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Is there power in the Power Sector?

It would come as a surprise to know that India still has low power connectivity in rural areas. One can only wonder how the connectivity is still low, given that rural electrification is touted as a raging success for the current regime. Going by the official figures of power capacity, the supply is so far ahead of demand, the power sector should be looking oversaturated. But with lower connectivity, over-saturation is not a possibility, right? The truth is that there are issues at both ends of the spectrum.

PM Narendra Modi in April 2015 announced the government’s grand vision of electrifying every village in the country. There were about 18000 villages still to be electrified, and the same was to be targeted over the next 1000 days. On the 988th day it was announced that every single one of these close to 18000 villages were electrified, which is unquestionably a great achievement given the difficult nature of the terrain. Ideally this would mean the avenues for investment in this space are limited. But there’s more to it than meets the eye.

Power Sector

Let’s take a look at various subsegments in the power sector which stand to gain/lose with the present government schemes. The main component of the sector is power generation. There are a host of companies from Reliance Power to Adani Power involved in power generation. Usually these companies are involved with the state electricity boards in signing a PPA (Power Purchase Agreement) which would entail them to sell a certain portion of their generation to the SEB’s (State Electricity Boards). Whatever is not included in the PPA will be sold directly to the grid . The PPA ideally has 2 components, fixed cost which takes into account the plant installation charges, and variable cost which takes into account the fuel (coal/gas) charges.

In theory PPA’s are advantageous for the power sector companies. If the power prices are low, the PPA helps them get higher than spot prices. On the other hand if the power prices are high, they can sell the extra power to the grid at elevated prices. If the SEB doesn’t take the stipulated power from the generation companies, they’re bound to pay a fine according to the offtake amount in PPA. But what actually happens is wildly different. When the prices are higher than PPA, they gain a bit as PPA is honoured and the extra production is sold to the grid. But when the prices are lower than PPA prices, there will be no offtake. And the fines the power companies are supposed to get never reaches them. These often get dragged to long drawn litigation while the power company keeps paying the interest for the fixed cost incurred.

Currently there is an excess supply of power in the country. With an electricity coverage of 99.7%, there’s not much incremental power demand likely to happen. With the onset of the current economic slowdown, the power demand has fallen further. October 2019 is the third straight month where the power demand has fallen, and this month it has declined at an alarming 13%. With a lot of plants running at less than 50% PLF(Plant Load Factor), there has been a further deterioration in demand. At this juncture not much of an incremental power demand can be expected.

Let’s take a look at the per capita consumption:

Figure :: Per Capita Consumption of Indian States

Only 11 states/UT’s have showed an incremental power consumption of more than 5% a year between 2012 and 2017. With states like Gujarat and Tamil Nadu riding on the manufacturing demand, this doesn’t come as a surprise. What’s surprising is the lower per capita consumption for UP and Bihar (50% and 27% of national average) which contribute to more than 25% of the country’s population. This means that the claim of 99.7% electricity coverage doesn’t hold water.

A village is considered electrified if 10% of the households have power connection, though it doesn’t matter for how long the power supply is provided. This metric is probably the reason the connectivity targets in UP have been revised. Under the SAUBAGHYA scheme, UP was supposed to have a target of 12m households to be electrified, which has been recently revised to 7m households. Given the per capita consumption of UP/Bihar is much below that of even J&K, there should ideally be avenues for more connectivity in those regions.

One metric to look at the possibility of more growth in power connectivity is the growth of transmission and distribution projects in the country. Looking at the capex budget from PGCIL, one can understand that the capex budget for the company has reduced from the usual 25000 Cr (last 4 years) to 15000 Crs for FY 21. One reason can be that in the last couple of years some budget has shifted from PGCIL to SEB’s, but a drop of 40% in capex can mean that there aren’t many areas left for T&D penetration.

Better yet, we can take a look at companies like KEC International and Kalpataru Power which are involved in executing EPC (Engineering, Procurement, and Construction) projects in T&D(Transmission and Distribution). Their order book gives us an idea about the growth of T&D in the country. An aspect to be kept in mind is that these companies don’t do last mile connectivity and hence we can’t gauge intensive electrification from the following data

Figure :: Order Book Status of KEC and Kalpataru Power

The above table gives the order book status of both players in the T&D segment. Even though the drop for KEC is not high, it has to be noted that the numbers were supported by T&D orders from the SAARC region and not India. The companies had hoped that the decline in FY19 orders were lower due to elections, but recently they explicitly mentioned that orders haven’t yet picked up. These two companies have been moving towards more civil orders to maintain the order inflow.

Returning back to the power companies, despite having idle capacities, these companies have embarked on capacity expansion in the renewable energy space to help aide government initiatives in moving away from the usage of conventional fuels (rise of alternate fuels). But given that old capacities are idle, the new capacities are not catering to demand. Hence these old capacities are going to be capital intensive assets which will continue to be a burden on the books. The only way to move these assets is move them to a country like Bangladesh, which Reliance Power is doing to the erstwhile UMPP(Ultra Mega Power Project) at Krishnapatanam. The government has set an ambitious target of 55% power output through renewables by 2030. A lot has to change for that to happen, including stimulus for the existing thermal power companies to phase them out.

Another crippling issue the power segment faces is AT&C losses (Aggregate Technical and Commercial losses). When the government embarked on the UDAY scheme (Ujjwal Discom Assurance Yojana), one of the key targets was to bring down AT&C losses with the other being debt restructuring. According to the latest data shared on the UDAY portal, the AT&C losses after declining for a brief period have started to move back towards pre-UDAY levels. Few state DISCOMS like Karnataka, Haryana have improved on AT&C losses, but a lot many are still to do so.

Power Sector

It certainly looks like doom and gloom in this sector, doesn’t it? May be not entirely. The best way to cut AT&C losses is to replace older equipment from meters to wires. This should control the technical losses. Meter manufacturers like Schneider, Genus Power etc can benefit from this. But the biggest beneficiary of the next wave in the power sector will be cable manufacturers. With schemes like SAUBHAGYA, power for all is no more a distant dream. Given that T&D coverage has increased significantly, only the last mile needs to be completed.

To an extent the effect of this is visible in the numbers of companies like Polycab and Kei Industries which continue to be stellar. With strong visibility in order inflow and execution, these companies may stand to gain a lot. Both of these companies have given strong guidance for revenue growth which indicates that work is being done towards the last mile connectivity.

Power sector will never go out of business. But it’s hugely susceptible to technological advances. The rise of renewables is a testament to that. Per capita consumption of power will also increase with white goods such as AC now being a necessity rather than a luxury. The grid capacity will hopefully be improved with initiatives like the Green Corridor ushering in new opportunities. Let’s hope to be a part of this ever-changing industry!

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