Calling for sops

Despite strong credit risk profile of ISTS projects and Rs 5,000 crore- inflow into the bond market, aging transmission dims hopes for government's energy goals as poor infrastructure weighs on the mainstay of electricity supply. Electricity forms an integral part of the utilities which currently contribute nearly 2.02 per cent to Asia's third largest economy. The nation's power sector has long been grappling with grim infrastructure and ageing transmission - woes that have debilitated the nation's economic health. A dearth of transmission lines has slowed, if not impeded, the fruition of clean energy goals of the corporates as well. For our readers to know, the T&D equipment contributes to nearly 72 per cent of the entire market for electrical equipment in India. Current scenario Currently standing at 22 per cent, losses in transmission and distribution (T&D) - the most critical component of infrastructure crucial for economic growth are disempowering. Issues like power theft, debt-laden companies and aggregate technical and commercial (AT&C) losses continue to plague the Sector, even in the wake of measures like Decentralised Distributed Generation (DDG) which rekindle the waning hope for room to set up independent power units without any grid. Of trend and technology Domestic and multinational companies are currently dominating the T&D equipment industry which comprises primarily of small and medium enterprises. Fast-paced industrialisation and urbanisation is providing impetus to adoption of smart grid technologies, say experts. 'Despite beginning late, India is fast catching up with countries like the US by setting the trend for adoption of grid automation technologies like smart grids on a war footing,' Hartek Singh, Chairman and Managing Director, Hartek Group told Power Today. 'Having adopted latest technologies like advanced metering infrastructure (AMI) and smart grid distribution and communication, the US dominates the smart grid market. But of late, this market has been attracting large-scale investments in India as well, where the focus is on reliable power supply like never before,' he said. Opportunities Privatisation of electricity distribution will help supply electricity to around 2 million consumers in the distribution circles of Bhubaneswar, Cuttack, Paradeep and Dhenkanal. Additionally, a green corridor project is under implementation in Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, and Tamil Nadu. Once completed, these corridors will facilitate evacuation from solar parks and large-scale grid-connected solar and wind projects. The critical green energy corridor, which is important to evacuate renewable energy, is being implemented at a relatively slow pace. Encouraging private investments and formulating favourable policies, says Singh, can propel the smart grid market by employing electrical power transmission systems based on high-voltage direct current for supplying electricity over long distances with minimal losses. This can help bridge the gap with the US, he said. Additionally, companies are also likely to get ample opportunities with augmenting clean-energy demand and development of under-developed area and cross border network. India Ratings and Research (Ind-Ra) has maintained a stable outlook on transmission sectors for FY19 given contracted long-term revenue, energy output in line with P90 estimates, among others. 'The country's 85 per cent of transmission network i.e. 145,400 ckm is owned by Power Grid Corporation of India (PGCIL) that has commissioned about 22,000 ckm and added capacity of about 49,000 mva, and plans to add another 21,000 ckm, and 63,000 mva in next two financial years,' says IS Jha, Chairman & Managing Director, PGCIL. At present, the company is sitting with a bag of projects worth Rs 1 lakh crore and approved capex plan of Rs 25,000 crore. PGCIL plans four inter-state transmission system projects worth Rs 2,600 crore. Bond market CRISIL estimates inter-state transmission system (ISTS) projects present a Rs 30,000 crore refinancing opportunity for the bond market over the next 3 years as 14,000 circuit km of under-construction lines come on stream. The credit risk profile of operational ISTS projects is strong because of assured cash flows, low operations and maintenance (O&M), and low counter party risk. This appeals to bond investors, as is evident from bond issuances of Rs 5,000 crore for operational ISTS projects over the past couple of years. Says Sachin Gupta, Senior Director, CRISIL Ratings: 'Such refinancing will help lower cost by around 100 basis points. Also, the tenure of funding will get extended to 15 years or more, which would improve the financial flexibility of projects. It will also free up capital for banks that can be used for lending to other sectors.' Revenue for ISTS projects is assured through long-term (30-35 years) transmission service agreements, and is delinked from the quantum of electricity transmitted. To be sure, revenue is contingent on maintaining line availability above 98 per cent. But this is easily achievable through routine O&M, and is not technically challenging. An analysis of operational ISTS assets of companies rated by CRISIL shows consistent availability of over 99 per cent. That's unlike private thermal generation assets, where revenue remains exposed to higher risks of fuel supply, plant availability and, most importantly, counter-party risk of financially challenged state distribution companies (discoms). Counterparty risk is quite low for ISTS projects because of the presence of a point of connection, or PoC, mechanism, managed by Power Grid Corporation of India (PGCIL). Under this, all ISTS projects have shown timely collection of more than 97 per cent payments from respective discoms. CRISIL expects this collection track record to sustain over the medium term given the strong and active role of PGCIL. Says Nitesh Jain, Director, CRISIL Ratings, 'Given the milieu, CRISIL expects the credit profiles of ISTS projects, once operational, to remain healthy, and present a fairly large, low-risk investment opportunity to bond investors.' Risks Transmission projects still exhibit high project availability. Interstate projects exhibit stable receivable period, while exposure of intrastate projects to single counterparty risk continues as a major credit risk, despite some states making regular payments for intrastate