Thermal Woes

Capacity addition to be subdued given sharper focus on renewables, surplus capacities and weak DISCOMs, observes Mayur Patil, Associate Director, CRISIL Research.

Power demand to log a compound annual growth rate (CAGR) of 5-5.5 per cent in the five fiscals through 2024, faster than 4.9 per cent in the previous five fiscals, CRISIL Research anticipates.

Growth will ride on the residential and agricultural segments. Residential consumption will gain from growing penetration of household appliances, improved power supply durations, and enhanced disposable incomes of urban and rural households, while rural consumption – especially in agrarian states – will get a fillip from strengthening of distribution infrastructure.

In fiscal 2020, demand is expected to be subdued due to the recent slowdown in industrial activity, lower agricultural consumption stemming from above-average rainfall across the country, and electricity supply disruptions caused by flooding in major states.

However, post fiscal 2020, the steps taken by government to boost consumption, economic revival and rekindled private investments are expected to shore up demand.

On the flipside, energy-efficiency measures across categories, reduction in transmission and distribution losses, and increased penetration of rooftop solar will limit demand growth.

Power demand seen growing steadily through fiscal 2024

Govt utilities to drive capacities, future uncertain for private projects

The pick-up notwithstanding, demand growth may be insufficient to ensure optimum utilisation of already installed conventional generation capacities, resulting in continued stress in the sector.

In fact, capacity addition in conventional (excluding renewables) power generation segment is expected to more than halve to around 31 GW (net of retirement/de-commissioning of around10 GW old and inefficient plants) between fiscals 2020 and 2024, compared with around 66 GW added in the preceding five years.

Consequently, a large number of projects, which are at a nascent stage, are likely to get postponed or cancelled until the demand situation improves significantly.

Moreover, fresh project announcements are limited as players are opting for the inorganic route for expansion, as a number of assets are available at reasonable valuations.

Private sector unlikely to add capacity in next five years

The private sector will bear the brunt of all this as large capacities under construction are stuck due to financial problems faced by promoters. Lenders are reluctant to extend further capital as the future of these projects is uncertain given the circumstances. Hence, a considerable number of under-construction capacities face a potential liquidation risk over the forecast period.

CRISIL Research expects around87 per cent of the total around 31 GW capacity additions between fiscals 2020 and 2024 to be coal-based, led by a large number of planned projects that are at advanced stages of completion and have some sort of fuel supply and offtake arrangement already in place. However, all these projects are expected to face ambiguity over fuel supply as well as power offtake on account of the supply surplus situation prevailing in the sector.

In case of gas-based power, too, capacity addition over the next five years is not likely to be significant given severe constraints in domestic gas availability. The government, though, is considering policy interventions to revive the existing stranded gas-based capacity in a bid to move towards cleaner, less polluting fuels such as natural gas for meeting the energy demand and tackling environmental concerns.

As for hydro power, capacity addition in the next five years is estimated at only around 2.5 GW given the long gestation periods and geological risks associated with these projects.

Policies, changes in rules to offer
respite, but timely implementation key

The government has initiated several measures to alleviate stress in the power generation segment, the most recent being the Scheme for Harnessing and Allocating Koyala Transparently in India (SHAKTI) policy, which is aimed at removing fuel supply bottlenecks by providing coal linkages to plants having a letter of assurance. This would keep their generation cost low and ensure increased plant availability with assured fuel supply.

The government also approved implementation of the recommendations of the high-level empowered committee constituted to address issues of stressed thermal power plants. Key suggestions of the committee include allocation of coal linkage to stressed power plants without power purchase agreements (PPAs), nonlapsing of short supplies of coal, determination of annual contracted quantity based on efficiency, mandatory payment of late payment surcharge, non-cancellation of PPA, fuel supply agreement or long-term open access in the scenario post resolution under the National Company Law Tribunal, non-cancellation of PPA for non-compliance of the Commercial Operation Date.

