Govt must take 3 steps towards sustainable, 24x7 power

When the Modi government took office on May 26, 2014, there were nearly 6 crore rural households — or close to 30 per cent of all households in the country — yet to be electrified, and peak power deficit hovered around 7,000 MW, making the ‘24x7 Power For All’ goal an overly ambitious one.

But three years into office, the government has taken some big strides, and it is easy to list out the major achievements.

On the coal front, the stand-out achievement has been the infusion of transparency in the award of coal blocks and coal linkage through competitive bidding.

There has been a sharp spurt in coal production by Coal India, too — from around 450 million tonnes (mt) in fiscal 2014 to over 550 mt at fiscal 2017 end, thereby improving coal availability for thermal power projects and bringing down dependence on imported coal.

In renewable energy, vigorous capacity addition is apace and tariffs have come down significantly. In solar power, tariffs are down almost 50 per cent compared with three years ago, and the industry could surpass the UPA government’s target of 20 GW solar capacity by 2022 four years in advance.

In wind power, too, transparency in procurement of power has brought down tariffs significantly.

Transmission has seen significant improvement with removal of bottlenecks, inter- and intra-State transmission capacity addition, improved connectivity and integration with the southern region.

Bringing 27 States on board to execute the Ujwal Discom Assurance Yojana, or UDAY, has been a herculean feat, too. The scheme aims to support utilities emerging from the financial mess they were in and also has the potential to cure utilities through initiatives under three broad heads — improvement of operational efficiency, reduction in cost of power and enforcement of financial discipline through alignment with State finances.

The government has also been able to push States to jointly sign the roadmap to electrify all households by 2019. However, much remains to be done, and will require, among other things, tackling three elephants in the room to achieve the stiff goals:

The target of 100 per cent electrification will require connectivity and supply to rural households, which would crank up losses when the low-tension network is extended to low-paying consumers. That could lead to a jump in distribution losses vis-à-vis the target under UDAY, leading to delay in financial turnaround and affecting the ability to arrange fresh capital for new network creation.

Thus, commensurate tariff hikes will be required for achieving the ‘24 x 7 Power For All’ mission. Yet, tariffs are a politically sensitive issue and so a national level policy on subsidy for low-paying rural and agricultural consumers, along with appropriate direct benefit transfer, needs to be developed. Such a scheme should, however, encourage metering as a pre-condition for availing subsidy.

In the past three years, demand from industrial consumers has been sluggish, while that from domestic consumers continues to grow despite discoms limiting supply because of lack of cost recovery. While this needs to be reversed — and should be met by assuring complete cost recovery to discoms through tariff hikes and/or direct benefit transfer of subsidy — estimates of ‘real’ demand will have to include that being either currently met through back-up capacities or are not supplied.

The total capacity of diesel generator sets in India is estimated at a gargantuan ~90 GW -- good enough to light up cities 24 x 7. There is no case for such a level of back-up, which depends not only on expensive fuel (primarily diesel) but also adds to greenhouse gas emissions. Other than banning these inefficient diesel-based generation, consumers need to be incentivised to move back to the grid by assuring them round-the-clock power and also through much more lenient open access regulation that allows them to buy directly from efficient generators at a relatively lower price. Only then will the industry become competitive.

Another potential demand will come from the electric vehicles (EV) segment. EVs can create additional demand of ~590 billion units (equivalent to 350 GW of solar/ 80 GW of thermal power) by fiscal 2030, if all incremental vehicle purchases shift.

Considering the government’s renewable capacity addition plans, the Draft National Electricity Policy of the Central Electricity Authority projects that the plant load factors (PLFs) of thermal projects will be in the 45-50 per cent range. But one cannot have a target of 175 GW for renewable energy with a scenario of lower PLFs for efficient super-critical thermal plants. Therefore, developing an overall integrated power market that provides opportunity to these efficient plants to run at full capacity becomes an imperative.

A potential solution is early decommissioning of highly inefficient older plants. This replacement could be done through transparent competitive bidding by the same procurer holding power purchase agreements (PPAs) with these old plants.

This will help distribution utilities to reduce their power purchase cost while integrating stranded super-critical capacity along with annual solar capacity addition plan.

Besides, increasing the share of solar will require greater balancing of the grid with hydro/gas generation and enhancing storage capacity to meet peak demand. Storage will play a key role in complementing solar capacity addition. Globally, the current cost of storage for households can vary between 9 cents and 20 cents per kWh depending on load and hours of storage. The cost of storage may decline with advancement of technology and increase in scale.

The writer is Senior Director, CRISIL Infrastructure Advisory

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