Tim Buckley, Institute for Energy Economics and Financial Analysis
India is positioned to deliver strong economic growth over the coming decade. To achieve this, a wider electrification programme coupled with accelerated deployment of renewable energy capacity is needed.
ndia is transforming its national electricity system by incorporating deflationary renewables.In doing so, it is improving energy security, reducing reliance on imported fossil fuels, addressing air pollution, and lowering emissions intensity.
The timing of this transformation is spot on.India’s economy is set to double by 2030. Even with improved energy efficiency and lower grid losses, an investment exceeding US$500 billion is required to deliver a near 70 per cent expansion in total electricity generation.
Clearly the challenges are huge, but so are the opportunities.To meet India’s energy needs and ensure continued economic growth, The Institute for Energy Economics and Financial Analysis (IEEFA) asserts a wider electrification programme coupled with an accelerated deployment of renewable energy capacity is needed.
In this article, we explore trends in electricity demand growth, capacity installations and plant closures, and we examine the financial sector’s capacity to fund development and the resulting energy mix changes.
Current trends in electricity demand growth
India’s electricity production in the six months to date (April-September 2018) is up 6.2 per cent compared to the same period last year. This reflects an increase of 29 per cent for variable renewable generation and 4 per cent for thermal/hydro/nuclear. Assuming a 0.8 per cent reduction in grid losses, this implies electricity demand growth of 6.7 per cent year-on-year, consistent with GDP growth of 7.0-7.5 per cent.
In the seven months to October 2018, India’s net thermal power plant (TPP) capacity has fallen 1.1 Gigawatts (GW).
Although 10 years in the planning, the addition of 600 megawatts (MW) at the Mahan Super Thermal Power Project in Madhya Pradesh was more than offset by the closure of 1,799 MW of capacity, principally at two other plants: 705 MW at the Badarpur Thermal Power Station in NCT of Delhi and 420 MW at the Ropar Coal Power Station in Punjab.
Echoing this trend, India’snewest power sector blueprint – the National Electricity Plan of 2018 (NEP 2018) – forecasts thermal power plant closures of 4 GW to 5 GW annually.
Increased financial risk of thermal power plants becoming stranded assets
India’s thermal power plant (TPP) sector is suffering clear stranded asset risk. This is making access to capital increasingly problematic. Public sector company NTPC is the only Indian power producer still able to regularly access capital for new TPP development. Their latest corporate presentation estimates TPP commissioning at 4.2 GW in 2018-19 and 5.2 GW in 2019-20. It would be fair, however, to expect delays with NTPC announcing cancellations/delays on 13 GW of TPP development to date in 2018-19.
IEEFA notes that even NTPC may be finding it difficult to justify investment in greenfield TPP developments, particularly when coupled with constraints including fuel access, the high tariffs required, and the long delays being experienced.
Despite Global Coal Plant Tracker estimating 103 GW of thermal power plants in the development pipeline (including 39 GW under construction), the cancellation of 26 GW during the first half of 2018 illustrates that most remaining projects are stalled.
The impact of stalled projects is far reaching.Right now, US$100 billion of distressed TPP loans are clogging the Indian banking system. Further, the travails at Infrastructure Leasing & Financial Services (IL&FS) suggests a real solution is yet to be found.
Stranded assets commonly reflect a myriad of problems, including outdated technologies, legal issues around land acquisition, a geographical misfit between proposed plant locations and the distance coal supplies must travel, and unviable tariffs.
TPP proposals are generally requiring tariffs at increasingly high rates. As a result, Indian ‘discoms’ — distribution companies that purchase electricity and supply it to consumers — will not accept them given renewable energy tariffs are the low-cost solution. For instance, renewables are now widely available at below Rs 3/kWh (US$40/MWh), with zero indexation for 25 years.
Similarly, other TPP proposals are pegging tariffs at rates deemed too low, making financing impossible. Either way, banks are unwilling to finance unviable TPP projects.Reviewing the evidence, IEEFA forecasts net thermal power plant installations of just 3 GW annually over 2018-19 and 2019-20 (taking into account 7 GW of new plants commissioned and 4 GW per annum of end-of-life closures).
Additionally, and despite significant planning, very few new hydro and nuclear power projects are likely to be commissioned due to legal, financial and land acquisition delays. In fact, IEEFA assumes just 1 GW to 2 GW per annum.
