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Overview | December 2017

Racing Ahead of Demand

<span style="font-weight: bold;">Power generation capacity surpassed demand, bringing the peak demand shortage to a marginal level. Stressed thermal assets remain sizeable at about 60 GW. Given this scenario, power generation prospects are linked to sustainable demand growth.</span> <p></p> <p> The power sector, over a period of six months, has witnessed large scale investments in the power generation segment leading to an increase in the installed capacity to 329 GW as on September 30, 2017 from 132 GW as on March 31, 2007. With the private sector alone accounting for over 50 per cent of this, its overall share in power generation capacity has increased to 44 per cent as on September 30, 2017. This capacity addition is primarily driven by the thermal segment with more than 110 GW added over the period from FY2012 to FY2017, followed by the renewable energy (RE) segment, which contributed 36 GW during this period. The hydro and nuclear power segments witnessed capacity additions of 6.8 GW and 2 GW respectively. As on September 30, 2017, the thermal segment accounted for a dominant share of 67 per cent of the overall installed capacity, followed by RE capacity at 18 per cent, hydro-generation capacity at 14 per cent and nuclear power capacity at 2 per cent. This increase in generation capacity has improved the overall availability of electricity in the country leading to lower energy deficit which has been on a declining trend over the past seven years. The energy deficit has declined from 8.5 per cent in FY2012 to 0.7 per cent in FY2017 with peak deficit decreasing from 9.0 per cent in FY2012 to 1.6 per cent in FY2017. </p> <p> <span style="font-weight: bold;">Challenges </span><br /> However, the sector is facing numerous challenges due to subdued electricity demand growth, delays in signing new power purchase agreements (PPAs) by state distribution utilities or discoms and shortfall in domestic coal availability till FY2015. Besides, continued shortfall in the availability of domestic gas, de-allocation of coal mines by the Supreme Court in September 2014, unviable tariffs due to increase in capital costs or fuel costs or both and high counter-party credit risks due to the weak financial profile of the state distribution utilities have also added to sector woes. These issues along with the sizeable capital expenditure incurred by the independent power producers (IPPs) have stretched their debt levels and coverage metrics. The overall stressed thermal power capacity in the private IPP segment remains sizeable at about 60 GW, despite the various policy level initiatives undertaken by the Government of India. </p> <p> <span style="font-weight: bold;">MARKET SCENARIO</span><br /> While the electricity demand across India increased at a CAGR of 4.7 per cent from FY2010 to FY2017, thermal power generation increased at a faster CAGR of 11.4 per cent. As a result, utilisation of thermal power generation capacity witnessed a significant decline from 77.5 per cent in FY2010 to 59.9 per cent in FY2017. What added to these woes was the focus on RE segment which increased the share of RE-based generation in the overall electricity mix from 5.5 per cent in FY2016 to 6.6 per cent in FY2017, and, is further estimated to increase to about 9 per cent by FY2019. This will, in turn, put more pressure on the thermal power capacity utilisation. This slow or subdued growth in demand can be attributed to the weak financial health of the state-owned distribution utilities, which constrained their paying capacity, and muted demand growth from the industrial segment. The situation is further augmented by the slow progress in signing of long-term PPAs, with state-owned distribution utilities in only four states inviting bids for long-term power procurement over the past four years. Moreover, out of the total bid capacity of 7.6 GW by these states, PPAs have been signed only for 1.4 GW so far. </p> <p> <span style="font-weight: bold;">GOVERNMENT INITIATIVES</span> <br /> To address these issues, the Government of India (GoI) has initiated several policy measures to increase the availability of domestic coal, new coal allocation policy and more importantly, the Ujwal DISCOM Assurance Yojana (UDAY) for the financial turnaround of discoms. Coal India Ltd (CIL) achieved record growth of 9.0 per cent in domestic coal production in FY2016 following a 6.9 per cent growth achieved in FY2015, which has lowered the dependence on imported coal for the power sector. This improvement in domestic coal production follows faster clearances by Government of India, better cooperation from the state governments in acquiring land for mining projects and higher rake availability from railways to transport coal. While the subdued electricity demand led to a slowdown in coal production in FY2017, the