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India’s Power Sector: Further Growth or Over Investment?
Overview of Indian Power Generation Industry
Indian power generation sector is one of the most diversified in the world. Power generation sources in India range from conventional sources such as coal, lignite, natural gas, oil, and nuclear to viable unconventional sources such as wind, solar, hydro, agricultural and household waste.
Electricity generation in India increased from 1,372 BU in FY19 to 1,618 BU in FY23, implying a compounded annual growth rate (CAGR) of 4.2%. Electricity generation increased by about 6% y-o-y to 745 BU during April 2023 to August 2023. Thermal power forms the largest source of power in the country with about 75% of the electricity consumed being generated from thermal power plants. There are different types of thermal power plants, out of which coal based thermal power plants account for highest amount of electricity followed by gas and diesel. Renewable Energy Sources (RES) including solar, wind and hydro are quickly increasing their share, and their contribution has increased from 19.1% in FY19 to 23% in FY23.
Power is one of the most critical components for infrastructure development and crucial for the economic growth and well-being of any country. The existence and development of adequate power infrastructure is essential for the sustained growth of the Indian economy.
Source: CEA; RES refers to power generated from Hydro, Wind, Solar, Small hydro and Bioenergy projects; Care Edge Research
Note: YTD FY23/FY24 indicates April to August
The power industry is divided into three segments
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Generation
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Transmission
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Distribution
Generation is the process of producing electricity from different sources like thermal energy (coal, diesel etc.), nuclear and renewable sources such as sunlight and wind, natural gas, etc. in generating stations or power generation plants. Transmission utilities transport large amount of electricity from power plants to distribution substations via a grid at high voltages. The retail electricity distribution, which is the distribution of electricity to consumers at lower voltages, forms part of the distribution segment.
India’s per capita power consumption
India’s per capita power consumption has been on a consistent rise with the government focusing more and more on electrification of villages and families across the country. It has risen steadily over the last nine years, from 884 kWh per capita in 2011-12 to 1,255 kWh per capita in 2021-22. At the time of India's independence in 1947, demand was only 16 kWh per capita.
Developed countries such as Japan and the United States have the world's highest per capita electricity consumption. India’s per capita consumption has remained low as compared to even the emerging countries like Brazil and Mexico, implying significant room for growth.
Sector wise Power Consumption in India
The Industrial sector accounts for majority of the power consumption in India followed by the domestic sector. The industrial sector consumption recorded a CAGR of 4.3% between FY13 and FY22 whereas the domestic sector recorded 7% over the same period, thereby indicating an increase in power consumption by the domestic sector as more and more household got access to electricity. The commercial and agricultural sectors’ consumption recorded a CAGR of 4.4% and 5%, respectively, between FY13 and FY22.
India is among the top nations in the world which are leading the global renewable energy growth. On technology specific installed capacity, India ranks 3th in onshore wind, 5th in Solar, 4th in Bioenergy and 6th in Hydro as per International Renewable Energy Agency (IRENA) renewable capacity statistics 2023.
Power Demand, supply and deficit in India
Power demand in the country has been on a rise in the past decade, with an exception during FY21 due to the Covid-19 pandemic. Peak energy demand grew at a CAGR of 4.7% from 148 GW in FY14 to 216 GW in FY23, while peak supply grew at a CAGR of 5.3% over the same time period. There has also been a decrease in the peak shortage from 6.1 GW in FY14 to 2.4 GW in FY22 and decline in the power deficit of the country supported by improving supply. However, in previous year i.e. FY23, there was a significant increase in peak shortage to 8.6 GW.
Covid-19 induced lockdown and restrictions had led to lower demand and generation of electricity since the pandemic had curtailed commercial and business activity. As a result, the first half of FY21 witnessed a decline in power demand. However, with the gradual reopening of the economy despite localized lockdowns, the power demand has continued to gradually rise over the past 2 year.
Power Supply Position in India
The electricity requirement has grown from 1,274 BU in FY19 to 1,512 BU in FY23. There has been a continuous deficit between electricity requirement and availability of around 0.4%-0.5% between FY19 and FY23. During April-September 2023, the electricity demand stood at 848 BU, an increase of 7% y-o-y, while the deficit was 0.3%.
The peak demand not met was around 3.31 GW in FY18 and the average energy not supplied was around 8,629 MU. The peak demand not met, and energy not supplied has been on a downward trend and has substantially decreased to 2,475 MW and 5,787 MU, respectively, in FY22. However, in FY23, due to very high demand of power, the peak demand not met was 8.6 GW and energy not supplied increased to 7,582 MU. In April-September 2023, the peak demand not met was 731 MW and the energy not supplied was 2,444 MU.
There was a 9.6% y-o-y increase in the power requirement by the country in FY23. The power consumption and demand were highest in months of March and April due to higher temperatures during the summer season compared to last year.
Outlook and Growth Drivers
According to the 20th Electric Power Survey of India, all India peak electricity demand projected for FY27 is 277 GW and energy requirement is projected at 1,908 BU. Going forward, the power demand is further expected to rise with rise in population and increased economic activity.
