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ICRA Management Consulting Services Limited

Solutions that work. ICRA Management Consulting Services Limited. Revitalising the Power Sector. 21 st India Power Forum 2018. 27 th November 2018, New Delhi. Power sector in India: A snapshot Hydro Power – Issues and Possible Solutions Distribution Sector – Health check

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ICRA Management Consulting Services Limited

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  1. Solutions that work ICRA Management Consulting Services Limited Revitalising the Power Sector 21st India Power Forum 2018 27th November 2018, New Delhi

  2. Power sector in India: A snapshot • Hydro Power – Issues and Possible Solutions • Distribution Sector – Health check • Stressed Power Assets – Reasons and Directions • Concluding thoughts AGENDA

  3. Power Sector in India: A snapshot Last couple of decades have witnessed several transformations in the power sector. • India has welcomed the near power surplus situation from the days of grid failures • Transmission networks have witnessed impressive growth across the country • Renewable energy generation mix has seen inspiring changes achieving nearly 20% share in generation capacity • Financially distressed Discoms are looking forward to aspirational UDAY scheme; yet, national level AT&C losses are well above the target of 15% • At this same time, several unique challenges have appeared –demand stagnation, low PLFs, dearth of new long term PPAs, PPA reneging and rising NPAs

  4. Notable capacity addition leading to near zero deficit • Significant generation capacity addition owing to increased private participation; yet subdued growth in Hydro • Renewables’ share witnessed gradual progression in overall generation mix, up from 12.3% in FY12 to 20.1% in FY18 • The zero deficit: reduction in energy deficit from 8.5% in 2011-12 to 0.7% in 2017-18 Source: CEA, IMaCS Analysis.

  5. Transmission growth supports overall sector favourably • Nearly six-fold growth since the 6th Five Year Plan Period (1980-1985) • Total transmission infrastructure witnessed average 40% growth in each of the plan period • Green energy corridors provide impetus for accomplishments of renewable energy targets • Reduction in energy deficit and uniformity in power price observed with One Nation One Grid program • Private sector participation started from 11th Plan onwards with significant capacity addition witnessed during 12th plan • Net profit of key players exhibited an average CAGR of over 40% between FY 14 and FY 18(1) Source: CEA, Moneycontrol, IMaCS Analysis. Note: (1) Key players include PowerGrid, Adani Transmission, KEC International and Kalpataru Power Transmission; growth between FY14-FY18 (for Adani its FY16-FY18).

  6. Green and clean energy need further pursuance; careful planning imperative • As per INDC, by 2030, 40% of cumulative installed capacity to be from non-fossil fuel-based energy resources • Also suggests reduction in the emissions intensity of its GDP by 33% to 35% of 2005 level • Percentage of non-fossil fuel in the installed capacity is likely to increase to 49.3% in March 2022 and 57.4% in March 2027(1) • Yet, hydro’s share stagnant at nearly 10-11% of installed capacity • More RE = More Infirm Power = More Grid Management • Careful planning is needed to ensure effective utilisation of renewable power, given its infirm nature • However, waning investor’s confidence observed owing to various issues leading to cancellation and correction in capacity in recent tenders 2022: 479 GW 2027: 619 GW Source: Ministry of Power – Report on Optimal Energy Mix in Power Generation on Medium and Long-term Basis (2018), IMaCS Analysis. Note: (1) As per the 19th Electricity Power Survey.

  7. Contemporary issues impacting the Indian Power Sector Certain key and contemporary issues need urgent intervention to achieve a comprehensive turnaround and revival • Subdued trends in thermal PLFs: Muted power demand could lead to stagnant PLFs, eventually burdening customers with more fixed cost. • Dearth of new long term PPAs: Complete absence of successfully signed long-term power procurement by discoms. • Stagnating hydropower generation: Lack of any substantial capacity improvement over the past several decades; proportion in generation capacity mix likely to remain at 10-11% or drop even further in the medium and long term. • Aggressively bid projects: Overestimating the efficiency of the plant or underestimating the cost leading to financial stress for bidders. • Power distribution remaining weakest link: Early signs are encouraging, however on consolidated basis, the target of achieving lower than 15% AT&C losses need substantial effort. • Working capital scarcity: Discoms’prolonged payables cycle creating working capital gap for the generators. • Rising Stress in Power Assets: Piling bad loans owing to the fundamental challenges. Source: IMaCS Analysis.

  8. 1a. Hydropower: Immense potential, yet low on development • Cumulative hydro-potential of about 252 GW(1), ranks 5th globally in terms of exploitable hydro-potential • Installed hydropower capacity to reach 51.3 GW in 2021-22 and 63.3 GW in 2022-27 • However, exploitation of hydro-potential has not been up to the desired level due to various constraints confronting the sector Source: CEA, IMaCS Analysis. Note: (1) Including pumped storage and small, mini & micro schemes.

  9. 1b. Hydropower: Sluggish capacity addition with shrinking share in generation mix • During FY2017-18, only 815 MW(1) of capacity addition of large hydro has been achieved against the target of 1,305 MW. This also suggests that target itself is very conservative • Contracting share in overall generation mix due to higher capacity addition from other sources of power generation Source: CEA, IMaCS Analysis. Note: (1) Total capacity of small hydro is 4,507 MW as on September 2018; Total capacity of all hydro is 49,994 MW.

