Special Feature on Power Sector

The Indian power sector is advancing at a fast pace with an ever-increasing demand for power. Shreya Chaware explains how India’s growing urban population, improvement in economic activities in recent months after the easing of the pandemic and the need for clean and reliable power supply provide huge scope for continued growth in this sector.

The power sector plays a vital role in the economic growth and human development of any country. It definitely improves the quality of life of human beings and the biotics of this sphere. In that sense, electricity consumption can be classified as one of the most important indices for measuring the development level of a nation. India stands to be the third-largest producer and second-largest consumer of electricity in the world, having an installed power capacity of 383.37 GW as of May 2021.

About 65 per cent of the electricity consumed in India is generated by thermal power plants whereas 22 per cent by hydroelectric power plants and 3 per cent by nuclear power plants. The remaining 10 per cent is generated by other alternate sources like solar, wind, biomass, etc. Up to 53.7 per cent of India’s commercial energy demand is met through the country’s vast coal reserves. In terms of production numbers, electricity reached 1,252.61 billion units (BU) in FY20. India was ranked fifth in wind power, fifth in solar power and fourth in renewable power installed capacity as of 2019.

Market Size
According to data published by the Ministry of Power, India’s power consumption increased 1.83 per cent in September 2021 to 114.49 billion units (BU), recording a sluggish recovery. Renewable energy is fast emerging as a major source of power in India. The Government of India has set a target to install 227 GW of renewable energy capacity by FY22. As of June 2019, the government had launched USD 5 billion of transmission line tenders in phases and has set a target of 175 GW by 2022. As of September 30, 2021, the total installed capacity of renewable power was 101.53 GW, accounting for 26.11 per cent of the total installed capacity.

India climbed 115 positions to 22nd in 2020 from 137th in 2014 on World Bank’s Ease of Doing Business – Getting Electricity ranking. The Indian power sector is estimated to attract investments worth USD 128.24-135.37 billion between FY 2019-23. The sector holds a bright future since by 2026-27 the country’s power generation installed capacity will be close to 620 GW, of which 38 per cent will be derived from coal and 44 per cent from renewable energy sources.

Showing a CAGR of around 6.8 per cent, electricity energy generation from renewable energy sources has improved from 193.5 billion units in 2013-14 to 306.3 billion units during 2020-21. In 2020-21, Bharat Heavy Electricals Limited (BHEL) commissioned around 119.5 MW worth of captive power plants while till September 2021, 75 MW of captive power plants had been commissioned during FY 2021-22. The total installed capacity as of January 2022 stood at 395 GW of which 38.5 per cent was generated from renewable sources. India bears an ambitious target of installing 175 GW by 2022 of renewable energy capacity.

Power Stocks and Equity Markets
In 2021, the power and utilities industry went through tough challenges, bagged measurable progress, and received clean energy encouragement from a new administration. As the US economy began to recover from its pandemic-induced recession, electricity sales improved 3.8 per cent through August 2021 as compared to the prior year. At the same time, unprecedented and unpredictable extreme weather events made the grid’s reliability and resiliency a bit shaky while cyber attacks on critical infrastructure infused cautiousness. In 2022, the key challenges for the sector are boosting clean energy, ensuring reliability and resiliency, and maintaining security, while keeping costs minimal.

The electric power industry is likely to advance in its transformation towards decarbonisation, digitalisation and decentralisation. In 2022, so far, the BSE Power index has outperformed the equity markets, zooming 38.52 per cent as against a 2.37 per cent dip in BSE Sensex. The returns delivered by the stocks making up BSE Power index have rallied up to 185 per cent in 2022, so far. The top performing stocks leading the index were from the Adani Group. Adani Power gained 185.56 per cent whereas Adani Green Energy and Adani Transmission grew 119.78 per cent and 61.69 per cent, respectively.

To take a look at the other power stocks, more than 50 per cent of them have delivered positive returns in 2022, so far. Only two stocks have doubled investors’ returns, namely Adani Power and Adani Green Energy. The entire energy and power sector is expected to gear up its performance and outperform key indices even as thermal power generation is facing a major challenge due to shortage in coal supply. The prices of coal as well as power are expected to rise. The demand for power is also expected to elevate during the summer. Owing to this, major power manufacturing companies like Adani Power are expected to get margin benefit on their buffer coal stocks.

During mid-March, the temperature across the country peaked and this further boosted the demand for power, creating a wide gap in supply and demand of power. In order to trim the profits of power generation companies, Central Electricity Regulatory Commission has introduced a cap of ₹ 12 a unit as compared to the previous limit of ₹ 20 a unit for electricity which is traded on the exchanges. Power tariff of ₹ 12 also appears to be on the higher side if compared with the tariff the power generation companies sell at via long-term power purchase agreements.

In the last one month, power stocks were seen surging, riding on the expectation that that their revenue would be mended by more returns from merchants and short-term sales since distribution companies would have to disburse more to meet the rising demand in summer. In the short-term market, a majority of power companies such as Adani Power, Tata Power and JSW Energy sell a small portion of the aggregate output produced on a merchant basis which aids them in getting better prices in a high demand environment. Filtering the companies with a market capitalisation of more than ₹ 10,000 crore, we find that they have delivered returns up to 64 per cent in the past one month.

Power Sector Reforms in India
In June 2021, the Union Ministry of Finance introduced a programme to allow additional borrowing space to state governments, conditioned on the states’ undertaking and supporting specific reforms in the power sector. REC Ltd. is working as nodal agency for implementation of the scheme for the Ministry of Power. The additional borrowing limit permitted for the power sector reforms is 0.5 per cent of the Gross State Domestic Product (GSDP) of the particular state. Fiscal year 2021-22 was the first year for the implementation of the scheme and hence the requirements and actions were less strict. The bar will be pushed higher in the coming years. The scheme aims to encourage the states to follow the reforms and make use of the enhanced financial resources.

This scheme includes provisions like timely publishing of annual accounts, filing of tariff petition, issuance of tariff orders, unit-wise subsidy accounting, publishing of energy accounts and adopting newer innovative technologies, among others. These remain common with the Revamped Distribution Sector Scheme, which again is a reform-based and resultoriented scheme by the Ministry of Power. Both the schemes allow states to leverage from the additional money that becomes available based on their commitment to underlying reforms as well as on proclaiming the corresponding outcomes. Under the scheme, the states may commit to reforms and be eligible for increased borrowing space of ₹ 80,000 crore.

Outlook
Global supply disruptions due to the Russia-Ukraine conflict have forced the coal prices to advance to historical highs. The cost of imported coal in India is predicted to be 35 per cent higher in FY22-23 as compared to FY21-22. In March 2022, power producers paid a premium of around 300 per cent to obtain coal supplies in the domestic spot market. The last week of March recorded 13 per cent higher demand as compared to trends in the past years bundled with high electricity prices on the power exchange. The Ministry of Power has taken a couple of measures to ease the crisis. This includes giving directions to ensure maximum production of coal at captive mines, rationing of coal to non-power sectors, and a price cap of ₹ 12 per unit on electricity traded on exchanges.

“The Government of India’s focus on reducing the carbon footprint has accelerated growth of renewable capacity addition in the country and the renewable capacity targets have been revised to 450 GW and more by 2030. The rise in power consumption, commissioning of renewable projects, and lower interest costs too are adding to the optimism for the power sector,” said Narendra Solanki, Head of Research (Investment Services), Anand Rathi Financial Services. In the fourth quarter of FY22, power generation companies are expected to report higher revenue and improved cash flow due to payment of dues from power distribution companies. New market mechanisms are being worked on to promote competition, thereby providing affordable power to the consumers.