Stressed Assets in Power Sector-Clear and Present Danger: 25 July 2019

Stressed assets in Power
Sector- Clear and Present

Danger
25 July 2019
Presented by:
Navneeraj Sharma
Senior Manager
Tax and Economic Policy
Contents
1 What is Stress
2 Stress in Power Sector
3 Stress in Distribution & Generation Sector
4 Future of Renewable Energy
5 Philosophy and Reality of Energy Transitions
6 Solutions and Strategies
Key Messages
➢ Stress in power sector is going to remain an ongoing problem for the next decade
➢ Currently, the stress is concentrated in private thermal generation and distribution sector
➢ It has led to spill over and distress in Public Sector Banks and NBFCs
➢ Going forward, onset of renewables is going to exacerbate this problem for thermal generation sector
➢ Distribution Sector stress, if it continues, can slowdown the renewable energy growth and have severe impact on
Indian economy
➢ Three things need to happen
➢ Realize the scale and enormity of the problem
➢ Realize there are no magic bullets and solving it will be a long drawn process
➢ Get serious about solving it
➢ Co-operative Federalism is the go to strategy
Page 3 26 July 2019 Stress in Power Sector

01
What is Stress
Stress- The Slow and Silent Killer
► Frequent onset of the stress response, can have devastating

consequences. It can lead to an increasing risk of adult diabetes,
high blood pressure and several gastrointestinal disorders.
► There are two kinds of stress;

► Acute stress- results from situations that are new and have never
been faced before
► Chronic stress- results from the repeated exposure to a
particular situation. This kind if stress is the most detrimental
► Chronic stress causes our body to be out of sync and can lead to a
domino/ cascading effect of several health problems such as
cardiovascular disease, truncal obesity, insulin resistance and type
2 diabetes, high cholesterol and the impairment of the human
reproductive system.
Robert Sapolsky has written several books including Why

Zebras Don’t Get Ulcers, his insights are based on several
years of field experience with wild African baboons.
According to him, Baboons are the most similar to
human beings, having no real stressors in their lives

How to Identify Stress?
A condition in which a firm or an individual cannot generate revenue or income because it is unable to meet or cannot pay its financial
obligations due to:
High fixed costs Illiquid assets Revenues sensitivity to economic downturns
Chronic Stress Acute Stress

Balance sheet Liquidity
1. Decline in working capital as the payables in the account grow at a faster 1. Lack of marketability of an investment that can’t be bought or sold quickly
rate than inventory and the receivables (CL>CA) 2. Cannot meet short term debt obligations
2. Higher interest repayments as there exists higher risk of defaulting 3. Lack of convertibility of assets into cash
3. Higher debt to equity ratio (D/E>1)
4. If ICR <1 then companies’ payment credibility is questionable and implies Cash Flows
that company cannot cover its interest with the earnings in the current 1. Negative cash flows over a sustained period of time
period
Stressed Assets
Stressed Assets = NPA + Restructured loans + Written off assets
A loan whose interest Restructured asset or loan are that assets Written off assets are those the bank or
and/or instalment of which got an extended repayment period, lender doesn’t count the money borrower
principal have remained reduced interest rate, converting a part of the owes to it. The financial statement of the
‘overdue ‘ for a period of loan into equity, providing additional financing, bank will indicate that the written off loans are
90 days is considered or some combination of these measures. compensated through some other way.
as NPA.

What are different definitions of Stressed Assets?
1 RBI definition
Stressed assets result from principal or interest payment or any other amount wholly or partly overdue
between 1 and 90 days
Interest Coverage ratio (ICR)
2 ICR = EBIT/ Interest expense.

It is used to measure the company’s ability to meet its debt obligations and interest payments.
If ICR <1.5 then companies’ payment credibility is questionable and implies that company cannot cover its interest with the
earnings in the current period
3
Page 7
IEA definition
Investment in fossil fuel-based assets, as a result of changes brought about by climate policy that do not
recover all or part of their investment during the time that they are operational.
26 July 2019 Stress in Power Sector

Consequences of stress at individual and macro level- How the Twin Balance
Sheet Crisis can spawn into a full blown depression
Final Round
Third Round ► Deflation expectation further
Second round curb demand, Crisis of
First round If this contagion spreads then
confidence freezes the
If stress continues then it GDP growth slows down or
Business doesn’t remain financial system and
spreads to the business turns negative, due to excess
viable, profits and Depression level situation
partners involved- supply and reduced demand
investments drop- Hope arises. Think of 1929 and more
vendors and suppliers, – prices start falling, capital
for economic recovery or recent 2008 crisis here
employees and creditors. outflows start. If this
tighten expenditures is ► Inherent counteracting forces
Now they have to tighten continues then deflation sets
the only way exist and the economy can
their belts to survive in. Even worse deflation
have multiple equilibriums
expectations get anchored
► Monetary policy has to
respond

02
Stress in Power Sector
Both Upstream and Downstream sectors are under severe chronic distress
Debt in DISCOM: INR 260,000 crores* with

accumulated losses still more than 3 lakh crores
Stressed sectors in Distribution lines

Power
Distributio
on subs
66-115 kV lines
r Transmission subs
Transmission lines 230-

