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Cover Story | June 2017

Problem of Plenty

India has become a power surplus nation, albeit with certain caveats. In its wake, it has changed the whole paradigm of generation sources, with solar and wind hogging the spotlight and coal being relegated a bit.

Power minister Piyush Goyal has announced at a post-budget conference a few months back that the government had been successful in realising the dream of 'power-surplus' India. A Central Electricity Authority (CEA) official recently said that while there was 310 gigawatts (GW) of capacity in the country, the peak demand was still at 160 GW only, leaving over 48 per cent of the installed capacity unused. Of this, about 46,000 MW of power capacity is fully stranded at the end-March 2017 on account of poor last mile connectivity to the consumers. It constituted about 30,000 MW of thermal generation capacity, while the remaining 16,000 MW is of gas-fed. The unmet demand for power on an average across the country in April 2017 was provisionally estimated at only 1,198 MW or around 0.8 per cent of the total peak demand, except Jammu & Kashmir (J&K) where the shortage is estimated at 20 per cent, all other states or union territories (UT) have experienced an unmet demand of less than 5 per cent. The deficit in power supply in March 2017 was at only 0.5 per cent, down from 1.6 per cent during the same month in 2016.

But one may ask if power supply scenario is so hunky-dory, then why people are unhappy with the power supply scenario? Behind the veil of these figures is the real scenario fraught with power outages and lack of quality power. Besides, it is estimated that power is not accessible to about 250 million people, or about 20 per cent of the country's population even today.

There is a vicious circle haunting the power sector in India - no demand, so no singing of power purchase agreements (PPAs), that means existing and new generators without PPAs flock to power exchanges for selling of power, glut in the exchanges leads to fall in prices leaving such generators high and dry, power distribution companies veered around to the view that buying in exchanges is cheaper compared to entering into long term PPAs, which leads to stranded capacities and lower plant load factor (PLF) in existing plants.

The government, of late, has shifted focus to renewable energy sources like solar and wind, besides in the recent Union budget it has announced its impetus to nuclear power plants in the next 10 years. With renewable energy sources proving to be price competitive when compared to coal-based base energy, and the gestation for renewable energy being below one year compared to four years in case of conventional energy, new capacities in renewable are picking up at a rapid pace.

The fall in prices of renewables has also rendered several existing and new coal-based power projects, particularly those depending on imported coal, unviable. Even the government has started cancelling unviable coal-based projects in the recent months, mostly on the request of promoters themselves.

Surplus
Pankaj Batra, Member (Planning) of CEA,
the nodal agency under the Ministry of Power, at the end of March 2017, surprised many by announcing that the stranded capacity has reached a record level of 46,000 MW - including 30,000 MW from thermal, mainly coal-based and 16,000 from gas-fed. Till then there was speculation on the exact figure on stranded power capacity. He held states and union territories (UTs) squarely responsible for the high level of stranded capacities for not building adequate last mile connectivity, so that this idle capacity could have been utilised to lighten up the rural landscape of the country.

Shailesh S Joshi, Executive Director & Head Energy Consulting Services, Feedback Infra Private Limited, has put the figure of total stranded power capacities in the country at around 50,000 MW.

Stating that there were multiple categories of stranded generation projects, Anish De, partner, infrastructure and government services at KPMG in India, said, 'On one hand, around 14,000 MW of gas based projects are stranded due to shortage of domestic sources of gas, while the remaining 10,000 MW of gas-based projects are operating at abysmally low levels of utilisation for the same reason. More than 6,000 MW of hydro projects are currently stalled due to various reasons such as local disputes, lack of funds and low visibility on power offtake.'

'There are also about 18,000 MW of under-construction thermal projects which are stalled at present due to poor financial condition of the promoters,' Anish De added, stating that such delays with under construction projects result in significant increase in interest costs, while commissioned plants operating at sub-optimal levels face cash flow issues as the revenue is often not enough to service their debt obligations. Joshi cited lack of demand resulting in lack of PPA bidding opportunities, slower than anticipated project execution (due to delays in land acquisition) and in some cases, lack of assured coal supplies, as the main reasons for stranded capacities. 'The project cost on account of delay in project execution increases beyond the appraised numbers. Lenders are unable to fund this project cost overrun and the promoters are also unable to bring in this additional equity. This affects the project viability. Lack of PPA bids means that the project is forced to sell power into power exchanges (at very low prices),' Joshi added.

