Power sector: Focus on other pain points

N Madhavan | Updated on November 21, 2019

While there’s enough capacity now, flexible generation, tariffs and regulation must be addressed to remain power-surplus

On the face of it, media reports painted a scary picture. One report mentioned that as many as 262 thermal power units had shut down operations by early November. Many of them have been shut for weeks. Another report said Coal India’s output fell to its lowest in six years in September on account of heavy rains. Not just that. Its coal shipment that month was a five-year low. Central Electricity Authority (CEA) data revealed that the plant load factor (PLF) of thermal units in the April-September 2019 period (at 57.67 per cent) was the lowest in a decade. Even worse, by end-September it had dropped further to 51 per cent.

Under these circumstances, the country should have been in a state of crisis with a crippling electricity shortage that would have brought industrial, commercial and retail consumers to their knees. But that is not the case. This fiscal, peak demand for electricity has been more or less met. The deficit was just 0.7 per cent. To put this in perspective, a decade ago this shortfall, in meeting peak demand, was 12.7 per cent.

This has been possible because India has finally overcome the capacity constraint that dogged power generation since Independence. That, indeed, is a significant achievement. In fact, the total generation capacity today at 3,64,960 MW is good enough to meet any surge in demand for the next few years even if economic growth picks up pace. Frequent load shedding and tripping of the electricity grids, it appears, is history.

Having said that, it is too early to uncork the Champagne bottle. Not all supply-side issues have been resolved. Any mature power sector will have sufficient reserve capacity, anywhere between 20 and 25 per cent of the generation capacity, to meet the seasonal swings in peak power demand. India, traditionally, never had this luxury.

Most thermal power plants operated at a PLF of 90 per cent or more to meet the tight demand-supply situation often at the cost of preventive maintenance which resulted in them breaking down causing disruption in power supply.

Reserve capacity

But what we have at the moment is a reserve capacity that is uncomfortably high. In October the average peak demand (of 1,64,875 MW) was less than half the total generation capacity. As many as 133 thermal power plants with an aggregate capacity of 65,133 MW have been shut down for want of demand.

This has raised concerns of a fresh set of NPAs hitting the already fragile banking system. This fear is a bit over-blown as most of these plants have a power purchase agreement (PPA) which has a ‘Take or Pay’ clause. Only those without a PPA and/or a coal linkage will face liquidity issues and possible default of their debt obligations.

Nevertheless, shutting down so many power plants and running the rest at half their capacity is not an optimal strategy. In fact, India is caught in a piquant situation. While it has to create capacity ahead of demand (power plants being long gestation projects), it must also reckon with the fact that as an emerging economy it is susceptible to vicious economic cycles compared to more mature economies. This invariably results in situations where supply far exceeds demand as is the case now.

The need of the hour thus is flexible generation capacity, something India lacks in its overall energy mix. Gas-based power plants offer this flexibility and so do pumped storage hydro power plants.

Unlike thermal or nuclear power plants they don’t have to be run continuously and can be operated on demand. Economic cycles and consequent demand volatility apart, flexibility in generation has become all the more important in this era of renewable energy.

Solar energy is available only during the day time and wind is seasonal, a sustainable grid uses clean energy when available and switches to conventional sources at other times. India’s share of renewable energy is 22 per cent and growing. The government has set itself as aspirational green energy target of 175 GW (achieved 83 GW so far) by 2022. It is high time planners impart significant flexibility to the grid to leverage clean energy effectively and optimally use the thermal assets.

Also, now that we are sitting on surplus capacity, the situation is conducive to weed out inefficient generation units, especially in the public sector, which are decades old with high variable costs. This will make the sector more efficient.

Tariff rationalisation

Today if the sector is under stress it is because demand from well paying consumer category such as industrial users has dropped, especially in the States such as Maharashtra, Tamil Nadu and Gujarat, while non-paying or low paying domestic consumers have risen. This has hurt distribution companies’ cash flow badly. The only solution to this problem is tariff rationalisation.

Consumers — industrial, commercial or retail — should pay the right price for electricity and if any government wants to offer free or cheaper power to a section of the population it should use direct benefit transfer (like LPG) to subsidise them. Cross-subsidisation of free or cheap power by charging the industry more will not work any more. It will leave manufacturing uncompetitive and hurt India’s ‘Ease of Doing Business’ ranking.

To make all this possible and protect the interest of all stakeholders an independent regulator is essential. But State governments still prefer to appoint ‘yes men’ to this role just to satisfy a constitutional need more in letter than spirit.

Warts and all, the electricity sector in India is in a relative better situation. It has overcome the capacity problem and is today in a position to meet every unit of demand. India’s per capita electricity consumption at 1,181 units is far lower than China’s 4,475 units and the US’12,071 units. The headroom for growth is immense.

A concerted effort to deal with the remaining pain points will ensure that it will be best placed to power India’s growth into a developed economy.

Published on November 21, 2019

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