GREEN ENERGY TRANSITION POST-COVID - CHALLENGES AND IMPERATIVES FOR POWER SECTOR - October 2020 - PSR Programme
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GREEN ENERGY TRANSITION POST-COVID CHALLENGES AND IMPERATIVES FOR POWER SECTOR October 2020
Disclaimer This report has been prepared on the basis set out in KPMG’s contract for ‘Service Provider for Supporting Structural Reforms in the Indian Power Sector’ with the Secretary of State for International Development at the Department for International Development (“the Client”). Nothing in this report constitutes a valuation or legal advice. KPMG has not verified the reliability or accuracy of any information obtained in the course of its work, other than in the limited circumstances set out in the Services Contract. In connection with the report or any part thereof, KPMG does not owe duty of care (whether in contract or in tort or under statute or otherwise) to any person or party to whom the report is circulated to and KPMG shall not be liable to any party who uses or relies on this report. KPMG thus disclaims all responsibility or liability for any costs, damages, losses, liabilities, expenses incurred by such third party arising out of or in connection with the report or any part thereof. By reading the report, the reader of the report shall be deemed to have accepted the terms mentioned hereinabove.
CONTENTS
01 Executive
Summary
02 Introduction
03 Impact of Covid on
Indian power sector
04 Impact on clean
energy transition
05 Role of power sector
in an inclusive clean
energy transition
06 Conclusion
Acronyms
AT&C Aggregate Technical and Commercial
BUs Billion Units
C&I Commercial & Industrial
CERC Central Electricity Regulatory Commission
CIL Coal India Limited
Cr Crore = 10 Million
CUF Capacity Utilisation Factor
DDUGJY Deen Dayal Upadhaya Gram Jyoti Yojana
Discoms Distribution Companies
EMI Equated Monthly Installment
EV Electric Vehicle
GDP Gross Domestic Product
Gencos Generating Companies
GoI Government of India
GW Giga Watt
HT High Tension
ICE Internal Combustion Engine
IDC Interest During Construction
IEX Indian Energy Exchange
IMF International Monetary Fund
INR Indian Rupee
IPDS Integrated Power Development Scheme
IPP Independent Power Producer
LGBR Load Generation Balance Report
LPSC Late Payment Surcharge
LT Low Tension
MNRE Ministry of New & Renewable Energy
MOP Ministry of Power
MU Million Units
MW Mega Watt
MWh Mega-watt Hour
O&M Operations & Maintenance
PFC Power Finance Corporation
PLF Plant Load Factor
POSOCO Power System Operation Corporation
RE Renewable Energy
REC Rural Electrification Corporation
ROE Return on Equity
ROW Right of Way
RTM Real Time Market
SERC State Electricity Regulatory Commission
SRT Solar Rooftop
T&D Transmission & Distribution
UDAY Ujwal Discom Assurance Yojana
VC Variable Cost
1. Executive Summary
The COVID-19 pandemic has caused turmoil recovery is expected going forward, there is
across the world. Along with the death toll of significant uncertainty attached to these
over a million people (as of 29th Sept' 20), the estimates. While the pandemic is expected to
unprecedented lockdown measures have hit affect India’s clean energy transition in the
all the countries hard. The COVID-19 induced short-medium term, it also presents an
economic crisis is being touted as the worst opportunity to become self-reliant, foster
recession since the Great Depression. Indian innovation and support a green and inclusive
economic growth is also expected to contract recovery from the crisis.
1
by 5-10% in FY21 and although gradual
COVID-19 pandemic – Key risks and opportunities for India’s clean energy transition
KEY Risks & Issues
Reduced appetite for RE capacity addition:
Economic slowdown will reflect in reduced
demand for electricity and further increase the
surplus power availability. Surpluses coupled
with the precarious financial situation of
Distribution Companies (discoms) will reduce
the market appetite for new projects, including
Renewable Energy (RE).
RE development challenges: Pace of RE
capacity addition has slowed down since 2018,
owing to sectoral challenges such as land
acquisition, power evacuation infrastructure,
imposition of price caps and import duties and
contract enforcement, etc.
Investment gaps and low risk appetite:
According to National Infrastructure Pipeline
(NIP), India needs a capital investment of INR
9.29 trillion (US$ 123 billion) in RE, over next five
years. Considering the economic slowdown,
power surplus and sectoral challenges, the risk
appetite of investors is low and total debt capital
availability itself is uncertain.
1
World Economic Outlook and agencies such as Goldman Sachs, State Bank of India, Nomura, Fitch etc.
7
Key Opportunities
Focus on ‘Atmanirbharta’ (self-reliance): COVID-19 crisis has brought increased focus on self-
reliance in domestic manufacturing and services. The Government is pushing reforms for creating an
enabling environment for small and medium size industries as well as entrepreneurs. Thus, there is
good opportunity for localisation of RE value chain leading to sustainable and inclusive development.
Retirement of old and polluting coal-based plants: Nearly 30 GW coal-fired capacity in India is
estimated to have completed the useful life of 25 years or more2, but is yet operational. As per
National Electricity Plan, another 16 GW of coal-based capacity does not have required space of
installing equipment for SOX/ NOX3 emission control. Retirement of old and polluting plants would
create a significant headroom for incremental RE capacity addition.
Increased demand from domestic consumers: Reduced social interactions and work from home
has increased the domestic consumption of electricity, which implies higher electricity bills for
consumers and increased competitiveness of Decentralised RE (DRE), such as solar rooftops. This
coupled with increased climate change awareness among people (during the lockdown) is a good
opportunity for increasing the uptake of SRT.
Electrification of transport: Accelerated adoption of Electric Vehicles (EVs) will help in quicker
green energy transition by way of reduced dependence on petroleum products as well as increased
demand for electricity which could be met by clean energy sources.
2
https://www.downtoearth.org.in/blog/energy/union-budget-2020-2021-suggests-closure-of-carbon-intensive-coal-power-plants-69101
3
SOX- Oxides of Sulpus; NOX – Oxides of Nitrogen, which are greenhouse and polluting gases.