500 kV
65% of debt to generation sector has IC<1

Generator
*HELC Reports
Variation on IITD MOOC by Dr. Arvind Subramanian
Steady Decline in the capacity utilization with Private sector faring worse
95
90 88.4
85.5 85.1
84.3
85
80.7 81.2
79.2
80
79.5 75.8
74.2 74.0
75 72.4
71.2 71.8 71.6 71.6 71.4
70.9
70 68.6
67.6
66.7
65.5 65.2
64.2
65 62.8
59.6 59.8
60 57.3 56.9
54.8
55
50
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Central State Private
Source – CEA

Marginal prices discovered through Day Ahead Market have also seen a steady
decline
8
0
2008 2009 2010 2011 2012 2013 2014 2015 2017 2018 2019
Rs./KWh Linear (Rs./KWh)

Source: Indian Energy Exchange Website
26 July
India
Page 13
and
2019
the World
Banking Sector under a slow bleed for last 7 years
Gross NPA ratio

18
15.6
16
12.6
12.5
14
11.6
12
9.6
9.3
9.3
10
7.5
6
4.4
4.3
5
4.2
4.1
3.9
3.8
3.8
3.7
4
4
3.2
2.8
3
2.1
1.8
0
2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
All banks Public sector banks Private sector banks Foreign banks
Source: RBI Financial Stability Report, June 2019

26 July
India
Page 14
and
2019
the World
Economy wide slowdown in Investments and Capacity Utilization
Capital expenditure funded through formal financial sector
Gross capital formation (% of GDP)

42%
40%
38%
36%
Capacity Utilization
34% 78
76
74
32% 72
70
68
30% 2QFY15 4QFY15 2QFY16 4QFY16 2QFY17 4QFY17 2QFY18 4QFY18 2QFY19
2004-05 2006-07 2008-09 2010-11 2012-13 2014-15 2016-17 2018-19 CU 4 per. Mov. Avg. (CU)
Source: CSO, RBI and IMF

Reasons for Power Sector Stress : The elephant in the room
“Happy families (unstressed assets) are all alike; every unhappy family (stressed asset) is unhappy in
its own way.”
Supply of fuel Judicial delays Low capacity utilization Health of discoms
Operational
High Real Interest inflexibility of the
Fixed Cost Debt Irrational exuberance rates plants
Technological Risks Railways Regulatory roadblocks Frauds
Economic downturn Market Factors ? Unknown Unknowns

Minsky Moment + Creative Destruction
Generation of a credit cycle or business cycle Thermal energy sector falls in with Schumpeterian
due to a collapse in the values of different vision of ‘gale of creative destruction’.
assets
Favourable investment
environment Financial liberalisation involves incentives
Increased risk taking and

speculation by investors Less bailouts and investments in stressed
thermal sector
Long-term favourability leads to more

investment and higher risk
Movement towards the creative, better and sustainable
renewable energy
Builds up till cash generated by assets is

not sufficient to cover the debts taken to
acquire them
Transition from thermal to renewable energy – old
process and commodity to new process
The market collapses and the
economy is disrupted
Destruction of the thermal sector and bad debts to
Higher investments and larger bailouts in the healthier sector
Losses are high, lenders call in their
power sector could lead to India’s Minsky moment
loans

03
Stress in Distribution and Generation Sector
0
20
30
50
60
70
80
10
40
Page 18
Himachal Pradesh
Kerala
26 July 2019
Telangana
Punjab
Gujarat
Uttarakhand
Andhra Pradesh
Tamil Nadu
Karnataka
Tripura
Maharashtra

Haryana
Assam
Rajasthan
Manipur
Chhattisgarh
Uttar Pradesh
Goa
Bihar
West Bengal
Madhya Pradesh
Jharkhand
Sikkim
Meghalaya
Odisha
Jammu and Kashmir

Discoms stuck with high Aggregate Technical & Commercial Losses
Arunachal Pradesh
Nagaland
Mizoram
Achilles heel of the whole value chain – Distribution Sector
Distribution is the power sector’s direct interface with the public. It is the Achilles’ heel of India’s power sector.
All the costs incurred in supplying power, including generation, transmission, and distribution, are recovered from the retail tariffs
charged by the distribution company (DISCOM) to its customers
► Distribution companies have mainly two functions:

1. Maintaining the network (the wire business)
2. Procuring power to ensure supply (the supply business)
► Distribution companies follow a supply oriented approach to planning; planning for purchase was thus adding to base load capacity
through long term power purchase agreements
► Chronic problems faced by DISCOMs:
01 02 03
Lack of financial viability of Poor planning and Non-competitive tariff

Distribution sector supply quality with high for large consumers
cost
Source - Prayas (Energy Group) Electricity Distribution Companies in India: Preparing for an uncertain future, May 2018

Problems in Distribution Sector… Portfolio Optimization gone wrong
Major causes of distress:

Issue with power procurement Operational efficiency Skewed tariffs
► 80% costs due to power purchase ► Persistent AT&C losses ► Subsidy to agriculture and other
► High cost of generation ► High operations and maintenance consumers

► Flawed planning expenses ► Excessive cross subsidy
► Inefficiencies in capital expenditure
Possible impact of renewable energy on DISCOMs; Fixed-cost

Fixed-cost for payments for
► For many DISCOMs, the average cost of power Backing down Fixed-cost
backing down backing down
purchase is above Rs. 3/kWh and it is increasing Backing down as % of payments due
State DISCOM as a % of fixed as a
reported (MW) contracted to backing
every year capacity down
cost payments percentage of
to generators agricultural
► However, new solar and wind capacity is available
subsidies
at less than Rs. 3/kWh, with tariff remaining fixed Rajastan 1798 14% 1051 16% 59%
for the next 25 years Punjab 3457 27% 3006 33% 51%
► Therefore, capacity addition in the future is likely to
Maharashtra 4231 19% 2828 21% 59%
be less expensive than the long term capacity
Madhya
currently contracted, if DISCOMs transition to Pradesh 2444 17% 2177 28% 40%
renewable energy Gujarat 5525 30% 3823 36% 104%

