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Power Sector Analysis Report 

[Key Points | Financial Year '16 | Prospects | Sector Do's and dont's]

  • Governments thrust for renewable energy with core focus on solar power dominated the power sector in the fiscal year 2016. 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 then 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.
  • Another important development in the power sector during the fiscal year 2016 was the announcement of the Ujwal Discom Assurance Yojana (UDAY) scheme. This scheme aimed at improving the financial conditions of the State Electricity Board (SEB) which had an aggregate debt of Rs 2.4 lakh crore at the end of the year 2016. Beneath the scheme, 75% of the loans on the SEBs books will be transferred in the books of their respective state governments. Transferring such huge quantum of loans will provide some relief to the SEBs in terms of finance costs.

    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 down 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.
  • Average transmission and distribution losses (T&D) exceed 25% of total power generation compared. 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 minting 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.

How to Research the Power Sector (Key Points)

  • Supply
  • The addition to total installed capacity during FY16 was around 29.5 gigawatt (GW), a growth of 13.4% over the previous years installed capacity. The capacity addition during the first four years of 12th plan stood at 87 GW which has not only exceeded the capacity addition of the entire 11th plan, but also constitutes 98% of the total 12th plan target of 89 GW. 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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Financial Year '16

  • 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 2.1% (3.6% in FY15).
  • As far as the T&D space is concerned, the year gone by saw a major development – that of the southern grid getting connected to the central grid in synchronous mode thereby achieving the goal of 'One nation - one grid - one frequency'. Nevertheless, the country continues to reel under the pressure of higher T&D losses and 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.
  • The target for power capacity addition during the 12th Plan period is 89 GW. A capacity of around 87 GW has already been added. However, a significant amount of capacity is stranded owing to the non-availability of gas. However, recently government has taken steps to revive the stranded gas based power projects.
  • 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 the privatisation coming in.

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Related Links for Power Sector
Quarterly Results | Sector Quote | Over The Years

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