Renewable Energy: It’s relaunch time again for power sector

Supply bottlenecks in coal have lessened. But financial reforms and lack of policy clarity on renewables are concerns

India’s power sector is poised for take-off. The Government is setting the stage for the next round of initiatives to move the sector forward. If one goes back to the set of reforms unleashed around 2003 there was a sense of expectation that India’s energy landscape would lead the country to unprecedented industrial development. Let’s trace some of the major observations:

Power sector became a new darling of investors. The gap between India’s low per capita consumption of 1000/Kwh and global benchmarks gave a feeling of assured returns over long periods, drawing the attention of investors.

Banks saw this as an opportunity and showed plenty of flexibility

Most foreign players saw the game being played from a distance, but were reluctant to invest due to risk uncertainty.

Imported coal market began to see all-time highs, led by India becoming a major importer and China’s decline in exports.

The overall end scorecard of the private sector was not good, post reforms

While all this was happening many overlooked the fact that unmet demand — which was the basic driver for expected growth of the sector — continued as before.

The mess and turnaround

Coal availability, transmission, railways and import price risks impacted the generation sector while continuing inaction in Discoms led to deterioration of finances leading to deliberate lower offtake to match their cash flows.

All this arrested the growth and led to NPAs for banks, and therefore overall a significant erosion of value.

The Centre took stock of the situation as soon as it came into power. The Supreme Court’s decision on allocation of coal mines set the ball rolling, followed by coal auctions, revving up the transmission sector, getting projects on key rail links to get underway, getting Coal India’s act together and finally the UDAY (Ujjwal Discom Assurance Yojana) scheme.

Coal India has already shown improvement; coal production is up in the current fiscal. But, instead of improvement in generation and consumption, growth is still subdued and plant load factors have actually declined in the last two years.

To add to the changing scenario in thermal generation, a new ‘rock star’ emerged on the scene called renewables. The attention on India’s renewables programme is partly pushed by pressures to contain climate change and partly by the Prime Minister’s firm belief in renewables.

These changes call for very different and dynamic approaches by power players in their deployment of capital. Investors who have a long term view on India may take some calculated risks by building a portfolio of good PPAs, fuel mixes and offtake risks.

Optimists in the sector would believe that the golden days are here. Coal supply has improved, energy deficit has reduced, power and coal prices have reduced and there is transparency in allocation of natural resources.

Questions remain

But pessimists would ask another set of questions:

Are we calculating deficits based on demand that is real and on 24/7 basis?

Why are PLFs of thermal stations falling?

Are lower rates of power at exchanges way below cost of generation and bid prices that are getting lower a good sign for the sector’s long term health?

Rising capacities in solar and wind adding to more fixed costs for the sector and growth in renewables may not necessarily meet gap in energy deficit – they may replace some base load power from the existing thermal plants and not meet incremental demand.

Some of the measures that will move the sector in the right direction are:

A comprehensive plan for hydros – the share of hydros has been declining continuously and hydro power is one of the best ways to address the country’s long term needs and climate change efforts

Ensuring stranded assets are put to use to add to the supply pool on sustainable basis with minimum additional investment

Making the UDAY scheme work – while the scheme is laudable in its intent and approach, it needs to be implemented. There has to be political will to reform the sector

To speed up the Discom reforms we need to bring down the aggregate technical and commercial losses. Tata Power Delhi distribution is a classic example of how this can be done well

Developing a framework for energy portfolio — we don’t just need more renewables, we also need coal, gas, hydro, wind, solar, distributed generation. We need a balance because each has merits and demerits.

Financing all of these is going to be another challenge. Even rough calculations show a requirement of upwards of $200 billion over next 10 years. Investors need assurance on policies: focus on viability, certainty and fair regulation

Lastly, the role of regulators has to be mentioned. We have a decent and evolving regulatory system in place, but it needs more changes to make it more effective.

The writer is CFO, Tata Power