Power Sector - Issues involved

What is the issue?

The growing risk profile for thermal power plants is likely to result in increasing cost of capital for them.

What are the recent events affecting the thermal industry?

• First is the Supreme Court order disallowing Tata Power and Adani Power from charging compensatory tariff to neutralize the price hike of imported coal due to a change in Indonesian regulations.
• Volatility in imported coal prices and the uncertainty around cost-efficiency of domestic coal production add more concern.
• Non-availability of coal could swiftly turn the once lucrative and viable coal power plants into stranded assets.
• Second is Indian solar tariffs fell to yet another record low of Rs2.44 for Solar Energy Corporation of India’s 500MW project at Bhadla in Rajasthan.
• Thus with the tariffs for both wind and solar power dropping to unprecedented levels, power sector investors may shift focus to renewables.

What are the issues in thermal power sector?

• Thermal power plants are increasingly facing lower capacity utilization.
• More than one-third of India’s total thermal power capacity is currently stranded and the rest is running at 55% utilization.
• This creates problems to lenders of these thermal projects, mainly state-owned banks, since lower capacity utilization translates to falling recoveries.
• Longer construction periods for thermal plants (three-four years), compared to renewable sources of power (12-14 months), is another important aspect for risk evaluation.
• Delays in obtaining environmental clearances, affecting 89% of the projects, according to a recent CAG report.
• The MoEF’s 2015 notification mandating stricter emission and water usage standards to minimize environmental impacts of running coal-based plants has also been troubling the sector.
• Thermal power producers have been persistent about not upgrading technology to meet the standards due to high costs and complicated procedures.
• Stricter standards are also likely to increase the cost of power for ordinary consumers.
• Thermal power producers should, however, is prepared for stricter enforcement of emission standards in the near future.

What are the issue in Renewable energy sector?

• While India’s renewables sector does not have to battle risks associated with fuel sourcing, the current reliance on imported solar panels and balance of system products exposes the renewable energy sector to balance of payment implications, as in the case of coal imports.
• This makes it imperative for India to rapidly ramp up domestic renewables manufacturing capacity.
• Renewable energy capacity is also increasingly seeing curtailment despite being granted a must-run status.
• In renewables, curtailment risk arises due to unavailability of transmission infrastructure, grid congestion, and grid instability.
• Renewable energy sector is also plagued by several risks, such as delays in executing off take agreements, delays in payments from the utilities, curtailment, etc.
• The biggest advantage in renewable energy projects, in most cases is exempt from environmental clearances.
• And also significant advances have been made in recent years in streamlining the procurement of other clearances for renewable energy projects.
• However, as the cost of renewable electricity declines, the financial burden posed by it on the utilities also declines, causing the most dominant risks in the sector to shrink.
• The redirection of investments to renewables and allied sectors such as energy storage, energy analytics services, etc., could decrease the price of electricity from renewable energy sources.
• This also improves their technical grid integration feasibility and shrinking associated risks for investors.

Source: Live Mint