The Indian power sector has been a hotbed of activity since the NDA government took over the reins two years ago.

From providing a lifeline to the ailing state-owned power distribution utilities (discoms) in the form of UDAY (Ujwal DISCOM Assurance Yojana) to ramping up the country’s traditionally neglected transmission network to boosting domestic coal supply, providing subsidised gas to stranded fuel-starved plants and introducing e-auctions for short-term power purchases by discoms, many initiatives have been introduced.

But are these measures enough to shore up the fortunes of the struggling power sector? We take stock of some of these developments.

All is not well Today, even though domestic coal supply has improved and international coal prices have fallen, the country’s power generation hasn’t shown drastic improvement. Thermal power (coal and gas-based), which accounts for 70 per cent of the country’s power generation, rose to 943 billion units in 2015-16, up only 5.5 per cent from the previous year. This was preceded by 8.6 per cent growth in 2014-15 and 6 per cent in 2013-14.

The country’s thermal power capacity, on the other hand, has grown at a much faster clip during this period. From 1,51,490 MW, three years ago, the capacity had expanded to 2,10,675 MW by March 2016, an average 11 per cent growth every year.

This has led to falling capacity utilisation levels at power plants — the all-India thermal plant load factor has gone down from 65.6 per cent in 2013-14 to 62.3 per cent in 2015-16.

This can be seen at the company level too. Take, NTPC, for instance, which is the country’s largest power producer. During 2015-16, the company produced 242 billion units of power, almost the same as in the year before. This was preceded by 3.4 per cent growth in generation in 2014-15. The company's generation capacity has been expanding but its plant load factor has been falling — it came down to 78.6 per cent in 2015-16 from 81.5 per cent in 2013-14.

So, what is holding up power generation? Insufficient purchasing power of the financially strapped state discoms.

Years of inefficiencies and subsidised tariffs have led to a situation where the discoms have accumulated loss of ₹3.8 lakh crore (as of March 2015). Given the state of affairs, the state discoms are in no position to buy electricity beyond a point and have instead been resorting to load shedding.

By lifting out the discoms from their financial mess, UDAY (discussed below) will help spur the country’s electricity demand. A lot, however, hinges on the extent to which the discoms adhere to the efficiency parameters laid out under UDAY.

Apart from that, a sustained pick-up in industrial and commercial (shopping malls, theatres and big offices) growth too is equally critical. It is this segment which pays higher power tariffs and cross-subsidises the cheaper household tariffs.

A new dawn The single biggest initiative, UDAY, the Centre’s financial restructuring package for state discoms, has attracted the most publicity and rightly so since its launch in November.

States that sign up for UDAY will take over 75 per cent (50 per cent in 2015-16 and 25 per cent in 2016-17) of their discoms’ debt and issue bonds to banks and other financial institutions to raise money to pay it off. The remaining 25 per cent debt will continue as a loan but with a cap on interest rates. This will bring in immediate interest cost relief to the discoms and, to that extent, improve their cash flows. ICRA estimates that this could take away interest burden of ₹30,000 crore from the books of the discoms, assuming all States except Tamil Nadu join the scheme.

In return for the financial assistance, discoms have to meet certain efficiency parameters through installation of smart meters and upgrading of transmission infrastructure and also undertake periodic tariff hikes.

To incentivise the States to join UDAY, the scheme provides for additional funding from the Centre and additional coal supplies. So far, 18 States have signed agreements or have agreed to join the scheme.

As the discoms’ finances mend, they can increase their power purchases, thereby boosting power demand and the capacity utilisation levels of power generation companies. Today, 20,000 MW of generation capacity is lying idle for want of power purchase agreements with discoms.

Strengthening network

Distribution apart, the government has been working on bolstering the historically ignored power transmission sector too. Data shows that there has been an addition of about 84,000 circuit km (cKm) of transmission lines during 2012-16, the highest ever in any Five Year Plan.

According to the set target, the transmission line network will be expanded to a further 3,64,900 cKm by March 2017. Likewise, the addition of 2,49,400 MVA transformation capacity during 2012-16, too, has been the highest ever.

With the commissioning of 765 kV of transmission lines since July 2014, the power transfer capacity to the southern grid has increased from 3,450 MW to 5,900 MW. The plan is to raise it further to 18,000 MW by 2020.