Distribution Sector – Strained Cross-subsidy model
► The distribution business is based on a ‘cross-subsidy’ model wherein some consumers are charged tariffs higher than the average cost
of supply (ACOS) whereas agricultural and small consumers pay a tariff that is much lower than the ACOS.
The ‘subsidy’ thus received from the higher tariffs charged to large consumers is referred to as cross-subsidy.
► In addition to such cross-subsidy, the state government may allocate explicit revenue subsidy for agricultural pump sets, below poverty
line (BPL) households, and a few other consumer categories.
Issues:
► The increasing ACOS and falling prices of renewable energy are
making the ‘non-DISCOM’ supply options such as renewable-energy
based open access and captive consumption more economical and
technically feasible
► Given the economic incentives, the high-paying consumers are likely
to opt for such non-DISCOM options leading to loss of sales and
hence of the cross-subsidy revenue for the DISCOMs

Unaudited UDAY numbers show an improvement
AT&C Losses (%) ACS-ARR gap (Rs./unit)

21 20.74 0.7
0.59
20.5 20.23 0.6
20 0.5
0.41
19.5 0.4
19 18.72
0.3
18.5 0.17
0.2
18
0.1
17.5
FY16 FY17 FY18 0
FY16 FY17 FY18
Power Purchase cost (Rs/unit)

4.24 ► Post launch of UDAY programme, AT&C losses have been
4.23 consistently declining and were brought down by 2% from
4.23
20.74% in FY16 to 18.72% in FY18.
4.22
4.21 ► Power purchase cost has almost remained same since

4.2
4.2 FY16, due to cost reduction measures taken by DISCOMs
4.19
4.19
► ACS-ARR Gap reduced by Rs. 0.42/unit
4.18
4.17
FY16 FY17 FY18
Source – UDAY Dashboard

However, debt overhang still stays?
DISCOM Debt (in INR ‘000 crores)

300 ► Aggregate debt of state-owned
275
264 distribution companies is set to
250 increase to Rs.2.6 lakh crore
228
by the end of this fiscal year
200 194
185
► Supposed to initiate structural
156
150 reforms by the reducing AT&C
losses by 900 bps but reduced
only by 400 bps
100
50
► Average tariff increase was
supposed to be 5-6% but
increased only by 3%
0
Sept '15 FY16 FY17 FY18 FY19E FY20F
Source: CRISIL ratings

Page 25
100
150
200
250
300
350
400
0
50
1950-51
1960-61
1970-71
26 July 2019
1980-81
1981-82
1982-83
Source – Economic survey,2019-20

1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
Electricity capacity addition
1990-91
1991-92
1992-93

1993-94
1994-95
1995-96
Installed Capacity ('000 MW) 1996-97

1997-98
1998-99
1999-00
2000-01
Vertical line
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Growth rates
2007-08
2008-09
2009-10
Electricity Generation Capacity Addition with CAGR of approx 8% since 1950
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
0
2
4
6
8
10
12
14
16
Power Sector deployment of Gross Bank credit
Power Sector deployment of Gross Bank credit

25% 15
20% 10
15% 5
10% 0
5% -5
0% -10
Nov.21, Mar.27, Nov.20, Mar.26, Nov.19, Mar.25, Nov 18, Mar.23, Nov.30, Mar. 22, Nov.29, Mar.21, Nov.28, Mar.20, Nov.27, Mar.18, Nov.25, Mar.31, Nov.24, Mar. 30, Nov.23, Mar.29,
2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019
vertical line Gross Bank Credit/Total Credit Growth

Total Credit rates
Growth Rate
Source: RBI Database

04
Future Role of Renewable Energy and its
effects
Global Renewable Energy penetration – BP Energy Report 2019
Renewable energy transition speeds Findings

10 ► Renewable energy grew by 14.5%, slightly
Percentage share of Renewable energy (%)
9 below its historical average, although its

8 increase in energy terms was close to the
7 record breaking increase of 2017
USA
6 France
► Growth in global primary energy demand
5 Germany
was 2.9% from last year, the fastest since
South Korea
2010
4
China ► Weather has also affected the energy
3
Brazil consumption in 2018 with unusually large
2 India number of hot and cold days across world’s
1 major consumption centres
0 ► Growth in carbon emissions has been 2%,
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Years as a consequence of increased energy
demand
Percentage of RE
in primary energy 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
consumption (%)
USA 1.31 1.58 1.77 2.07 2.41 2.73 3.01 3.23 3.76 4.25 4.51 45% 76
France 0.88 1.17 1.37 1.78 2.22 2.36 2.75 3.27 3.52 3.96 4.37 China’s contribution to India’s rank on the energy
Germany 4.92 5.46 5.82 7.62 8.55 8.88 10.21 11.91 11.67 13.30 14.60 global renewables growth transition index 2019
South Korea 1.24 0.16 0.19 0.22 0.33 0.43 0.75 0.95 1.06 1.35 1.66
which Is more than the calculated by the World
China 0.29 0.47 0.64 0.85 1.05 1.45 1.72 2.13 2.68 3.55 4.38
Brazil 1.96 2.26 2.89 2.86 3.23 3.63 4.44 5.41 6.60 7.28 7.93 entire OECD combined. Economic Forum
India 1.13 1.22 1.43 1.66 1.86 2.03 2.14 2.13 2.52 2.89 3.40

