Opinion | Power sector: going beyond insolvency4 min read . Updated: 02 Oct 2018, 09:00 PM IST
We must not allow the current distress to define the investment climate; it is time for the policy makers to articulate a vision for the power sector
It would perhaps be rash to look beyond insolvency when the courts, a parliamentary committee, and the central bank are deliberating it. In the power sector, the problem is so complex and large (about 66 GW of generating capacity with loans of ₹ 1.8 trillion) that despite many government initiatives, much of it remains unresolved.
The power developers, who experienced this in full measure, having seen their capital erode and lose control of projects, however, are starting to look beyond the distress. They regained just enough confidence to invest in the sector again, although in very different ways than in the past.
This change of heart could not have come at a more critical juncture. The country’s economic growth is starting to pick up and rural households are getting power connections in record numbers. In 2018, more than a million households have been electrified each month, climbing to over 3 million last month. The switch to electricity is a part of a broader policy agenda seen, for example, in the recent decision to electrify the entire railway broad-gauge network.
There is an element of urgency driving this transition. The rising cost of global energy commodities and rupee depreciation comes at an inconvenient time, when India’s energy consumption is set to grow faster than all major world economies (BP Energy Outlook 2018). Global coal and oil prices are at the highest levels in six years and four years, respectively. The spot prices on the power exchange have last seen this month’s peaks way back in 2012.
Power developers are unmoved by this and are staying away from resources. The shift in government policies, such as the cancellation of captive coal blocks, levy of coal cess, and stricter environmental norms, has been particularly harsh on them. A similar regulatory churn in other countries from where we source coal, such as Indonesia and Australia, meant that few private power producers could escape unscathed.
The revival of interest in the power sector, thus, is taking on a different direction. The focus is shifting away from contracts with government-owned utilities to serving direct consumers. This is happening through acquisitions (such as Adani taking over a Mumbai distribution licensee), franchisees and privatisation (such as an ongoing bid process in Odisha). The open access route, where regulators have allowed viable sales to end-consumers, has attracted fresh investments and in the case of Karnataka propelled the state to lead renewable energy charts last year.
The government’s proposed amendments to the Electricity Act 2003, if enacted, will only accelerate this trend. Specifically, the proposal to allow renewable energy generators to supply directly without a licence and the capping of open access charges will set off a scramble for consumers. Even now, rooftop solar is the fastest growing asset category (an increase of 164% in FY18), where self or third-party owned facilities supply a part of the consumer’s demand. The final endorsement of this move towards consumers will come over time, with the separation of the distribution and supply businesses.
Overseas markets are starting to feature in power companies’ business plans as they try to maintain growth and diversify risks. In transmission, as the volume of tenders offered fell (from 10 projects in 2015 to just five in 2017), developers turned global, with Sterlite finding considerable success in Brazil. In renewable energy, foreign tenders offer more safeguards than those at home. Solar auctions in Mexico and South Africa index tariffs to local inflation or to the exchange rate. Cross-border power trade with the commissioning of new transmission lines presents an opportunity for under-utilized power generators. India has now become a net exporter of power and an independent power producer recently won a long-term contract for supply to Bangladesh from its power plant in the south.
New technologies are another hot topic, where power developers are investing in innovation to solve the industry’s emerging needs. The rise of renewable energy, for example, sucks in a lot more transmission capacity and its variability casts a burden on conventional power plants. Hybrid projects, which solve this by adding storage, such as pumped-hydro, and co-locating projects to share land and transmission capacity, have seen early investment such as with Greenko’s novel round-the-clock renewable energy project. The maiden offshore wind tender for 1 GW, which extends the scope for wind power into the sea, has attracted 34 international and local bidders. The deregulation of charging infrastructure for electric vehicles allows developers to build and integrate it with their merchant power plants. The economics of these technologies and their ecosystem is not yet established. State governments must adopt pro-investment policies with balanced risk sharing to support such investments.
India is hugely under-served in terms of energy and needs these investments. As it develops to the level of middle-income countries (whose per capita electricity consumption is two times higher) or China (four times higher), we have to create an additional power generation capacity of 50-100 GW. The health and expertise of private power developers is key to building this at an efficient and competitive price. We must not allow the current distress to define the investment climate, and it is time for the policy makers to articulate a vision for the power sector post-insolvency.
(Kameswara Rao, is leader (energy, utilities and mining) at PwC India )