Higher investments in the transmission sector should benefit Power Grid Corporation of India, the country’s principal transmission utility and also other private sector players bidding for transmission projects.

Clarity on coal After growing at a very slow pace, coal supply to the power sector rose 12.5 per cent to 388 million tonnes in 2013-14. From there, the coal supply expanded further to 455 million tonnes by 2015-16.

Expansion in the capacity of the existing mines, faster government approvals, higher railway rake availability and improved rail connectivity in coal-rich Jharkhand, Odisha and Chhattisharh have helped Coal India, the country’s largest coal miner, to ramp up production.

Coal-based power accounts for 62 per cent of the country’s total electricity generation.

Apart from taking steps to boost domestic coal production, one of the major initiatives by the government was the introduction of the Coal Mines (Special Provisions) Ordinance, later replaced by an Act, to bring in the much needed transparency in the sector.

The Ordinance detailed the process of auctioning/allocating coal mines, the original allocations of which were cancelled by the Supreme Court in 2014 on account of irregularities.

Nine coal mines have been auctioned to the private power sector and the winners include Essar Power, JP Power Ventures, Adani Power and CESC.

While companies have managed to bag mines, the viability of the power produced from the aggressively-bid-for mines remains to be seen.

Additionally, the government also allocated mines (as provided under the Act) to central and state public sector companies, including NTPC, Karnataka Power Corporation, West Bengal Power Development Corporation, Odisha Coal and Power and Damodar Valley Corporation.

Most recently, the Cabinet’s nod for flexibility on utilisation of domestic coal by power plants bodes well for the sector. While the details are still awaited, the proposal is to allow flexibility in the use of coal among different generating stations of a power company.

This is expected to promote efficient utilisation of coal, thereby bringing down thermal power costs.

Firing up gas plants Apart from efforts at improving the domestic supply of coal, gas (re-gassified LNG) auctions conducted by the government have helped fire up many stranded gas-based plants. So far, three auctions have been conducted.

During 2014-15, over 50 per cent of the country’s gas-based capacity had no supply of domestic gas.

Under the auctions, the government has been importing RLNG for supply at subsidised rates to gas-based plants operating at very low capacity.

At the auctions, the companies asking for the lowest subsidy from the government for supplying power to the discoms are allocated gas.

During June 2015-March 2016, 16 billion units of power were generated for supply to power discoms at ₹4.7 (or below) a unit. Another 6.8 billion units will be produced during the six-month period ending September 2016.

Twenty-nine power plants, including those of Gujarat State Electricity, Essar Power, Torrent Power and GMR, were eligible for participation in these auctions.

Take the case of Torrent Power, which runs over 80 per cent of its power generation capacity on gas.

Helped by the supply from the RLNG auctions, three of the company’s plants generated close to 7,000 million units of power in 2015-16, about 2.5 times more than in the year-ago period. This helped the company grow its revenue and operating profit at 12 per cent and 42 per cent, respectively, in 2015-16.

With international LNG prices having eased considerably, some companies may now be in a position to source imported gas for their plants.

More transparency Another recent government initiative has been the launch of ‘DEEP’ — Discovery of Efficient Electricity Price — portal for compulsory purchase of short-term power (for a period of more than a day to a year) by state discoms through reverse e-auctions. Today, short-term power trades, which happen either on power exchanges or bilaterally (directly between a discom and a power producer), account for about 10 per cent of the country’s power generation.

Since April 2016, all bilateral trades are being conducted on the newly launched e-auction platform.

Participation from a much wider network of players (as compared to bilateral trades) on this platform via a reverse auction methodology is expected to bring in greater transparency and thereby bring down tariffs.

This is already evident from the average winning bid tariff quoted in the auctions held for procurement of short-term power by the distribution utilities of Bihar, Kerala and Uttarakhand.

These were in the range of ₹2.59/unit–₹3.54/unit in most cases. This was lower than the average tariff of around ₹4/ unit for short-term procurement under the earlier bilateral route over the past 2-3 years.

According to estimates from ICRA, assuming that 10 per cent of the power procurement of a discom is from short-term trades, it can bring down retail power tariffs by 4-5 paise/unit.