The Effect of Renewable Energy on the Average Retail Price of Electricity
► Renewable Energy Mandates (REM) raise electricity prices by

11%
► when renewable energy accounts for 1.8% of the total energy
and by 17% when the share of renewables is 4.2%.
► Ample space is required to set up renewable energy generators
such as a wind mill farm.
► These spaces are usually highly dispersed which adds to the
cost of transmission of energy.
► The integration of renewable energy results in an excess of
installed capacity that renders existing baseload generation
unnecessary.
► The decommissioning of generators and the associated costs
of stranded assets have to be borne by distribution companies,
generators, and ratepayers.
► Even though negative prices of electricity may exist retail
electricity rates may rise to adjust these stranded asset costs.
► Solar and wind energy generators do not provide a constant
supply nor can they respond to variable electricity demands.
Some sort of back up has to exist until sizeable storage
methods can be developed
Source: https://bfi.uchicago.edu/wp-content/uploads/BFIEPIC_WP_201962_v4.pdf

What will be the impact in India? -NREL Greening the Grid Study-2017
50% to 62%
Percentage of total fleet capacity with Plant Load Increase in coal fleet’s average PLF after retirements of low-PLF
Factor(PLF) under/over plants by 2022.
80
74 Otherwise it will stay below the technical minimums for coal
70 generation
59
60
Policy directions and implications
% of coal plants
50 ► Improved RE integration will be costly because it requires expensive

transmission expansion so institutional support needs to be provided
40
► Renewable energy targets of 175 GW are achievable, and continued
investment in both interstate and intrastate transmission will help
30
24 facilitate these targets
20 ► Reduction in information asymmetry (e.g., costs, generator
12 availability) to enable more coordinated dispatch
9.4
10 ► Modifying the minimum generation levels of all coal plants will be
1 important for RE integration but it will come at a cost of greater and
0
wear on the plants
under 0.2 under 0.8 over 0.5
► Payment of fixed tariffs will exist even though plant load factors
Plant Load Factor decline reducing the incentive for plants to provide RE services and
100S-60W Coal Retirements transitions
► Economic optimization (cost minimization) is required in power system
operations and planning as in some case RE curtailment is cheaper
than avoided shutdowns. It also boosts the confidence of RE investors

Possible dynamics of the renewable integration: The Green Paradox &
Failure of Policy
As first proposed by Hans-Werner Sinn and later described in a research paper*;
► A weak green paradox exists when the rate of extraction of fossil fuels increases rapidly in anticipation of the tightening regulations and
stricter enforcement of new climate policies. This leads to global warming acceleration.
► A strong green paradox exists when the present value of the costs of global warming, in terms of reduced output, falls in anticipation of
tightening climate policy.
Government failure arises when carbon taxes are not imposed rather renewable energy and renewable plant components are subsidized
Effect of a carbon tax Effect of subsidies

A high rate of increase of carbon taxes not in sync with the rate If the costs of renewable energy are reduced due to a
of increase of interest can disrupt the equilibrium price path of technology breakthrough or subsidies being imposed on
fossil fuels. One of the consequences of this is the higher rate the technology during the gradual phase out of fossil fuels,
of extraction due to the steeper price path. Carbon emissions the equilibrium price path will become steep resulting in a
will rapidly increase until an equilibrium price path is reached. weak green paradox. This will increase emissions and the
The enforcement of this policy will not limit carbon emissions rate of extraction.
and is counterproductive. Alternately if carbon tax grows at a
smaller rate than the rate of interest then global warming and
oil extraction will occur less quickly.
Source: https://www.economics.ox.ac.uk/materials/working_papers/4844/oxcarrerp2013116.pdf
* “Global Warming and the Green Paradox: A Review of Adverse Effects of Climate Policies”, Department of Economics, University of Oxford

Counter narrative IISD-Report on India’s stranded assets: Government
interventions are propping up coal power
29% Report summary
India’s power sector burden till March
2018.
• The impact of governments interventions in
the non-economic coal assets are
India’s levelized renewable energy India's installed capacity mix (%) categorized into public finance, subsidies
costs are among the lowest in the and policy postponement.
world
• Identifying the major drivers behind asset
Key drivers of asset stranding stranding in India with emphasis on the
poor electricity planning, the de-regulation,
► Cost competitiveness of the excessive risk-taking by promoters and
renewables aggressive bank lending.
► DISCOM’s financial distress and
collective debt burden of billions of • The counteracting effect of the
dollars interventions and the drivers with
► Air pollution regulation inferences on the energy market in India as
government is masking the reality of the
► Water scarcity coal sector.
► Coal shortages Coal Gas Diesel
Government Interventions Nuclear Hydro RES
► Public finance
► Subsidies
► Policy postponement
Source:- India’s stranded assets: how government interventions are propping up coal power, IISD Working Paper, September 2018
Counter narrative…IISD Report – Analysis & Findings
Under the UDAY Scheme, central, state and public finance institutions have taken over up to 25% of DISCOM debt
Findings
► Increase in capital expenditures and operating
costs in the coal sector as a collective result of
the drivers of asset stranding
► Elimination of special fund for renewable
energy and reallocation of revenues for
compensating state-level losses associated
with GST
► Postponements in implementation of new
environmental standards are causing avoided
capital expenditure costs and additional
health costs
► India’s DISCOMs can look into lower cost
renewable solutions to remedy the financial
position.
► Government interventions are supporting the
coal power value chain, e.g. subsidies to coal
are higher than subsidies to renewables
► Coal power plants are not charged for the cost
of water despite the scarcity
Source:- India’s stranded assets: how government interventions are propping up coal power, IISD Working Paper, September 2018
Policy Dilemmas: Renewables may be the Future but are they the Present?
Background:
► India is committed of installing 175 GW of renewable energy by 2022.

