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Power Sector Analysis Report

 

[Key Points | Financial Year '15 | Prospects | Sector Do's and Dont's]

  • Central institutions like 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 account for about 60% of the total power generation capacity in India, followed by hydro-electricity (15% share). The rest comes from nuclear and other renewable energy sources (RES).

  • 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. Further, big bang efforts are underway to shift to renewable source of energy in order to reduce the carbon emission. The government has laid down an ambitious plan to generate 100 GW of solar power capacity by 2022 from the 3.3GW at present. This will be a mammoth task to achieve given that land acquisition remains cumbersome.

  • 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.

  • The government recently introduced 'Ujwal Discom Assurance Yojana' (UDAY) scheme to rescue SEBs. 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, SEBs situation will improve substantially only if there are regular tariff hikes. Most political parties intend to gain vote bank from farmers by offering them free of cost power. The fear of losing vote bank makes the state government reluctant to increase the power tariffs. This perception needs to be changed in order to revive the sector.


     Key Points


    Supply

    The addition to total installed capacity during FY15 was 26 gigawatt (GW), a growth of 10.8% over the previous years installed capacity. The capacity addition during the first three years of 12th plan stood at 61 GW which has not only exceeded the capacity addition of the entire 11th plan, but also constitutes 68.9% 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.

    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 customers is low, as power is in short supply. However, the 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 and natural gas and regulatory hurdles has dissuaded new entrants.

    TOP

     Financial Year '15


  • 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. SEBs and IPPs were the worst performers during FY15. 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 3.6% (5% in FY14).

  • 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 (about 27%) 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.
    TOP

     Prospects


  • 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 88 GW. A capacity of around 61 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. 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.

  • 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.
    TOP
    Related Links for Power Sector: Quarterly Results  NEW | Sector Quote | Structure | Over The Years

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