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Mr. Sunil Wadhwa, Managing Director, IL&FS Energy Development Company Limited’s (IEDCL)

05 Nov 2015

Thermal to remain dominant source of power generation in India.

IL&FS Energy Development Company Limited’s (IEDCL) generation portfolio includes projects both in conventional and renewable energy space with an operational capacity of 2,200 MW, 900 MW of near operational projects and 13,600 MW projects under development. The company’s Managing Director, Mr. Sunil Wadhwa, Managing Director, talks to InfralinePlus about the issues facing the power sector, his outlook on the coal sector and the expansion avenues being considered by the company in future. Excerpts.

What is your outlook on the power sector in India today? Please specify your present area of operation and future targets in power generation and transmission segments.

India has made significant efforts to address its electricity deficit. The installed capacity has increased more than 4 times from 64 GW in 1990s to 280 GW in October 2015. The power supply deficit improved from 11% in FY 2009 to 8.5% in FY 2012 and to 3.6% in FY 2015. However the per capita power consumption of about 1,000 kWh is still amongst the lowest in the world. In comparison, China has a per capita consumption of 4,000 kWh and other developed nations consume on an average 15,000 kWh per capita. In India around 300 million people (22%) still do not have access to electricity, suggesting a large unmet/latent demand in the country. The new Government has undertaken a slew of steps to provide the necessary impetus to the power sector to be able to support the targeted growth trajectory of 7% - 8% of the Indian economy over the next few years and to provide power to all.

IL&FS Energy Development Company Ltd (IEDCL) is the energy vertical of IL&FS. The Company has established capabilities in conceptualisation, implementation, commissioning and operations across a diversified energy portfolio including thermal power plants (coal-fired as well as natural gas-fired), renewable energy power plants (wind, solar, waste-to-energy, biomass and bagasse) and transmission lines. The Company’s operational power generation capacity is around 2,200 MW (out of which around 40% is renewable capacity) and around 900 MW capacities are targeted for commissioning during FY 2016. Another 13,600 MW of generation capacities are under various stages of development. In the area of power transmission, the assets include a fully operational 400 kV D/C transmission line of 663 km in the North East Region of India (in Joint Venture with ONGC, PowerGrid and NER States) and a 47 km transmission line in Southern India. IEDCL is also constructing a 130 km 400 kV D/C Indo – Nepal Transmission line along with Indian & Nepalese Public Sector Undertakings.

What are the chief issues facing power sector in India, especially relating to fuel supply and financing? What is the way out?

The major issue facing the power sector is the poor financial health of the distribution companies. There is an urgent need to fast forward the much needed Distribution Sector reforms through private sector participation for (a) AT&C loss reduction from current ~ 30% to ~ 10%, (b) improved network condition and power supply situation and (c) improved customer service. In order that the financial restructuring scheme such as UDAY is effective, it is important that Discom operations are made self sustaining so that revenue deficits don’t again balloon up over time. Pro-active transmission planning to remove mismatches in timelines for capacity addition and development of evacuation infrastructure is also becoming critical.

On the financing front there has always been a challenge for banks to fund long-gestation projects due to the asset-liability mismatches and have therefore restricted their finances to a maximum of 12-15 years. While the PPAs are long term (upto 25 years) the bank financing is available only for half the duration. There is a need to have bank financing available on a format that the lenders can extend longer amortization period to projects in the infrastructure and core industries sector, based on the economic life or concession period of the project.

The thermal power generation sources (coal, gas, oil) accounted for around 70% of total electricity generation capacity in October 2015, with coal contributing the bulk. Thermal power is expected to remain the dominant source of power generation in the country. Coal has in the recent past, witnessed significant regulatory reforms, Government has passed coal and mining legislations in the Parliament, allowing private and foreign companies to mine and sell coal. The process of allocation of coal blocks for captive use by power plants and other users has been streamlined. The current Government is targeting to increase the domestic coal production to 900 MT by 2020 from the current 550 MT. This would require a concerted action to translate policy intent into action.

