New Delhi: 2021 promises to be a year of hope and optimism. Despite the challenges of ill-fated 2020, current backdrop of recovery in global sentiment, bounce back in local demand, ample liquidity and favorable oil prices provides a supportive launchpad for India to lead the journey of economic recovery in 2021. One sector which is expected to play a crucial role in this recovery is the Indian power sector.
In the wake of the challenges of a global pandemic, nationwide lockdown, unprecedented collapse in country’s economic activity and GDP, 2020 has also left behind a lot of learnings. The world as we know it has changed and with it has emerged a new perspective to face challenges by constantly evolving and pre-empting the changing need of the consumers and businesses. While the power demand is expected to slowly limp back to high-single digits in tandem with GDP growth, several over-arching fundamental trends are expected to drive the sector transformation in 2021:
1.Technology: The catalyst
Historically, Indian power sector has been characterized by power-cuts, economic losses, system inefficiencies and archaic last mile networks. While the sector has been undergoing an overhaul over the last few years, the coronavirus pandemic underscored the need of accelerated technological upgradation. Going forward, the focus on implementation of smart technologies like an evolved grid system, smart metering, digital asset management will help transform the seemingly traditional, manpower-heavy sector into a smarter, more efficient power system with each element in the value chain re-imagining their processes and streamlining infrastructure.
2.Green Energy: The way forward
Renewable energy is expected to form 70% of fresh capacity expansion expected over the next 5 years. This would help achieve India’s commitment to increase renewable share in total generation to 40% by fiscal 2030 from current 25% as part of the Paris climate deal. According to International Energy Agency (IEA), India would be the largest contributor to the renewable upswing in 2021, and the country’s annual additions are expected to double in 2021 compared to 2020. Strong government focus which is evident from the fiscal and regulatory incentives, viability gap funding and execution support in terms of land and evacuation infrastructure is expected to support this upswing. Apart from the support for setting up new capacities, the government has lent significant comfort to private investors by ensuring better payment security mechanism and enforcement of signed PPAs to avoid tariff-related disputes. While most of the upcoming PPAs under the central level schemes have at least two layered payment mechanisms (i.e. letter of credit and payment security funds), going forward with the finalization of competitive bidding guidelines by MNRE, even state nodal agencies and discoms will have to keep provisions for dual payment security mechanism. Additionally, the improved availability of low-cost finance will fuel the capacity addition and help sustain the private sector interest. Sizeable investments are also expected in improving the energy storage solutions and dynamic load management which would help in maintaining constant generation, thereby producing a smooth generation curve and reducing a sharp ramp–up or ramp-down for other plants connected to the grid.
3.Transmission: The missing link
Historically, a lion's share of investment in power sector has flown into adding generation capacities. But in order to ensure reliable and uninterrupted flow of electricity, every megawatt of new generation capacity needs to be matched with a certain transformation capacity added to the system. Going forward, significant development in the transmission sector would be triggered by the aggressive renewable expansion plans. Large scale grid connected solar and wind plants are usually located in the far-flung areas, where there is limited existing transmission infrastructure. Renewable power generating companies have urged for adequate grid availability in the past. This will urgently need an expansion of grid connectivity in the next two years to be able to accomplish the renewable energy target. Furthermore, rising private sector participation with favourable risk-return profile of transmission projects will also support growth in transmission sector in India. With the renewed government focus on alleviating congestion, providing reliable power to all and strengthening inter-regional grid availability, transmission capacities are expected to grow at a robust pace in 2021.
4.Private participation : The fuel for future growth
Over the last few months, we have witnessed a liquidity glut across major economies on the back of fiscal support by central banks. This liquidity is chasing returns and higher yields which augments well for India as India has managed to recoil from the shock of coranavirus faster than other country. This, coupled with the under-penetration, favourable demographic and govt's atmanirbhar push puts India firmly on an accelerated growth plan and makes India a compelling investment opportunity for foreign capital hungry for growth. A huge amount of this foreign capital is expected to flow into Indian infrastructure sector. One mode which is expected to facilitate this flow is InvITs and REITs.
5. Policy reforms: Unfinished business
Over the last few years, Indian power sector has undergone a significant transformation that has redefined the industry outlook through path-breaking policy initiatives like UDAY, Power for All, UJALA, among others. While discoms reforms have achieved limited financial success, recent policy reforms like payment security mechanism, power-cut penalization, Electricity Amendment Bill will go a long way in bringing in efficiencies into the sector. India has already kick-started the process of privatization of its power distribution territories in the union territories (UTs), with bids being called for purchase of entire 100% stake in the Chandigarh discom. But going forward, a similar privatization drive for state transmission companies should be undertaken to free-up government capital and allow parity with industry efficiency. The government may also want to re-initiate discussions around “carriage and content separation” which would effectively allow end-consumers to choose who they want to buy electricity from, similar to the way telecom operators work. This would usher in competition, forcing discoms to improve their performance standards, and adopt a more consumer-centric approach rather than remain geographical monopolies.
[This piece was authored by Harsh Shah, Chief Executive Officer, IndiGrid]