8
Key recommendations to enable green and inclusive recovery from COVID-crisis:
Ÿ Energy transition roadmap and strategy: private sector. However, to accelerate the clean
Learning from the experience of expeditious energy transition, the Government may consider
coal-based capacity addition in the previous introduction of PPP based models in parallel, in
decade (which eventually led to surplus capacity such cases where Government presence can
and stranded assets), India needs a expedite pre-development activities and improve
comprehensive roadmap for green energy the financial attractiveness of the project.
transition by 2040/2050. The roadmap should
consider various scenarios for demand growth, Ÿ Comprehensive reforms: COVID-19 crisis has
resource availability, emerging technologies, brought to fore the importance of ‘localisation’.
economic feasibility of different technologies, The need of the hour is to attain excellence,
social development and economic needs (such efficiency and scale in manufacturing. Apart from
as affordable, reliable and clean energy access), the measures already taken under the economic
power system modernisation, localisation, etc. stimulus rolled out in May’ 20, this would require
to clearly lay out future energy mix scenarios and comprehensive suite of reforms focused on
indicate the expected investments in different reducing the hurdles for new businesses in terms
technologies going forward. Public utilities must of licensing, permits, financing, labour laws,
align their own business strategies with this taxation, land acquisition and skill development,
national level roadmap and work accordingly. etc.
Ÿ Policy certainty: Investors require clarity on the Ÿ Fostering innovation: Innovation is a catalyst for
market demand, risks and returns, etc. which effectively leveraging any transition. Expenditure
depends significantly on the Government on Research and Development (R&D) and
policies and market outlook. Policy flip-flops are enabling the start-up ecosystem is critical in this
the biggest hurdles that could dampen the regard. The stimulus measures and/or power
investor sentiments and impede much needed sector budget allocated by the Government
private, institutional and foreign investments. should include budget for R&D and pilots to test
Therefore, successful clean energy transition emerging technologies and business models.
will require consistent and evidence-based Likewise, key market players (public and private)
policies (based on transition roadmap or similar must take lead and increase their R&D spend.
exercise) to reduce market risks and garner
investments. Ÿ Market inclusiveness: Post-COVID, it becomes
critically important to drive inclusive policies,
Ÿ Project bankability: Government needs to take frameworks, models, investments and stimulus
cognisance of the sectoral challenges and measures for generating employment and
provide support for improving bankability of jumpstarting economy. Some of the measures
projects by measures such as enabling land could be - energy transition roadmap/strategy to
acquisition, expediting creation of transmission incorporate 24x7 affordable and reliable energy
infrastructure, access to cheaper finance access, expansion of schemes like KUSUM,
(through credit enhancement, bank guarantees priority support to new businesses/ventures and
and leveraging other innovative financing skilling programmes, etc.
mechanisms), payment security and strong
enforcement of contracts, etc. A designated Ÿ Institutional framework: Robust governance
Project Preparation Facility (PPF) for small size structures and institutional capacity are vital for
developers (who do not have much access to successfully traversing the energy transition. It is
capital markets and/or technical expertise) could the role of institutions (public or private) to ensure
also play a significant role accelerating the implementation of policies, regulations,
uptake of RE projects. guidelines and roadmaps, which demands the
institutional frameworks to be strong.
Ÿ Public-Private Partnership (PPP): Majority of
the RE projects in India have been developed by
9
2. Introduction
COVID-19 Impact on the Global
Economy
The COVID-19 pandemic has caused major
upheaval across the world. Along with the
death toll of nearly a million people, the
unprecedented lockdown measures have hit
all the countries hard. Livelihoods of the poor
have been hit the hardest. The COVID-19
induced economic crisis is being touted as
the worst recession since the Great
115
Depression, almost a century ago.
The World Economic Outlook (June’20 110
edition) called COVID-19 ‘a crisis like no
105
other’. The outlook estimated that the
pandemic has impacted the economic
100
activities in the first half of 2020 worse than
anticipated. As per estimates, the global
95
output is expected to drop to -4.9%
(negative 4.9%). Worst hit countries are 90
expected to be US, Germany, Italy, Spain, UK
Q1’19 Q2’20 Q4’21
and France, Brazil, Mexico and South Africa 85
whose economic output is expected to drop World
Source: World Economic Outlook
to - 8% to -13%. There is yet a high degree of Advanced Economies
Emerging/ Developing Economies, excluding China
uncertainty with these estimates. China
The impact on low income households is expected to be particularly acute, which could upset the
4
progress made in reducing extreme poverty across the world. According to World Bank analysis , the
COVID-19 crisis is expected to have disproportionate impact on the poor, due to job losses, loss of
remittances, rising prices and disruption of education and healthcare services. 40-60 million people
are expected to fall into extreme poverty (income below $1.9/ day). In all, 150- 390 million people are
expected to become poorer (below income of $5.5/ day) in 2020. The number of people facing acute
food insecurity could double to 260 million in 2020. Overall, COVID-19 crisis is expected to increase
poverty, hunger and social inequality. Access to healthcare, potable water, sanitation, education and
energy is likely to be further impeded.
4
https://www.worldbank.org/en/topic/poverty/overview
11COVID-19 Impact on the Indian Economy
Initial estimates from various agencies such as electricity is a basic input for all economic
WEO, Goldman Sachs and Nomura suggested activities- agriculture, mining, manufacturing,
a economic contraction of 5% in FY21, which services and trade, etc. Clean and affordable
is at par with their estimate for average global energy (electricity) is also one of the
economic contraction. However, the latest Sustainable Development Goals (SDGs), an
estimates (by Goldman Sachs, Fitch Ratings, indicator of socio-economic development of
State Bank of India, etc.) present a sombre any nation.
picture wherein the economic contraction is
expected to be 10% to 14% in FY21, which Being the backbone of any economy, power
implies India could be amongst the worst sector needs to play a crucial role in speeding
affected countries. As per the numbers up economic recovery and emerging stronger
reported by Ministry of Statistics and from COVID-19 crisis. Focused efforts on well-
Programme Implementation (MoSPI), the being of the power sector and channelising the
Indian economy contracted by 23.9% in the investments strategically to meet the SDGs,
first quarter of FY21, on account of stringent will be helpful in driving economic recovery.
lockdowns. WEO estimates suggest that For instance, the National Infrastructure
whilst the recovery is going to be more Pipeline (NIP) envisages INR 23.4 trillion (US$
gradual, the global economy is expected to 310 billion) public-private investment across
bounce back by Q1FY21. The recovery is likely power sector, which could help jumpstart the
to be quicker for emerging economies, economy. Thus, future energy transition
although there is significant uncertainty planning, investments and recovery measures
attached to these estimates. must focus on green and socially inclusive
growth while addressing the existing sectoral
The impact has already been severe for BPL inadequacies.
households, especially 120 million5 migrant
labourers who depend on construction, This paper attempts to discuss the key
domestic work, textile, mining & quarrying, impacts of COVID-19 across power sector,
brick kilns, transportation and other industrial particularly on ongoing energy transition and
activities. the role sector can play to support green and
inclusive recovery from COVID-19 crisis.
