In 2016 the government tried hard to revive the sector, to promote green energy and secure last mile connectivity so that power reaches the poorest of the poor. But weak demand leading to lower utilisation of existing capacities, grid constraints for renewable power and reluctance by many states to completely adhere to the spirit of UDAY have not helped improve the health of ailing discoms, which puts a strain across the entire power value chain. Some key highlights for 2016 were:
Meeting the demand
The power demand continued to grow at an average of almost 5 per cent over 2015 despite slipping in recent months to of 2.5 per cent as a result of slow industrial growth. It’s imperative for macroeconomic conditions to improve in India to facilitate higher demand to improve the power sector scenario.
Growing renewables space
The renewable energy space continued to witness accelerated growth that is primarily attributable to solar and wind capacity addition. Aided by reduction in module prices, the tariffs continue to fall and achieving grid parity is no longer a distant dream. The tariff fell to Rs 5/kWh last year largely as foreign players bid aggressively. This year rooftop solar bids have gone as low as at Rs 3/kWh and have set another benchmark for the industry.
Achieving fuel sufficiency
Domestic coal supplies have improved considerably this year resulting in a limited need for imported coal benefitting India’s Current Account Deficit. This is a noteworthy achievement as no plant has reported generation loss due to non-availability of coal this year. Coal availability for the power sector under e-auction has also improved significantly; the relative price gap between linkage and e-auction coal has narrowed down and has become more affordable.
Reviving the distribution sector
The UDAY scheme launched last year to help financial turnaround and revival of discoms has been implemented this year. 17 states have ‘in-principle’ agreed to join the scheme. While the condition of other utilities continues to remain critical, it has been noticed that 28 of 40 utilities did not file for tariff revisions with the regulator on time this year.
2017 – The year ahead and expectations
For the power sector to revive completely and become more attractive for fresh investments, it is important for the announced reforms to be implemented successfully. For 2017, we expect the following:
Successful implementation of UDAY: 2017 will see the implementation of reforms by states as per the roadmap envisaged under UDAY. It’s important for the state to ensure timely tariff revision and T&D loss reduction so that this doesn’t become just another financial restructuring scheme like in the past.
Meeting India’s renewable energy targets: To be able to meet the stiff targets set by the Indian government, it would be important to mitigate inherent risks associated with projects from an investors comfort perspective. Once these risks are taken care of, more capital will find its way towards making fresh investments for new projects.
Improvement of coal quality: The outcomes from the initiative of independent third party coal sampling will be important to help in better grade determination and better estimate of specific heat rates for coal fired power plants.
Support for peaking plants: To cater to peaking power demand and help the ailing hydro and gas based generation, it is important to have a clearly articulated policy direction for them.
It is unreasonable to expect a quick fix solution for the above issues. But if the State and Central government machineries can continue to align their efforts, it will result in creating a win-win scenario not only for private investors but also for end customers.
Oil and gas
The oil and gas sector is among the six core industries in India and plays a major role in influencing decision making for all the other important sections of the economy. India’s economic growth is closely related to energy demand; therefore the need for oil and gas is projected to grow more, thereby making the sector quite conducive for investment. India will overtake Japan to become the world’s third largest oil consumer after the US and China by 2025.
The strategic task for India is to figure out how it can create an environment such that its energy needs are met domestically since India imports close to 80 per cent of its oil consumption. Purchasing resources is easy but a large country has to have a long term economic strategy. Maximising on domestic natural resources is far better than importing.
According to the International Energy Agency, India’s net oil imports will grow from US$ 110 billion in 2014 to US$ 480 billion in 2040. This will have a deleterious impact on India’s economy and lead to a huge transfer of wealth every year from India to oil exporting nations. In its plans for the sector, the Government of India’s (GoI) vision runs complementary to rise in domestic demand. The Prime Minister has just issued a clarion call to potential partners to invest in the sector, affirming that the country’s economy is expected to grow five-fold by 2040.
It is important that the energy policy is responsive to the needs of the nation and players in the sector. For example, if one is allowed a fair market price for oil, for every dollar one gets, 70 per cent of that will go to the national exchequer. The government understands these issues.
There have been some very positive developments in 2016. The sector has had some respite in the rate of cess in Budget 2016 and hope that with the oil prices gradually rising, the next Budget will further consider the current rate of 20 per cent ad valorem cess. Cairn India’s extension of our PSC contract also looks positive. Added to this, with the merger in place, things are surely looking up.
2016 also marks a generational shift and modernisation of the oil and gas exploration policy. The introduction of HELP is a major policy step in the right direction. Allowing companies access to all forms of hydrocarbons, marketing and pricing freedom for gas and moving towards an open acreage licensing system are a quantum change in the E&P sector governance in the country.
However, a long road remains to be tread. The total crude oil production in 2015-2016 was 33 million tonnes as opposed to 38.76 million tonnes in 2014-2015. This presents an urgent need to boost domestic production and encourage investments in the sector, with predictions of rise in consumption. There is a need for a policy that promotes domestic production. Businesses would invest only when they get risk-adjusted returns. Issues such as PSC extension, CESS and fair price realisation are key elements that determine the return. Cairn India looks forward to an exciting 2017 and will continue work with the government, to drive production to serve the energy self-sufficiency goals of the country.
In 2016, the power industry witnessed partial growth in case of stationary gas engines, wind sector and new projects of turbines during the first half of the year. The biggest challenge that the industry currently faces is low awareness about available lubricants and understanding of the right lubricant for a given application. We understand that in the coming years, power industry shall demand a more stringent performance requirement from transformer oils to ensure higher system reliability and efficiency levels. Hence, in the near future it would be imperative to meet the changing demands and needs of the power sector for superior reliability. At Shell Lubricants India, we witnessed good growth in all the key segments that we work on within the power sector.
The drive for renewables was demonstrably successful during 2016, with 65.78 BU of power derived from renewable sources in 2015-16 as compared to 61.78 BU in 2014 – 15. This progress has encouraged the government to revise upwards the target of renewable energy capacity to 175 GW by 2022.
Coal remains the cornerstone feed stock, however, with a jump in coal production contributing significantly to ratings agency Moody’s upgrade of the outlook for India’s power sector from negative to stable.
The big change with coal is the drive to lessen the environmental impact.
This was heralded at the end of 2015 with the announcement of new emissions
norms. These will be achieved by retrofitting air quality control (AQC) equipment to existing coal plants and specifying AQC equipment for new assets. Adopting ultra-supercritical combustion technology will also help reduce coal’s environmental impact
Another significant factor in Moody’s more upbeat assessment was optimism about the effect of the government’s UDAY programme to improve the financial stability and operational performance of state discoms. Getting to grips with distribution challenges is central to ensuring the power sector as a whole can meet consumers’ needs.
At the nexus of the growth in renewables and addressing distribution challenges is the growth in micro-grids. In June the government proposed the development of 10,000 renewable micro-grids and mini-grids with a combined capacity of 500 MW. Challenges exist, however, in terms of funding and viability due to the price differentials with state discoms. We are making progress, but there is still much to do before the government’s vision of 24×7 power for all is a reality.