BackRenewable power: the challenges ahead
The target of raising renewable-based capacities to 175GW by 2022 is a continuation of the generation-centric approach, while neglecting the criticality of the distribution segment
Premium(Indranil Bhoumik/Mint)
The electricity business is not merely about setting up power generation stations and transmission systems, but equally, and probably more crucially, about retailing electricity and recovering the cost of service from consumers.
Unfortunately, the story of the development of the Indian electricity sector has always been one of increasing capacity to generate electricity and evacuating it. Successive governments have been at pains to take steps that will achieve capacity additions annually and commensurate transmission infrastructure. But the distribution segment, which retails electricity and where revenue originates, has not received the same attention as generation.
The result has been that despite impressive achievements in increasing generation capacity and creation of a state-of-the-art national transmission grid, power sector finances have remained weak, mainly because of distribution companies, or discoms.
The aggregate losses of discoms (before accounting for government subsidies) stood at about ₹ 1 trillion on 31 March 2013. Irregular and infrequent tariff increases and incomplete/late subsidy payments by governments have been mainly responsible for this state of affairs.
Discoms lost on average ₹ 0.83/kWh in 2012-13 in the retailing of electricity. To cover losses, discoms have borrowed heavily from commercial banks and other financial institutions.
Mounting debt and losses have seriously eroded the creditworthiness of discoms, resulting in the reluctance of lenders to loan more money to the electricity sector, which, in turn, has rendered discoms unable to pay for power purchases.
To cut losses, discoms have preferred shedding loads rather than contract more electricity to meet increasing demand. In the last 5-7 years, long-term tenders for electricity procurement called for by discoms added up to about 10,000.
Power generation firms, largely dependent on discoms for power purchase, find it difficult to identify alternative buyers. Overall, investor sentiment on the electricity sector is extremely weak.
It is in this backdrop that the target of raising renewable-based capacities to reach 175 gigawatts (GW) by 2022, including 100GW of solar and 60GW of wind power, is to be seen. It is unfortunately a continuation of the same story of generation-centric approach, neglecting once again the criticality of the distribution segment.
Is this target feasible? It is five times the current capacity overall; wind-based capacity is set to treble and solar capacity to be practically built from zero. It is difficult to imagine the addition of 20GW of renewable capacity year-on-year for the next seven years.
Pessimism stems from past trends: it has taken 25 years for wind power to reach the current level and about five years for solar; even conventional capacities only grew at 5GW per year in 1997-2007 and 10GW in 2007-12.
It should also be remembered that the central government has for many years offered incentives like accelerated depreciation to bring down wind energy prices. Solar energy has been supported by bundling it with coal-based electricity to make it affordable to discoms.
It was widely expected that the announcement of such a huge push-up for renewable energy will be accompanied by fiscal incentives, subsidies, duty structure rationalization and low-cost financing to make it possible. That, however, did not happen. Especially for solar energy, the earlier incentive through bundling is not likely to be offered as coal-based power, not already allocated to different states and available with the central government, is limited. The latter also earlier offered a payment security mechanism to solar developers to guarantee against payment defaults by discoms. Can the central government offer such security for 100GW? In its absence, how will solar developers be confident of setting up such huge capacities?
Raising funds, both equity and debt, to finance such a huge capacity addition is also fraught with challenges. Developers will be looking for long-tenor, low-cost debt. Given the state of finances of discoms detailed earlier, banks and other financial institutions will be hesitant to offer loans. Their enthusiasm will be dampened further if the centre does not offer any payment security mechanism.
Banks and financial institutions will look for power purchase agreements (PPAs) to be signed by the developer with the discoms before considering financing.
Tenders for electricity procurement from conventional sources on long-term basis in the last 5-7 years were for about 10,000 megawatts (MW).
It is inconceivable that PPAs will be signed for 100,000MW in the next seven years. To provide the demand-side pull, discoms have been mandated to achieve RPOs of 0.25% in 2012-13 for solar energy alone, but have been difficult to enforce. RPOs for solar are mandated to rise to 3% by 2022, when the earlier target for solar was 20GW. Will RPOs also have to be pitched at 15%, with the current target of 100GW? Will it be enforceable? Is it fair to force discoms to buy higher cost electricity when they cannot ask for and get cost-reflective tariffs? The government should work to make discoms commercially viable, when the sale of a unit of electricity does not mean loss. That is when discoms will embrace renewable targets. That is when financial institutions will come forward to support the sector. That is when investors will be keen to invest and stay with the sector.
The writer is a former power secretary.
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