there are further challenges pertaining to lack of evacuation infrastructure, land acquisition, contracts which falter in case of unforeseen risks, bankrupt investors, change in international law affecting viability of assets in India, lack of proper arbitration and dispute resolution mechanism (judicial process takes long time), state ownership of utilities (who do not operate efficiently or on prudent business principles) and politicization of power tariffs (thus sending wrong signals to both consumers & investors).
• Implementation of Bankruptcy Code and subsequent plan of liquidation of assets has attracted investors to re-look at thermal power sector. Some of these investors come with deep pockets and/or operational expertise, such as Tata-ICICI-CDPQ, Piramal-Bain, Apollo and Brookfields. This is a positive signal, even though there has not been any major deal activity yet.
• However, the stressed assets problem in the sector is less likely to abate without PPAs getting signed and demand being boosted. As the financial stability of discoms improves through UDAY and electricity demand picks up again opportunities for power sale will pick up. Policy makers have also been working on a framework to enable sale of power for stressed assets.
• In past, we have witnessed issues with coal production which may crop up once stranded capacities start operationalizing. Monopoly in a sector will create performance and price issues in future. Thus, it is important that initiatives such as allowing commercial mining and captive coal block auctions should move forward.
Thermal power plants would continue to serve as base load power plants in a country like India. Grid connected renewables do have limitations as they will require additional investment in grid, hydro or gas based peaking plants to manage the variable nature of power from renewables (solar/ wind).
However, falling prices of renewable power, stringent environmental norms requiring additional investment and low operating efficiencies due to evacuation, merit order (renewable plants with must run status), fuel (in past) and power sale related constraints will have an impact on the overall growth expectations of thermal power sector.
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