10/10/2017 Reviving Power Demand Indian Infrastructure

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Home Spotlight Reviving Power Demand

Reviving Power Demand

Steps to boost consumption and utilise existing assets

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May 2017
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October 2017
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receiving station in
Mumbai. The
he situation today More

The Indian power sector today is facing a strange conundrum where existing GUVNL tender for
power plants are su ering from low utilisation rates (about 60 per cent) or power procurment
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10/10/2017 Reviving Power Demand Indian Infrastructure

are lying stranded either for want of fuel or power purchase agreements
(PPAs); meanwhile, new renewable capacity and thermal capacity through n
PSUs is being added at a brisk pace. d
s
Today, the grid-connected installed capacity in India stands at about 310 GW n
while peak power demand is only 170 GW. In addition, there is an estimated o
60-90 GW of diesel generator (DG) set-based capacity installed by business bi
establishments to provide standby power at prohibitive costs. As per the d
regulations set for the power sector, the projects are funded 70 per cent
ders
through debt, mainly from domestic nancial institutions. The
October 2017
underutilisation of the existing assets a ects the pro tability of power
Gujarat Urja Vikas Nigam
companies and hampers their capacity to service their debt obligations,
Limiteds tender for
thereby increasing the risk of becoming non-performing assets (NPAs).
procurement of 1,000
MW of coal-based power
The large quantum of NPAs in the power sector has become a major witnessed no
potential challenge for lending institutions. Today, there is already an participation from
estimated 90 GW of grid-connected power capacity in the country that is private players
stranded. Addressing this challenge will result in two major bene ts for the More
country: it will give a boost to Make in India, thereby generating more
employment, and ensure power to all.
V
Reasons for the situation
a
n
Power capacity addition in India is based on the ve-year demand growth O
estimates prepared by the Central Electricity Authority (CEA). The CEA o
estimates are, in turn, based mainly on projections of the countrys GDP r
growth. Over the past few decades, the real growth in power demand has d
not matched up to the growth assumptions/CEA estimates. This can be due wins three-year
to factors such as less energy-intensive service sectors driving economic maintenance
growth rather than the manufacturing sector. This is further exacerbated by dredging contract at
the poor performance of distribution companies, which are plagued by high Kandla port
aggregate technical and commercial (AT&C) losses and resort to load- September 2017
shedding rather than serving the latent demand due to poor recovery. This Netherlands-based Van
lack of su cient o take has led to large capacities of power plants not Oord has won a contract
getting su cient loads to serve. Indias per capita power consumption (1,010 to maintain Kandla
kWh per annum) is very low compared to other countries such as China ports approach channel
(4,000 kWh per annum) and developed countries (about 15,000 kWh per for the next three years
annum). Although e orts have been made to boost residential demand and (2017-20). The
the number of unelectri ed villages has reduced to nearly half (6,175 as on More
December 31, 2016; Source: CEA) since the beginning of this nancial year
(11,344), a lot needs to be done on the industrial power consumption front.
India has 60-90 GW of DG set capacity and about 60 GW of thermal
generating capacity for captive, largely grid-connected generation, which has
been set up by industries due to the absence or inadequacy of reliable grid-
based power supply.

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Possible remedies to enhance power demand and gainfully deploy built-

up assets Minimise the use of DG sets

The government should consider imposing steep taxes on the oil used, as
also standby DG set equipment. It should actively deter users of DG sets and
levy penalties on them for falling back on

oil-based power supply as it is neither environmentally friendly nor is it

contributing to creating a robust grid. Grid-based power, even at industrial
tari s, is cheaper than DG set-based power. Deterring DG set users in the
strongest manner will help shift this customer base to the grid and put
pressure on the distribution companies to perform and not default on power
supply. This could include imposing penalties in the event that they do not
supply power.

Allow reliability charge and make state discoms accountable

Power distribution companies need to be made more responsible and

accountable for the supply of 247 electricity, at least to major consumers
such as industries and commercial establishments, to give a boost to
economic activity. The Ujwal Discom Assurance Yojana has greatly helped
reduce the nancial burden of discoms, which should allow them to be able
to procure and sell su cient power to industrial consumers. In order to
ensure reliability of supply, regulations should be formulated for penalising
discoms for disruption of supply to industrial consumers, which may be to
the tune of 1.25-1.5 times the tari charged to the consumer (alternatively,
discoms should pay consumers about 0.85 times the cost of oil burnt by
them in DG sets). In order to nance the discoms for such a framework, a
small reliability charge (about 50 paise per kWh) may be allowed to be
charged along with the tari s, thereby o ering discoms an incentive to
procure and supply su cient power (including arranging temporary
alternative power supply in case it is required). This initiative will consolidate
power demand in the national grid, making it strong and robust, and will
bring the highest value to all stakeholders in the long term. After the
implementation of such a mechanism, if the discoms still undertake load-

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shedding, the regulator, supported by the central and state governments,

should take action by depriving such discoms of tax bene ts/other bene ts
under various schemes, or even consider privatising the deviant discoms.

