Power sector fails to live up to the expectations in 2017; year-ahead to bank on plan implementations
For the Power sector, the year 2017 has been a mixed bag where the thermal and wind segment under-performed the expectations while the solar sector did comparatively better. In the six months to October 31 of 2017 total power generation including conventional and non-conventional power rose a meagre 1.3% to 331,881 MW. Thermal power (Coal and Gas) contributed the maximum at 219,415 MW, while contribution of coal based generation stood at 193,427 MW, Gas based generation at 25,150 MW and oil based generation at 838 MW. For the period between April1 to October 31 2017, other renewables generation that includes wind, solar, bio-mass (excluding hydro) stood at 60,158 MW an increase of 5.06%, while the growth in nuclear power generation remained constant as no addition was made in capacity, hydro power generation for the period grew by 0.64% to 44,765 MW. On the transmission front, according to the Ministry of Power website, the country has added around 13,820 circuit kilometers of transmission lines as of November 30, FY18 taking the total installed capacity to 381,671 circuit kilometers. The total substations capacity has also increased by 50,805 MVA/MW to 791,570 MVA/MW as of November 30, FY18. Read On...
The total capacity added in renewables –Solar and Wind – in the first six months of FY18 stood at 2,900 MW, primarily led by the solar power segment. The wind segment witnessed a slowdown in capacity in FY18 given the ongoing transition from feed-in tariff based projects to competitive bid-based auctions. It needs to be mentioned that the government has shifted its focus to auctioning of wind capacities at the national level as against feed-in-tariffs determined by state regulatory commissions. The passing of new bidding guidelines for wind projects will help states to invite tenders which was earlier not possible without the guidelines. The idea is to arrive at market determined tariffs for projects as against usually high regulated prices of Rs 6-7/kWh determined by state regulatory commissions.
Year 2017 also witnessed drop in tariffs for both the solar and wind power projects to an all time low of 2.44/kWh at the Bhadla Phase III project in Rajasthan for the solar projects, and to Rs 2.43/kWh for wind at the recent Gujarat auctioning of wind capacities. The drop in competitive tariffs have also acted in reducing around 60,000 MW of thermal projects as stressed assets for Banks. Discoms have preferred to purchase in the spot market and on exchanges where the average rate is around Rs 2.9/kWh, and have even refused to sign power purchase agreements for projects that were awarded at much higher rates.
These drop in tariffs have also impacted the developers who bid aggressively for projects as they found it difficult to achieve financial closure for projects. Projects where bids were lower than Rs 3.5/kWh in the solar sector given the increase in panel prices by 15% in the last six months, it is estimated the internal rate of returns for these projects would fall to less than 10%. For wind projects with bids at Rs 2.64 and below, the IRR is expected to drop to 8-9%.
Power sector as a whole however faces the biggest challenge in the form of lack of demand from the distribution companies (Discoms) and their unwillingness to sign power purchase agreements with the developers. Although the government has taken several steps to improve the situation in the form of Ujjwal Discom Assurance Yojana (UDAY), Saubhagya and energy efficiency measures, a lot still needs to be done.
Huge generation and transmission capacities have made sure power supply is ramped up, while energy efficiency measures have made consumption smarter. With the lack of industrial growth, the overall demand has not caught up with the supply side and this is resulting in record low deficits and low Plant Load Factors for most power plants. The overall PLF of the coal based power plants have dropped to 59.79% as of October 31, FY18 from the high of 77% in FY10, according to the Central Electricity Authority.
Salil Garg, director, corporates at India Ratings, says, "The primary reason for the lack of demand and lower PLFs can be attributed to the poor financial health of the Discoms. While UDAY has been considered a landmark policy for distribution sector reform, its effect has not started to show yet. The PLF which is close to 60% will continue to stay at these levels unless the demand picks to 8-9% from the current 4.5%. Meanwhile, the industrial demand has also stagnated as it has not been able to ramp up fully. A lot would depend on how soon this sector picks up."
"In the meantime, policy makers should focus on the commercial and residential sectors and make sure that the last mile issues are resolved to increase consumption in these large user bases. Further, agricultural use will also act as a key driver," Garg added.
The states have also failed to raise the tariffs as provided under the UDAY scheme on an average of 5-10% in the states like UP, Andhra Pradesh, Punjab and Mahrashtra. Moreover, tariff orders have not been issued for FY2018 in many of the states who have joined UDAY. This is especially significant given that one of the key conditions under UDAY is timely filing of tariff petitions by the discoms and timely issuance of tariff orders by the State Electricity Regulatory Commissions.
"Achieving a sustainable improvement in the financial profile of the distribution utilities would require adequate and timely tariff revision by the regulators including a periodic pass-through of fuel and power purchase cost fluctuations and timely and adequate subsidy release by the state governments. The implementation of these measures remains critical for the improvement in the financial profile of the distribution utilities, thus enabling them to off-take power and making timely payments to the generation companies," said Sabyasachi Majumdar, Group Head of ICRA.
Finally, the implementation of Saubhagya Scheme that is planning to take electricity to each and every household in rural areas is expected to positively impact the power sector as its execution is likely to improve energy demand in the coming years.
"Even assuming the consumption of 50 units per family per month for 40 million households, which are currently without access to power, incremental demand rise is estimated to about 24 billion units, which after adjusting for distribution losses, correspond to about 2.5-3% increase in the all India energy requirement. In addition the capital goods industry, especially players in the distribution segment will benefit from implementation of this scheme," Majumdar said.
- TradeBriefs Bureau -
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