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 over the past two years. So much so that the sector that cornered a bulk of the 5 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 65% of the total power generation capacity in India. This is followed by hydro-electricity (22% 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 all power companies has far exceeded the average revenue realized. Not surprisingly, the accumulated losses of SEBs were estimated at Rs 1.8 trillion at the end of FY12, from Rs 1.2 trillion in FY11. The non-receipt of subsidies from cash-strapped state government coffers affected the finances of distribution companies. Subsidies from state governments were estimated at 19% of the total revenue of state utilities in FY10. Although subsidies booked have grown at 30% YoY, cash received stood at only 14%.
Many projects have been planned but due to slow regulatory processes and inadequate equipments and fuel, the supply is far lesser than demand. Currently, India needs to double its generation capacity over the next decade or so to meet the potential demand.
The long-term average demand growth rate is 7-8% per annum and is expected to grow at faster rate in the future.
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 as government controls tariff structure. However, this may change in the future.
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.
Getting intense, but despite there being enough room for many players, shortage of inputs such as coal and natural gas has dissuaded new entrants.
The demand for coal is expected rise to 980 m tonnes by 2017. The domestic availability of coal has been pegged at 795 m tonnes. This demand-supply gap of around 200 million tonnes is expected to be made up substantially by imports by 2016-17. Power utilities, he said, have reported a generation loss of 8.7 billion units in 2011-12 (up to February, 2012) due to shortage of coal.
As many as 11 plants of state-owned NTPC lost 7.8 billion units because of shortage of coal during current fiscal. Total power generation stood at 877 bn units (BU) in FY12, as compared to 811 BU in FY11. This represented a growth of just around 8%, when the requirement is anywhere around 10-12% per annum.
The average PLF in the Central Public Sector Undertakings and private sector companies was much higher than that achieved by the SEBs as a whole in FY12. Wide inter-state variations were noticed in the average PLF of thermal power plants with southern and northern zones having better performances.
As far as T&D segments of the sector are concerned, there was little that actually happened in FY12. The country continues to reel under the pressure of higher T&D losses and with the government going very slow with the reforms process in these segments, 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 was targeted to be raised to 37,150 MW by the end of the 11th Plan period. Power Grid was the only company from the power sector to have met its investment target during the 11th Plan. Its pace of investment was higher compared to the generation sector.
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 36% of the households did 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 electricity generation target for the year 2012-13 has been fixed at 930 BU (growth of 6% YoY) comprising of 767 BU thermal, 122 BU hydro, 35 BU nuclear and 5 BU import from Bhutan.
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.
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 per cent 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
On the logistics front, serious issues remain on the efficiency and capacity of railways and ports to handle 200 metric tonnes of imported coal. Liquefied natural gas, or LNG, terminals to receive imported gas require augmentation as well as pipelines across the country. These are capital investment and project execution challenges that are largely under the Centre's control.
Coal costs from both domestic linkages and imported sources are expected to be on the rise. Shortfall of coal in India is expected to go up to 100 MMT (m metric tonnes) by FY14. Availability of coal from domestic linkages would suffice only 55 to 60% of the PLF equivalent. Hence purchase of coal by way of Coal India's e-auction would only become more expensive.
Restoration of the financial health of SEBs and improvement in their operating performance continue to remain a critical issue in the power sector.
On an overall basis, power distribution has been loss-making business in India. But with the privatization coming in, the investment in transmission and distribution networking is expected to improve.
Trading in electricity has brought a sea change in the structure of the industry because some parts of country are power surplus and some are deficient. A power trading company buys power from surplus area and sells it in a power deficit area through transmission lines. While the potential for power trading is huge, the regulator has to play a key role in removing all discrepancies that occur in terms of electricity pricing across trading regions.