The CAGR between FY24 and FY27 is expected to be around 4.5% for energy requirement while for peak demand it is expected to be around 4.8%. For FY27 to FY32, the CAGR is on a higher side at 5.3% for energy requirement and 5.7% for peak demand.
The government has taken various steps to meet the peak demand of power such as:
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175 GW of power generation capacity, 17,33,459 circuit km’s of transmission lines and 6,21,176 MVA of transformation capacity has been added to the grid from 2014 till Dec 2022.
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Schemes like Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY)/ Pradhan Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGYA) / Integrated Power Development Scheme (IPDS) have strengthened the distribution system.
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100% FDI through automatic route for power generation projects.
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Private sector participation in generation and transmission through notification of revised Tariff Policy on Jan 2016.
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For promoting generation, purchase, consumption of green energy the Green Open Access Rules, 2022 have been notified in June 2022.
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Revamped Distribution Sector Scheme (RDSS) launched in 2021 for improving the financial sustainability and make operationally efficient distribution sector.
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The Electricity Amendment Rules, 2022 has been notified on Dec 2022 which mandate preparation of resource adequacy plan so as to successfully meet the power demand of the consumers.
GDP and energy intensity
India has latent power demand because of its low per capita power consumption, strong GDP outlook and growing population. India is likely to emerge as one of the world’s fastest growing economy as per IMF which is expected to lead to an increase in the power demand of the country.
Urbanization
Urbanization leads to faster infrastructure development, job creation, development of the consumer and services sectors, and hence is a major driver for the growing power demand. The urban consumption is increasing due to rising disposable income, favourable demographics and the trend is likely to continue.
Demand for Round-The-Clock power
Recently, there has been a significant focus on blending two or more energy sources like wind-solar hybrid to achieve better synergies, higher plant load factor and better energy gains. The wind and solar energy have complementary generation patterns and hence provide smooth output. Round-The-Clock ensures quality clean power is made availableround the clock, mixing renewable with conventional energy sources for stable power and utilization of existing coal based plants.
Rural Electrification
The government of India has taken joint initiative with the state governments for providing Power for All (PFA) to all households/homes, industrial and commercial consumers including supply of power to agricultural consumers. PFA initiative along with rural electrification across various states aims to ensure 24X7 electricity access, enhance the satisfaction levels of the consumers, improve quality of life of people and increase economic activities resulting in development. This is one of the key drivers for the growing power demand.
Make in India push
The Make in India Initiative which aims to boost manufacturing’s share in the GDP would lead to substantial growth in electricity demand.
Cross border power trading in South Asian countries
Power deficit in India has been on a declining trajectory and India is expected to further expand its generation capacity. India is also evaluating opportunities with neighbouring countries such as Nepal, Bangladesh, Sri Lanka, Maldives and Bhutan for better integration and synergies by interlinking electricity transmission systems and allowing surplus power to be exported to other grids.
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Cross border power trading in South Asian countries
A lot of emphasis is given to railway electrification with the view to reduce the nation’s dependence on the imported coal and petroleum-based energy and with a vision of providing eco-friendly, faster and energy-efficient mode of transportation. In the past 9 years, the pace of electrification has increased significantly with a record breaking 37,011 route kms (RKM) of tracks being electrified.
A total of 58,424 RKMs have been electrified, nearly 50% was completed in the last 5 years alone. 100% railway electrification in 14 states/UTs has been achieved making significant strides. Electrification of 6,542 RKMs has been achieved in Indian railways history during FY23, registering an increase of 2.76% over last year. Government plans to fully electrify railway network by 2024. To support the electrified railway network, close to 30 billion units of electricity shall be required on an annual basis by 2024.
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Electrification of Mobility Infra
The global market for electric vehicles (EVs) is growing. As per the International Energy Agency (IEA), the global EV fleet will reach about 130 million by 2030, a sharp rise from just more than 5.1 million in 2018.
The growth of EV segment in India has also been on an increasing trend. The penetration of EVs has increased to 5% of the total vehicle sales in FY23. The EV sales have witnessed massive growth in FY23 on account of favourable government policies for EVs supporting reduction in upfront cost and expansion of charging infrastructure, rising fuel prices and shifting consumer preferences.
The 2-wheeler and 3-wheeler segments dominate the electric vehicles market in India, comprising of around 62% and 34%, respectively, of total EV sales in year FY23. Electric two-wheelers (E2Ws) are a key segment of the electric vehicle market in India, with growing interest among consumers and increasing government support for electric mobility. On the other hand, Electric three-wheelers (E3Ws) are also an important mode of public transportation in India, particularly for last-mile connectivity and intra-city transportation.
The Government of India has targeted 30% EV penetration by 2030. NITI Aayog projects EV sales penetration of 80% for two and three wheelers, 50% for four wheelers, and 40% for buses by 2030. As EV adoption grows, there will be additional power demand for EVs and hence readiness of the electricity grid to EV charging demand is critical to achieve rapid and large-scale transition to EVs. The total electricity demand for EVs, at 33% EV penetration rate by 2030, is projected to be 37 TWh as per NITI Aayog 2021 report. This constitutes less than 2% of the total electricity demand across the country by 2030. Therefore, meeting the overall energy demand for EVs in India can be met going forward.