► An emphasis on renewable energy has resulted in over-expansion, which has led to plummeting plant load factors and lower
profitability
► Stranded assets in the power sector can adversely affect the health of the economy already affected by the twin balance sheet
challenge.
► Coal mining provides employment to millions of communities and is an important source of fiscal revenue for many states
► Coal is also the cause of the “resource Curse” and the “Dutch Disease”. Renewable energy can avoid these outcomes.
Propositions:
1. Policies for coal and renewable energy should be decided jointly
2. The social costs of coal should include the domestic externalities not the international externalities
3. The cost of renewables should be scrutinized. True parity, in social terms, will be achieved only in the future.
4. Carbon imperialism of developed countries should not affect Indian policy makers’ judgement
5. Social costs of renewables should include the costs of the stranded assets due to an already stressed economy struggling with the twin
balance sheet challenge.
6. Current bids do not reflect the true costs of renewables due to extensive subsidies awarded by the center and the states and the
strategies adopted by renewables producers.
7. There exists a narrow opportunity for ramping up the extraction of fossil fuels and driving up utilization capacity sharply in thermal
power generation.
8. Subsidizing renewables despite its high social costs will add the burden of financing stressed assets on the government
9. Subsidies will raise challenges on the political/social side and on the economic/financial side
10. Technological progress in cleaning coal can help in easing the stress between coal and renewables.
Source: Darbari Seth Lecture, 2016 - Dr. Arvind Subramanian
05 Philosophy and Reality of Energy
Transitions- Future is here but it is not
evenly distributed
Dynamic Integrated model of climate and the economy simplified
► The dynamic integrated model of climate and the economy (DICE) is a

simplified analytical and empirical model that factors in the economics,
policy, and scientific aspects of climate change.
► In this model economies make investments in capital, education, and

technologies, to reduce present day consumption and increase future
consumption
► GHG emissions is negative capital while investments in reduction of

GHG emissions reduce this negative capital.
► Objective: DICE is designed to be a policy optimization model with the

objective function to maximize the economic well-being associated with
consumption.
Scenario 2015 2020 2025 2030 2050 ► Baseline: No climate-change policies are adopted
Baseline 30 35.7 42.3 49.5 98.3
Optimal ► Optimal: Climate-change policies maximize economic welfare,
controls 29.5 35.3 41.8 49.2 99.6
with full participation by all nations starting in 2020
2.5 degree maximum
Maximum 184.1 229 284 351 1008.4 ► Temperature-limited: The optimal policies are undertaken
Max for 50 subject to a further constraint that global temperature does not
years 147.2 183.2 227.2 280.4 615.6
exceed 2.5 °C above the 1900 average. (The international goal
Stern
review
of 2 °C is not feasible with current DICE estimates without
discounting 256.5 299.6 340.7 381.7 615.5 technologies that allow negative emissions by mid-21st
century.
Page 36 26 July 2019 Stress in Power Sector Source : Yale DICE model
Environmentalists (The Prophets) vs Economists (The Wizards)
“you could be 2% richer, but all you had “The danger with the very alarmist
to do was acidify the oceans and risk portraits—for which there is real basis—
killing off coral reefs and other marine is that it will make people apathetic and
ecosystems, risk melting the ice caps hopeless”
with rapid sea-level rise…and so on, –Paul Romer
would you take all of that environmental
risk, just to be 2% richer?” • Romer believes that innovative
-Ken Caldeira economies will increase efficiency leading
• Measures to rapidly decrease emissions to lesser carbon emissions.
should be adopted to avoid reaching the • Emissions should be taxed in a gradually
”tipping point” after which no amount of increasing manner to encourage progress
measures can stop accelerated global in a different vein. The development of
warming. energy efficient technology to avoid
• High ”unrealistic cost” measures are paying high taxes and continuing to earn
necessary to avoid climate change profits.
doomsday. • Limiting global warming to 1.5 degrees
• If drastic action is not taken now, global would cost the global economy more than
GDP losses will amount to 5% each $50 trillion, while yielding benefits of well
year and damage estimates could rise under $5 trillion.
to 20% of the GDP. • Damages will account for 2.1% of global
• Limit greenhouse gas emissions to 1% GDP at 3° and 8.5% of at 6°.
of global GDP each year. • According to Nordhaus’s model, a 6° C
• There should be absolute cuts in rise would take 130 years with no action
emissions, 60-80% by 2050. to mitigate climate change.
• A discount rate of 0% on carbon • A discount rate of 2-3% on carbon
pricing should be adopted pricing should be adopted.
Independent View on Energy transitions – Vaclav Smil- The Turkey Fallacy?
Findings
► Potential maximal usable renewable energy needs careful assessment of regional
and local limits which makes it substantially low
► The renewable energies available for commercial harnessing fall short of today’s
fossil fuel flux
► Solar energy is the one kind of renewable energy which is large enough to satisfy
global energy demand but the large scale commercial conversions of that flux is
till in early stages
► Hydro projects are one of the stridently opposed form of renewable energy
because of the negative impacts on the environment
► Transition to renewable energy will move the global energy system in the opposite
and in a less desirable direction, away from the superior density fossil fuels
Challenges to the transition The wind-

power growth
► The overall scale of the coming shift on a global level curves
indicate how
► Magnitude of renewable energy and their uneven distributions the growth
► Unpredictability and uncertainty of most renewable energy flows pattern for
renewable
► Lower energy density of the fuels produced to replace solid and liquid fossil fuels energy is ex
post.
► Lower power densities with which we can harness renewable energy
Source:- Energy Transitions: History, Requirements, Prospects: Vaclav Smil

