Sustained economic growth continues to drive electricity demand in India. The Government of India’s initiative for attaining “Power for all” has accelerated capacity addition in the country. At the same time, the competitive intensity is increasing at both the market and supply sides. The Indian power sector is undergoing a significant change. India is both a major power producer as well as a major power consumer. The power sector is high on India’s priority as it offers tremendous potential for investing companies based on the sheer size of the market. Investment in power sector is a must to enhance the infrastructural capacity of a country to sustain the process of its economic growth. The financial viability of the power sector is a prerequisite for attracting the investment needed to ensure reliable energy supply, meet universal access targets, and hasten the clean energy transition.
The electricity industry is different from all other industries because of its distinctive engineering characteristics and peculiar features that electricity as a commodity cannot be stored. The demand for power fluctuates widely not only over seasons but also over any particular day. The supply must be there to meet the demand and should be able to cope with any sudden change in the demand. The entire industry is linked by distinct stages starting with fuel inputs leading to generation, then by high voltage transmission through distribution networks and then finally reaching the customers. Coordination between generation and transmission is vital for ensuring the integrity of the supply network. Electrical equilibrium is essentially to be maintained continuously at every node of the network so as to prevent any failure in supply. Generation, distributed generation, renewables and captive generation, power projects, rural electrification, renovation, modernisation, human resource development, research and development, transmission and distribution and demand side management all requires high capital costs. Availability of financial resources and the viability of utilities in the sector are much needed.
Electricity Act, 2003 (EA03) inter alia brought provisions on open access, power trading, regional and national electricity market, etc. to facilitate private sector participation and to help cash strapped State Electricity Boards (SEBs) to meet electricity demand. EA03 envisaged that with the setting up of independent regulators and distancing of Government from tariff matters, the State distribution utilities would achieve financial viability to restore the financial health of the power sector. The Indian power sector has come a long way since then and during the course the State Discoms resorted to loans from the banks and financial institutions to meet operational deficits, it has now resulted in a position of debt trap for many of the State power utilities thereby frustrating the very purpose of EA03 to reduce the losses in power sector and improving the financial health of the sector. To govern the sector better and handle its requirement, the Government of India has identified power sector as a key sector to promote sustained industrial growth. As of September 2018, a draft amendment to EA03 has been introduced as a major initiative by the Government of India to boost the Indian power sector. The proposed amendment will have a profound impact on the Indian power sector. It touches upon different aspects of the sector, right from segregation of carriage and content to renewable energy and open access to tariff rationalisation and so on. The Bill also aims to infuse healthy competition in each distribution area, and deals with aspects pertaining to promotion of renewable energy, open access, smart grid, and ancillary services. It discusses direct benefit transfer of subsidy, 24*7 power supply as an obligation, penalisation on violation of PPA, setting up smart meter and prepaid meters along with regulations related to the same. Some of the amendments are seen as much needed and address the major caveats and limitations of the Act. These proposed amendments necessitate significant reorganisation of the distribution and supply businesses and propose significant measures for renewable energy promotion, including obligations for thermal power developers to establish renewable generation capacity and provide measures for tariff rationalisation. The key intent behind the amendments is to allow competition and better customer service without significantly increasing tariff, which is significant to minimise the power sector’s negative macroeconomic, fiscal, environmental, and social impacts.
Building Electricity Market
The emergence and development of a sustainable competitive marketplace depends in large part on its structure. Markets in electricity do not happen; they have to be created. Supply shortages and transmission capacity constraints make the design of power markets extremely difficult. Although market structures vary, there are some common functions that an electricity retailer has to be able to perform, or enter into a contract for, in order to compete effectively. Supply and demand characteristics comprise a market’s core structure, but in a power market these are unusually complex therefore power market deviates from standard economics. The demand side is largely disconnected from the market, and details of the supply costs violate a basic competitive assumption. The supply side cannot store its output so that real-time production characteristics cannot satisfactorily operate on its own, and is essentially incomplete. A well-functioning power market and associated institutions depends upon the presence of lot many sellers and buyers to create competition. Ultimately from the competitive market, the concentration of generating capacity would amount to “market power”.
To become a successful player in the marketplace, one has to be quality conscious and cost-effective. Cost is one of the key success factors and has to be managed efficiently. Strategic cost management has to become a discipline practice. Power exchange is a common platform where buyers and seller of electricity come together for trade. Open access allows consumers to purchase electricity directly from power generators or exchanges. This increases the competition in the market and ultimately benefits the consumers. Power trading bridges the gap between deficit energy and surplus energy and improves power distribution milieu. Distribution companies manage network as well as supply electricity to residential and commercial consumers. The Indian Government has embarked on a highly ambitious programme of electricity reform to create market structures, market rules and a regulatory framework that will foster the emergence of competitive wholesale and retail markets in electricity.