Though the Government has significantly
reopened the economy, these people have
already faced a loss of three months of wages.
An estimated 7.5 million6 labourers have
migrated back to their native states such as
UP, Bihar, Odisha, MP and Rajasthan and may
spend more time without employment. A
majority of these labourers are employed with
MSME and unorganised activities, which are
expected to be significantly hit by economic
contraction.
Indian power sector contributes to about 2.2%
7
of Gross Value Added (GVA) to the Indian
economy and supports millions of households
directly and indirectly. Beyond the GVA share,
5
http://www.aajeevika.org/labour-and-migration.php
6
https://economictimes.indiatimes.com/news/politics-and-nation/migrants-and-companies-get-help-to-bridge-the-distance/articleshow/76291327.cms?from=mdr
7
GVA is a measure of the economic productivity of any sector or institution. GVA implies amount of goods and services produced, less the cost of inputs and raw materials.
123. Impact of Covid on Indian power sector
Electricity Demand Thus, fall in demand has led to corresponding
change in fuel mix. COVID-19 proved to be a
st
The lockdown imposed from 21 March silver lining for RE as its share in generation
onwards led to a sharp fall in the peak (MW) and mix jumped from 9 to 15% whereas that of
energy (MWh) demand. In the first week of coal dropped from 73% to 65%9. Interestingly,
lockdown, the demand dropped to about 30% while the demand has recovered to Pre-
as non-essential industries, commercial COVID-19 level, the share of coal-based
establishments (responsible for 50% demand generation has not bounced back to the same
share) were shut down. On the other hand, the level. Owing to muted industrial as well as
domestic consumption went up as people power sector demand, the coal demand has
remained indoors. Demand gradually picked up correspondingly weakened. The coal
thereafter with onset of summer season and production has declined by ~15% in this
further with easing of lockdown (May’20 period.10
onwards). While the demand has now
recovered to pre-COVID-19 levels, it still lags
Supply
the 2019 demand which is indicative of the
lagged recovery of economic activities despite Electricity supply has remained uninterrupted,
the lockdown easing and economic stimulus. being an essential service. However, the
Discoms are facing headwinds due to steep
The first quarter of FY21 has witnessed about fall in revenue and collections during the
53 Billion Units (BU) demand erosion, which lockdown. While the Government and
translates into 4% of annual energy demand. regulators have provided relief through
Based on current trends, we could see 5-6% measures such as 6-month moratorium on
contraction in energy demand in FY21. Overall, debt service, rebate in late payment
the demand recovery is expected to closely surcharge and a INR 90,000 Crore capital
follow the economic recovery as electricity is a debt infusion, the relief measures are
major input for manufacturing, services, estimated to be insufficient to provide
commercial establishments, agriculture and adequate liquidity in Discoms. It is estimated
households, etc. that cash deficit could lead to Discoms' debt
hitting an all-time high of INR 4.5 Lakh Crore
11
Generation at the end of this fiscal .
Coal based thermal power plants were Discoms and state regulators have offered
primarily backed down in response to demand relief to consumers who have been hit hard
reduction, since RE and nuclear are must-run by the pandemic, through deferment of due
and hydro supports more peaking load. Gas dates, curtailment of disconnections, waiver
based plants run for limited periods due to of fixed charges, rebate in late payment
deficit of domestically sourced fuel (natural surcharge and other such measures. Many
gas). Hydro and gas played a key role in states have also abstained from tariff hikes in
balancing the grid, in response to sudden the annual tariff setting process for FY21.
demand variations (especially the light switch
th 8
off event on 5 April) .
8
Hon’ble PM of India appealed to citizens to switch off lights and illuminate flashlights and candles on 5th April, 9 PM for 9 minutes
9
Source: POSOCO reports
10
Source: Ministry of Coal; https://coal.nic.in/content/production-and-supplies
11
CRISIL
14Prices Power Market Reforms
Retail and wholesale electricity prices being After the initial delay, the Real Time Market
regulated by respective state and central (RTM) was launched on 1st June '20. This
regulators, have largely remained unaffected market will enable market participants to meet
by drop in demand and other COVID-19 led their energy requirement closer to real time,
impacts. However, in the short-term market helping grid balancing and optimise power
(power exchange), average prices recorded in procurement costs. The much-awaited draft
April '20 and May '20 were INR 2.42 per kWh Electricity Amendment Bill 2020 was
and INR 2.57 per kWh respectively, which were introduced by Ministry of Power in April’20.
25% and 23% below those recorded Upon enactment, it will help long standing
compared to the previous year. The high sell issues such as contract enforcement,
side liquidity owing to reduced demand was competition and efficiency in distribution
the key factor responsible for low prices on segment, National RE policy, etc. While the
average12. The impact of short term-market reforms are progressing, COVID-19 could lead
prices is again minimal because the market is to delay in enactment of the bill and
responsible for only 3-4% of the total power introduction of other initiatives and reforms.
trade.
Employment
The market demonstrated a significant uptick
in May '20 mainly owing to the increase in The jobs across electricity sector operations
demand and consumption in the month driven have been largely unaffected. However, the
by seasonality and increase in consumption disruption of projects, construction,
across essential services. Moreover, the manufacturing and supply chain related
easing of the lockdown restrictions enabled activities are expected to have affected jobs
industries and commerce to get back to and livelihoods during the lockdown. The
business, thus resulting in a rise in open access unemployment rates (across Indian economy)
transactions. have bounced back from 23.5% in April to 7.4%
13
in July’20 . While this is slightly above the Pre-
As per IEX report, the low prices during COVID-19 unemployment rates (7-8%), the
lockdown prompted utilities from Southern, curve seems to be flattening; a positive news
Western and Northern states such as Andhra for the economy and energy sector.