Energy Transition Roadmap: Germany— The Prometheus
Mineral oil Others Electricity Prices for Households (¢/KWh)

1% 4%
Energy Mix 21
► GDP per capita: $ 47,501.8 20
Natural Gas
► Price of German electricity market 13%
19
rose by 53% to 49.53 $/MWh in
Hardcoal 18
2018. 13%
Renewables 17
Source: aleasoft, World Bank 35%
16
Lignite
15
22% Nuclear 14
Power
2010 H1
2010 H2
2011 H1
2011 H2
2012 H1
2012 H2
2013 H1
2013 H2
2014 H1
2014 H2
2015 H1
2015 H2
2016 H1
2016 H2
2017 H1
2017 H2
2018 H1
2018 H2
12%
● Lignite and hard coal capacity should fall to 15GW leading to a The German commission
A substantial interim step will take place to
reduction of 5GW in lignite and 7.7GW in hard coal capacity. believe that coal-fired power
reduce 10 million tonnes of carbon
● Overall reduction of a minimum of 12.5 GW of coal capacity. generation should end
emissions through an innovative project.
● Switch from the current 2.3GW of grid reserve capacity from completely by 2038.
coal to gas.
2022
2018 2025 2038

● Coal fired capacity should fall to a maximum of 9GW in lignite and 8GW in
hard coal, leading to a reduction capacity of 10.9GW lignite and 14.7GW
hard coal.
● Target of 40% emission reduction to be reached compared to 1990.
Source: Cleanenergywire

Energy Transition Roadmap: China- The Hercules
Renewables Average Retail Electricity Price (¢/KWh)

(including 8.5
biofuels)
Nuclear 3% 8.4
2% Hydro Oil
8% 19% 8.3
GDP per capita: $ 7,755.0
Source: World Bank 8.2
Gas 8.1
7%
8.0
7.9
7.8
Coal
61% 7.7
7.6
2013 2014 2015 2016 2017
● Increase the share of renewables by 15%

● Increase renewable power capacity to 680GW
● Coal’s energy share to reduce from 62% to 58%
● 270 million tonnes of coal capacity to be cut
● 14 large coal bases will account for 95% of coal production with an output of 3.7 billion
2017 tonnes 2030
● China spent $51 billion on power projects, 36%
for coal projects and 11% for renewable 2020 ● Lower carbon dioxide emissions per unit of GDP from
projects 60% to 65% from the 2005 level.
● China’s emissions trading scheme launched to ● It is estimated that coal power plant capacity will
limit emissions and cover 1700 power increase by 450 TWh
companies Source: NDRC China, Sinopec report on transition, 2019,
● Coal demand target to reduce to 3.5-4 billion tonnes
IEA, MDPI

Energy Transition Roadmap: USA- Random Walker
Energy Mix Average Retail Electricity Price (¢/KWh)

Others 11.
Renewables 0%
► GDP per capita: $ 54,541.7 17% 10.5
► The energy transition shown below 10.
was developed under the Obama 9.5
administration. The trump 9.
Natural Gas
administration moved to cut EPA’s Nuclear 35%
8.5
budget by 31%, cancel the clean 19% 8.
action plan and remove the $100 7.5
Other Gases
million allocated for research on 0% Petroleum
Coal 7.
28%
combating climate change. 1%
6.5
1990
1995
2000
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
• Half net oil imports
• coal power sector investments • 17% reduction in GHG emissions below 2005 levels
• Reduction in carbon
declined to only USD 48 billion • integration of 50% variable distributed energy resources
• emissions by 3
average retail cost of new wind • With electric vehicles and building energy management systems
and solar PV energy in the • Reduce cost of transportation of fuel by more than 25% reaching billion metric tons
United States has dropped to the target of $40/kilowatt since 2009
around 10 U.S. cents per kWh 2017 2025
2013/14 • Provide $8 billion in loan 2020 • $500 billion savings through 2030
guarantees to advance efficiency
lower emission fossil • Reduction in GHG emissions by
energy technologies 500 million metric tons annually
• Cumulative savings exceeding
200 billion kWh
Source: EPA, US Dept. of Energy, World Bank Data, EIA, statista

Energy Transition Roadmap: France
Fuel Wind Solar Bioenergie Electricity Prices for Households (¢/KWh)

0% 4% 2% s
► GDP per capita: $ 43,663.6 35
Coal 2% 34
2% ► During 2018, the average 33
32
Gas
market price was 55.91 $/MWh, 31
8% with a rise of 12% compared to 30
29
2017, and an accumulated 28
Hydro increase of 37% since 2016. 27
10% 26
Nuclear
72%
● 40% less consumption of fossil fuels as compared to 2012
● The value of a tonne ● Fuel taxation will fund the energy transition.
Carbon neutrality goal to be
of carbon emission to ● Offshore wind energy will grow up to 5.2GW, Onshore wind
achieved
reach €86 by 2022 capacity will grow up to 35.6GW
● Solar capacity will be between 35.6GW and 44.5GW
2019 2028 2035
2022 2030 2050