sector continued to witness a slowdown in coal imports. </p> <p> <span style="font-weight: bold;">A POSITIVE STEP</span><br /> Further, the GoI in May approved a new coal allocation policy, 'SHAKTI' to enable signing of fuel supply agreements (FSAs) with existing holders of Letter of Assurance (LoA) from CIL and to introduce a transparent bidding-based mechanism to allocate fresh coal linkages. This is a positive development for the domestic coal-based power generators, with a combined capacity of around 28 GW in the private IPP segment, adversely affected by lack of FSAs. </p> <p>Moreover, the electricity demand has witnessed an uptrend leading to a marginal improvement in the all India thermal PLF to 60.0 per cent for the first six months of FY2018 as against the reported PLF of 58.8 per cent in the corresponding period of the previous year. This improvement in demand growth with year-on-year (Y-o-Y) growth of 5.2 per cent in 6M FY2018 has been led by a significant pick-up in electricity demand in the states of Uttar Pradesh (15.4 per cent), Telangana (15.3 per cent), Maharashtra (8.8 per cent) and Andhra Pradesh (6.1 per cent). The increase in demand, coupled with the decline in generation from hydro, nuclear and wind sources also led to an escalation in power tariffs on the Indian Energy Exchange (IEX) in August and September 2017. The average spot power tariffs on the IEX increased to Rs. 3.13/unit in August 2017 and Rs. 4.09/unit in September 2017 respectively, representing an increase of 43 per cent and 63 per cent on Y-o-Y basis. However, the spike in spot tariff is likely to be temporary and unlikely to sustain given the surplus thermal capacity available. </p> <p> <span style="font-weight: bold;">NEW SCHEMES</span><br /> In September 2017, the GoI launched the 'Saubhagya Scheme' with an objective of providing household electrification, especially in rural areas. The scheme aims to provide last mile connectivity and electricity connections to nearly 40 milion rural and urban un-electrified households by December 2018. The thrust of this scheme is on rural electrification which, if implemented in a time-bound manner, is likely to a boost the energy demand, apart from improving the quality of life for rural households. </p> <p>However the implementation of this scheme, on the local front, is likely to face challenges, given the stiff timeline and the wherewithal at the disposal of state power utilities to execute the scheme. </p> <p>On the distribution front, the UDAY scheme envisages financial turnaround of discoms through lower interest costs with a takeover of 75 per cent of their debt by the respective state governments, efficiency improvement and lower cost of power procurement through improved coal supply from domestic sources. State governments in 26 states and one union territory have signed MoUs with the Ministry of Power for implementation of this scheme. Bonds worth Rs.2.32 lakh crore have been issued by states towards refinancing the debt on the books of the distribution utilities, which in turn has improved the liquidity profile of the discoms in these states. The state governments' are taking over this debt in a gradual manner, with part of the refinanced debt being retained as state government loans to the discoms, which will be subsequently converted to grants over the period ranging from FY2018 to FY2021.</p> <p> In addition, increased efforts are required towards improving their efficiency levels in line with regulatory targets and timely issuance of tariff orders by the regulators. </p> <p>However, the issuance of tariff orders by the State Electricity Regulatory Commissions (SERCs) for FY2018 has been delayed in a number of states. As per the regulations only 12 states have issued tariff orders within a timeline of March 31, 2017 so far. </p> <p>Moreover the extent of average tariff hike, based on the tariff orders issued in 21 states is at a modest 4 per cent and does not conform to the proposed tariff hike under the UDAY MoUs in some of the key states. Implementation of UDAY has improved the liquidity profile of the discoms to some extent following the refinancing and part takeover of the debt by the respective state governments. However, the same is not true about the improvement in operating efficiency, given that the progress in AT&amp;C loss level in many of the states is still slow and the losses continue to significantly exceed the targeted loss level agreed in the UDAY MoUs. A sustainable improvement in demand growth and prospects for the power generation capacity remains linked with the extent of improvement in financial profile of the state-owned distribution utilities and recovery from the industrial segment.</p> <p> <span style="font-weight: bold;">Author: </span>Sabyasachi Majumdar, Senior Vice President and Group Head, Corporate Sector Ratings, ICRA Ltd</p>
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