Pradesh, Telangana, Tamil Nadu, Maharashtra,
Gujarat, Uttar Pradesh, Bihar and Punjab
amongst others to continue procuring power
through power exchange. This has enabled
them to save significantly while procuring
uninterrupted 24x7 power for all the critical
sectors.
12
IEX reports
13
Centre for Monitoring Indian Economy (CMIE)
154. Impact on clean energy transition
COVID-19 crisis has been a difficult period for RE is nil. It costs much more to run a plant on
humanity but has been a boon for the coal (or any other fossil fuel) than to run a plant
environment. The temporary shutdown of on wind and sunshine which are available at no
industries and transport has led to significant cost. Moreover, the cost of building RE capacity
reduction in carbon emissions. International (capital cost) has also become cheaper than
Energy Agency (IEA) estimates that global CO2 building a thermal project.
emissions would decline by 8% in 2020 (~2.6
gigatonne) which is the biggest decline since The impact of COVID-19 on operational RE
14
World War II . projects has been limited due to timely
Government interventions, its preferential
Moreover, COVID-19 fueled the decarbonisation status and policy support available. However,
efforts across the globe. UK’s power system COVID-19 has impacted the under-construction
operated without coal for a record 67 days. US and planned projects and is likely to create
and several EU nations were already moving significant impediments in the path of energy
away from coal before the pandemic, as they transition, which could manifest over short to
announced closure of coal-based plants and long term. Some of the key impacts of COVID-
banned financing of new coal-based projects. In 19 are discussed below:
July’20, Germany adopted a law to ensure all
coal-based generation is phased out by 2038. Capex Deferment
Similarly, Spain shut down seven of its 15 coal-
based plants on June 30th. Japan, which has The pace of RE capacity addition was already
been building new coal-based capacity till 2019, slowing down since 2018, due to sectoral
decided to shut down 100 low-efficiency coal issues (cancellation of bids, policy uncertainty,
15
projects by 2030 . weak energy demand, Discom stress, land
acquisition delays, investment gaps and
India too witnessed a steep fall in contribution of transmission corridor availability, etc.). Stringent
coal in supply mix and increased share of RE and lockdown imposed by India, especially in the
hydro on account of reduced demand. The light months of March and April, abruptly halted the
switch-off event of 5th April saw a sharp construction activities and supply chain.
reduction in power demand by 31089 MW (26% Though as an immediate relief measure,
of prevailing demand) within a short span of 25 Ministry of New and Renewable Energy
minutes and then sharp increase of 27004 MW (MNRE) issued guidelines for resumption of
within the next 45 minutes. The event brought activities post 20th April’ 20, the supply chain
to fore, the importance of flexible resources bottlenecks, labour shortages due to reverse
such as hydro and gas-based generating migration and logistical hurdles have delayed
stations which were critical in managing the full resumption of construction activities.
sharp load fluctuations. Without these flexible Financial close and statutory approvals too are
resources, the grid would have faced a severe likely to get delayed. It is estimated that 6 GW
threat. capacity (4 GW Solar and 2 GW Wind) is likely
to get delayed by 3 to 6 months.17
Due to COVID-19, the world has witnessed that
energy system could exist without coal-based
electricity. What’s more important is that
marginal cost16 of generating electricity from
14
https://www.iea.org/topics/climate-change
15
https://www.downtoearth.org.in/news/energy/countries-move-away-from-coal-even-as-india-moves-towards-it-72145
16
Marginal cost refers to cost of generation of additional unit of electricity
17
Source: KPMG analysis
17Increased Capital Costs package of INR 90,000 Cr (through REC and
PFC20), as part of its economic stimulus, the
MNRE has acknowledged COVID-19 as force amount could possibly help meet the Pre-
majeure and issued guidelines to implementing COVID-19 dues (INR 94,599 Cr as of March
agencies for extension of project deadlines till 202021) and not the expected future deficits in
30th June’ 2018. Beyond this period as well, the the wake of COVID-19. Furthermore, as of July
resumption of construction activities is likely to '20, Discoms' applications amount to only a
take more time due to labour and logistical third of the total outlay, of which about INR
constraints. Time extension and project delays 20,500 Cr has been sanctioned and INR 4,800
imply additional burden of interest during Cr has been disbursed22. To avail the loans, the
construction, which will increase the project Discoms are required to meet eligibility criteria
cost. It is estimated that this could increase the (such as working capital limits, digital
overall tariffs by INR 0.06- 0.09/ kWh19. payments, and additional data not outstanding
power purchase bills, dues and subsidies from
Demand Slump state departments, etc.) and furnish state
government guarantees. The loan is available at
India requires incremental energy to feed its market rates, which is bound to further strain
growing economy, a lion’s share of which the balance sheets of Discoms. All these
comes from power (electricity). Slower than issues have hindered uptake of the liquidity
expected economic growth over this decade infusion scheme.
had already led to surplus power generation
capacity in the country. With COVID-19, India is Faced by liquidity constraints, mounting debt
already seeing its first recession in decades and and surplus power (with associated high fixed
the recovery to Pre-COVID-19 levels (though costs), the Discoms are likely to avoid capital
expected to be quicker than most developed expenditure and power offtake from upcoming
and other emerging economies), will take a power projects (including RE). Prior to COVID-19
couple of years under an optimistic scenario. as well, states have reneged RE contracts,
Regardless of the future growth trajectory, the quoting financial constraints and high tariffs
slowdown in growth is bound to reduce the (though discovered through competitive
need for incremental energy in short-medium bidding). Under construction and operational
term. It implies incremental RE capacity could projects may also face such contractual
further substitute coal-based energy supply, confrontations with deepened financial
but the fixed costs (of coal-based capacity) will constraints.
get loaded onto Discoms, which will get passed
on to consumers. Alternatively, RE offtake
capacity of Discoms will diminish, particularly
due to their precarious financial position.
