The spectre of losing power

The power sector in India is in a state of flux at the moment, with many challenges facing it. On the financial side, a Standard Committee on Energy reported last year that non-performing assets (NPAs) in the sector has reached over Rs 37,941 crore; a big worry for banks and investors. Apart from this, the non-availability of fuel (coal/natural gas), the inability of the promoter to infuse equity and working capital, and lack of enough power purchase agreements (PPAs) by states have contributed to the crisis. Currently, thermal power plants contribute 66 per cent of the electricity consumed in India, and the fact that a large chunk of stressed assets is from the thermal sector is a big worry.

The other problem is that gas power plants are operating below capacity. As reported by the Central Electricity Authority, average plant load factor (PLF) of gas-based power plants (24.8 GW) is just about 23 per cent, which is a severe under-utilisation of assets. This needs to be seriously evaluated and actions initiated to improve PLF of gas-based power plants. Higher utilisation of gas-based power plants will mean higher availability of green electricity for consumption.

The power ministry is aware of these problems. Former minister of power, coal and new and renewable energy Piyush Goyal has assessed the power sector investment potential to be to the tune of $250 billion by 2019. But with 2019 almost upon us, it’s time to reassess, revisit investment fundamentals, and look at new strategies to revive the power sector.

The main problem is with the thermal power sector. Owing to rising emission concerns, setting up new coal power plants is a big challenge. Introduction of clean coal technology is the alternative to dealing with emissions and simultaneously capitalise on coal resources. However, the commercial feasibility of clean coal is far from reality in India. Therefore, coal-based power plant capacity addition has dampened over the years.

The other problem is the addition of gas power plant capacity. This addition sounds unrealistic until the domestic gas supply increases beyond current demand. In view of the slowing of domestic gas production, the option of gas-based power plants looks bleak at the moment. As for nuclear power, the government has been trying to push the expansion of nuclear power base, but fierce social resistance has continued to hinder this form of energy.

The government has also sought to clean up the power sector by putting renewable energy at the forefront, with a set target of 175 GW of renewable power to be achieved by 2022. To achieve this ambitious target, however, a major thrust has to be given to solar energy, which currently stands at 66 GW. This would demand massive investment, which would be a big challenge for the government.

On the positive side, in recent times a remarkable fall in solar tariff has been observed in India, which could be ascribed to aggressive bidding owing to a fall in solar module prices, efficiency enhancement, and economies of scale. Solar power can be a good energy source for India but the fact that private bids on tariffs have reached as low from 17/unit in 2014 to Rs 2.44/unit in 2018 have raised concerns about its market sustainability in the long-run.

Due to this downward price spiralling, multiple issues related to PPA have started to surface. Suddenly, earlier prices as determined by the Central/State Electricity Regulatory Commissions have now started to look irrational to the power purchasers and on many occasions these buyers have created problems for producers. Such developments have created bottlenecks in power purchase and have forced power producers to be cautious about their future investments and recalibrate their operational strategy.

Similarly, wind power producers, have been facing several challenges to monetise their investment. Interactions with some of the wind power producers suggest they were compelled to invest and changing market dynamics hardly make any business sense. Hopefully, better sense will prevail to bring wind power growth back on track.

As a result, downward renewable tariff corrections may not serve the industry well in the long run. Maybe, some years down the line, investors in the renewable sector will have no option but to suffer the same fate as thermal power, roads, and pipelines to name a few. If this happens, there would be hardly any takers for the stressed assets, resulting in market imbalance. Finally, consumers and taxpayers may have to bear the burden of aggressive pricing, overconfidence, and inefficiency of producers.

India needs a renewable capacity of 28 GW every year to achieve the target set for 2022, which looks like a daunting task. Huge capital requirements could hamper progress. If we consider five crore capital requirement per 1 MW solar plant, 80 GW solar capacity addition needs Rs 4 lakh crore over the next four years. Considering, the debt equity ratio of 70:30, debt requirement touches Rs 2.8 lakh crore for the solar sector, which could easily put banks in a spot of bother. Putting together thermal and renewable power, the capital requirement may exceed Rs 6.5 lakh crore. In addition to capital requirement for power production, capital infusion is desired in transmission and grid development. For instance, planned green transmission corridor development would require more than Rs 43,000 crore.

With limited scope for sectoral financing, Indian banks may find it difficult to address the capital crunch for the renewable sector. In this context, the formation of International Solar Alliance could prove helpful to help address the above concerns.

The success of India’s power sector revamp, driven by renewable energy demands massive investment, without which the transformation will remain incomplete. Let’s hope the government is able to complete this transformation.

The author is Associate Professor & Head, Department of Management Studies, Rajiv Gandhi Institute of Petroleum Technology, Jais. Views are personal.