Charging demand by vehicle segment
Source: Handbook of electric vehicle charging infrastructure implementation by NITI Aayog – Version 1
A recent report by Avener Capital states that the sector’s transformation is being driven by India’s energy goals of achieving energy independence by 2047 and net zero emissions by 2070, creating substantial opportunities and challenges.
India’s transmission capacity, currently at 2,530 GVA, is set for a fivefold increase over the next eight years. The surge in demand will largely be met through Tariff-Based Competitive Bidding (TBCB) mechanisms, which now account for over 90% of transmission projects awarded under Public-Private Partnership models. This shift underscores the government’s push towards attracting private to build critical infrastructure, with TBCB becoming a preferred model for transparency & price discovery.
After this overall talk on “Growth” then why the question raised on “Over Investment”?
ARE WE OVERINVESTING IN POWER?
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India plans 80 GW of new thermal power capacity by 2032 to meet surging demand
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Tata Power to invest ₹60000 Crore over the next three years.
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Banks, FIs to invest ₹ 32.5 Trillion in renewable energy by 2030.
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SJVN to add1.5 GW to 2 GW of Renewable Energy Annually
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Primary energy demand is expected to double by 2045.
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Record 69+ GW of renewable energy tenders were issued in FY’24
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Waaree Energies Launched Major IPOs, Raised Over ₹13,000 Crore to Fuel RE Expansion.
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India Sets ₹9.15Lakh Crore Blueprint to Strengthen Power Infrastructure by 2032.
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India’s Renewable Energy Sector Attracts US$ 6.1 Billion FDI in Three Years.
Planned Capacity Additions
India plans to nearly double its power capacity to about 900 GW by 2030, a whopping 12% CAGR, whereas, power demand historically has grown at 6-7% which might lead to demand-supply mismatch.
Over the last year, peak power deficit which was at ~9 GW has already come down to 0.009 GW. Electricity demand in August was down 5% Y-o-Y. Capacity addition in power generation has risen significantly over the last couple of year
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An increase in borrowings - Substantial borrowing by all segments has underpinned the dramatic expansion of the power sector. In 2018, ~34 stressed power projects, representing 40 GW capacity, were earmarked to be admitted under NCLT with an Outstanding loan of 1.77 Lac crores - Few of these stressed assets haven’t been resolved yet Almost all capacity additions undertaken by private sector power producers from FY 2010 onwards have faced significant cost overruns, which were close to 70-80% of the originally appraised project cost. This happened due to time delays exceeding 3 years.
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Cost Run-up: Projects were launched without coal linkages, and the SC cancellations of 214 coal blocks forced reliance on expensive imported coal. This led to lower PLF levels.
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Double whammy: Aggressive Bidding without firm PPAs and cost run-ups made operations financially unsustainable. In the stressed assets, more than 50% did not have PPAs.
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Supply outpaced Demand: India became a net exporter of power, selling 5.8b units. Electricity shortage went down to 0.7% (of demand) in 2018 from 9% in 2013.
Aequitas, an independent power market advisory firm, regarding the potential risks of overinvestment in India's power generation capacity without adequate long-term power purchase agreements (PPAs) in place. Over the past several years, India has seen a significant expansion of its power generation capacity, particularly in the renewable energy sector. However, Aequitas estimates that a substantial portion of this new capacity, around 60 GW of thermal power and 40 GW of renewable energy, is currently operating without any long-term PPAs to guarantee offtake and revenue for the generators.
The lack of long-term PPAs is a major concern, as it exposes power producers to significant risks of underutilization and financial stress. Without assured long-term PPAs, generators may struggle to maintain high plant load factors, leading to higher per-unit generation costs. This could in turn put them under financial strain, especially for highly capital-intensive renewable energy projects. The unpurchased capacity also creates uncertainty for power distribution companies (discoms) in terms of their future power procurement requirements and ability to meet renewable purchase obligations.
Aequitas emphasizes that the government and regulators need to take proactive steps to incentivize the signing of long-term PPAs between generators and discoms. This would help ensure better coordination between capacity addition and demand growth, reventing the build-up of excess generation capacity that cannot be fully utilized. Additionally, the advisory firm recommends that policy measures be implemented to discourage generators from setting up new capacity without firm long-term offtake agreements in place.
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India had a massive power capex boom from 2007 to 2009. There was an over-allocation of capital to the energy sector which led to massive capacity coming up from 2014 to 2017. India from a situation of massive power deficit in 2010 went to being power-sufficient in 2020. Post-Covid, there was a significant increase in power demand led by rise in the middle class & government focus on providing electricity to all. This led to power shortages in 2021-22 & a revival of investments in power sector. The big question mark is, with massive capacity additions outstripping demand, are we looking at a scenario similar to yesteryears?