Increased Liquidity Crunch (Discoms)
The lockdown induced revenue and collection
hit is expected to aggravate the liquidity
position of Discoms, which is likely to hit the
power procurement (as it contributes to 70-
80% of total costs for Discoms) and further
delays in making payments. Albeit Government
of India (GoI) has rolled out liquidity infusion
18
https://mnre.gov.in/img/documents/uploads/file_f-1593516228866.PDF
19
https://energy.economictimes.indiatimes.com/energy-speak/renewable-energy-new-normal-and-impact-of-covid-19/4167
20
REC Ltd. and Power Finance Corporation (PFC) are government owned institutions, primarily for lending to power sector
21
https://praapti.in/
22
https://www.cnbctv18.com/finance/pfc-rec-disburse-rs-4842-crore-to-power-discoms-under-rs-90000-crore-liquidity-infusion-scheme-6269661.htm
18Investment Gaps Power Evacuation Infrastructure
Mounting losses of Discoms and stressed Transmission network is one of the most
thermal assets have already made lenders critical components for large scale integration
averse to lending in power sector. Apart from of RE with the grid. Lack of power evacuation
Discom stress, the financial stress for thermal infrastructure and network congestion can
generators is also going to increase on account increase the project development and
of low-utilisation of plants, increased surplus operational risks for RE. The ambitious Green
capacity and potential payment defaults by Energy Corridor (GEC) programme intends to
Discoms. Consequently, the overall liquidity and evacuate 66 GW25 power from the RE rich
sustainability crisis is going to cascade zones. It is being implemented by eight RE rich
upstream and reduce the risk appetite for states (Tamil Nadu, Rajasthan, Karnataka,
lenders and equity investors. High risk projects Andhra Pradesh, Maharashtra, Gujarat,
further require allocation of a larger part of Himachal Pradesh and Madhya Pradesh). The
lenders’ capital towards capital adequacy infrastructure is being funded by the GoI and
reserves, which is not remunerative for them. respective state governments with loans from
International Financial Institutions (IFIs) such as
Data on sectoral deployment of credit (by banks) KfW and Asian Development Bank (ADB).
shows that net credit towards power sector has However, so far about 10GW capacity has been
remained stagnant (0.4% growth) in the last five added to the GEC (as of Sept’ 19)26, indicating a
years (Mar '15-Mar '20). On the other hand, the significant delay in project implementation.
credit growth in overall infrastructure sector,
though nominal, has been 15%. In contrast the COVID-19 is expected to further strain the
credit growth across all sectors has been 55% Government finances and impede bidding,
in the same period23. As domestic banks are procurement and construction activities,
responsible for providing much of the financing delaying the reliable integration of RE with grid,
across economy, the lack of credit growth in which would manifest in form of network
power sector implies a significant financing gap, congestion and curtailment of RE.
on account of high risk associated with this
sector. This highlights that credit availability to
power sector has been severely restricted over Transport Electrification
the past few years, which could likely worsen Near term outlook suggests that global crude
Post-COVID-19 and impede materialisation of oil prices are expected to remain subdued in
planned projects. 2020-2127. However, in India, the global price
reductions have not been passed through to
According to the targets set under National
consumers as central and state governments
Infrastructure Pipeline (NIP), India needs to
have raised taxes. In May’20 GoI has increased
install incremental 140 GW RE capacity over the
the excise duty on fuel by INR 10/ litre for petrol
next five years. NIP envisages capital
and INR 13/ litre on diesel, which takes the total
investment of INR 9.29 trillion (~US$123 billion)
central taxes to over INR 32/ litre. In addition to
till FY25. Assuming normative capital structure
this, state governments have also imposed
of 70:30 (debt: equity), it implies INR 6.5 trillion
steep taxes on retail sale of fuel. The net impact
needs to be funded through debt. Considering
24 is that tax load on fuel has become 60- 70% at
INR 5.69 trillion as the total outstanding credit
retail level. Thus, global oil price movements
to power sector and 0.4% credit growth in the
are likely to be counteracted by Government
past five years, the debt investment gap is
policies, hence having no likely impact on
enormous. At the same time, the equity
vehicular sales or fossil-fuel consumption.
investment gap is also vast, whereas the risk
appetite and private capital availability is low on
account of sectoral challenges.
23
Source: Reserve Bank of India (RBI) data on sectoral deployment of credit across Indian economy.
24
O/s as of June; 20
25
https://mnre.gov.in/green-energy-corridor
26
https://mercomindia.com/renewable-capacity-green-energy-
corridor/#:~:text=Answering%20a%20question%20regarding%20the,transmission%20laid%20out%20to%20support
27
https://www.eia.gov/outlooks/steo/report/prices.php#:~:text=EIA%20expects%20Brent%20crude%20oil,by%20the%20end%20of%202021.&text=EIA%20forecasts%20
West%20Texas%20Intermediate,and%20%244%2Fb%20in%202021. 19E l e c t r i c Ve h i c l e s ( E V s ) a n d c h a r g i n g While the move seems contrary to India’s
infrastructure are in a fledgling state in India. To climate change commitments, it is not likely to
boost the same, GoI is subsidising EVs and have an impact on the clean energy transition,
associated infrastructure development through especially for the power sector. The key reason
schemes such as Faster Adoption and is that at the expected pace of electricity
Manufacturing of Hybrid and Electric Vehicles demand growth in near-medium term, India
(FAME- Phase I and II). However, the uptake does not need more coal-based energy. Nearly
has been extremely slow particularly in the 4- 64%29 of coal produced in India is thermal coal
Wheeler (4W) category. As per industry data, (consumed for power generation) and the
the average sales volume of EVs in Apr-Oct '19 share of coal-based generation in electricity
has been 153 which is negligible compared to supply mix is on a decline due to increasing
sales of over 235,000 Internal Combustion substitution by RE. Also, India currently does
engines (ICE) based passenger vehicles. not have plans to add more coal-fired capacity
(beyond under-construction projects or
Currently the EVs are not competitive with ICE committed investments).
vehicles, despite Government and industry
efforts. The key constraints have been high Due to presence of INR 400/ tonne coal cess
cost of vehicles (due to high import content and (which contributes to 30- 40% of landed cost of
recent increase in duties 28 ), very limited thermal coal) and significant transportation
charging infrastructure, limited vehicle range cost, the potential efficiency gains due to
and lack of fast charging capabilities in existing privatisation are not likely to make the
vehicles. incremental domestic production more
competitive for power generation. However,
For the last couple of years, the automotive increased domestic may substitute imported
sales in India have already been slowing down coal (~ 200 million tonnes annually30) which is
due to demand stagnation. In post COVID-19 used by Independent Power Producers (IPPs)
times, the vehicle sales are likely to plummet who do not have access to domestic coal, but
further due to reduction in discretionary spend this is not likely to increase carbon emissions.