● Annual expenditure will increase from €5 billion to €8 billion ● Reduce nuclear
• nearly six million households will receive
● €51 billion in total to support renewable energies over the next energy by 50%
help to pay their heating bills whom will Source:
ten years. and diversify
receive €60 on average https://www.gouvernement.fr/en
● €20 billion towards new, more competitive projects. the energy mix
● Between four to six nuclear reactors scheduled to shutdown /multiannual-energy-
before 2030 programme-what-are-its-aims
India’s preparedness for Energy Transition
Effective energy transition depends on the

system performance of a country, which
measures the ability of the energy architecture
System Economic of the country to perform on:
Energy Security Environemntal
Country Performance Growth &
& Access Sustainability • economic growth and development
Rank Development
• energy security and access
India 97 48% 71% 42% • environmental sustainability
Norway 1 89% 87% 70% Norway has the highest system performance
Sweden 2 74% 92% 78% rank.
Switzerland 3 73% 87% 74% The Energy Transition Index (ETI) captures the
France 4 70% 92% 69% readiness of a country through six enabling
Uruguay 5 67% 81% 76% dimensions:
i. Energy system structure
ii. Regulation and political commitment
Infrastructure Human
Regulation & Institutions Energy iii. Capital and investment
Transition Capital & and innovative capital and
Country political and system iv. Human capital and consumer participation
Readiness investment business consumer
commitment governance structure v. Infrastructure and innovative business
environment participation
environment
India 76 50% 74% 46% 58% 36% 32% vi. Institutions and governance.
Finland 1 76% 69% 82% 81% 83% 52%
Denmark 2 73% 68% 85% 78% 81% 49% India
Austria 3 73% 67% 82% 75% 67% 60%
• ETI Score: 51%
Switzerland 4 69% 75% 83% 83% 55% 58%
• System Performance Score: 53%
Sweden 5 62% 66% 84% 81% 62% 57%
• Transition Readiness: 49%
Source: WEF, Energy Transition Index,2019
06
Solutions and Strategy
HLEC Report on Stressed Assets
Stressed Assets Overview

► Unreliable coal supply due to power plants without coal linkages from CIL
► Surplus supply and underutilization has led to high costs of power
► Slow project implementation by developers leading to cost overruns without sufficient financial capacity to service debt
► Non-compliance of banks and financial institutions on sanctioning additional term loans
► Unsustainable and aggressive tariff proposals by private sector developers have led to equity erosion and insufficient funds to service
debt.
► Aggressive re-bid for coal mines have led to legal complications post-bidding
► Operational issues such as delays in land acquisition, statutory clearances, and inadequate transmission system have led to cost and
time over-runs
0.7%
The peak energy
demand in 2018, which
has reduced from
8.71% in 2013
59.88%
was the plant load
factor in 2017-18,
which declined from
78.8% in 2006-7.

HLEC Report on Stressed Assets
Current Situation in India

► The Electricity Act, 2003 removed licenses for power generation, introduced
international competitive bidding, separated transmission from generation, and
encouraged public and private sector participation.
► The increase in capacity and an addition of 99,209MW during the 12th five year plan
period outpaced demand growth leading to a declining plant load factor
► 44% capacity addition, 77,891MW, from the private sector has led to a widening gap
between demand and supply
► Per capita power consumption in India is 1122 units against the global per capita
consumption of 3110 units
Recommendations
Coal Allocation Sale of Power , Regulatory & DISCOM Other Recommendations
► Coal linkages to be allowed for short term PPAs and power to payment issues ► Approvals should not be cancelled even
be sold in a day ahead market. ► Old and inefficient plants not complying if a power plant is being acquired by
► Generators can terminate PPAs in case of delayed payment with environmental regulations to be another entity
from the DISCOM without the loss of coal linkages phased out without a demand/supply ► In case there is a delay in the
► Stressed plants to use NTPC’s PPAs until its own plants are mismatch commissioning of the plant, PPAs should
commissioned ► Late payment surcharge to be not be cancelled but kept on hold for a
► 60% coal to be earmarked for e-auction mandatory without negotiation period of time
► Once a PPA has been bid for, a linkage should be assigned ► Tri-partite agreement to be set up with ► Ministry of power and ministry of
► Coal shortages to be carried forward up till 3 months the RBI to enable stressed assets to petroleum and natural gas to devise a
► States can reassign coal linkages according to plant efficiency obtain loans from public financial scheme in line with the e-bid RLNG
institutions scheme to revive gas power plants
Suggestions – Distribution companies
► Regulated supply only for small consumers (Moving away from the cross subsidy model)
► No new long-term, baseload power purchase by DISCOMs without rigorous demand assessment
► Meeting the challenge of agricultural demand through solar feeders
► Re-thinking tariff design in the context of changing cross-subsidy scenario
► Moving away from cost-plus regulation
► Inflation-indexed tariff increase
► Equitable tariff design for small consumers
► Developing robust markets
► Due to variability in supply and demand, distribution Slab for
Average tariff (Rs/kWh) under
companies monthly Average tariff (Rs/kWh) in a
the proposed LT general
consumpti typical tariff design
should not procuring power on round the clock (RTC) on (kWh) category
basis, especially in the short term Domestic Commercial Industrial Domestic Commercial Industrial
► More flexible instruments to aid procurement decisions 0-100 3.5 3.5 3.5 3.5
and development of capacity markets 101-200 4.5 4.5 4.5 4.5
► Accountability for supply and service quality 201-300 5.5 9.5 8.5 5.5 5.5 5.5
300-500 6.5 7 7 7
► Monitoring actual supply hours >500 7 9 9.5 8.5
► Metering and billing
► Public hearings on supply and service quality issues
► Harnessing technology to improve efficiency