  10. 1c. Hydropower: Key challenges and way forward Way forward Key Challenges • Inappropriate tariff design • Lengthy pre-development procedures • Uncertain commissioning challenges • Uncollaborative planning and allocation of projects • Land acquisition and safeguard issues • High financing risk • Human capital challenge • Providing additional incentives and innovative approach towards tariff designing • UK: Innovative tariff design • Designing improved mechanism for project licencing and award • Enabling sharing of benefits with all stakeholders • Nepal: Locals becoming active co-investors in hydro projects • Increasing focus on remote power evacuation infrastructure • Implementing technology specific auctioning • Argentina: RenovAr programme with a sector specific focus on capacity addition • Development of pumped storage schemes • Norway: Retrofitting and upgrades for improving efficiency Source: CEA, IMaCS Analysis.

  11. 2a. Power Distribution: Encouraging signs of UDAY, though significant efforts still needed • All India AT&C losses are pegged at 22.99%(1); well above the target of 15% • Andhra Pradesh, Telangana, Tamil Nadu, and Gujarat stand below 15% • J&K, Uttar Pradesh, Madhya Pradesh, Jharkhand, Chhattisgarh and Bihar exhibit much higher AT&C losses • ACS-ARR gap reduced to Rs. 0.27 / kWh(1) from Rs. 0.59 / kWh in FY16 • Nearly 86% of the bond issued out of proposed total bond issuance of Rs. 2.69 trillion • Tariff revision has been done for 25 out of 27 states/UTs • Better performing states have continued to improve better while the less efficient ones have witnessed a deterioration. Hence, continued efforts needed with greater rigour. Source: CEA, IMaCS Analysis. Note: (1) As per the UDAY portal on 18/10/2018

  12. 2b. Power Distribution: Necessitating change in institutional framework • Co-opting private sector participation – a long standing demand from industry experts • The Distribution Franchise model: staging a strong business case • Feedback Energy Distribution Company Ltd (FEDCO) operates as a distribution franchise in select areas of Odisha and has been able to bring down AT&C losses by 23% since 2012-13 • Torrent Power has reduced AT&C losses in Bhiwandi and Agra, AT&C losses have reduced from 22.22% in FY 2016-17 to 17.28% in FY 2017-18 in Bhiwandi and from 26.78% in FY 2016-17 to 20.89% in FY 2017-18 in Agra • International learning: The distribution service operator (DSO) model in Europe • Management operator model: The first of its kind is being implemented by FEDCO with three discoms of Madhya Pradesh Source: IMaCS Analysis.

  13. 3a. Stressed Assets: Power sector a significant contributor to bad assets • As on March 2018, the total outstanding loans of scheduled commercial banks to the power sector (including renewables) stood at Rs. 5.65 lakh crores, with slippages exceeding Rs.1.8 lakh crores. • Gross NPAs: Rs. 10.09 trillion as on March 2018(1) Generation Transmission Distribution Source: Standing Committee on Energy, 37th Report, IMaCS Analysis. Note: (1) Credit Suisse report.

  14. 3b. Stressed Assets: Reasons contributing to stress and low investor confidence Source: IMaCS Analysis

  15. 3c. Stressed Assets: Interventions needed for stress reduction Reallocation of coal to more efficient power plants Speeding up domestic coal mining and logistics Stress Faster Resolution of Dues as a Result of Change in Law Preventing Aggressive Bidding Increasing Demand via 24x7 Power for All, Household Electrification, Competitive Industrial Tariffs Source: Standing Committee on Energy, 37th Report, IMaCS Analysis.

  16. Concluding thoughts • Provide policy impetus to realise full potential of hydropower with improved mechanism for project licensing and award, benefit sharing with stakeholders, providing incentives, development of pumped storage schemes with lower risks etc. • (Re-)Development of hydro is indeed critical to ensure overall sustainability of operations of power sector in the country • Prolonged demand for review of the institutional structure of the Discoms is suggestive increasing private sector participation • Cues should be taken from success of transmission sectorto improve distribution sector • Further unbundling of large distribution companies into smaller discoms and franchise model could help improve billing and collection efficiency, eventually reducing losses • Tough interventions such as reallocation of coal mines to more efficient power plants, speeding up domestic coal mining and logistics, faster resolution of dues, and prevention of aggressive bidding may needed to improve investor confidence • There is a need to sustain the momentum of reforms, push these reforms further and complement these initiatives directed towards the conclusive goals of the sector to revitalise and sustain it.

  17. CONTACT INFORMATION Thank you for your time. Name | Sabyasachi Majumdar Senior Vice President & Group Head, ICRA Ratings Email: sabyasachi@icraindia.com Energy Sector Contacts: Mumbai: Satyajit Suklabaidya | AGM, Principal and Head: Energy | satyajit.suklabaidya@imacs.in | 7738522244 NCR: Rachit Verma | AGM & Principal: Business Development | rachit.verma@imacs.in | 9167692971

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