(owing to economic recession/contraction and
loss in consumer income). These factors are While COVID-19 may increase pressure on the
likely to impede the uptake of EVs further, Government to expedite the commercialisation
delaying the electrification of transportation. of coal mines in order to support the economy
and livelihoods, the limited (or potentially
Commercialisation of Coal Mining declining demand) for thermal coal is not
expected to have adverse impact on the pace
India’s coal production has been dominated by of clean energy transition and climate change
the public sector entreprises (PSE) for commitments.
decades. In March '20, India enacted the
Mineral Law Amendment Bill which aims to
open up coal mining for new and private
players. India has vast coal reserves and coal
mining supports millions of jobs and
contributes to GDP. India’s largest PSE – Coal
India Limited (CIL) is the single largest coal
producer in the world. With the new Act, India
aims to increase its annual coal production to 1
Billion Tonnes (from 602 Million Tonnes in FY20
and 606 Million Tonnes in FY19).
28
In a bid to promote domestic manufacturing, the government had further increased import duties on BEV by 15% earlier this year.
29
https://economictimes.indiatimes.com/industry/energy/power/india-will-not-be-able-to-achieve-its-renewable-energy-targets-anytime-soon/articleshow/69286279.cms?from=mdr
30
https://www.google.com/search?q=200+million+tonne+coal+imports&rlz=1C1GCEU_enIN821IN821&oq=200+million+tonne+coal+imports&aqs=chrome..69i57j33.
6035j1j7&sourceid=chrome&ie=UTF-8
20Energy System Power Market Reforms
Apart from the power evacuation infrastructure, a Lockdown led to delay in launch of Real
smart and resilient energy system is a critical Time Market (RTM) from 1st April to 1st
enabler for clean energy transition. As we move June '20. RTM helps market players trade
towards high share of variable and intermittent RE, electricity closer to real time, which is a
distributed energy resources (DREs), such as solar vital for improving the balance of demand
rooftop (SRT) and EVs) and two-way flow of power, and supply of electricity flowing through
the energy system infrastructure must also evolve the grid and helpful in bringing down the
to accommodate such resources. Mature regimes cost of power. While the Government
such as UK, EU and US are investing in introduced long awaited Electricity
development of smarter, flexible and more Amendment Bill 2020 (EA Bill), the tariff
resilient grid that can integrate the new energy filings and other regulatory proceedings
resources effectively. were delayed during the lockdown.
India’s energy system transformation is currently
limited to increasing uptake of smart meters.
However, the adoption has been slow as only 1
million smart meters have been installed as of
early 202031. Furthermore, the deployment of
smart meters is more aimed at limiting AT&C
losses than enabling RE integration and smart
grids. Emerging technologies such as Battery
Energy Storage System (BESS), flexible coal and
Demand Response (DR), etc. are still in pilot or
conceptualisation stage. The domestic market
lacks the enabling policies, regulations,
investments and business models necessary for Though the activities are gradually
commercialising and scaling up adoption of these resuming with lifting of lockdown, the
technologies, necessary for developing smart current priority is going to be ensuring
energy system. Discom sustainability, managing liquidity
constraints and resuming the ongoing
COVID-19 is likely to bring more focus of market reforms. Therefore, future reforms such as
players and policy makers on managing introduction of enactment of the EA Bill
sustainable operations and ensuring continuous and development of National Policy
supply of electricity than creation of a future ready (envisaged in the Bill), etc. may get
energy system. Investment gaps and low risk deferred.
appetite could further add to the challenges.
31
https://government.economictimes.indiatimes.com/news/technology/power-min-announces-installation-of-10l-smart-meters/74320713
21
155. Role of power sector in an inclusive
clean energy transition
India has moved up two spots to rank 74th in socially inclusive and centered around the
32
the global “Energy Transition Index” survey vision of clean energy transition. Some of the
published by the World Economic Forum barriers to energy transition and imperatives
(WEF) in May’2020. Despite being an for power sector are discussed below:
emerging economy with growing energy
needs for supporting population growth,
economic development and urbanisation Capital
needs, India is one of the few countries that Availability
have shown gradual but definite improvement Institutional
in moving towards transition to clean and Support
sustainable energy use.
Conductive
Policy and
Notwithstanding the progress, there are range Enablers for Regulatory
of sectoral issues that have limited the Energy Environment
momentum of the transition. Considering the Transition
historic and current pace of RE capacity Market
addition, India will directionally move towards Inclusiveness
the ambitious target of 175 GW installed RE Enabling
capacity by 2022, but is not likely to meet the Infrastructure
target in the said period. COVID-19 will further Fostering
cast a shadow over adoption of other Innovation
emerging technologies, development of smart
and flexible energy system and pace of other
enabling reforms in the power sector. Adapted from Energy Transition Index,
Therefore, the next set of sector recovery, World Economic Forum
resilience and stimulus measures must be
5.1 Conducive and Consistent Policy & Regulatory Environment
GoI has exhibited strong political commitment capacity) and scrapping of tenders due to wide
towards 24x7 clean and affordable electricity variation in tariffs discovered are some of the
supply and laid out enabling policy policy flip-flops in recent times that have led to
frameworks, although the policy uncertainty negative investor sentiments and loss of
has emerged as one of the biggest challenges momentum.
in recent times. Introduction of tariff ceilings
for competitive procurement carried out by Presence of Government subsidies is a key
SECI, levy of heavy import duties on solar challenge in adoption of decentralised RE
panels to promote domestic content (though (solar rooftops).
