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Expert Speaks | February 2017

India Progressing Towards Optimum Energy Mix

Ashok Puri, Managing Director, Hinduja National Power Corporation Ltd (HNPCL), talks about how despite a necessary dependence on coal, India´s future energy mix, does look greener.

The summer of 2017 promises to be a watershed year for India. While the government burns the midnight oil to introduce GST by start of the upcoming financial year, Piyush Goyal, Minister of State (I/C) Power, Coal, New and Renewable Energy and Mines, is confident that all villages will be connected to the grid by May 2017.

A reform-led government, has had an unprecedented impact on India´s ease of doing business. The DIPP´s state rankings index has made each state vie for the top spot, as it would help attract more investments. With over $220 billion investment pledges by companies to ´Make in India´, there is a huge potential to raise India´s manufacturing prowess. But, is India´s energy sector ready for the challenge emanating from rising power needs for industrial purposes? The energy sector in India has seen a transformational shift in the past decade with policy-level initiatives and focus on effective implementation. More recently, initiatives towards addressing pending issues such as coal auction as well as allocation and auction of natural gas have rejuvenated the power sector. Also, Integrated Power Development Scheme, Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Ujwal Discom Assurance Yojna (UDAY) have addressed specific issues for the industry.

Per-capita electricity consumption of the country has now crossed 1,000 kilowatt-hour (kWh), which is still way below the average global consumption. China for instance, has a per capita consumption of 4,000 kWh while advanced economies on an average consume 15,000 kWh per capita.

India´s generation capacity has grown at ~CAGR of 10 per cent since 2009. Significant growth in energy capacity has led to energy availability outpacing the energy requirement of discoms and this has resulted in reduction of base peak deficit to 2.6 per cent (LGBR Report 2016-17 CEA).

While these data indicate that the government is doing its best to ensure that the entire country has access to electricity in a short span of time, there are some anomalies that need to be redressed. The demand projected is then quite suppressed. As the State Electricity Boards (SEBs) face financial difficulties due to low tariffs and high purchasing costs, their capacity to buy electricity is greatly reduced.

It is pertinent to note that the latent demand is much higher than the energy requirement projected by discoms, which have been relying on medium and short-term contracts to meet demand. However, due to the transmission constraints, vagaries of short term procurement, discoms will be entering into the long term PPAs. The proposed GNA (General Network Access) Framework may encourage discoms to enter the long term PPAs.

The financial health of the discoms and efficiency in operations is an essential element in delivering reliable, cost effective power supply. The recent policy initiative -UDAY, is a good step forward in revival of the distribution sector.

Unlike the previous schemes, UDAY´s focus is not only turnaround of discoms, but revival of the entire distribution sector. The emphasis is on cost efficiency through reduction in interest burden, operational cost and losses, and revenue efficiency through metering, billing, collection and periodic tariff increase to adjust the increase in fuel prices.

The aggressive targets to bring AT&C losses to 15 per cent and to completely bridge the gap between the annual revenue requirement and average cost of supply as well as making discoms profitable by FY19 are indeed encouraging.

The active enrolment of 13 states to the UDAY scheme and its projected impact are transformational.

The distribution sector revival will go a long way in rejuvenating the latent demand and contributing the overall sectoral growth.

There is little doubt that reforms in the power sector brought about by the Electricity Act 2003 have been phenomenal in enhancing transparency, competition and efficiency. Despite significant progress, the distribution sector revival has been slow on account of multiple factors. According to the Power Ministry, over 28,000 ckm of transmission lines have been constructed in FY2016 and 15,000 ckm more have been constructed from April to September 2016. Energy deficit hit an all-time low of 2.1 per cent.

As of September 2016, India´s installed power capacity stood at over 306 GW. These impressive numbers against the backdrop of the ailing power sector indicates that India´s power sector suffers more from lack of infrastructure and demand issues than the supply problems experienced earlier.

Stranded assets, lower demand growth and rising interest rates, fuel security, regulatory environment, have in recent past contributed to slower pace of investments. The sectoral exposure of banks has been high due to rapid capacity addition during the 11th and 12th five-year plans.

Policy level initiatives such as the R-LNG e-auction scheme for stranded gas assets, enhancing fuel security by ramping up domestic coal production, signing of FSA for linkage projects and allocation of coal blocks have boosted the confidence of investors. The subsequent cut in interest rates by the RBI has also improved the market sentiment significantly towards the sector.

Significant investments are envisaged in the transmission and renewable sector. Creation of green corridor for renewable power evacuation and transmission capacity augmentation to realise unconstrained power trading across the country holds significant opportunity to build strong relations across the sub-continent.

Last but not the least, the government´s drive to build 175 GW of renewable energy by 2022 will help achieve energy security and reform the energy mix. The considerations to meet energy demands, sustainability, energy security and lower costs are driving renewable energy growth.

Renewable electricity prices are have now achieved grid parity. Public opinion is positive with the recognition of environmental, economic and social benefits. The resource potential of India is now recognised as substantially higher than earlier. Higher wind energy potential is possible with new scale and technologies.

Strong support from the Government of India reinforces the market fundamentals, creating a vibrant market which is growing rapidly. India already has 44 GW of renewable energy capacity and plans to grow this by 500 per cent over the next few years. With social and economic growth are at the top of the government´s agenda, and new energy sources to serve this demand are increasingly coming from renewable energy.

Government policies in the renewable sector have been encouraging ù through incentives, infrastructure and investment promotions. Technological advancement, larger-scale projects and learnings from the execution have resulted in reduction of costs. With the power from renewable sources achieving grid parity and lower project execution time lines, renewable energy has grown attractive to power utilities that are contracting new long-term capacity. Reforms and a strengthened regulatory framework to resolve challenges namely grid integration and power off-take, have resulted in market creation. The renewable sector presents compelling opportunity for developers and suppliers and is a major transformation opportunity for power markets.

With increasing demand growth, the sector presents great opportunity. In the days to come, reinvigorated interest will attract significant investments in the power sector. The consistent demand growth, financially strong discoms and augmented transmission corridor capacity and a rapidly growing renewable market are signs of beginning of a new growth phase in the sector.

This will impact electricity tariffs, operations of utility, environmental conditions, and increase accountability of stakeholders as well as consumers. But most importantly the heightened interest and investments will culminate into an optimum energy mix that bodes well for India´s identity as a leading economy against climate change.

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