Suggestions – Distribution companies (Schemes)
Integrated Power Development Scheme (IPDS) National Electricity Fund (NEF)
Approved on 20.11.2014. with a total outlay of Rs 32,612 crore ► To promote investment in the distribution sector
which includes a budgetary support of Rs25,354 crore from ► Provide interest subsidy on loans disbursed to the Distribution
Companies (DISCOMS) – both in public and private sector, to improve
Govt. of India. The objectives of scheme are:
the distribution network for areas not covered by RGGVY and R-
► Strengthening of sub-transmission and distribution networks in the APDRP project areas.
urban areas;
► The preconditions for eligibility are linked to certain reform measures
► Metering of distribution transformers / feeders / consumers in the taken by the States and the amount of interest subsidy is linked to the
urban area. progress achieved in reforms linked parameters
► IT enablement of distribution sector and strengthening of distribution
network
Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) Ujjwal DISCOM Assurance Yojana
Scheme approved on 20.11.2014 with a total outlay of Rs ► (UDAY) is the financial turnaround and revival package for electricity
44,033 crore which includes a budgetary support of Rs 33,453 distribution companies of India (DISCOMs) initiated by the Government
crore from Govt. of India. The objectives of scheme are: of India with the intent to find a permanent solution to the financial
situation of power distribution.
► Separation of agriculture and non-agriculture feeders
► Strengthening of sub-transmission and distribution networks in the
rural areas; ► Allows state governments, which own the DISCOMs, to take over 75
percent of their debt as of September 30, 2015, and pay back lenders
► Metering of distribution transformers / feeders / consumers in the rural
by selling bonds. DISCOMs are expected to issue bonds for the
area.
remaining 25 percent of their debt.
► Rural Electrification

Strategy
CO-OPERATIVE
FEDERALISM

Solutions
Tone down expectations and be realistic about time frames
Better design of PPPs
Better data with less lag- Metering
Wholesale market reforms
Do away with long term contracts
Find alternate financing mechanisms than sourcing finance from banks

► Balance Sheet Financing vs Special Purpose Vehicle
Optimal level of creative destruction- Renewable energy penetration

continues to increase

The views and opinions
expressed in this presentation
are personal views and do not
represent views of any entity
whatsoever with which I have
been, am now, or will be
affiliated

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Stressed assets in Power

Sector- Clear and Present

➢ Co-operative Federalism is the go to strategy

Page 3 26 July 2019 Stress in Power Sector

► Frequent onset of the stress response, can have devastating

► There are two kinds of stress;

Robert Sapolsky has written several books including Why

Page 5 26 July 2019 Stress in Power Sector

High fixed costs Illiquid assets Revenues sensitivity to economic downturns

Chronic Stress Acute Stress

Page 6 26 July 2019 Stress in Power Sector

Interest Coverage ratio (ICR)

2 ICR = EBIT/ Interest expense.

26 July 2019 Stress in Power Sector

Page 8 26 July 2019 Stress in Power Sector

Debt in DISCOM: INR 260,000 crores* with

Stressed sectors in Distribution lines

Transmission lines 230-

65% of debt to generation sector has IC<1

Central State Private

Page 11 26 July 2019 Stress in Power Sector

Rs./KWh Linear (Rs./KWh)

Gross NPA ratio

Source: RBI Financial Stability Report, June 2019

Capital expenditure funded through formal financial sector

Gross capital formation (% of GDP)

Source: CSO, RBI and IMF

Supply of fuel Judicial delays Low capacity utilization Health of discoms

Technological Risks Railways Regulatory roadblocks Frauds

Economic downturn Market Factors ? Unknown Unknowns

Page 15 26 July 2019 Stress in Power Sector

Increased risk taking and

Long-term favourability leads to more

Builds up till cash generated by assets is

Page 16 26 July 2019 Stress in Power Sector

Stress in Power Sector

Jammu and Kashmir

► Distribution companies have mainly two functions:

2. Procuring power to ensure supply (the supply business)

► Chronic problems faced by DISCOMs:

Lack of financial viability of Poor planning and Non-competitive tariff

Page 19 26 July 2019 Stress in Power Sector

Major causes of distress:

► High cost of generation ► High operations and maintenance consumers

► Inefficiencies in capital expenditure

Possible impact of renewable energy on DISCOMs; Fixed-cost

Page 20 26 July 2019 Stress in Power Sector

Page 21 26 July 2019 Stress in Power Sector

AT&C Losses (%) ACS-ARR gap (Rs./unit)

Power Purchase cost (Rs/unit)

4.21 ► Power purchase cost has almost remained same since

Page 22 26 July 2019 Stress in Power Sector

DISCOM Debt (in INR ‘000 crores)

Source: CRISIL ratings

Page 23 26 July 2019 Stress in Power Sector

Source – Economic survey,2019-20

Stress in Power Sector

Installed Capacity ('000 MW) 1996-97