November, 2017 I Industry Research. India s evolving power sector

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1 India s evolving power sector Contact: Madan Sabnavis Chief Economist madan.sabnavis@careratings.com Ashish K Nainan Research Analyst ashish.nainan@careratings.com Mradul Mishra (Media Contact) mradul.mishra@careratings.com Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report November, 2017 I Industry Research India s power sector landscape is undergoing transformation. This includes a growing significance of short term power market, the energy mix witnessing significant reconfiguration, with growing share of renewable energy and government implementing schemes to spur demand by targeting 100% electrification of households. Lack of infrastructure and their short-coming persists which includes inadequate grid connectivity for power evacuation, inadequate capacity and power transmission network, shortage of railway rakes to supply coal to power plants leading to fuel shortage etc. Between 2007 and 2017, India s peak demand increased at a CAGR of 4.5% from 100GW to 155 gigawatts (GW) and the installed power capacity increased from 135 GW to 329 GW at a CAGR of 9.3% during the same period. Thermal power plants have led this growth in capacity addition and contribute almost 80% of the electricity demand of the country. Renewable energy which has witnessed rapid capacity addition in the last 3 years lags when it comes to electricity generation, comprising a little less than 7% of the total electricity generated in the country. The Union Government has been trying to address some of the legacy issues which included financial restructuring of state discoms; fuel supply, especially availability of domestic coal for thermal power plants, development of a national grid and developing a sustainable green energy eco-system. Schemes like UDAY, SHAKTI and SOUBHAGYA aim to address the above mentioned issues. But post-implementation, the indicative achieved targets highlight the need for improved implementation and additional measures. State DISCOMs which have been avoiding signing long term PPAs are facing an unforeseen trend, when power tariffs on the power exchange hovered around Rs. 10 per unit for captive users. Though the trend may be temporary, but the DISCOMs that are facing a sudden power supply shortage due to hydel and nuclear power undergoing maintenance, would realise the significance of long-term PPAs.

2 in Billion Units 64.6% 65.1% 66.8% 68.2% 69.6% 69.7% 69.6% 66.6% Industry Research I Power Sector Evolving energy mix: (i) Energy Mix: Installed capacity by Source 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 22.6% 21.2% 18.9% 13.6% 17.4% 16.1% 15.2% 14.1% 2.1% 2.8% 2.6% 2.3% 2.1% 1.9% 2.1% 1.9% 10.0% 11.1% 12.0% 12.3% 12.5% 13.1% 14.4% 17.7% Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 RES Nuclear Hydro Thermal Thermal energy constitutes almost two-third of the total installed generation capacity in the country. Coal and Gas based electricity generation witnessed net addition of 135GW between 2007 and 2017 while renewable energy capacity grew from 10GW to 59GW during the same period. Hydro and Nuclear energy generation capacity as a percentage of total installed capacity has fallen during this 10 year period. Nuclear power and Hydro power capacity addition has been much less compared to thermal and renewable energy which could be attributed to lesser private sector role in setting up power plants in these segments. As a percentage of total installed capacity, hydro power witnessed a fall in its share from 23% in 2007 to 13.6% in Nuclear power capacity during the same period witnessed its share falling from 2.8% to 2.1%. (ii) Electricity Generation- Annual RES Hydro Nuclear Thermal Total

3 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Industry Research I Power Sector In terms of electricity generation, total energy generated in the country stood at 1135 billion units (BU) at a peak demand of 157 GW. Thermal energy has been contributing in excess of 80% of the total electricity generated in the country. Thermal energy is followed by hydro power whose share has fallen from 15-16% in 2007 to 10% in Renewable energy in terms of electricity generated constitutes for 6-7% of the total electricity generated in the country. Even if renewable energy were to achieve its 2022 target of 175GW by 2022 and at the current electricity demand growth of 5%, coal would still continue to fulfil over 75% of the electricity generation requirement in the country. Currently, the PLF of coal based thermal plants is in the range of 58-60% as reported by CEA. Gas-based thermal power plants which constitute approximately 10% of the total installed thermal power capacity would continue to witness lower capacity utilization in the range of 22-25% on the back of rising global gas prices. Contraction in power deficit: Electricity production has been the silver lining in the past few months of India s industrial output. For the months April- September 2017 the growth of electricity production has been 5.7% compared with 2.5% overall growth in IIP. The demand supply gap for FY17 was the lowest ever in the country with a deficit of 0.7% in comparison to a deficit of 2.1% in FY16. In the month of September 2017, the same deficit peaked at a 16 month high of 2 per cent owing to lower production from hydel, nuclear and wind energy. (iii) Peak and Base Deficit 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% -6.00% Peak Met Base Met The thermal power plants across states are reeling under coal shortage stress due to unavailability of railway rakes to transport coals from mines to power plants. The Government through schemes like SHAKTI and policies has been trying to highlight the need to cut on imported coal for power generation by thermal plants. At the same time, inadequate infrastructure and lack of comprehensive planning has led to the schemes being unable to achieve the desired targets. Rajasthan, Maharashtra, Karnataka and Andhra Pradesh have been highly affected by the coal-shortage. Per capita energy consumption: The current per capita consumption of India is approximately 1200 units. Developed nations have an average per capita consumption of 14,000 to 15,000 units. The per capita consumption of electricity consumption grew at a CAGR of 6% during the last decade in India. 3