PPAs
However, the proof of pudding is in the discoms buying more power through signing long term PPAs to cater to those who are not connected till now. But that is unlikely soon, as surplus capacity is leading to lower prices in power markets, providing a cheaper alternative to the state discoms.

With the narrative shifting from shortage to surplus, the promoters are struggling for PPAs in buyers market as even utilities with old PPAs prefer to buy cheaper power from electricity exchanges than getting tied down with new agreements.

'The growing trend appears to be shifting away from long term PPAs to medium/short term contracts as the distribution utilities have experienced first-hand the risk of entering into long term commitment contracts,' said De. We have already seen an increase in appetite for short term power from the utilities in the recent months. While many utilities are not opting for long term PPAs after expiry of the earlier PPA or for singing with a new generator, the recent incident of Uttar Pradesh government cancelling 15-year PPAs in operation with eight independent power producers (IPPs), with 3800 MW of capacity.The bids for these PPAs were held by the previous government.

Analysts feel that the lower electricity rates in the spot markets have triggered this. 'While the PPA with power producers was signed at a 15-year committed price of Rs.4.15/unit, in the spot market, the price is at Rs.3/unit. Long term power purchase agreement assures long term procurement of the power from the power station as well as its financial viability. Cancellation of the bids, in our opinion is a setback to the power sector which is facing problems on several fronts,' said Angel Broking in a report. As a result, with lack of PPAs a majority of the promoters have found their bank guarantee locked up, even in cases where the projects are complete or PPAs have been inked for part of the capacity. And ultimately, they are unable to service their debt and assets, in some cases lenders are taking over the stuck projects.

'In the meantime, old projects the PPAs of which have expired, and new projects where there are no PPAs are selling power through power exchanges. Therefore, low prices in exchanges are actually an 'effect' and not a 'cause'. Demand has to pick up for this anomaly to get rectified,' Joshi said, while exuding hope.

Cheaper solar
Solar energy in India is now cheaper than coal power. Solar installed capacity has grown by 370 per cent in the last three years to 12288.83 MW by March 31, 2017, as Mr Goyal claimed. This increase has taken place in tandem with a crash in tariff rates over the years. The tariff rate for solar power has fallen from around Rs.12 per unit in 2010 to Rs 2.44 per unit in a recent transparent bidding process, where international companies too have participated.

The bidding for 500MW of projects, including some projects at the Bhadla Phase IV solar park in Rajasthan, has brought down the solar prices to Rs.2.44/kWh, down 7 per cent from the earlier bid for projects at the same park for Rs.2.62/kWh. The reverse bidding experiment of Solar Energy Corporation of India (SECI) with wind power also paid off in February 2017, bringing down the price by over 20 per cent to `3.46/kWh, compared to the previous bids across India.

'For the first time solar is cheaper than coal in India and the implications this has for transforming global energy markets is profound,' said Tim Buckley, Director of Energy Finance Studies Australasia at Institute for Energy Economics and Financial Analysis (IEEFA).

'India's solar tariffs have literally been free falling in recent months. The record low solar auction rate of Rs.2.44/kWh is significantly lower than the average rate of Rs.3.20/kWh which NTPC Ltd, India's biggest coal power utility, wholesales its electricity for,' Buckley added.

Shifting of the government's focus from thermal energy to environmentally efficient renewable sources like solar and wind in line with its Paris Summit commitments, tighter environmental prescriptions, and falling prices of renewables have together affected the financial viability of several existing coal-based projects.

Coal plant cancellations
Already coal power projects, particularly those relying on imported coal, are feeling the heat of falling solar and wind prices done through reverse bidding process. IEEFA said, 'Cancellation of 13.7 GW of Indian coal power projects in May 2017, coupled with a record low solar tariff .., are the strongest indications yet that an energy transformation in India is gaining rapid momentum and global capital markets endorsement.'

