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Analysis | October 2012

Power sector scenario in next five years

Power deficit and insufficient transmission capacity are widely believed to be the main causes of this grid failure. This might just be a tip of the ice berg of issues currently vexing Indian power sector.

Power supply deficit in India during 2011-12 stood at 9 per cent and the peak load deficit stood at 11 per cent. The deficit is only expected to increase in the coming years. A sustained high GDP growth will put further demand pressure and about 95 GW of generation capacity addition is required by FY 2017. This seems to be a big task given the issues such as fuel unavailability, high system losses, transmission capacity constraints, delays in generation capacity addition, etc. Ensuring fuel security for such large capacity additions would be a challenge for the nation.

Revenue Management

The distribution utilities have accumulated losses of Rs 107,000 crore as of March 2010 as the gap between the tariffs and the costs have widened over the years. The main reason for this is the non-regular increase of tariff (due to political interference in tariff setting).

Taking a step in right direction, many states have recently hiked tariffs by upto 26 per cent. However, this may not be sufficient to cover the accumulated losses. State electricity regulatory commissions (SERCs) need to ensure regular change in consumer tariffs to reflect the economic realities of discoms.

Distribution

The distribution utilities in India experience very high aggregate technical & commercial (AT&C) losses. While AT&C losses have reduced from 39 per cent in 2001-02 to 27 per cent in 2009-10, the absolute losses are still very high. With huge power supply deficit, India cannot afford such high loss level.

Government of India launched R-APDRP programme to reduce AT&C losses up to 15 per cent through application of IT and technological upgradation and strengthening of distribution infrastructure. Projects to the tune of Rs 31,418 crore have been sanctioned under this scheme. SERCs, along with setting yearly loss reduction targets, should proactively ensure right measures are implemented by utilities and monitor their performances with stringent incentives/penalties.

Existing UI policy and the penalty charges are not acting as a deterrent for the distribution utilities to overdraw power from the grid and instead UI is being seen as a source of power. The regulator needs to have a relook at the UI policy make suitable modification to ensure grid discipline.

Transmission

Congestion of existing transmission lines limits the amount of power certain regions (eg, Southern Region) can import or trade. With significant generation capacity coming up in the Eastern India (closer to domestic coal mines) and along the coast (imported coal plants), additional transmission capacity is required to enable power transfer from surplus regions to deficit regions and trading.

Inter-regional transmission capacity at the end of 11th Plan was expected to be about 25,650 MW. With expected generation capacity addition of 76,000 MW during the 12th Plan, additional interregional transmission capacity of about 38,000 MW may be needed thereby more than doubling total capacity to 63,000 MW. This scale of addition targeted is very ambitious.

The estimated investment requirement for transmission system in the 12th Five Year Plan period is about Rs 1,80,000 crore. Given such scale of investment, encouraging larger private sector participation by modifying participation models to ensure optimal returns and optimal risk sharing is necessary in order to bring in necessary capital and execution capability.

Obtaining Right-of-Way (ROW) is a key challenge in implementing the transmission projects. Innovative models such as paying a lease rental over long term instead of high upfront payment in order to reduce the initial cash outflow. This would also provide regular income to land owners and help in overcoming their resistance. Increasing the transmission voltage would also reduce overall requirement of ROW.

Generation

A myriad of issues are leading to slower than required growth in generation capacity.

Land, water and environmental clearances: Land is increasingly becoming a scarce resource due to demand from competing sectors and resistance from local population and land owners. With other uses such as drinking and irrigation having priority in allocation of water, the power plants are facing constraints in availability of adequate fresh water and difficulties are being faced in selection of suitable plant location.

Delay in obtaining environmental clearance is one of the key reasons from delay in execution of generation projects. Government needs to take a balanced view in awarding environmental clearances in the larger interests of the nation. Expediting the clearance would help in achieving the required generation capacity addition targets. Coal transportation infrastructure: Unavai¡lability of rakes is a major bottleneck in coal movement and has resulted in a huge stock of around 70 million tonnes at CIL mines by the end of 2011-12. To meet the targeted off-take of 474.70 million tonnes for 2012-13, CIL has sought 193 rakes/day for 2012-13 against the average availability of about 168 rakes/day during 2011-12. This appears to be a big task for the railways to match.

