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Future of private sector investments in thermal power generation

(01 Aug 2016)

A few days ago, JSW Energy Ltd announced the acquisition of the 500 megawatt (MW) power plant of Jaiprakash Power Venture Ltd. The power plant has a long-term power purchase agreement (PPA) of about 70% of its capacity and coal linkage, making it an attractive target. Though consolidation was always expected in this space, few Indian entities other than Adani Power Ltd and JSW Energy have shown the appetite to acquire coal-based thermal generation assets. Singapore-based Sembcorp Industries Ltd has been the only foreign entity to acquire assets in this space. The sector has also experienced a few abandoned deals, including Tata Power Co. Ltd terminating the share purchase agreement with Ideal Energy Projects Ltd due to non-fulfilment of condition precedent.

Not so long ago, in financial year (FY) 2007-08, India faced an unprecedented power shortage of up to 17% of the peak demand. That was the time when the economy was growing at more than 9% and experts said if there were no power deficit, the gross domestic product (GDP) growth would go up by 2% more. Indian entrepreneurs took advantage of the liberalisation in the sector after the Electricity Act, 2003, supported massive deregulation of the power generation segment. Backed by easy finances—in terms of debt and equity—and the policy that gave access to captive coal blocks, Indian entrepreneurs made huge bets on electricity generation.

Initially, these power projects faced several challenges, such as land acquisition, clearances and approvals, coal availability from Coal India Ltd and above all, the financial position of the distribution utilities. A few foreign investors attempted a re-entry to the sector after failed attempts in the 1990s. They were still overwhelmed by the challenges in the sector and no actual investment materialised. But Indian entrepreneurs overcame all these challenges and led the investment in the sector. Coal-based thermal power generation capacity nearly doubled, from 94 gigawatt (GW) to 185GW, in a short span of five years between FY2010-11 and FY2015-16.

The electricity demand-supply scenario has changed considerably over the past few years. The economy started slowing down from 2011-12 onwards and the industrial sector saw a particularly severe recession. While the generation capacity addition grew at a rate of 12% per annum during these five years, the demand grew at a moderate 5% per annum instead of the expected 8% per annum that was planned. This has resulted in both peak and energy deficit getting almost wiped out from all regions in the country, except in southern India.

Distribution utilities are not signing long-term power agreements. Over the past four years, PPAs of only 12GW have been signed under the competitive bidding route (case 1 bids). Leading state electricity boards (SEBs) such as Maharashtra, Gujarat and even Tamil Nadu have become power surplus and may not require additional contracts for the next couple of years.

Other utilities who need power are taking full advantage of the prevailing low spot power prices in exchanges (less than Rs.2.5 per kilowatt-hour), rather than entering into long-term contracts. Currently, around 21-22GW of coal-based generation capacity is stranded without a PPA. The plant load factor (PLF) of the existing coal-based capacity for private independent power producers with a contract is less than 60% in FY2015-16. While Coal India Ltd’s stellar performance over the past two years has taken away fuel-related worries to some extent, legacy issues such as new coal block auctions at aggressive prices still haunt some generators.

Now, the entire focus is on recovery of demand. In the first six months of this calendar year (January-June), electricity demand has grown at more than 9% compared with the same period last year, giving hopes to ailing generators. But it’s going to be a long and painful journey to a full recovery.

The Index of Industrial Production numbers have been extremely disappointing for some time now, even slipping into the negative in some months. This has a direct impact on the distribution utilities’ sale of power to industries. That, in turn, has a double impact on their ability to buy power, as industries throughout the country pay double of what it costs to supply power to them.

The National Democratic Alliance (NDA) government is also going about energy-efficiency measures in a missionary mode—planning to replace 770 million incandescent lights with light-emitting diode (LED) bulbs, use 10 million energy-efficient agriculture pumpsets and 30 million LED street lights. This is apart from the move to have efficient home appliances such as fans, air conditioners, washing machines, among others. All these initiatives have definite impact on residential load in urban areas. According to a recent news report, the managing director of Energy Efficiency Services Ltd was quoted as saying that about 30GW of peak-hour generation demand can be reduced in three years because of these energy-efficiency measures.

The National Democratic Alliance government is targeting ‘power for all’ in the next couple of years, leading to massive household electrification in a number of states such as Odisha, Assam, Bihar and Uttar Pradesh where access is still very low. But this segment is not going to contribute a lot to the overall demand for electricity as the consumption will be only at subsistence level.

The Ujwal Discom Assurance Yojana (UDAY), launched by the government for financial turnaround and revival of power distribution companies, will have definite impact on the buying capacity of the distribution utilities. But that’s going to be more long term and sustainability would depend on the overall turnaround of the distribution segment.

Demand would come back within the next few quarters with successful monsoon and overall recovery in the economy. Untied capacity would get tied up in the next two years and the power plants will be running at better utilisation. India will continue to depend on coal-based thermal generation for the next few decades, but it will become increasingly difficult to attract fresh investments from the private sector in the next few years.

Due to India’s commitment to reduce carbon dioxide emission intensity by 33-35% by 2030, the government has also come out with stringent norms on sulphur oxides and nitrogen oxides for thermal plants, adding to the cost of setting up thermal capacity. A clean energy cess on coal, amounting to Rs.400 per tonne, was announced in the last Union budget, further adding to the cost of coal-based power. Post the Supreme Court’s order leading to the cancellation of all coal block auctions, subsequent bidding rounds and the pending government policy on linkage, uncertainties regarding predictability of fuel supply continue to plague the private sector.

Currently, investors are excited about opportunities in the renewable energy sector, given the country’s massive 175GW RE capacity plans. Till the thermal generating capacity utilisation improves to 75%, PLF levels and the existing untied capacities are contracted, it’s unlikely that there will be any private sector interest in the coal-based thermal generation sector even though public sector generating companies would continue their capacity addition programme during this period.

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