India’s renewable energy sector has increasing momentum
India’s renewable energy momentum entering 2018 has been staggeringly positive. Tariffs of below Rs 3/kWh are still being registered relatively consistently.While up 10 per cent to 20 per cent on the record lows of Rs 2.43-2.44/ kWh observed in the past two years, this still puts renewable energy as the lowest cost source of new electricity supply for India. Further, an understated positive in the renewables industry is the price of solar modules which have fallen some 30 per cent over 2018 to US25-27c/w, thereby offsetting the price inflation of import duties.
A few headwinds, however, have taken some of the wind out of the renewable sector.
Grid integration of variable renewable energy is an increasing challenge. This could be partly addressed by an accelerated deployment of distributed residential, commercial and industrial rooftop solar. Another key avenue would be to minimise land acquisition impacts and maximise affordable distributed energy solutions (e.g. solar irrigation pumps) in the agricultural sector.
Some of the other issues affecting the renewable industry include increasing access difficulties, a 25 per cent solar module import duty, GST uncertainties, the depreciation of the currency, higher interest rates and policy uncertainty.
Tariff guarantees by the Solar Energy Corporation of India Ltd (SECI) and NTPC are largely circumventing the lack of bankability of discoms for now, but the Ujwal DISCOM Assurance Yojana (UDAY) reforms must be completed to resolve this critical headwind.
Figure 1: India thermal and renewable power capacity additions (MW)
Source: Central Electricity Authority, MNRE, IEEFA Estimates
Note: The renewable estimates include large scale hydro and excludes ‘behind the meter’ rooftop solar
IEEFA now expects 13 GW of net renewable capacity addition in 2018-19, a marginal decline on 2017-18. Despite this, with a building pipeline of project tenders currently sitting at 26 GW, momentum into 2019-20 is looking a lot stronger.
Reviewing the energy mix
In the four years to 2015-16, India over-built 20 GW annually of net new TPP. This was well ahead of demand growth, and meant that coal utilisation rates fell to a decade low of 56.7 per cent in 2016/17. 
With current underinvestment in new generation capacity, India is now seeing an uptick in coal utilisation rates to an estimated 58.8 per cent in 2018-19 (See Figure 2).
Figure 2: India electricity capacity and production 2018-19 (Est.)
Source: Central Electricity Authority, MNRE, IEEFA Estimates
In the near term, a higher utilisation rate will improve capacity efficiency through the better use of existing investments, in turn reducing financial system stress.
Further, with Coal India’s production up 10.4% year-on-year year-to-date to October 2018, coal availability should progressively improve. However, combined with an increased system reliance on variable renewable energy, a rising utilisation rate of coal reduces system capacity surplus and if sustained, will reduce India’s grid stability.
While the TPP pipeline is notionally large, most of these proposals are stale, stuck in litigation, using outdated technology, and poorly located relative to fuel supply.Indian banks are unlikely to provide yet more capital to proceed, leaving most as stranded assets. For the few that do, construction timelines of 3-4 years are likely.
In comparison, there are 26 GW of renewable energy projects already in India’s project development pipeline. A renewable energy project development only takes about 12 months, making such projects readily scalable in the near term to meet India’s ongoing demand growth.
Domestic and international capital and finance are both available for new renewable projects at prices that give adequate returns to investors, while also bringing down system generation costs and backing in long-term wholesale electricity system deflation.
It is clear that grid connectivity needs to be further enhanced. An acceleration of existing plans for transmission and distribution investment by Power Grid Corp of India, Adani Transmission, et al, is also required, but well in hand.
Accelerating deployment of renewable energy capacity needed
India is positioned to deliver sustained, strong economic growth over the coming decade.To achieve this, a wider electrification programme coupled with an accelerated deployment of renewable energy capacity is needed to power this growth, without the unsustainable constraint of ever higher fossil fuel imports.
Grid stability needs to be enhanced, a requirement made harder by the variable nature of renewable energy.
Finally, a more progressive peaking power supply price signal is needed to appropriately reward flexible supply, be that fast ramping coal power, gas peakers, batteries, pumped hydro storage and demand response management.
The increased extreme weather events and rising pollution health costs in India make this strategy both economically sensible, more sustainable, and necessary.
[Kashish Shah, Research Associate at IEEFA, contributed to this article as a co-author]
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