Urgent correction of the cross-subsidy regime distortion

The average industrial power tari in almost all the states today is higher
than the industrial tari charged in most developed countries. This is clearly
not aligned to the governments push towards Make in India and is, in fact,
working to actually discourage making in India. In order to make industrial
tari s more cost competitive, cross-subsidy should be removed. Industry
accounts for about 50 per cent of the total power demand in India and this
one correction can substantially shift power demand back to the distribution
companies and also send the right economic signals to all categories of
consumers. Low-end domestic consumers may be cross subsidised by
higher-end residential consumers or commercial consumers. The agricultural
subsidy may be funded through high-end residential and commercial
customers. This can be done through supplying power to even low-end
consumers at the cost of supply and providing the subsidy through direct
bene t transfer to the needy consumers linked bank accounts. The fund for
cross-subsidy can be formed by accumulating the cross-subsidy surcharge
into a corpus that is used for the disbursement of direct bene t transfers.
This can help minimise leakage and reduce the misuse of subsidised power.
By leaving industrial consumers out of the burden of cross-subsidising and
keeping industrial tari s as close to the cost of supply as possible, Indian
manufacturing can be made greatly cost competitive with respect to global
players. This can help bring more industries under the Make in India
initiative, thereby creating more job opportunities and leading to the
utilisation of Indias demographic dividend.

Incentivise incremental industrial consumption through tax sops

The current tari constitutes an element of about 20 per cent as taxes

charged as pass-through on the fuel side as well as on spares, service
charges, etc. In order to incentivise job creation and Make in India, each
category of industry can be incentivised to add capacity and expand its
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production and
market activities. This
can be done through
a scheme in which all
production units at
more than, say, 20-25
per cent of the
previous year would
get 10-15 per cent
discount as credits
in industrial tari s, to
be funded through
the goods and
services tax or a
speci c corpus
created for a boost in
industrial production.
This will help enhance
the demand pro le,
as also improve
competitiveness
through economies of scale and create more jobs.

Supply-side initiatives: Re-evaluation of capacity addition programmes

In order to ensure that the existing generation capacity gets fully utilised and
the existing PPAs are honoured, fresh capacity addition needs to be re-
evaluated. There needs to be a hiatus on the setting up of new planned
thermal capacity till such time this evaluation is completed. There are a large
number of assets that are either under execution or have been executed but
are stressed/ stranded due to a lack of PPAs or reliable fuel supply, or both.
Meanwhile, large capacity additions have been planned by power sector
PSUs. Nearly 50 GW of thermal capacity is currently under execution, mainly
by PSUs. A large portion of the new capacity is expected to supply power at
prices above Rs 4 per kWh, whereas the existing assets, with sub-Rs 3.50 per
kWh generation, are lying stressed or are stranded. The PSUs get coal
linkages and PPAs for these new projects, which should be held back as they
are economically ine cient. Also, in light of the global climate change
commitments, the e ciency of generating stations needs to be considered.

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Expeditious retirement of old, ine cient generating sets

Old ine cient assets of nearly 35 GW capacity need to be retired and their
fuel linkages and PPAs transferred to more e cient generating stations. The
government should encourage consolidation in the sector, including PSUs
acquiring stranded assets (instead of building new capacity), so that
e ciencies are brought in. This would also create opportunities for growth in
a sector that is otherwise facing lack of gainful deployment of new and
e cient generating sets.

Reassess the pace of renewable capacity addition

The target for renewables may also be reassessed to identify the capacity
that would be needed vis--vis the expected demand for power in the
coming future, and what would be the most e cient way to meet the
demand using renewables. A tapering down of growth projections in
renewable generation may be necessary to ensure a smooth transition in the
countrys power mix.

PPA or privatisation of the distribution supply business

Power is available at near variable cost on a short-term basis on the power

exchanges, but this is not being lifted by the discoms. Meanwhile, load-
shedding is often resorted to for curtailing demand. E ciency needs to be
brought into the distribution business in order to ensure that the lowest
possible price of power is o ered to consumers. A way to do that can be
through reforms that allow the introduction of competition in the
distribution supply business, which is controlled by state-owned entities in
most places. As observed in the case of Delhi, reforms in the distribution
business, allowing private players to bring in professional management, have
led to e ciency in discom operations, as demonstrated by the lowering of
technical and commercial losses and ultimately bene ting consumers. The
bane of distribution companies is AT&C losses. Unless these are brought
down all over the country, tari s cannot be lowered.

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The above suggested steps to revive growth in power demand and utilise the
installed capacity are imperative for ensuring that generating stations do not
become NPAs and help drive the engine of the Indian economy.

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