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Power Sector Analysis Report

 

[Key Points | Financial Year '13 | Prospects | Sector Do's and Dont's]

  • Coal shortages, scams, hike in prices of imported coal, lack of land availability, shortage in supply of equipments for new capacities and policy logjam have together paralyzed the prospects of power sector in India in the recent past. So much so that the sector that cornered a bulk of the five-year plan infrastructure outlays for decades, is now a forbidden one. Not just for investors but even for bankers and financers that a sector like power heavily relies upon.

  • The key problems hindering the growth of the power sector are land, fuel, environment, and forest clearances. Even the government is finding it very difficult to get the required land for allotting to power projects. One of the key problems in getting land is Naxalism in the eastern and central states, where a large number of projects are being planned owing to abundance of fuel resources.

  • Central institutions like National Thermal Power Corporation Limited (NTPC) and the State Electricity Boards (SEBs) continue to dominate the power sector in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 68% of the total power generation capacity in India. This is followed by hydro-electricity (28% share). The rest comes from nuclear and wind energy.

  • Average transmission and distribution losses (T&D) exceed 25% of total power generation compared to less than 15% for developing economies. The T&D losses are due to a 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.

  • Losses of India’s State Electricity Boards have once again assumed disproportionate levels, thus coming full circle since the Electricity Act of 2003 which tried to make these entities more efficient. The average cost of supply for most discoms has far exceeded the average revenue realized.


     Key Points


    Supply

    Many projects have been planned but due to slow regulatory processes and inadequate equipments and fuel, the supply is far lesser than demand. As per certain estimates, India needs to double its generation capacity over the next decade or so to meet the potential demand.

    Demand

    The long-term average demand growth rate is expected to remain in the higher single digit growth levels given the lower per capita power consumption in india as compared to the global average.

    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.

    Bargaining power of customers

    Bargaining power of retail customers is low, as power is in short supply. However government is a big buyer and payments from it can be erratic, as has been seen in the past.

    Competition

    Getting intense, but despite there being enough room for many players, shortage of inputs such as coal and natural gas has dissuaded new entrants.

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     Financial Year '13


  • While average PLFs declined for all thermal power generation utilities across sectors, the Central Public Sector Undertakings continued to be the best performers, followed by private sector. SEBs and IPPs were the worst performers during FY13. Key reasons for the declining PLFs were shortage and poor quality of coal coupled with backing down of units and shutting down of units due to low demand from beneficiary states as well as delays in stabilisation of new plants.

  • Energy deficit (difference between requirement and availability) numbers worsened during the year with the same standing at 8.7% (8.5% in FY12). Peak deficit numbers however improved on a year on year basis.

  • As far as T&D segments of the sector are concerned, there was little that actually happened in FY13. The country continues to reel under the pressure of higher T&D losses (about 26%) and with the government going very slow with the reforms process in these segments, due to which the long-term sustainable growth of the sector seems doubtful.

  • After the massive grid collapse in August in 2012, the problems of the transmission segment have resurfaced to government’s attention. Investments in this segment have, however, moved rather slowly. The existing inter-regional power transfer capacity stood at 27,750 MW at the end of the 11th Plan period. The same is targeted to increase to 65,550 MW by the end of the 12th Plan. The challenges that need to be addressed to meet this plan include right of way, flexibility in line loading and improvement of operational efficiency, amongst others.

  • In order to ensure adequate supplies of coal and avoid stranded generating capacities in the country, the government issued a Presidential directive to CIL to sign Fuel Supply Agreements (FSAs) with power producers assuring them of at least 80% of the Annual Committed Quantity. However, CIL was unable to honour the 80% commitment on account of production shortfall.
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     Prospects


  • Recognising that electricity is one of the key drivers for rapid economic growth and poverty alleviation, the industry has set itself the target of providing 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.

  • The target for power capacity addition during the 12th Plan period is 88,000 Mw. With about 60,000 Mw under execution, this 88 Gw should be achieved after hitting 55 Gw in the 11th Plan. The country added nearly 20 GW in FY13 - the first year of the plan. However, a significant amount of capacity is stranded owing to the non-availability of gas. Rising demand and falling domestic production has pushed the share of imported gas to 40% of the current consumption in India. The US has turned into a net energy exporter on the back of huge quantities of shale gas and oil becoming available commercially.

  • Import of coal in India is expected to rise up to 200 MMT (m metric tonnes) in the terminal year of the 12th Plan as availability of coal from domestic linkages would not suffice the requirements.

  • Restoration of the financial health of state electricity boards (SEBs) and improvement in their operating performance continue to remain a critical issue for the sector. As such, effective implementation of the restructuring package remains the key. While the power distribution has been loss-making business in India on an overall basis, the investments in T&D are expected to improve with the privatization coming in.
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