Steady growth in demand and supply

The Indian power sector, despite its inherent systemic stress, is witnessing growth on the back of technological advancements in renewables and continued government support. With a total generation capacity of over 350 GW as of March 2019, India has emerged as the world’s third-largest electricity producer. Of its total installed capacity, around 46% is contributed by the private sector.

India’s electricity demand growth, which has been steady at 5% over the last five years, is expected to increase. This increase in demand growth is expected as a result of two factors. First, increased electricity demand owing to rising disposable income, increasing urbanisation and government policy initiatives such as ‘Saubhagya’ providing electricity access to all and ‘24X7 Power for All’, increasing per capita electricity consumption. Second, shifts from other fuels to electricity with standby power, agricultural applications, transportation and cooking among others. As per the latest study1, the share of electricity in India’s energy mix stands at 17%, which will move closer to 25% as is in developed countries.

Balancing the increasing electricity demand along with local and global environment considerations would need a transition to a balanced mix of various generating capacities, including thermal and renewable. Penetration of renewable power, especially wind and solar, has been increasing steadily and is expected to grow much faster in the coming years.

Balancing renewables with conventional energy

Such higher penetration of variable and dispersed generation presents a challenge in planning as well as operation of grids. While renewable energy has enormous environmental and energy security benefits, it poses a challenge due to its variable generation profile. Thus, its benefits can be fully utilised only by striking a right balance with other dispatchable generation sources such as thermal power. Such optimum balance will ensure power supply that is economical, clean and reliable, and will stir growth in the economy.

Higher renewable capacity addition would create opportunities in transmission, especially in the areas where grid is either absent or weak, to strengthen the network. The government plans to add ~500 GW of renewable power by 2030. As of now, most of the renewable capacity is transmitted through existing surplus capacity in the grid; however, such magnitude of renewable energy addition would require planning and development of new transmission corridors. The amendment in the regulations by the Central Electricity Regulatory Commission (CERC) to allow the Solar Energy Corporation of India (SECI) to apply for connectivity to interstate transmission network is an indication of changing transmission model.

In terms of operations, the balancing requirement of variable renewable generation is already leading to emergence of market for supply of balancing power. The unrequisitioned surplus generation capacity of generators is used as ancillary services; such surplus may not always be available however. A permanent mechanism to manage renewable integration as well as provide for emergency situations is on anvil. In addition, and prior to ancillary services, the discoms would require a liquid intra-day market for power to manage the variable generation and load. The central commission has already initiated the process and has published a discussion paper on redesigning the real time electricity market in India. Such market also offers opportunity for thermal generation to provide balancing power at a short notice.

Supportive national policies

As thermal generation continues to be stressed, now there is an increased level of realisation at the policy level on the need for coal-fired plants to address base load in the near-term. A number of recent policy initiatives are gradually showing results. This includes at the operational level where centralised bids for supply of mediumterm power were invited. At the policy level, a High Level Empowered Committee was set up to address the stress issues in thermal generation. Its recommendations would have wide-ranging impact such as grant of linkage coal for shortterm power purchase agreements (PPAs), procurement of bulk power by a nodal agency against pre-declared linkages, and also making late payment surcharge mandatory by discoms.

As a longer-term policy initiative, a draft of New Tariff Policy was published, which proposed several key changes such as ensuring 24-hour power supply to consumers by improving fiscal discipline, stringent enforcement of clearing discom payment dues, subsidy disbursement through Direct Benefit Transfer (DBT) on similar lines of LPG, reduction in cross-subsidies – to be brought within ±20% of the average cost of supply -- shift from post-paid billing to pre-paid, early dispensation of impact of change in law and associated carrying cost for generators. Introducing measures like enforcing payment security mechanism in PPAs by linking it with grid access, will be a watershed intervention.

Further, with increasing concerns about the environment, thermal generation would also be going through a major change in terms of stricter norms for emission, ash utilisation, water use, etc. Thus, while the cost of power from renewables is coming down, the actual delivered cost of power is bound to increase in near future due to balancing cost of renewables, cost of meeting environmental norms for thermal plants, new and lower utilised transmission system required for renewables. To minimise national generation costs, CERC has introduced optimised dispatch of inter-state generating plants for which tariffs are determined by CERC. This would eventually lead to a pool market model operating on principles of merit-based economic dispatch where generators with long/medium and shortterm contracts will be able to participate, while existing contracts are protected. Merit-based economic dispatch would provide easier access to power markets for discoms to balance their power portfolio with long- and medium-term contracts and meeting the residual demand through the pool market, resulting in optimised cost of supply of power. There have also been other regulatory changes proposed in the past that are in advanced stages of implementation, which would facilitate this transition. A major one is regulation on network access. If implemented, this would enable a new market structure as the access to central grid would be uniform and would discontinue present system of long, medium-term and short-term access. Further, to facilitate market development, CERC has notified an amendment to the Open Access Regulation to create National Open Access Registry. This will enable transparent online processing for getting inter-state open access to the Inter State Grid System. Its implementation will open the power market by removing controls/constraints in issuance of access to the potential consumers.

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Distribution still a concern

To sustain the transition to optimised, clean and sustainable power sector, distribution is a key link. Power distribution in India is largely a state-owned monopoly and despite number of measures taken by the government over the years, it remains the most challenging part of the power sector value chain. Distribution sector will have to improve its technical and financial efficiency, i.e., technical losses and full recovery of cost of supply. The UDAY scheme, introduced in 2015 to improve discoms’ financials, achieved some of its goals but not a complete turnaround. Although there have been improvements -- as against the target of 15%, average aggregate technical and commercial (AT&C) -- losses in the country are still around 18% with the gap between average cost of supply (ACS) and average revenue realised (ARR) at H 0.23/unit in FY 2018-19. This is leading to large outstanding receivables from discoms. As per PRAAPTI portal where the data for receivables is compiled, the total outstanding dues by discoms to generators as on March 2019 are to the tune of H 374.5 billion. Of these, the private sector accounts for nearly 50%. Not included in this are the disputed amounts that need regulatory clarity. As a result of financial stress and also due to perceived falling prices of renewable power, discoms are not planning any long-term power procurements and are increasing their reliance on short/medium-term power procurements. Supply of free or subsidised power, without adequate ring fencing of the necessary subsidy by state governments, has become an unsustainable trend. This in long term would affect investments in generation sector.There is a growing realisation that to improve the power sector in general and discoms in particular, greater regulatory independence, capability-building, and resourcing are necessary. It is anticipated that the upcoming amendments in the Electricity Act and tariff policy will address this issue.