In 2000 and 2001, California in the US faced a power crisis. There were frequent blackouts during peak hours and shortage caused power prices to rise up to 20 times. This was despite the installed capacity of 45 GW being much higher than the demand of 28 GW. Later, it came to light that some energy traders, in collusion with Enron, were shutting down lines during peak hours to create artificial demand. This made a couple of large energy utilities bankrupt. This is now a case study on distortions in the power market.
Observers of India's power sector say there is a likelihood of a crisis here too. "Solar power will, in our view, put pressure on power prices and erode margins of generators, along the lines of what occurred in California," says a recent Morgan Stanley report on the power sector. It downgraded power utilities, saying that renewable energy can cause a major disruption for the thermal players.
The analysts said earnings of many thermal power utilities are likely to come under pressure over the next 12-18 months. Once battery storage costs reach grid parity, coal-based contracts may be renegotiated in the long run, they said. Grid parity occurs when an alternative source generates power at a cost that is less than or equal to the price of power from the grid. Companies mainly dependent on thermal power, such as Adani Power, NTPC and JSW Energy, are likely to be affected, they say.
Though India has added a record 60 GW thermal capacity in the last three years, new additions will dry up, mainly as power from sources such as solar and wind is reaching critical mass. Last year, for the first time, renewable power capacity addition (15 GW) surpassed thermal power addition (11 GW). Renewable power cost is now less than Rs 3 per unit, almost on a par with the cost of power from conventional sources.
While companies are abandoning greenfield expansion plans, the sector is facing a host of other issues as well. "Large underutilised capacities, muted demand, bunched capacity addition, soft merchant power prices, investments in renewable capacities, lack of enough PPAs (power purchase agreements) and weak discoms add up to a negative outlook for the sector," say India Ratings and Research (Ind-Ra) analysts.
There are several reasons why the future may be worse than the present. The government plans to generate 40 per cent electricity from non-fossil sources by 2030 and so wants to discourage new coal-fired projects. An estimated 50 GW thermal capacity is under construction, but several states are dropping plans for fresh capacities."In the current scenario, I don't think anyone will go for greenfield capacities as many unviable or stuck brownfield coal power plants are available for sale," says Anil Sardana, Managing Director and CEO of Tata Power, which has offered to give half its equity in the 4,150-MW ultra mega power project (UMPP) at Mundra in Gujarat to the state utility. The plant went into trouble after Indonesia changed its coal policy in 2012 that made coal imports from there unviable for independent power producers. The government has almost put plans to set up another five-six coal-based UMPPs in cold storage.
While conventional projects are burdened with debt and facing shortage of funds, renewable power developers are at an advantage due to falling cost of inputs such as solar panels and the cost of financing as both private equity players and banks are happy to fund their projects.
"While generation and transmission growth plans are on track, the real issue for the sector is distribution. Though the financial health of many discoms has improved, many are still struggling, and in the long run, many PPAs may have to be re-negotiated," says Sunil Mathur, Managing Director and CEO of Siemens.
"Private thermal projects are staring at muted demand, partly due to non-remunerative tariffs, partly due to aggressive bids and partly due to adverse perception due to falling renewable tariffs," Ind-Ra analysts Divya Charen and Siva Subramanian say in another report.
These are valid concerns. India is moving towards surplus power even during peak hours. The total installed capacity as on May 31 was 3,30,261 MW, of which the private sector accounted for 43.84 per cent, according to the Central Electricity Authority. The thermal plants accounted for 2,21,626 MW, or 67 per cent, capacity. But the Plant Load Factor of conventional plants, which determines their health, has been coming down over the last eight years - from 77.5 per cent in 2009/10 to 59.88 per cent in 2016/17. "The life of numerous old plants is nearing an end. It is necessary to undertake modernisation to extend their life and efficiency," says Mathur of Siemens.
India had a 10.1 per cent power deficit in 2009/10. This is down to 0.6 per cent. Power generation has been growing at an average of 6 per cent for the past eight years. Experts say coal-based companies will continue to operate. They may even gain when growth picks up. But those that depend on coal should add renewables to balance their portfolio and reduce risk, they say. ~