4 (iv) Per capita Consumption (kwh) 1205* *Projected SAUBHAGYA scheme which aims at connecting every household to the grid based electricity, should be a growth driver leading to sizeable improvement in the per capita consumption, if the scheme achieves its targeted level of implementation. One-fourth of the households in the country have no access to electricity. It would be a significant milestone for the country if it achieves 100% electrification of households. Tariff trend and All-India PLF: Coal-based Nuclear Thermal- Gas Hydel Solar Power Wind Power Tariff trend by Source of Generation (As per CEA) Rs per unit (lowest and highest tariff as per CEA) Rs per unit Rs per units Rs per units Rs per unit Rs per unit Power tariff across sources remain to be low on account of suppressed demand and the same is expected to continue for the coming months. Renewable energy auctions witnessed tariffs hitting new low on the back of competition due to limited capacity addition. This year, during the peak season between June-September, the overall plant utilisation of thermal power plants witnessed an improvement over the previous year due to demand arising out of shut down of nuclear and hydel power plants for maintenance. Power imported from Bhutan was 25% higher than the target for the April-sept 2017 period. All India Plant Loading Factor (PLF) for Coal and ligite based power plants was a mixed bag between April-September Month of April, June and August had lower PLF at 65%, 70% and 66% during the year compared to 67%, 73% and 70% during the same period in PLF in the month of May, July and September stood at 64%, 68% and 61% showing improvement over last year s PLF during these months. 4

5 Average transmission and commercial (AT&C) losses: 30 (v) AT & C Losses (%) AT & C Losses UDAY scheme addressed the issue of freeing state discoms from the debt burden, but the key issue of average revenue realised for every unit of electricity distributed seems to be widening. As per UDAY website, the AT & C losses still remain in the range of 23-24% and there is no visible improvement in the same. Subsidized power supply to rural users including the new Saubhagya Scheme may further widen the AT & C losses. States have realised the importance of cutting on AT & C losses. Few states are implementing metering of feeders to measure input and output of energy, ensuring each household attached to a feeder is metered and disconnecting and penalizing illegal connection In order to improve revenue realization. Implementation of better revenue realization schemes including privatization of revenue collection is vital for the operational and financial revival of state discoms. Deficit and Surplus power states: Table 1. Electricity Deficit States ( ) State Deficit (Percentage) J & K 3201 MU (-18.4%) Assam 329 MU (-3.6%) Bihar 580 MU (-2.3%) Uttar Pradesh 1869 MU (-1.7%) Rajasthan 421 MU (-0.6%) As per CEA, most states were able to meet their power requirement during the year Power deficit states include Jammu & Kashmir, Assam, Bihar, Uttar Pradesh and Rajasthan. Refer to Table 1. Capital expenditure: Planned, outstanding and stalled (Source: CMIE) For the year , planned projects in the electricity generation sector stood at Rs lac crore compared to Rs, 2.67 lac crore in % of these planned projects are concentrated in Andhra Pradesh, Uttar Pradesh, Jharkhand and Gujarat. Projects stalled or shelved stood at Rs lac crore for compared to Rs lac crore during the previous year. 57% of the stalled projects were concentrated in 6 states, namely Himachal Pradesh, Jharkhand, Maharashtra, Orissa, Rajasthan and West Bengal. 5

6 As per Power ministry, hydel projects with capacity of 11.8GW are running behind schedule on account of land and forest clearance, law and order problems, natural calamities etc. Additional Key Government initiative for reviving the power sector: UDAY (Revival of DISCOMS) SHAKTI (Fuel Linkage) SAUBHAGYA (Connecting households to GRID) Ujjawal DISCOM Assurance Yojna Aimed at - Improving operational efficiencies of DISCOMs - Reduction of cost of power - Reduction in interest cost of DISCOMs - Enforcing financial discipline on DISCOMs through alignment with State finances Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India) - Coal Linkage on auction basis for IPPs: Independent Power producers (IPPs) with PPA based on domestic coal. - PPA holders to reduce tariff for linkage - Targeted capacity- Coal linkage for 78 GW of thermal power plants. Pradhan Mantri Sahaj Bijli Har Ghar Yojana SAUBHAGYA - Ensure electrification of all willing households in the country in rural as well as urban areas - The total outlay of the project is Rs. 16, 320 crore - The Rural Electrification Corporation Limited (REC) will remain the nodal agency for the operationalisation of the scheme throughout the country. The Union Government launched UDAY in 2015 with the aim of financial turnaround and revival of electricity distribution companies. The scheme led to the transfer of liabilities of Rs lakh crore from the distribution companies to the state government. A - T & C losses for 23 states under UDAY stood at 24.01%. - Average cost of supply (ACS) and average revenue realised (ARR) Gap has improved to Rs /unit in the month of September2017 compared to Rs /unit reported in the month of March Barring two states- Kerala and Tripura, all other states have issued and revised their tariffs. SHAKTI scheme launched in June 2017, aimed at providing secure coal linkages to thermal power plants with PPAs. This in turn would require power plants to offer discount on the power tariffs in return for cheaper coal supply. The total quantity booked under the first auction stood at 27.8 million tonnes. The Government also aims to reduce import of coal for thermal power plants. State-run generation companies were advised to end coal imports but the implementation of the same has not been possible due to shortage of domestic coal and poor quality of domestic coal requiring blending with imported coal for better plant output. The recently launched SAUBHAGYA Scheme (Pradhan Mantri Sahaj Bijli Har Ghar Yojana) aimed at providing universal access to electricity. The Rs16,320-crore scheme has a target to provide electricity connections to over 40 million families in rural and urban areas by December As per the Government think tank NITI Aayog, Saubhagya will have several benefits apart from enhancing demand on the grid and viability of stressed assets. Last mile connectivity will provide options to customers to utilise electricity for cooking, mobility, heating and lighting apart from socioeconomic benefits. 6

