Power Sector Analysis Report 

• Indian power sector has had eventful developments in not only generation and transmission capacity addition, but also from the distribution reforms aspect. The sector witnessed 9.6% growth in installed capacity with an addition of 28,788 MW.
• The major growth of 47.5% was witnessed in renewable capacity addition reaching to 57,260 MW. The renewable sector achieved grid parity or even surpassed conventional sector tariffs with competitive bid discovered prices of Rs 2.44 per unit for solar and Rs 3.46 per unit for wind power projects. All these developments lead to improvement in the power supply situation with 0.7% energy deficit and 1.6% peak deficit during FY17 as compared to 2.1% energy deficit and 3.2% peak deficit last year.
• Distribution reforms through Ujwal Discom Assurance Yojana (UDAY) have resulted in Discom savings of around Rs 120 billion with issuance of UDAY bonds worth Rs 2.32 trillion. However, even after implementation of the UDAY scheme the situation at SEBs will only improve if they take tariff hikes. While some states have taken tariff hikes recently, many states have yet not taken the same on account of political pressures. Increase in tariff hike does not bode well with the political parties as it takes a toll on their vote bank.
  
  Further, these SEBs had aggregate technical and commercial losses of 24.6% in 2013-14. And this ratio hasn't improved significantly since then. This means that a major portion of the power that is used is not paid for. Unless these issues are addressed, the situation at the SEBs is not going to change drastically even after implementation of UDAY.
• In further development for making coal allocation more transparent, Scheme for Harnessing and Allocating Koyala (Coal) (SHAKTI) was launched through which allocation of linkages for power sector shall be based on auction of linkages or through Power Purchase Agreement (PPA) based on competitive bidding of tariffs except for the State and the Central Power Generating companies, and the exceptions provided in Tariff Policy, 2016. Coal drawal will be permitted against valid Long Term PPAs and to be concluded Medium Term PPAs. The sector also witnessed emphasis on transparency through various web/mobile applications and digitization of competitive bidding through MSTC platform for short and medium term power procurement.
• Government's thrust on renewable energy with core focus on solar power dominated the power sector in the fiscal year 2017. Government has laid an ambitious plan to add 100 Gigawatt (GW) of solar power by 2022. However, solar power tariffs continue to trade at levels higher than thermal power tariffs. Tariffs in some of the agreements that State Electricity Boards (SEBs) have signed with renewable developers are as high as Rs 7 per unit. Burdened with a huge pile of losses, the SEBs are increasingly shifting to purchase cheaper power from the power exchanges wherein the spot price is hovering somewhere around Rs 2.41 per unit. This puts into jeopardy the massive renewable projects that are scheduled to come up going forward. Solar power offtake is already seeing curtailment in the state of Rajasthan and Tamil Nadu.
• Average transmission and distribution losses (T&D) exceed 25% of total power generation. India's T&D losses are almost 2.5 times the world average. The T&D losses are due to variety of reasons viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing, and high pilferage.
• Lack of coal supply was a major hurdle in the power sector till some time back. Majority of power generation takes place through thermal power plants which uses coal as its raw material. However, with e-coal auctions coming in the picture, this problem seems to have been resolved considerably. Major players in the generation space were sitting on sufficient inventories of coal as at the end of the previous fiscal year.
• Presently, major concern for the power generators is the off-take of electricity. Power generators sell power to SEBs or DISCOMs. SEBs are facing financial crisis and are suffering losses to the extent of Rs 700 billion annually. The SEBs do not have enough resources to purchase power from the generators. Hence a situation has risen wherein there is excess of power but no takers for the same.

• Supply
• The total installed capacity in the country as on 31 March 2017 was 326,848.5 MW (including renewable). During FY17, capacity of 14209.8 MW (excluding renewable) was added. With this the total capacity addition during the 12th plan period is 99,209.5 MW (excluding renewable) which is about 112.1% of the planned capacity addition of 88,537 MW for the Plan. Hence, sufficient capacity is being built to meet the demand requirements.
• Demand
• The long-term average demand growth rate is expected to remain in the higher single-digit growth levels given the much lower per capita power consumption in India as compared to the global average. Not only this, the poor financial state of SEBs could possibly lead to lower demand for power going ahead.
• Barriers to entry
• Barriers to entry are high, especially in the transmission and distribution segments, which are largely state monopolies. Also, entering the power generation business requires heavy investment initially. The other barriers are fuel linkages, payment guarantees from state governments that buy power and retail distribution license.
• Bargaining power of suppliers
• Not very high since the tariff structure is mainly regulated.
• Competition
• Getting intense, but despite there being enough room for many players, shortage of inputs such as and natural gas and regulatory hurdles has dissuaded new entrants.

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• The low demand scenario is still a concern with plant load factors (PLFs) reducing to 60.2% during FY17 from 62.3% during FY16 leading to piling up of stranded capacity of around 25-30 GW due to various reasons including the low paying capacity of financially distressed Discoms and last mile connectivity to all consumers yet to be achieved. This has, in turn, led to a heavy financial burden in the form of NPAs to the banking sector.
• Average PLFs declined for all thermal power generation utilities across sectors. Nevertheless, the Central Public Sector Undertakings continued to be the best performers, followed by private sector. Key reason for the declining PLFs was shortage of demand from the SEBs.
• Energy deficit (difference between requirement and availability) was the lowest ever as numbers improved tremendously during the year with the same standing at about 1.1% (3.6% in FY15).
• It has been a land mark year for renewable energy, as 14,410.9 MW capacity was added during the year.
• As far as the Transmission & Distribution space is concerned, there has been rapid growth in the transmission sector with over 70 circuit-kilometers (CKms) of transmission capacity being added daily against an addition of 46 CKms a day between 2012 and 2014. However, the financial health of state electricity utilities in retail distribution continues to remain the most critical issue for the sector's viability. To resolve the challenge in the distribution business, the Government of India launched the Ujwal DISCOM Assurance Yojna (UDAY) to reduce the financial burden on state DISCOMs by transferring 75% of accumulated losses/debts of the DISCOM to the state in a 2-step phased manner over financial years 2016-2018. Nevertheless, the country continues to reel under the pressure of higher T&D losses with the government going slow with the reforms process in these segments. Financial turnaround of the distribution sector is essential for commercial viability of the entire sector.

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• Recognising that electricity is one of the key drivers for rapid economic growth and poverty alleviation, the government and the industry has set itself the target of providing electricity access to all households over the next few years. As per government reports, about one third of the households do not have access to electricity. Hence, meeting the target of providing universal access is a daunting task requiring significant addition to generation capacity and expansion of the transmission and distribution network.
• Restoration of the financial health of SEBs and improvement of their operating performances continue to remain the critical issue for the sector. As such, effective implementation of the restructuring package remains the key. While the power distribution space has been a loss-making business in India on an overall basis, the investments in T&D are expected to improve with privatisation coming in.
• Going forward, it is expected that the demand will grow to cater to the continued economic growth of the country, creating more volume in the power market with strengthening of financials of Discoms. The demand is also likely to come from shift of usage from fuel to electricity in transport and agriculture sector in particular from distributed generation with solar installations.
• Trading of solar power is one segment that has not picked up yet due to aggressive tariffs, however, this also maybe an opportunity in future from the perspective of stronger payment security mechanism. Efficiency improvement measures in the sector especially through the IT enablement, promotion of environment-friendly renewable technologies and energy efficiency solutions in the coming future are expected to provide business opportunities to various stakeholders.

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Related Links for Power Sector
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