India has inadequate domestic manufacturing
32
http://www3.weforum.org/docs/WEF_Fostering_Effective_Energy_Transition_2020_Edition.pdf
23On one hand, Government subsidises SRT 5.2 Enabling Infrastructure
installation, and on the other hand the
subsidies/ cross-subsidies available to Localised manufacturing and supply chain
consumers (domestic and agricultural) infrastructure
artificially keep the retail electricity tariffs low
and make grid-based electricity more COVID-19 crisis has brought to fore the risks
competitive than SRTs. Subsidies and cross- associated with overdependence on
subsidies do not help reflect actual cost of international supply chains and the
supply and do not differentiate between source importance of ‘localisation’. GoI has
of energy (fossil-fuel based or clean). centered the existing stimulus measures
Consequently, the capital cost of SRT and around self-reliance (Atmanirbharta) and put
longer break-even period inhibits the uptake of impetus on supporting domestic
RE. manufacturing, especially for Micro, Small
and Medium Entreprises (MSMEs).
Such bottlenecks impede the effective Strengthening domestic manufacturing and
implementation of political vision and socio- supply chain capabilities will not only help
economic development. Some general meet the demands of the energy sector but
recommendations going forward to mitigate also play a key role in supporting economy
these issues are: and livelihoods.
Ÿ Owing to inter-sector linkages, the policy One of the important initiatives taken in
development should not be siloed or ad-hoc. recent times to support local content is SECI
Rather, the required policy restructuring be tender to develop hybrid solar cell and
done across all or priority sectors (such as module manufacturing facility and project
industrial promotion, land and labour, etc.) development. The 8 GW order with
for effective implementation. associated 2 GW manufacturing capacity, is
Ÿ Clear market signals for specific technology also the world’s single largest bid ever.
and capacity addition. Leverage capacity Another policy measure has been recently
market mechanisms to procure fresh issued guidelines by Ministry of Power
capacity. (MoP), which mandates local procurement
34
for many goods and services .
Ÿ Clear policies required to move public
finances away from fossil-fuel based Till now, the focus on domestic content/
projects. localisation has been largely limited to
policies that penalise imports (through taxes
Ÿ Market and policy reforms to attract
and duties) and mandate procurement of
investments in emerging technologies.
certain percentage of domestic content by
Ÿ Strong commitment and policies to retire Government agencies. However, the need
old coal-based projects to absorb more RE of the hour is to attain excellence, efficiency
into the energy system and improve the and scale in manufacturing that China and
sustainability of new projects. other Asian economies have achieved. This
Ÿ Future policies and regulations must reward would require comprehensive reforms
innovation, efficiency and social inclusion focused on reducing the hurdles for new
(for instance RIIO33 price controls in the UK businesses in terms of licensing, permits,
are aimed at promoting innovation and financing, labour laws, taxation and land
efficiency in networks and have been acquisition, etc. In addition to ‘ease of doing
effective in reducing the tariffs over the business’ the focus should also be on skill
years, while creating more resilient development to prepare a workforce to
networks). meet future needs.
33
Revenue = Incentives + Innovation + Output
34
https://energy.economictimes.indiatimes.com/news/power/india-reserves-110-power-plant-equipment-services-for-local-companies/77268483
24Energy Infrastructure
Lack of power evacuation infrastructure is a key
reason for reduced interest of investors in RE
sector. While focusing on RE capacity addition,
Indian policy makers and market players must not
lose focus on enabling infrastructure. The private
investments in network infrastructure have been
very limited, despite being a regulated and
comparatively risk-free segment that offers good
returns (~15%). The NIP envisages INR 3 trillion
(US$ 40 billion) investment in transmission sector
alone over the next five years. The National Tariff
Policy laid the foundation for introduction of
competition in transmission segment. However,
projects of strategic importance and requiring
technical upgrade as well as urgent works were
excluded from competitive bidding and were
meant to be taken up by Government owned
transmission utilities.
Out of 145 intra-state projects awarded since
2012, ~70% have been awarded to Government
owned35 PGCIL (through regulated as well as
competitive routes), which has limited the flow of
private capital in the sector. Some of the other
issues that limit private participation are:
Till recent times, the transmission segment has
completely been publicly owned. Number of
private players are limited and large network
capacity is awaited to be awarded on PPP basis.
It is a very capital-intensive segment, requiring
large and risk-free balance sheets and ability to
raise capital.
Delay in land acquisition and Right of Way
(RoW) is a major hurdle in project development.
There is no quick-fix solution for easing the
transmission sector challenges, but policymakers
must work towards increasing private sector
participation and leveraging international
capabilities and learnings to address the issues.
35
https://ieefa.org/wp-content/uploads/2020/02/Increasing-Competition-in-India-Transmission-Sector_February-2020.pdf
255.3 Fostering Innovation 5.4 Market Inclusiveness
Innovation is a catalyst for effectively Market inclusiveness implies inclusion of
leveraging any transition. It not only helps consumers and people at large, in the energy
adoption of emerging technologies and transition journey. Post-COVID-19, it becomes
models but also captures the economic value critically important to drive inclusive policies,
by building specific capabilities and attaining frameworks, models, investments and
global leadership. Energy Transition provides stimulus measures for generating employment
such an opportunity to test, commercialise and jumpstarting economy. The role ought to
and scale up technologies and models around be played by policymakers, market participants
energy storage solutions, carbon capture, as well as civil society. Another aspect is
demand aggregation, smart home systems, consumer centric products and services and
energy management, energy efficiency, peer- enabling inclusion of consumers in the
to-peer energy trading, vehicle-to-grid (V2G), markets.
green hydrogen, application of 5G/ IoT, etc.
Some of the measures that need attention in
Expenditure on Research and Development this respect are:
(R&D) and enabling the start-up ecosystem is
critical in this regard. The stimulus measures Ÿ Energy system design, vision and roadmaps
and/or power sector budget allocated by need to incorporate 24x7 affordable and
Government should include budget for R&D reliable energy access as basic requirement.
and pilots to test emerging technologies and
business models. Likewise, key market Ÿ Cost reflective tariffs and direct subsidy
players (public and private) must take lead and transfers aimed at making electricity
increase their R&D spend. A good example of affordable for the poorest and marginal
a conducive ecosystem is the Network consumers.
