The right power sequence is key

Ramesh Subramanyam | Updated on March 09, 2018

Open to improvement It’s a big ask - K. ANANTHAN

Maximise capacity utilisation, lower power generation costs, address existing excess capacities — this is the way forward

The power sector has undergone significant changes in the last decade or so with the entry of many new private players. This has resulted in an increase in installed capacity under Central, State and private (from 132 GW to 326 GW), renewable energy (from 8 GW to 57 GW), and coal-based plants (from 86 GW to 218 GW). Overall, private sector installed capacity increased by about 733 per cent, that is, 125 GW addition with about 69 GW coming under coal-based capacities and about 49 GW coming under renewable energy-based capacities.

While the surge in installed capacity has led to a short-term decrease in power market prices (from about ₹8/unit in 2008-09 to about ₹2.50/unit in 2017), there are still a number of issues that need government focus.

Losing trend

The health of discoms is a crucial issue. The much publicised UDAY programme called for a reduction of debts in the discom balance sheets. However, in many ways, this is no more than a transfer of debt from discoms to the state treasury, thereby resulting in a cosmetic reduction in the cost of power at the discom level. Even though it gives the impression of a new lease of life for discoms, there is little change in their tariff structure and losses continue to pile up.

Similarly, in the case of regulated capacities, discoms pay pre-agreed fixed cost based on plant availability criteria even if they do not offtake the contracted capacity. This results in discoms far fewer units, pushing up the power purchase cost per unit. Hence, the average cost of supply for discoms is higher.

On the other hand, open market capacities are facing oversupply due to excess power capacity, forcing generators to supply power at near-variable costs which are just enough to keep the plant running. As prices fall below variable cost, plants shut down, causing stranded assets and creating NPAs in the banking system.

Thus, it is crucial for India to focus on maximising capacity utilisation, lowering power generation costs and addressing existing excess capacities. The path should be to embrace renewables and suspend thermals, but only after collective utilisation is at its peak. Sequencing is key.

About 33 GW in plant capacities is stranded due to shortage of water and fuel as well as other issues. The Government needs to address them. Smaller and inefficient units must also be taken out.

Power generators should be encouraged to switch to more efficient capacities, which pollute less and are more sustainable. This would be cheaper than brand new capacity addition to meet the environment laws.

Level the field

The Government should also work towards creating a level playing field for discoms and generators by creating equitable clauses in the model PPA. This should not be about favouring any one segment of the sector but ensuring optimum and fair risk allocation. There is also a need to line up capacities which would be required in the next decade and not just in the next few years. At present we have about 21 per cent installed capacity under gas and hydro.

Coal-based plants as base load, aided by gas and hydro plants, could act as peaking capacities along with renewables. In short, higher utilisation of existing thermal assets, gradual retirement of inefficient ones followed by a push towards renewables and hydros and then balancing through highly efficient thermal plants would be ideal.

There is no doubt that the stakeholders have a clear picture of the way ahead. The right programmes with honest intentions are also in place. However, there is an urgent need to control the sequence and set priorities given the high costs of underused assets. Unfortunately, the largest consumers are State-owned discoms which are heavily regulated by the Government and thus, have little or no control over power pricing and market play. This puts responsibility on the Government to ensure fair play and reasonable returns to investors. Getting the sequence right is just the first step towards this goal.

The writer is the CFO of Tata Power

Published on January 09, 2018

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