The power sector is one of the most important constituents in the infrastructure sector and plays a critical role in the overall development of the economy affecting its growth and prosperity. While the transmission and distribution (T&D) segment in power sector is primarily owned by the central and state sector, the ownership share in the generation segment is distributed across the central, state and private sectors. In case of power transmission sector, ownership is predominantly led by Power Grid Corporation of India Ltd (PGCIL) in the inter-state and regional transmission network and by state-owned transmission utilities in the intra-state transmission network. The National Tariff Policy 2006 introduced mandatory tariff-based competitive bidding for transmission projects awarded from January 2011 with the objective of promoting competition and to encourage investments from the private sector, although there is provision of exemption for certain inter-state transmission projects as decided by the Government of India (GoI). While there has been a good progress in attracting private investments in the inter-state transmission segment, the progress in attracting private investment in intra-state transmission sector has not been significant. The share of private players in terms of total line length has increased from 3.3 per cent in FY 2012 to 7.4 per cent in FY 2019. Meanwhile, their share in terms of substation capacity has increased from 0.5 per cent to 3.7 per cent. Overall, the private ownership in transmission network both in inter-state and intra-state segment remains still limited.
Strengthening transmission network
Given that thermal capacities are located closer to fuel source in case of domestic fuel-based projects and closer to coastal location for imported fuel-based projects and hydro power projects usually being located in remote areas in the north and north-eastern regions, transmission network remains critical so as to transmit power from such generating stations to the other load centric regions across the country. Moreover, the strengthening requirements in transmission network (both at inter-state and intra-state level) remain quite significant, given the rising renewable energy mix in the overall energy generation. The share of renewable energy capacity in all India installed power generation capacity has increased from 11 per cent (18 GW) as on March 2011 to 22 per cent (80 GW) as on June 2019, aided by strong policy support and an improved tariff competitiveness of renewables, especially wind and solar energy. With this, share of renewables in energy generation has too gone up to about 8 per cent in FY 2018-19 from the negligible levels till FY 2011 and going forward, the share of renewables is estimated to rise further. This in turn, has necessitated large investment requirements to facilitate the integration of renewables in the grid so as to mitigate the risk of grid inadequacy as well as grid stability. Under Green Energy Corridor (GEC) scheme of Ministry of New & Renewable Energy, aggregate investments of about Rs. 43,000 crore have been planned to enhance transmission network, under which projects of about Rs. 11,500 crore have been awarded so far both through bidding and regulatory tariff-based route, for the expected commissioning over the next 2-year period. Given the execution challenges seen in transmission network projects due to right of way, land acquisition delays and other permitting risks involved, timebound execution of such projects remains critical especially for the large sized renewable projects which are under implementation, having relatively shorter gestation period.
Poor financial health of DISCOMs – A concern
Unlike the transmission segment, the distribution segment in power sector is mainly dominated by state owned distribution utilities or DISCOMs. However, continued weak financial position of most of the DISCOMs in the country remains an area of concern in the power sector. The financial position of state-owned distribution utilities on an all India basis has remained weak (as also reflected from median cost coverage ratio being less than 0.9 times in FY 2018) due to:
• Inadequacy of tariff in relation to cost of supply,
• Inadequate subsidy receipts from state governments, and
• Limited progress in improvement in the operating efficiency level i.e. distribution loss as compared with the regulatory targets set by the State Electricity Regulatory Commissions (SERCs) in respective states.
Further, utilities in some of the states have high unrecovered revenue gap position because of the lack of tariff revision for a prolonged period in the past and large delays in true-up of the cost variations based on actual. Inconsistency in implementation of fuel & power purchase cost adjustment (FPPCA) framework by distribution utilities in many states has also adversely affected the credit profile of the distribution utilities. With the notification of Ujwal DISCOM Assurance Yojana (UDAY) scheme in November 2015, financial position for the DISCOMs on all India basis has shown an improvement in FY 2018 mainly on account of reduction in the interest cost with de-leveraging or debt take over and debt refinancing done by DISCOMs backed by State Government Guarantee; as seen in Exhibits herewith.
Apart from debt takeover, the financial turnaround of the DISCOMs remains linked to improvement in AT&C losses. However, the progress on this front remains slow. The current AT&C loss levels (source: UDAY website) continue to remain significantly high for utilities in several states as compared to the target fixed for FY2019. The current loss levels continue to remain significantly high in several key states such as Bihar, Chhattisgarh, Haryana, Jammu & Kashmir, Madhya Pradesh, Punjab, Rajasthan and Uttar Pradesh as compared to the target fixed for FY2019. On the other hand, the loss levels in the states such as Gujarat, Karnataka and Maharashtra have witnessed an improvement over the loss levels reported in FY2015. Nonetheless, the loss levels in majority of these states also remain slightly higher than the targeted loss level for FY2019.
Another important aspect of the UDAY scheme was the timely filing of tariff petitions by the DISCOMs and issuance of tariff orders by the SERCs. However, the tariff hikes proposed by the DISCOMs and approved by the SERCs for the past 2-3 years have remained lower than what was agreed under the UDAY MoUs leading to persistent gap between average tariff and average cost of supply, though reducing from earlier years. The median tariff hike for the DISCOMs at all India level has reduced from 8 per cent for FY2015 to 4 per cent for FY2016 and FY2017 and further to 3 per cent and 1 per cent for FY2018 and FY2019 respectively. The tariff hike to remain subdued for FY2020 as well, given the limited or no tariffs hikes proposed by most of the DISCOMs and in view of the upcoming elections.
Cash flow improvement in a sustainable manner is critical
With respect to the distribution segment, the progress in improving the financial profile of the DISCOMs as envisaged under the UDAY scheme thus remains slow, given that the reduction in AT&C losses is lower than expected in some of the key states and as the tariff revisions remain lower than agreed under UDAY and are not reflecting the movement in cost structure. In the long-run, the DISCOMs’ ability to keep their operating efficiency within the targets specified by the regulator and their ability to pass on the variations in power purchase costs to the consumers in a timely manner would remain critical for sustained improvement in their financial position. Recently, Ministry of Power has issued direction to the National Load Dispatch Centre (NLDC) & Regional Load Dispatch Centres (RLDC) to schedule and dispatch power from generation companies to distribution utilities (DISCOMs) only after implementation of payment security mechanism w.e.f. August 1, 2019. Payment security as per the notification is required to be in the form of Letter of Credit (LC) by the DISCOMs to the generation companies for the scheduled quantum of power. While the power purchase agreements (PPAs) tied-up between the generation companies and DISCOMs so far have the provision for payment security mechanism in the form of LCs, the provision has not been implemented by the DISCOMs in most of the states till date. The direction by MoP to NLDC/RLDC/SLDC regarding the LC requirement is being implemented by DISCOMs in states especially for conventional power projects and yet to be implemented for renewable power projects (as per industry sources). While the stricter direction of LC requirement is certainly a positive for generation entities, more importantly the cash flow improvement in a sustainable manner is critical for DISCOMs which require adequate tariff revision, operating efficiency improvement as well as timely and adequate subsidy support from respective state governments.
Vice President & Sector Head – Corporate Ratings,