Initiatives such as linkage rationalisation, setting up of coal washeries, building adequate crushing facility at mine head, and increasing effective carrying capacity of rakes would help reduce transportation cost and increase rake availability. Integrated planning and development of different modes for domestic and imported coal evacuation (rail, road and ports) would ensure timely availability and optimal utilisation of evacuation infrastructure. Encouraging higher private sector participation would complement the availability of capital and other resources required for infrastructure development.

Financing the projects: Uncertainties of fuel supply, power offtake and expected revenue realization are resulting in the financial institutions shying away for extending funding to the power generation sector. Most of the upcoming generation projects are either in near completion stage or in planning stage. The plants that get commissioned in next two years might reduce the power demand-supply gap. However, the projects in the planning stage which have not tied up funds are at greater risk.

Fuel Sourcing

Lack of fuel security: About 28 GW of coal-fired capacity is currently stranded due to coal unavailability, which is the biggest threat to the sector. India has the fourth largest coal reserves (276 billion tonnes) in the world. However, the domestic coal demand-supply gap has been increasing consistently from 50 million tonnes in 2007-08 to 161.5 in FY 2011-12 and is likely to increase to 943 million tonnes by 2031-32. Issues like land acquisition and delays in environment clearance for new projects have affected the production ramp-up of CIL.

Slow growth of coal production from captive coal blocks further increased the fuel deficit. Of the 215 coal blocks (geological reserves of 45-50 billion tonnes) allocated to various private and public sector players, only 28 blocks have started production. Delays in obtaining forest clearance, land acquisition and commissioning of the end use projects (power, steel, cement plant) are major reasons of slow development of captive mining. Show-cause notices for de-allocation of block has been recommended/issued for 58 captive coal blocks which have not met development targets.

Creating a favourable policy framework to ramp up the domestic coal production should be the top most priority for the country. Expediting legislative reforms pertaining to land acquisition and R&R and captive mine surplus coal usage as well as enforcing single-window clearances for priority projects would help in increasing the coal production. CIL should adopt better technologies to increase productivity and increase share of underground mining, which requires lesser land area than open-cast mining.

Gas-fired capacity (18,039 MW) was run at lower PLF (59.9 per cent during 2011-12) due to fuel shortage. The short-fall in the expected supply from KG-D6 basin may lead to further lower PLFs. Gas supply shortage resulted in an idle capacity of over 1,600 MW in AP. LNG imports seems to be an unviable alternative due to current high cost ($10-16/mmbtu) compared to the KG-D6 gas price ($4.2/mmbtu). Enabling LNG import infrastructure and creating a regulatory framework to enable developers operate the gas based capacities as peak load plants using LNG would help in utilisation of stranded assets and make LNG imports viable.

With the technological developments and the government incentives, renewables are becoming more viable sources of power generation. However, in the near future renewables are likely to play the role as a support source and dependence on conventional energy sources would continue.

Fuel price escalation risk: In the competitive bidding process (Case-1 and Case-2), many bidders have taken on larger share of fuel price risk and have acquired coal mines in countries like Indonesia to mitigate fuel price escalation risk. But recent regulatory changes in these countries resulted in significant increase in the coal cost. This unforeseen fuel cost increase and inflexibility of Power Purchase Agreement (PPA) terms is impacting viability of imported coal based power plants. Private developers are currently taking up this issue across various government agencies to increase the agreed tariffs. Current PPA contract structure doesn't protect bidders against changes in imported fuel regulations and bidders' ability to manage this risk is limited. Options such as allowing changes in the PPAs to factor in the changes in the fuel regulations and ensure appropriate equity returns (lower of RoE assumed in the bid and 15.5 per cent assured by regulator for plants under regulated tariff) to the bidder needs to be evaluated. This would encourage participation in future bids. Also, moving towards efficiency based bidding instead of tariff based bidding might be more beneficial to the buyers.

While the sector awaits a solution for the above myriad of issues troubling power sector, the investments in the sector are dwindling which could lead to larger power demand-supply gap by 2016-17.

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