On the installed capacity front, coal-based capacities should not increase from the current level. While there is surplus power generation, rise in power demand and signing of PPAs remain the key factors to watch.
India's power sector is undergoing structural changes with an unprecedented scale-up in renewables, Ujwal Discom Assurance Yojana (UDAY) implementation at distribution companies (discoms/SEBs), uncertainties over offtake arrangements and pressure on promoters/lenders to divest assets to avoid bankruptcy. The government is focusing on Aggregate Technical and Commercial (AT&C) loss reduction, fuel and Power Purchase Agreement (PPA) rationalisation, energy efficiency and demand revival. While there is definite progress, implementation is likely to be uneven as power is a concurrent subject with different starting points for each SEB. Though power procurement remains uncertain with competition among various modes of generation, we are seeing steady demand for Transmission and Distribution (T&D) infrastructure. India's total installed power capacity as of October 2017 stood at 331 GW with ~58 per cent share of coal-based capacities. All India installed renewable capacities as of September 2017 stood at 60 GW, with Wind and Solar capacities comprising ~54 per cent and ~25 per cent respectively. In the past 3 years, Solar and Wind are growing faster than the remaining market, but have seen headwinds emerge over the last 6 months in terms of revision of PPAs by states, rise in solar panel prices and GST related uncertainties. .
Receding renewables' pace
An August 2017 address by Arvind Subramaniam, the Chief Economic Adviser to the Centre, highlighted that renewables have not attained true parity against coal, if one factors in subsidies and cesses on both. Reviving coal-based plants would also aid resolution of India's twin balance-sheet problem. On the other hand, renewable expansions will slow down in FY18E (2017-18) due to migration of wind to competitive bidding and a rise in module prices. .
We have run sensitivities on (1) 4-8 per cent demand CAGR and (2) net 15 -10GW change till FY20 and 8-12GW annual expansions. We expect coal-based PLFs to hover between 57/55 per cent and 77/79 per cent in FY20/FY22 respectively in these scenarios..
Visibility of govt initiatives
Given the current supply-demand equation, the action plan includes reducing AT&C losses, increasing energy efficiency and pushing demand growth. T&D is a focus area for attaining these objectives. Schemes like UDAY, Integrated Power Development Scheme (IPDS), Deendayal Upadhyay Gram Jyoti Yojana (DDUGJY), and Transmission App for Real Time Monitoring & Growth (TARANG) target reduction of AT&C losses, while Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India (SHAKTI), Discovery of Efficient Electricity Price (DEEP) and 'Vidyut PRAVAH' mobile app should enable fuel and PPA rationalisation. URJA MITRA App and Unnat Jyoti by Affordable Lighting for All (UJALA) scheme would help improve energy efficiency, while the 'Power for All' scheme is seen spurring demand in Uttar Pradesh, South India and Rajasthan. Updated websites and mobile apps have made it easy for the general public to track these initiatives.
Drying greenfield funding
With banks turning cautious on greenfield generation and SEB financing, power sector financing has grown 5 per cent in the past 30 months. Policymakers need to resolve the twin balance-sheet challenge at the earliest. The 'twin balance sheet' challenge refers to the problematic balance sheets of Indian companies and banks -meaning, both the lenders and borrowers are under stress due to rising corporate debt burden. We have seen a rise in the sale of viable and profitable projects, but projects weighed by cost overruns have hit roadblocks due to the need of lender haircuts. Going ahead, we expect acquirers and lenders to be more flexible on this front since there is pressure on account of the Insolvency and Bankruptcy Code.
States like Rajasthan, UP, Punjab and Maharashtra have seen year-on-year (yoy) demand growth ranging from 9 per cent to over 25 per cent in FY18. 'Power for All' and UDAY implementation could be the main reasons driving this growth. About 86 per cent of the committed bond issuance under UDAY has been completed and there has been reduction of the ACS-ARR gap from 79 paise in 2016 to 26 paise in September 2017. Tariff petitions have been filed by 22 states and issued to 20 out of the 27 states under UDAY. On the operational front, there has been all-round progress from March 2016 to September 2017 with several activites reporting growth - in feed metering (18 per cent), DT metering (23 per cent), electrification (10 per cent), smart metering (23 per cent), feeder segregation (7 per cent), feeder audits (308 per cent) and LED distribution (258 per cent).
Power Transmission & Distribution is witnessing expansion with major capital expansion (capex) led by Power Grid Corporation of India Ltd (PGCIL) and states also are focusing on reducing AT&C losses under UDAY scheme. PGCIL has planned investment of around `130,000 crore for the next five years. Also, many government schemes like DDUGJY, IPDS, Power for All and Saubhagya are pushing electrification in the country. We expect the government to make concerted efforts to increase the share of electricity in total energy demand from ~17 per cent to 25 per cent. Apart from the electrification push, we expect a major thrust on transport and cooking fronts with initiatives like railway electrification, electric vehicles and induction cooking, which will boost electricity consumption.
On the installed capacity front, coal-based capacities should not increase from current levels with the government focusing on shutting older power plants, and increased thrust on renewables in the country. Renewable share will rise gradually in total installed capacity in longer term, despite near term sector headwinds. While there is surplus power generation in the country, rise in power demand and signing of long term PPAs remain the key factors to watch out for.
Author: Devam Modi - Director of Equirus Securities
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