7 Coal supply and consumption: As per data available on CEA for the month ending October, 23 power plants with an aggregate capacity of 25GW are facing shortage of coal with 14 plants at less than 4 days stock of coal required termed as super critical stock and another 9 plants at less than 7 days stock of coal required termed as critical stock. The number stood at 27 in the previous month of September signalling slight improvement in coal supplies. The problem of coal shortage has been more evident post August when hydro and nuclear power plants were unable to meet their production targets. Interestingly, coal imports during the year have fallen to a 3 year low of 67 MT for April-July period. Given the trend of shortage of domestic coal due to inadequate railway rakes, power plants near port-based coastal areas may resume importing coal, negating the fall in import of coal during the first half of the year. State-run power plants have already imported almost 2MT of coal during the year. Coal India limited which supplies coal to Short term power market: Short term power market is expected to benefit in India s power market landscape. Presently, short term power markets through power exchanges constitute approximately 4% of the total power transacted in the country. Given the evolving diversification in the generation capacity, excess capacity owing to suppressed demand, growing competition in tariffs for long term PPAs and growing consumer base as an outcome of Government backed initiatives; energy exchanges would witness strong participation from both generating companies as well as buyers. At present these exchanges offer products for Day Ahead, Term Ahead, renewable Energy Certificates and Energy Savings certificate. As the electricity consumer base expands, demand forecasting becomes more difficult during the peak season. Power discoms would have to purchase more power from exchanges during peak season due to sudden spurt in demand, as long term contracts for peak load requirement are economically inefficient. Currently renewable energy is not traded on the energy exchanges due to inability to forecast production a day in advance. Given the recent trend of renewable energy tariffs hitting new lows and once these renewable sources develop reliable forecasting tools, they should be able to trade their generated power on exchanges. At present factors like excessive transmission charges on purchase of power from exchanges and purchase of power from exchanges require upfront payment, limit the growth of power exchanges. It is expected that with improved financial health of DISCOMs would be another factor which would lead to growth in volume of electricity traded. CARE Ratings Outlook: - Coal shortage persists disrupting electricity generation by thermal power plants across states in the country. Implementation of schemes needs to be backed with adequate infrastructure support. Disruption In fuel supply has negated the overall improvement in capacity utilisation for thermal power plants during the September-October period. As mentioned above, thermal power capacity utilization is expected to improve during the year and disruption of fuel supply needs to be addressed. - Post implementation of UDAY in 2015, it took another 12 months before most States became a part of the Central Government Scheme. AT & C losses which indicates the operational and collection efficiency of State Discoms continues to be around the 25% level which highlights the need for better implementation of the schemes by the state DISCOMs. States like Jammu and Kashmir, Bihar, Chhattisgarh, Jharkhand, Uttar Pradesh, Madhya Pradesh, 7

8 Haryana, Rajasthan and Maharashtra have AT & C losses above 25%, with 4 of these States having losses in excess of 40%. - AT & C losses remain to be a matter of concern. For UDAY scheme to succeed and to improve the operational and financial parameters of DISCOMs, minimizing AT & C losses is vital. Measures to accelerate feeder metering, metering households, improving collection efficiency and punitive action on theft of electricity have to be implemented across states. - On the tariff front, addition of capacity across electricity sources has subdued compared to the last 2 years. Renewable energy is witnessing a slowdown in capacity addition due to inability on the part of state discoms to sign new PPAs. The tariffs seem to have bottomed out and are expected to remain steady going forward especially for renewable energy. Wind and solar tariffs may see a marginal downward trend in new tariffs owing to competition for limited capacity being auctioned by States for a long term PPA. - PLF of thermal (coal and lignite) power plants are expected to improve and SAUBHAGYA scheme implementation could help in additional demand growth in the next 12 months. CORPORATE OFFICE: CARE Ratings Limited (Formerly known as Credit Analysis & Research Ltd) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai ; CIN: L67190MH1993PLC Tel: I Fax: care@careratings.com I Website: Follow us on /company/care Ratings /company/care Ratings 8