Power play: How renewables’ march could end state discom era

Competitive Solar power tariffs & Rise of Open Access could add to state-owned discoms’ financial stress as they get stuck with costlier long-term Coal power PPAs

Electricity consumption in the country fell 1.6% y-o-y to 109.7 BU in August, which was even 2.2% lower than July with the monsoon reducing domestic home-cooling demand.
Open access in the power distribution sector is one of the neglected provisions of the Electricity Act, 2003.

By Kumar V Pratap

The Indian electricity sector is undergoing rapid changes, among which the most important is the progress of solar power in the country. While this is helping increase competition in the sector and to fulfil India’s obligations on climate change, it is also throwing up a lot of challenges like low and decreasing capacity utilisation of the thermal power generating projects; this will add to the financial stress of the power sector. However, the challenges that the Indian electricity sector faces is part of global trends, and India must prepare for it.

Solar tariffs, in the recently concluded solar auctions, have reached a low of Rs 2.36 per unit of power (as compared to Rs 6 per unit average cost of electricity supply for distribution utilities). The low cost of solar power means that it has reached grid-parity and more, which is the primary driver for its rapid growth. India currently has an installed capacity of 35 GW of solar capacity, which is about a tenth of the installed power generation capacity in the country.

Falling solar prices is helping the cause of open access in the power distribution sector (with consumers having a choice of electricity supplier just as in the telecom sector). Using open access, DMRC, for example, is sourcing 32% of its power requirements from the Rewa solar project in Madhya Pradesh. Open access in the power distribution sector is one of the neglected provisions of the Electricity Act, 2003, and operationalising it would make the power sector competitive, which, in turn, would improve the cost competitiveness of the Indian economy.

One of the significant criticisms of renewable power like solar and wind is their intermittency. However, recent contracts, anchored on renewable energy, have also reached grid parity. ReNew Power won the world’s first tender for round-the-clock supply of green power (solar, wind, solar-storage or hydel) by quoting a tariff of Rs 2.90 per unit (first year) in May 2020. Adani Green Energy has recently won the bid for firm renewable power at Rs 2.96 per unit, which is again far below the average cost of power supply in the country.

The need for cleaner power is also overdue, with six Indian cities figuring among the ten worst polluted in the world (World Economic Forum 2020). As per the State of Global Air report 2020, air pollution contributed to over 16.7 lakh deaths in India in 2019. And it is well-known that coal-based thermal power generation is a major cause of air pollution.

The coming energy transition is also as per domestic plans. The government, as per its Nationally Determined Contributions, as part of the Paris Accord, has pledged reduction in the emission intensity of its GDP by 33-35% by 2030 from 2005-levels, and 40% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.  This would obviously mean more renewables in the energy mix, pursuant to which the government had targeted a renewable capacity of 175 GW by 2022, of which 100 GW would be solar power. With an installed solar capacity of 35 GW, we are well on our path to achieve the target.

However, the coming of age of solar power and open access in India would increase the challenges for the power distribution sector, which is dominated by the public sector power distribution companies (discoms). These discoms have existing long-term Power Purchase Agreements (PPAs) with mainly coal-based thermal power generating projects. Any decrease in thermal power demand emanating from less expensive solar power and operationalisation of open access would mean more financial stress for the discoms (losses for distribution utilities increased from Rs 29,452 crore in 2017-18 to Rs 49,623 crore in 2018-19) as they would be required to pay the fixed costs of power. This may necessitate another discom bailout soon, for which the government is ill-equipped in the current Covid pandemic times, given the expected over 12% fiscal deficit (the Centre and states) and growth rate of about
-10% in FY21.

The financial stress of the discoms would also be transferred to the thermal generation projects, many of which are already stranded, queering the pitch further for banks and other lending institutions through an increase in their non-performing assets (NPAs).

To add to this, with solar power reaching grid parity the capacity utilisation (plant load factor) in the thermal generation is expected to fall further from the already low below-60%, making it more uncompetitive, as the fixed costs get spread over smaller volumes of power.

What the Indian electricity sector is going through is in sync with worldwide trends. The International Energy Agency’s World Energy Outlook (October 2020) observes that the world electricity sector looks set to evolve into a system with lower carbon-dioxide emissions, and enhanced flexibility. Solar output is expected to lead a surge in renewable power supply in the next decade, with renewables expected to account for 80% of the growth in global electricity generation. Renewables are expected to overtake coal as the primary means of producing electricity by 2025. Coal’s share of global electricity generation is expected to fall to 28% in 2030, down from 37% in 2019.

Given the impending changes in the electricity sector, the power distribution segment may have to plan for a future without state-run discoms. In the interim, it may be prudent for the discoms to sign only medium-term PPAs, if at all, as most of the power transactions move to the power exchanges. More widespread privatisation of power distribution (like in Delhi) would mean that the power sector financial stress does not translate into fiscal stress as experience has shown that the private sector employs innovative ways to be ahead of the curve.

(Author is former joint secretary (infrastructure policy & finance), ministry of finance and currently JS (UT), ministry of home affairs. Views are personal)

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First published on: 27-10-2020 at 05:30 IST