projects. Introduction of general network access would not affect the payments to interstate transmission projects, as revenue collection by pooling mechanism is slated to continue under general network access. Projects under construction remain constrained by risk of delay in commissioning due to right of way issues and cost escalation. Of 39 interstate projects which have been awarded based on tariff-based competitive bidding, 15 projects have commissioned. Four projects have commissioned on or before scheduled commercial operation date and the rest have faced delay of 1-22 months. Delays beyond a year were majorly caused by delay in forest clearance and change of project scope. Since 2016, says Divya Charen C, Analyst, India Ratings, 'Transmission projects have been allowed to start work in forest area after receipt of Stage I clearance instead of Stage II clearance earlier. Hence, forest clearances may no longer cause significant delays.' Of imports 'The country is still import-dependent owing to its inability to cater to the domestic or global demand for T&D equipment,' says Gautam Seth, Joint Managing Director, HPL Electric & Power Ltd. Given a lack of stringent industry norms, a significant number of unorganised players are present in the electrical equipment industry value chain, characterised by low or sub-standard market offerings, grey market interests, and regional presence. LT electrical equipment segments like domestic wires, LT switchgear, and lighting products also witness a large number of unorganised market players, Seth said adding, 'growing awareness of safety and product standards continues to contribute to a decline in their market share'. Feeling the blues Transmission capacity has grown at a healthier pace - at a CAGR of 9.1 per cent between fiscals 2015 and 2017. However, grid integration could pose a challenge as more renewable energy capacity is added. The overall AT&C losses (%) for utilities selling directly to consumers increased from 22.58 per cent in the year fiscal 2014 to 23.97 per cent in fiscal 20172, which underscores the distribution sector woes. One of the key missions of Ujwal Discom Assurance Yojana (UDAY), launched a year and half ago, was to reduce AT&C losses to improve operational efficiency of state-owned discoms. While some discoms have managed to reduce, the laggards are many. Only 5 states have managed to achieve their UDAY target on this count. The 10-per cent surcharge on customs duty for import on all items has already spooked the sector followed by the Directorate General of Safeguards Duty that suggested 70-per cent duty on import from China. The move, if implemented, could swell the solar power rates Rs 1-2 per unit and is also likely to set the cost of energy storage batteries soaring. Experts believe consumers are likely to feel the heat given that changes in cost due to surcharge would be passed on to them, leading to rise in power cost causing a domino effect on fuel cost as well. Further, measures for provisioning system of solar panels, metering of distribution transformers or feeders or consumers in urban areas and IT enablement of the distribution sector, are still awaited. These measures, if implemented, could help in strengthening sub-transmission and distribution. Deals speak The sector is witnessing hustle in the space of projects. L&T Construction recently bagged orders worth Rs 500 crore for projects in Kerala and Jammu and Kashmir, while CLP India acquires Essel Infraprojects Ltd's power business. T&D projects are considered to be a safer bet, owing to the annuity nature of the business. However, land acquisition, right of way, forest clearance, among others is risks which are restricted to the stage of construction alone. Currently, total outstanding order book for transmission companies is at Rs 40,000 crore which includes domestic and international orders, and is swelling with rising demand. Power transmission capex, according to Antu Epan Thomas, Research Analyst at Geojit Financial Services is estimated at Rs 2.6 lakh crore for the next five years on the domestic front. 'Internationally, capex is estimated at $1 trillion over the next five-six years,' he says. 'We remain positive on KEC international owing to pick up in execution and scaling up business in international market. We expect strong orders from markets like SAARC, Brazil, Africa, and in domestic market traction in SEBs will ensure healthy order pipeline,' he said. Power moves Increasing waiver of inter-state power transmission charges and losses for the renewable energy projects commissioned till 31 March 2022, the government reinforced its thrust to achieve the 175 GW target for renewable energy capacities. This includes 100 GW of solar and 60 GW of wind energy. India has an installed renewable generation capacity of 62.84 GW, presently, excluding large hydro projects exceeding 25 MW. The government is also in plans to auction 40GW of solar energy capacities and 20 GW of wind projects in 2018-19 and 2019-20, so as to meet the target. With the roll out of an array of schemes including Deen Dayal Upadhyaya Gram Jyoti Yojana and Integrated Power Development Scheme (IPDS), the government also aims to pare mounting T&D losses to 15 per cent by 2019. Experts hinge hopes on government initiatives including an outlay of Rs 16,000 crore to provide free electricity to all unelectrified house in rural areas under Saubhagya Yojana, an estimated Rs 30,000 crore for inter-state power transmission system projects, Integrated Power Development Scheme (IPDS) for urban areas with outlay of Rs 32,612 crore with a focus to reduce the AT&C losses to 15 per cent by 2019. On the clean energy front, renewable has bagged Rs 10,099 crore which the government earmarked in Budget 2018 out of which 50 per cent is given to solar energy while 20 per cent of the funds would be reserved for wind energy. Experts believe the allocation could prove to be beneficial for T&D companies.    Big Picture While the government had rolled out Rajiv Gandhi Gramin Vidyutikaran Yojna (RGGVY) in 2005 for creating rural electricity infrastructure and electrifying the households falling below poverty line, among other such initiatives, rural population of over 300 million is still spread thin over living amid lack of quality power supply. Power sector, in a country called the 'fastest growing economy,' stands in supplication seeking sops to resolve the lingering issues.