The dwindling domestic gas supply had starved the gas based power plants (~ capacity of 24 GW as on October 2015). Some of the stranded plants have been revived using Re-gasified Liquefied Natural Gas (RLNG) through various incentive structures. These plants are however still working on low PLFs. Internationally, with falling crude prices there is availability of cheaper LNG in the market and this is an opportune time to scout for long term gas supply contracts to further improve the PLFs.

The government has planned an investment of Rs one lakh crore in the transmission sector. What are your plans in this segment? Are you planning to bid for any upcoming projects?

As mentioned above, in the area of power transmission, the 400 kV D/C transmission line of 663 km in the North East Region of India and the 47 km transmission line in Southern India are associated transmission lines that connect the Company’s power plants to the national grid. Presently, in the transmission space the Company is focussed on providing last mile connectivity to its own power plants. IEDCL’s investment in 130 km 400 kV D/C Indo – Nepal Transmission line along with Indian & Nepalese Public Sector Undertakings is a strategic one.

The government recently announced the phasing out tax exemptions and deductions extended to companies ahead of its plan to cut the headline corporate tax from 30 per cent to 25 per cent. How do you see the move impacting the power sector?

Reduction in headline corporate tax from 30% to 25% should lead to reduction in electricity tariff and improve profitability of the projects; however as the exemptions are also proposed to be phased out the final outcome may be neutral at best. The two most common exemptions availed by the Power Sector Companies include accelerated depreciation and the 10 year tax holiday. The withdrawal of these exemptions is likely to more than offset the reduction in the headline corporate tax rate.

There has been a lot of emphasis on Renewable Energy (RE) in India and the government is betting big on adding 175 GW of capacity by 2022. Infact, India has also pledged to increase share of non-fossil fuels in electricity generation to 40% by 2030. The country has also committed to reduce its emissions intensity per unit GDP by 33 to 35 percent below 2005 by 2030. Being a power sector player, how do you view this policy shift? What are the key issues in achieving the same?

The Central Government is taking several steps to accelerate deployment of renewables, particularly solar, in the country. Given the current installed RE capacity of ~ 39 GW, target of reaching 175 GW implies an annual run-rate of ~ 20 GW for the next 7 years. For solar, given the current installed capacity of ~ 4GW, the target of 100 GW implies an annual run rate of ~14GW. The target looks very stiff. However, even if we fall short of the targets, the renewable sector is expected to see a lot of action over the next few years. Some of the key issues related to the RE sector going forward are as follows:

  • a.Given the current financial health of the distribution companies, the purchasing power of the discoms is limited. Success of the distribution reforms is critical for achieving the ramp-up targeted in the RE capacities.
  • b.There is also a need to develop an alternate market for RE. With solar and wind power reaching socket parity (i.e. solar and wind power price on a kWh basis is at par with the retail price of electricity paid by the industrial and commercial customers in many states) and many large corporates aspiring to switch to direct purchase of green power for their energy needs, tremendous potential exists in the socket parity based market for quick capacity additions
  • c.Most of the resource rich states like Rajasthan, Madhya Pradesh and Gujarat have already fulfilled their RPO targets and any further development of RE projects in these states will necessarily have to be designed for inter-state sale of power. CERC has already exempt solar power from inter-state transmission charges and losses for projects commissioned before June 30, 2017 for the useful life of these projects. However, the end consumers who wish to buy green power are not connected to the CTU and hence have to use the STU and Discom’s network and pay the associated charges.
  • Certain policy enablements have been made by SERCs for bilateral sale/ captive consumption of solar power in many states like Karnataka, Andhra Pradesh, Maharashtra, Madhya Pradesh, Tamil Nadu, etc. However, these enablers are currently limited to solar projects installed within the respective states. If socket parity based market has to grow, these enablements and concessions need to be extended for solar power imported from other states as well. These policy enablements & concessions are in the form of wheeling & banking and non-applicability of cross subsidy surcharge.

  • d.Integration of the targeted 160 GW of variable RE capacity (wind and solar) into the grid would increase the share of variable RE to over 35% in capacity terms by 2022. Such RE penetration would be abnormally high and unsustainable from the perspective of grid stability unless energy storage solutions are integrated with the induction of such volumes of variable power.

Regulators/Grid Operators could potentially decide to mandate storage solutions, which would trigger large scale deployment of storage solutions driving down its cost (just as it happened in Solar PV modules).