Key amendments proposed in the new tariff policy

On the other hand, gains achieved through the Ujjwal DISCOM Assurance Yojana (UDAY) have started to reverse as continued inefficiencies, tariff hikes lower than the targets set under UDAY, and piling up of DISCOM debt due to continued losses have started to weaken DISCOMs across states.

The Centre is constantly pushing for distribution reforms to strengthen the weakest link in the power sector value chain – the DISCOMs – through various interventions at both policy and regulatory levels. The draft tariff policy under discussion is expected to shift the focus on operating efficiencies and accountability of DISCOMs. The government also plans to introduce UDAY 2.0 with renewed focus on DISCOM turnaround to achieve the stated objective of 24×7, cheap, reliable and quality power to all at the earliest.

However, regular tariff revisions and large-scale investments in distribution infrastructure for operational efficiency are critical to improve the financial health of state DISCOMs.

Apart from this, ministry of power has made it mandatory for state DISCOMs to give payment security to inter-state generators in terms of opening up of letter of credit against quantum of power purchased by them post August 1, 2019. This is expected to induce financial discipline in some of the major DISCOMs whose mounting dues were hurting working capital cycles of private generators – one of the reasons for the current stress in the sector.

Implementation of these measures in a time-bound and effective manner is crucial for addressing the woes of the thermal power generation sector.

Outlook on investments in power sector between fiscals 2020 and 2024

A robust pick-up in power demand – crucial for revival of the stressed generation segment – has eluded the sector despite several measures initiated by the government. As of fiscal 2020, major DISCOMs had already tied up for excess power procurement through long-term PPAs to meet their respective demand.

The overall power procurement structure is also expected to undergo a shift and DISCOMs are likely to prefer short/ medium-term procurement instead of long-term PPAs considering the increasing share of intermittent renewable energy and rise in industrial open access consumption. As DISCOMs are avoiding tying up for excessive capacities under such uncertain sales growth projections, few fresh long-term PPAs for conventional power are expected till fiscal 2024. This means financial woes of generators with untied capacities will continue.

Transmission and distribution segments
to drive investments

CRISIL Research expects investment worth Rs 9.5-10 lakh crore in the power sector over the five years through fiscal 2024, marginally lower than that seen in the preceding five years.

The generation segment will continue to account for a large share of these investments, though its share is expected to be lower at around 33 per cent (excluding renewables) compared with 41 per cent in the preceding five years.

Investments in the transmission segment (around Rs 3.8 lakh crore) are expected to witness strong growth over the next five years, led by robust investments in inter-regional transmission by Power Grid Corporation of India Ltd, development of green energy corridors, and steady investments from various states to augment intrastate network. Increasing private sector participation will also support transmission investments.

Strengthening and expanding the regional and intrastate grids, along with improved rural electrification, is also expected to ease grid congestion and supply constraints, eventually benefiting power generators.

The planned strengthening of inter-state and intrastate transmission systems, and ultra-high-capacity green energy corridors to evacuate renewable energy from renewable energy-rich states are expected to boost growth in the transmission segment.

Outlook on transformation capacity by fiscal 2024

In the distribution segment, investments of Rs 3.0 – 3.2 lakh crore are expected. These would be driven by increased outlay from the central government on various distribution-related schemes and state investments to reduce aggregate technical and commercial losses. Under the central governmentsponsored Integrated Power Development Scheme and Deendayal Upadhyaya Gram Jyoti Yojana, projects worth Rs 62,900 crore have already been sanctioned and are under implementation.

To sum up, while the thermal generation segment is staring at hard times, the transmission and distribution segments would see both investments and capacity additions over the next five years.

Also, while the transmission segment is on track to achieve targets, the distribution segment remains hobbled. Further reforms and their pragmatic implementation by states is the key to next phase of power sector growth.

Mayur Patil,
Associate Director, CRISIL Research

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