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Mr. Salil Garg, Director-Corporate Ratings, India Ratings

01 Aug 2016

‘Discoms unable to cater to latent demand’ After the Modi government came into power in May 2014, India has seen dramatic improvement in generation, pushing electricity shortfall to all-time lows. This turnaround was made possible by increased production of coal. Coal availability has improved to the extent that now the government is looking at exporting coal to deal with rising stocks at mines. However, the moot question is, how sustainable is this situation? As economic growth picks up momentum and flows of investment into government’s flagship programmes like Make in India become stronger, electricity demand too would go up. In such a scenario, will electricity supply be able to keep pace with demand? In an interview to Infraline Plus, Salil Garg, Director-Corporate Ratings, India Ratings, fields questions about the medium-term electricity supply challenges.

The central electricity authority (CEA) says India will become power surplus by end of this fiscal. How sustainable will be this projected situation of excess power given the government’s strong focus on manufacturing sector?

India has seen rapid growth in power generation capacity in the past 5 years because of investments in the sector from 2006-2007 onwards. As a result, almost 100,000 GW of new capacity has been added in the past five years. This capacity has helped reduce the power deficits which is visible in CEA data. Many states are reporting very low or nil deficits. Therefore, CEA could be technically right in saying that India will become power surplus by the end of this fiscal. However, this will not capture the latent demand in the system and scheduled load shedding by the discoms. The surplus power situation will continue as long as the coal supplies remain robust and as long as the discoms are unable to cater to the latent demand. Over the medium term, the demand is expected to catch up with supplies.

The government says it could export surplus coal. Do you think India will find buyers for its high ash content coal? Anyway, will this strategy make sense for India which has been undertaking huge imports to meet domestic coal deficit? Would India not benefit more if it exports electricity instead of coal?

The government is hopeful of finding buyers for Indian coal. It may sound far-fetched but small quantities of Indian coal could get exported in the near term while India would still be importing coal at some other locations as boiler designs and other economic considerations will prevent complete import substitution. Export of electricity is an option but such exports are possible to limited geographies. India is already exporting electricity to Bangladesh where potential exists for further increase in volumes. There was a talk of electricity export to Pakistan as well but that has other geopolitical implications.

Do you think electricity demand is growing at a healthy pace? How is your medium-term outlook on power demand growth?

Electricity demand is indeed growing at a healthy pace though the bulk of the increased demand is coming from the domestic segment. The slowdown in industrial growth has, however, subdued demand growth from the industry. As we know, electricity demand in this country is also a function of effective intermediation by the discoms. The discoms have not been able to service demand fully due to their poor financial status, thus there is a huge latent demand in the sector. In the medium term, electricity demand will still remain robust and could outstrip the GDP growth. In case the discoms are able to improve their financial capabilities under Mission UDAY, there is a possibility of consistent double-digit demand growth over the next 3 years.

Do you think time has come for the government to open up commercial coal mining for private sector? Is the goal of producing 1.5 billion tonne of coal by 2019-20 achievable?

Globally coal mining is largely in the domain of coal mining companies instead of the captive users. Commercial mining companies are expected to have the technical capabilities to mine coal economically and also manage the market risks. India has not seen very effective results from allocating mines to the end users. Opening of the coal to commercial mining involves a deeper dialogue with the stakeholders especially from the regulatory and environmental perspective. Given the present state of affairs, a rapid action is not expected on this front. As far as growth in coal output is concerned, the last two years have been very successful but it is difficult to maintain high rates of output growth over a long term. The target of 1.5 billion tonne by 2019-20 appears to be very difficult, even achieving 1 billion tonne will have serious challenges. One also has to look at the demand.

Do you think India should use nuclear power instead of coal-fired generation given the growing global concern over emissions? Or do you think clean coal technologies will show the way in coming days?

Theoretically, nuclear fuel has an edge over coal from emissions perspective but nuclear power will face difficulties in gaining critical mass India, mainly due to long gestation period, high cost and concerns over fuel availability. Thus, coal will remain the dominant fuel in India for power generation even if further investments in coal remain muted.

Should India provide additional incentives to promote usage of LNG in electricity generation?

Use of LNG for electricity generation is not economical and is possible only with the help of subsidies. It is not possible to have a large capacity based on an imported fuel which is highly price sensitive and needs constant government support. This is not a viable business model from the point of view of investors and users. At a time when LNG prices are benign, there is no interest to invest in gas-based power generation. Making the existing gas-based investments viable is a challenge at the moment.

How far solar and wind electricity can help India in meeting its energy demand given the intermittent nature of renewable?

India has declared very ambitious targets for solar, wind power generation but even after achieving these targets, renewable will remain less than 10% of the total electricity produced in the country. Yes, solar and wind pose grid stability issues which will hopefully get resolved with the help of advancements in technology. Also, the renewables will meet part of the incremental electricity demand and garner a large chunk of investments in the sector. However, we have seen that there are other challenges in the renewable electricity space including availability of capital and poor financial health of counterparties. As a result, investors are cautious at this moment.