India's power sector on revival mode, but needs bolder reforms to remain viable

Gradual revival in demand in the power segment with push towards renewable energy

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The demand for power in India fell more than 30 per cent from peak levels during the months of the COVID-induced lockdown. Though still lower than the pre-COVID levels of February, the demand for power has shown a recovery with the unlocking of the economy, a healthy sign.

However, according to a recent report by Brickwork Ratings, bolder reforms and faster implementation in the power sector are imminent to bring about a meaningful change in the sector's viability.

The report observes that on the distribution side, the struggling sector received some respite, with an increase in electricity demand recently. However, the challenges faced by the sector are far from over. The Brickwork report points out that of the total liquidity package of Rs 90,000 crore announced for discoms (electricity distribution companies), more than Rs 70,000 crore has been sanctioned and Rs 25,000 crore has been disbursed. But the payables of these discoms increasing by the day is a growing concern and the amount released by the government until now is not sufficient. The benefit is also yet to be passed on to generators.

The report observes that the overall revival of the power sector in the country will require meaningful structural changes, targeting an improvement in the operational efficiency, a reduction in cross subsidies and cost-reflective tariffs, too. 

Meanwhile, the Centre continues to push for renewable energy as it plans to replace old thermal power plants with the former. India has set an ambitious target of setting-up 300 GW of solar capacities over the next 10 years. The government also plans to double the solar modules or cell manufacturing in two years, which is expected to increase the appeal of the sector even more for investors. 

As per a recent report by CRISIL, investments in the renewable energy segment can surge by as much as 35 per cent. The report points out that whetted global investor interest and enabling regulations can fuel an addition of as much as 35 GW of renewable energy (solar and wind power) capacity, involving Rs 1.5 lakh crore of investments in the three years through fiscal 2023. This would translate into a 35 per cent growth over the Rs 1.1 lakh crore invested in the past three fiscals. CRISIL observes that a push towards clean energy is driving global investor interest in the Indian renewables sector  that has been reflected in the project tenders in India getting oversubscribed amid strong participation by global investors.

“Global investments have risen from around 15 per cent of the total capital investment in fiscal 2015-18 to around 50 per cent of total investments in fiscal 2018-20. Going forward global investments and internal accruals can generate around half of the Rs 1.5 lakh crore investments required,” pointed out Hetal Gandhi, Director, CRISIL Research. 

Experts at CRISIL observe that continued investor interest builds on sustained enabling regulations, visible through removal of tariff caps, consistent regulatory policies and rising renewable energy targets. Even during the Covid-19 pandemic, the ‘must-run’ status of projects has ensured continuous power offtake, despite weak demand. Further, enablers such as extensions to under construction projects have helped developers deal with mobility constraints, supply hurdles and labour shortages.

CRISIL’s recent study on generation across 75 solar projects (with a track record of more than three years) indicates that  performance was better than the estimation. It has been estimated that risks related to delayed payments from state discoms are being better managed by leading developers through liquidity buffers. Their project diversity also reduces exposure to single site or counter party-related risks. It has also been estimated that superior governance mechanisms and beneficial tax structures, also offer avenues to enable fresh investments from global funds that are scouting for green investments and have the capability to free up developers’ equity capital for growth. 

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