Power Trading Corporation (PTC) is a unique example of public-private partnership which was established to develop a commercially vibrant power market in the country. It seeks to provide holistic services in the power trading market, including intermediation for long-term supply of power from identified domestic Independent Power Producers (IPPs) and cross-border power projects, financial services like providing equity and debt support to projects in the energy value chain through its subsidiary. It undertakes trading activities which include long-term trading of power generated from large power projects as well as short-term trading arising as a result of supply and demand mismatches, which inevitably arise in various regions of the country. The concept of power trading is introduced in India under the approved guidelines of Central Electricity Regulator Commission (CERC) under EA03 which aims for the development of a multibuyer seller market in power.
Power Exchange India Limited (PXIL) is India’s first institutionally promoted power exchange that provides innovative and credible solutions to transform the Indian power markets. It endeavours with local and global market insight to improve the efficiency of the power market. It shape policies and projects and helps its stakeholders to make better informed business and investment decisions. PXIL is promoted by two of India’s biggest exchanges National Stock Exchange of India Limited (Nseil) and National Commodity and Derivatives Exchange Limited (Ncdex).
The Power Market-Centre of Excellence (PM-CoE) has been established to enhance the knowledge about power markets. It proffers platform to team up academicians, industry, experts and economists at a national and international level. It conducts various training programmes, workshops and seminars for achieving its objective of capacity building and spreading knowledge about the power markets. Central and State utilities, system operations, trading companies, Central and State-owned power generation companies, captive power plants, independent power producers, industrial consumers financial institutions, banks, development institutions and consulting firms across India are the beneficiaries of the training programmes.
Power Finance Corporation (PFC) provides affordable and competitive products and services with efficient and internationally integrated sourcing and servicing, partnering the reforms in the Indian power sector and enhancing value to its stakeholders. It has been providing financial assistance to power projects across India including generation, transmission, distribution and RM&U projects. Recently, it has forayed into financing of other infrastructure projects which have backward linkages to the power sector.
The Indian capital market has emerged as an attractive avenue for international investors has been an important financial story of recent times. The entry of world players has revolutionised Indian capital markets, largely for the better. But problems of understanding the management systems and behaviour of the capital market scientifically are vastly ignored by general investors and good times for investors may not last long without proper and scientific vision.
It is not always easy to raise financial resources and implementation of power investments. Investments are held back due to high corporate tax, statutory obligations, emission levels, power theft, low performance of old power plants, financial crisis of private power generators/IPPs, land acquisition issues, high non-performing loans which weigh on banks’ lending, and infrastructure bottlenecks. Unviability of the distribution segment reflected in very high transmission and distribution losses; inadequate supply of raw materials; power pilferage; uneconomic tariffs; power evacuation; hold up environment clearances hamper the financial investment in power sector. The delay in implementation of projects for reason, whatsoever and inability of promoters to infuse additional fund aggravate the problem and weaken the financial health of distribution companies (Discoms) thus impacting their liquidity position. The growing financial strains on power utilities mean that greater attention has to be paid to financial viability, tariffs, and financial structure. The Government has been attempting to help the power sector by permitting the stressed thermal assets to retain their coal and power supply and long-term transmission network access rights in order to enable them to save the value of the projects and fetch fair deals to the lenders. But capital contributions from the Government is not always forthcoming when due, and utilities therefore either have to rely to a greater extent on money borrowed at high rates of interest or cut back their programmes. Lack of essential diligence by financiers and an inept regulatory regime that allows cost plus tariffs selectively to certain vested players have also contributed to making India’s power sector uncompetitive. The lenders to the Indian power sector are reportedly holding stressed debt, accounting for over 40 per cent of their exposure to this sector. The Reserve Bank of India has directed banks to finalise a plan in case of default, insolvency proceedings to be invoked against the defaulters.
To Sum Up
The power sector development seems to continue in a steady pace, allowing for further liberalisation and new market structures. Adapting to these changes will be crucial for success in the future. The volatile nature of electricity prices foreign exchange, interest rates and credit risk has the direct impact on the profitability. The electricity market is highly dependent on implementation of climate policies. A change in tax or a subsidy may totally shift the market towards different electricity sources. The rapid changes in this sector makes managing of assets, liability, raising of funds, money flow cost of capital and returns more challenging than those in any other sector.
Harsha Rajwanshi is the Assistant Professor of Law, Gujarat National Law University & Faculty Advisor to GUVNL-GNLU Research Fellowship on Energy Law and Policy.