The government recently announced the UDAY scheme for revival of Discoms. According to you, how is the scheme different from other financial restructuring packages announced in the past? Do you think it will work? What are the issues that need to be resolved to make the scheme a success?

The UDAY scheme is an inclusive scheme for distribution reforms and not just a financial restructuring package. Hence we cannot compare it with the earlier FRP schemes. To begin with, the financial restructuring process under the UDAY scheme is very different from the earlier FRP schemes wherein this time the states shall take over 75% of the Discom debt and issue SDL (State Development Loan) bonds with maturity period of 10-15 years and a moratorium on principal up to 5 years. The remaining 25% debt will be serviced through efficiency improvement and tariff increase. In the last FRP, state governments were to take over half the outstanding loans of State Discoms and the remaining debt was to be restructured by banks.

Under the UDAY scheme, to enable states to take over the debt, the states have given necessary relaxation in their Fiscal Responsibility and Budget Management (FRBM) limit i.e. the Centre will disregard the principal debt taken on by the states when calculating their fiscal deficit for allocation of funds from the central exchequer.

On one hand the scheme provides for a quarterly tariff adjustment and allocation of cheap power from Central sector generating stations to reduce debt burden and interest costs for the Discoms and on the other hand mandates achievement of milestones for operational efficiencies by Discoms. States accepting the scheme and performing as per operational milestones will be given additional / priority funding through DDUGJY, IPDS, PSDF or other such schemes of MoP and MNRE and will also be supported with additional coal at notified prices.

Do you feel that timely tariff hike is a must for discom health?

We feel that tariffs should be cost-reflective and should be reviewed and (if required) revised timely. The tariff-setting process should be free from government control by giving the regulators autonomy in deciding tariffs and undertaking activities to reduce AT&C losses.

Post APTEL’s judgment in 2011 (directing that the tariff petition to be filed in time by Discoms and upon failure by the Discom to file in time, the State Commission to suo-motu initiate proceedings for determination/revision of tariff), yearly tariff revisions have been happening in most states. Most states have been maintaining tariff increase trajectory with average annual increase in last five years at 8%.

However, while regular tariff revisions are a positive development for the sector, Regulators must ensure that the Discoms do not pass on their inefficiencies to consumers.

Please highlight your future expansion plans>

IEDCL’s strategic approach has been to develop projects with diversified fuel sources and geographical footprint. Our generation portfolio includes projects both in conventional and renewable energy space with an operational capacity of 2,200 MW, 900 MW of near operational projects and 13,600 MW projects under development.

We recently commissioned the first unit (600 MW) of our 3,840 MW imported coal based Cuddalore Power Project in September 2015 and started supply of power to TANGEDCO under the long term PPA. The second unit is also expected to be commissioned in next few months which will complete the first phase of 1,200 MW. The remaining capacity shall be implemented in subsequent phases based on the demand in the Region.

We are also developing a 3,960 MW coal based project in Kutch district of Gujarat. The Project is being developed as part of a multi-product SEZ / Free Trade and Warehousing Zone being developed by IL&FS Group and most of the clearances are in place.

In the renewable space, we have an operational portfolio of 735 MW wind projects spread across 7 states with diversified PPA arrangements (FIT/APPC+REC/third party) which will increase to 775 MW in the next few months. We are evaluating new sites located in states with financially stable Discoms and reasonable offtake prices for further expansion of the wind portfolio.

In the solar space, our strategy is twofold – first to utilise our project infrastructure development experience in solar park development, and second as a project developer create a well diversified portfolio of solar projects similar to our wind portfolio. We commissioned our first solar project of 40 MW capacity in Madhya Pradesh implemented under the JNNSM VGF Scheme in May 2015. We are actively pursuing solar projects for direct sale of power to large credit worthy industrial and commercial customers in states with conducive regulatory framework for the socket-parity based market.

IEDCL has entered into a joint venture with Govt. of Rajasthan for development of 5,000 MW multi-location solar parks in the state. The JVC Saurya Urja Company of Rajasthan is implementing the first solar park in Bhadla, Jodhpur for 1,000 MW solar projects. The land has been allotted to the JVC for this Solar Park.