The following some of the coal-fired power plant closures and cancellations in May 2017, according to IEEFA:
Uttar Pradesh cancels bids for 3.8 GW of coal fired power due to surplus power supply for tenders;
Gujarat cancels plans for a 4.0 GW plant on the Kathiawar peninsular;
BGR Energy Systems and Kalinga Energy & Power cancel a 2.3 GW plant in Odisha;
A 2.4-GW plant proposed by Odisha Thermal Power Corporation Ltd stalls after its coal supply plan fell over as uncompetitive. This follows the cancellation of a 2.0 GW plant by Tata Power in Odisha in January 2017; and
Essar Power puts its 1.2 GW Gujarat power plant in for a debt recast plan, citing unviability of its import coal fired power plant.
The coal-based power plants in India have witnessed low plant load factor (PLF) of around 63 per cent over the last two financial years, which is nothing but under-utilisation of existing capacity.

The government revised the mega power policy for extending a lifeline worth Rs. 10,000 crore to revive coal-fired power projects with cumulative capacity of over 30,000 MW and reduce burden on the banks in the form of stressed assets. This move is expected to revive investment in the sector.

'As thermal power will continue to cater to the base demand load of the country, such opportunities may result in some of the stranded capacity coming back on stream in future,' says De.

A comparison of generation capacity addition reflects on the fall in growth of thermal capacities, of late. while 22.46 GW of thermal capacity was added during 2015-16, only 11.55 GW capacity was added during 2016-17, a fall of 49 per cent. On the other hand, Hydro capacity addition grew about 9 per cent during 2016-17 compared to the previous year. About one GW of nuclear capacity was also added during 2016-17. (See Graph)

Demand
The demand for electricity is steadily coming down with introduction of energy-efficient LED lighting in a big way across the country through EESL; broadening the understanding of star rating of kitchen and white goods, introduction of energy-efficient air conditioning systems in government buildings.

Demand projections based on which the last few rounds of Case-1/Case-2 biddings took place have proved to be very aggressive with the actual demand being much lower than projections. Therefore, the power tied-up under such Case-1/Case-2 route is expected to suffice for the next 3-4 years, says Joshi. The demand is growing on a compounded annual growth rate (CAGR) of around 7 percent per annum. This will certainly pick up with the UDAY interventions, which induced profitability improvements and reduction in AT&C losses.

The government is also toying with the idea of replacing old and inefficient power plants with superefficient and supercritical modern technology for reducing carbon dioxide emissions and pollution. Power minister Piyush Goyal recently said, 'We have already embarked on a programme- NTPC Ltd, which is the country's national utility, generating one-fourth of our power, has already taken a decision to replace all plants which are more than 25-years old with supercritical modern plants.'

The government is in dialogue with other states who largely own the older plants to see if they can replace them with supercritical new technologies.

Looking ahead
The government has already embarked on several schemes to improve the power sector efficiency - 'UDAY' for improving the health of power discoms, '24x7 Power for All' scheme to ensure adequacy of generation, transmission and distribution systems, DDUGJY for rural electrification etc. The recent allocation of coal linkages to power plants is expected to improve predictability of their business plans. Though the Reserve Bank of India (RBI) is trying to expand the scope of funding to the power projects, the real improvement will come only when PPA bidding opportunities are revived.

Replacement of old and inefficient units which are imposing heavy toll on the power distribution companies and their customers is imminent. This will also help revive some of the stranded capacities adopting latest technologies. 'In case additional capacity is needed, these need to be awarded on the basis of competitive bidding to ensure least cost and high efficiency capacity addition,' says Anish De.

Given that interruptions in power supply are still commonplace, the focus should be on supply of quality power at economical price.

Last mile connectivity, which is the domain of state governments, should be ensured to enable all the households to access electricity and in that process increase demand for power. At present, 24x7 Power for All looks quite ambitious if one considers the volume of unconnected geographies and households in the country. But that is not a big challenge to surmount for a country like India.

- BS Srinivasalu Reddy

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