Innovation Competition (NIC) undertaken by 36
Ÿ Expansion of schemes such KUSUM
UK regulator Ofgem. Through NIC, the
(aimed at provisioning of grid-connected
electricity network owners compete for
clean energy for irrigation) to other primary
f u n d i n g r e s e a r c h , d eve l o p m e n t a n d
economic activities, micro enterprises and
demonstration o f n ew t e c h n o l o g i e s ,
marginal households, with specific focus on
operational and commercial arrangements.
women.
Ÿ Priority support to new businesses/
ventures that create more jobs across the
value chain. For instance, a transformer
manufacturing firm that sources all
components domestically creates more
jobs than that which imports major
components and assembles in India.
Ÿ Skilling programmes focused on making
manpower change ready.
Ÿ Increasing awareness and extending
support to consumers on adoption of new
technologies/initiatives/schemes such as
SRT, EV, Net-metering, etc. for accelerating
the uptake.
36
Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyaan (PM-KUSUM) is aimed at solarisation of irrigation pumps and installation of decentralised ground mounted solar power plants
265.5 Investments and Capital Flow
Sustainability of Discoms
Sustainability of Dicoms is critical for overall technological prowess. Whether it is demand
well-being of the power sector as they generate forecasting, power procurement, commercial
revenue for the entire value chain. Discom processes, asset maintenance or reduction of
sustainability will ensure financial attractiveness T&D losses, all these aspects of day-to-day
of the power sector for channelising new operations should incorporate the latest
investments, reduced debt burden, recycling of technological tools. By adapting these tools to
capital, increased offtake capacity and increased daily operations, energy companies will be able
focus on managing energy transition. to enhance their performance, optimise costs
and improve their ability to react and respond to
There is no clear panacea for Discom challenges unforeseen situations. In turn, this will help make
but there is need for consistent and focused the tariffs more affordable, which would help
reforms targeted at challenges across the board. improve the competitiveness of our industries.
Thus, reforms targeted at AT&C loss reduction,
power purchase cost optimisation, financial Digitalisation across the board will be necessary
management, performance monitoring, etc. in both internal and external interface, to lower
need to continue. In the short-term, Discoms reliance on human intervention in day-to-day
may require a larger liquidity infusion package operations. For instance, the impetus should be
(beyond the INR 90,000 Cr stimulus announced on improving online payments and services by
in May '20) at nominal interest rates to avoid strengthening the infrastructure and inducing the
accrual of more debt and other operational consumers to use the online channels through
challenges. behavioural nudges, incentives and awareness.
There is need to bring in further competitiveness
through innovative franchisee and sub-licensee
models as envisaged in draft Electricity
Amendment Bill 2020. Whereas the privatisation
(Public-Private Partnership or PPP) in Discoms
have been limited to Delhi and Odisha, the
COVID-19 crisis has compelled central and state
governments to explore privatisation of
Discoms. GoI has recently announced intentions
to privatise the Discoms in Union Territories
(UTs) and Uttar Pradesh Government announced
plans to privatise one of its Discoms (PuVVNL37).
Therefore, the renewed interest of the sector in
privatisation which needs to be leveraged to
bring in efficiency and move towards sustainable
operations.
Discoms also need to emerge from this crisis
with a resolve to innovate and upgrade their
37
Purvanchal Vidyut Vyapar Nigam Limited (PuVVNL)
27
15Mobilising Investments
inconsistent payment settlement mechanisms,
As mentioned earlier, there are large etc. Likewise, GoI has assigned state-wise
investment gaps in power sector (including RE). targets for solar park development and there are
While the low sector attractiveness is partially state-wise RE policies, but the progress varies
responsible for it, there is need for improving widely across states. There are several such
private participation across segments and challenges that inhibit the uptake of even
e m e r g i n g t e c h n o l o g i e s . C u rr e n t l y R E commercial technologies for which conducive
generation is the only segment which has policy environment exists.
garnered most private investments. The same
model needs to be replicated for other Ÿ As electricity is a concurrent subject, there are
segments as well, viz. transmission, smart multiple layers of governance and the
grids/ metering, battery storage and EV consistency in implementation across states
charging infrastructure. is not easily achievable. However, the onus on
central and respective state governments is to
In addition, the market must leverage innovative set the standards of performance, align the
financial instruments such as Infrastructure policies and link the incentives/budget
Investment Trusts (InvITs), Infrastructure Debt available for institutions with their performance.
Funds (IDFs) and Masala Bonds to recycle the
capital into new projects as well as attract Ÿ Institutional capacities need to be developed
foreign capital at attractive rates. Access to across the board. The implementing agencies
affordable capital remains a large challenge for often lack the skills, capabilities and
small players and some of these innovative manpower to implement projects, schemes
financing instruments can bridge this gap. For policies and guidelines. In this regard,
instance, the National Infrastructure Investment governance mechanisms must identify the
Fund (NIIF) is one such platform which has capacity barriers and address the gaps.
attracted offshore capital and is being
channelised for Smart Meter installation across Ÿ Institutions need to share knowledge and
India in partnership with EESL (Intellismart). learnings with each other to bridge the
Creating a pipeline of bankable projects will experience gaps. GoI and state governments
additionally help reduce the development risks must promote initiatives/platforms for
and improve the attractiveness of projects. knowledge and information sharing around
technologies, processes, projects and other
relevant areas.
5.6 Institutional Support Ÿ Working with civil society to support
establishment and scale-up of non-profit
Robust governance structures and institutional institutions that implement innovative models
capacity are vital for successfully traversing the aimed at accelerating uptake of clean energy
energy transition. It is the role of institutions while providing clean energy access and
(public or private) ensure implementation of employment opportunities to the poorest
policies, regulations, guidelines and roadmaps, (such as SELCO foundation).
which demands the institutional frameworks to
be strong. For instance, Open Access (OA) Ÿ End-to-end support to private investors/
promulgated in the Electricity Act '03 for developers throughout the pre-development
ushering in retail competition, has not been and development phase of projects in terms
implemented in spirit across most states due to of statutory clearances, land acquisition,
conflicting priorities. SRT implementation permits, etc.
across states faces similar challenges in
implementation. Whereas net-metering Ÿ Adoption of Environmental, Social and
regulations have been rolled out across states, Governance (ESG) Standards.
the implementation varies with states – due to
capping on plant size for specific consumers,
lack of awareness, variation in models,
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