Industry Overview

Steady growth in demand and supply

During FY 2020-21, under exceptional circumstances stemming from the COVID-19 pandemic, strict lockdowns were implemented in the country, resulting in significant drop in electricity demand. As the lockdown measures were softened there has been a steady recovery in demand. In fact, following September 20, the monthly demand has been higher than that in 2019. Further, although overall demand growth in FY 2020-21 was negative at -1.2%, it is significantly better the GDP contraction of -7.3%. In FY 2021-22, with GDP growth expectations of 9.5% , electricity demand is also expected to rebound at a rate over 5% to 6%.

Long-term demand growth is also expected to remain high, as a result of the following factors:
  • Changes in working culture which would result in increase in domestic power consumption and Government policy initiatives, which would mandate providing uninterrupted electricity access to all along with increasing per capita electricity consumption.
  • Shift from other fuels to electricity, agricultural applications, transportation and cooking, etc. As per the latest study, the share of electricity in India’s energy mix stands at 17%, which will move closer to 25% as that in developed countries.

With a total generation capacity of over 382 GW as of March 2021, India has emerged as the world’s third-largest electricity producer. Of its total installed capacity, around 47% is contributed by the private sector.

On the supply side, despite its inherent systemic risks, the country has been witnessing growth on the back of technological advancements in renewables and continued Government support.

Steady growth in demand1

Capacity addition and energy mix continue to reflect the green transition

Of the total generation capacity of 12 GW added in FY 2020-21, the 7.4 GW addition of RE commanded a lion’s share of 61%, followed by 4.2 GW of coal-based capacity. Within RE, solar capacity addition continued to dominate, accounting for 74% (or 5.5 GW). Compared to FY 2019-20, the RE capacity addition, however, remains lower as a result of relaxed timelines for project commissioning allowed by the GoI. due to COVID-19.

Renewable capacity addition higher than thermal capacity2
Renewable capacity addition3

India also achieved an impressive solar rooftop capacity addition of 1.9 GW led by Maharashtra and Gujarat. This was against the backdrop of encouraging policies and emerging business environment for solar rooftop.

A strong marker of a low risk perception among developer and investors of the Indian market, FY 2020-21 saw the discovery of an unprecedented tariff of INR 1.99 /kWh. This year also had its share of challenges in terms of delays in project implementation due to restrictions related to COVID-19. The year saw around 14.2 GW of RE capacity getting auctioned, dominated by grid-scale solar PV (9.4GW) followed by wind-solar hybrid (2.6GW) and wind (2.2GW)

The year also saw lower wind generation across states due to lower wind resource. It underlies the importance of wind resource measurements over longer period. However, even with a low wind season year, share of RE in overall energy mix steadily increased, reaching 11% in FY 2020-21 from a meagre 5% just five years back in FY 2015-16.

Steadily rising share of RE in energy mix4

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

Renewable power procurement is gradually shifting from standalone wind or solar projects to hybrid projects blended with other sources to procure Peak/Round The Clock (RTC) power. So far 5,850 MW of hybrid bids have been successfully auctioned. FY 2020-21 also witnessed a surge in ‘RE plus storage’ auction announcements. Going forward, RE project auction activity is expected to lean towards innovative project designs with the inclusion of energy storage and/or hybrid generation source. Such hybrid projects coupled with storage are expected to enable efficient grid integration of renewables and will also tackle intermittency issues with renewables

Recent policy initiatives to address major issues in the sector

Relief package to tackle impact of COVID-19 lockdown:

Recognising the fact that the power sector would play a key role in economic recovery post pandemic, and as the COVID-19 lockdown dented liquidity position of Discoms impairing their ability to pay to generating companies, special interventions were made by the Government. To maintain liquidity position for the power sector, the following relief measures were introduced under the “Atmanirbhar Bharat” scheme:

  • Liquidity package of INR 1.25 lakh crore to discoms for clearing pending dues to generating companies.
  • Moratorium for discoms to pay fixed charges for power procurement and transmission charges to CPSUs.
  • Payment security maintained by discoms with Gencos was temporarily reduced by 50%.
  • Maintained continuity of coal supply to generators.
  • Extended the timelines for commissioning of RE projects.
Introduction of RTM and G-TAM on power exchange:

In terms of operations, the balancing requirement of variable renewable generation is already leading to emergence of a new market. The un-requisitioned surplus capacity of generators is used as ancillary services; such surplus may not always be available. The discoms need liquid intra-day market to manage variable generation and load. The central electricity regulator has introduced a real-time electricity market (RTM) which caters to the real-time energy needs by bringing the power trade a lot closer to the actual power flow. Both buyers and sellers get opportunities to optimally manage their portfolio through a transparent and efficient mechanism. In addition, it also assists to integrate the intermittent or variable renewable energy into the grid. Within a year of its launch the average cleared volume has more than doubled from ~700 MW in June 2020 to 1,900 MW in May 2021.

Going forward, more renewable hybrid projects would come up and total installed capacity would be more than the contracted capacity leaving a sizeable generation surplus. Such renewable normal power exchange platforms would lose their green attribute. With the introduction of a separate green term ahead market, renewable power would now be able to sell on an exchange platform. This also provides another alternative for discoms and corporate consumers to meet their renewable purchase obligations (RPO). Volumes in G-TAM underwent an initial increase and a subsequent decline due to higher agricultural demand and lean solar and wind season from December 2020 to February 2021. Development of markets like G-TAM is expected to create opportunities for development of merchant RE capacities in the country.

Proposed amendments in Electricity Act:

The power sector has evolved since introduction of the Electricity Act 2003, requiring certain changes to improve discom finances, refining the institutional structurer. The Government has proposed an amendment in the Electricity Act, 2003, laying the ground for landmark structural reforms. Major amendments proposed are:

  • Delicensing of distribution business – Provision to operate private and multiple discoms in same areas, such delicensing of the distribution business is expected to unlock several benefits such as increase in demand, new PPA opportunities, promotion of competition, encouragement for innovative products in the market.
  • No scheduling in absence of payment security as per PPA – to improve cash flows for generating companies.
  • ARR Filing of ARR mandated and SERCs to suo-moto fix tariff if no filing is made within the prescribed timelines – to improve liquidity position of discoms.
  • Granting mandates to state commissions to fix RPO and penalties as per the trajectory prescribed by the Central Government.
  • Enhancing trade of cross-border electricity opening new market opportunities for export of power.

These provisions, if passed, would have a very positive and long-term impact on the power sector.

Optimum dispatch through national merit order:

A national level merit order, the SCED Security Constrained Economic Dispatch (SCED), for ISTS-connected plants was introduced last year. So far, participation in the SCED has been on a voluntary basis, however, with its success, the CERC has proposed to extend it as compulsory for all plants. Such national level economic dispatch of power provides a win-win situation for both discoms and generators, resulting in the formation of a pooled market model. The proposed model will operate on principles of merit-based economic dispatch (MBED) and provide easier access to power markets. Grandfathering the existing contracts, the MBED will help discoms meet the residual demand through the pooled market and help in optimisation of the cost of power.

Scaling up domestic solar manufacturing:

India has set an ambitious target of 450 GW of solar capacity by 2030 to meet its energy needs and spur economic growth. Whereas the manufacturing capacity in India is only 2.5 GW for solar cell and 9-10 GW for solar module in comparison to annual demand of 30 GW. Considering such a gap between demand and supply, India needs to develop domestic solar manufacturing capacities and reduce its dependence on imports. To scale up the domestic solar manufacturing and compete with international players, the Government has imposed a Basic Custom Duty (BCD) of 40% on modules and 25% on cells, from April 2022. This would although increase the tariffs by 25-50 paise per unit, but this step would have a positive impact on domestic equipment manufacturers.

Issuance of Electricity (Rights of Consumers) Rules, 2020:

To empower consumers and hold discoms accountable to provide reliable and quality power, the Government has issued Electricity (Rights of Consumers) Rules, 2020. These rules cover various areas including discom obligations, metering arrangements, release of new connections and modifications of existing connections, grievance redressal and compensation mechanisms. To ensure compliance, the Government will apply penalties that will be credited to the consumer’s account. These rules are also an important step towards furthering the ease of doing business across the country. Implementation of these Rules will also ensure that new electricity connections, refunds and other services are given in a time-bound manner.