Energy Generation Strained by Burgeoning Power Demand

Pranav Master & Probal Biswas | April 7, 2023

India has pledged to reduce its carbon by 2030 but the fact remains that our energy consumption has skyrocketed in the past year and to meet that demand, we are largely dependent upon coal. For the second year in a row, the central government has conveyed all thermal plants to run at full capacity from April through June in 2023. This would mean an increase in the emission of greenhouse gases and push our zero net carbon target further.

India Business and Trade spoke with Pranav Master – Director-Consulting, CRISIL Market Intelligence & Analytics, and Probal Biswas – Associate Director-Consulting, CRISIL Market Intelligence & Analytics exclusively to get an insight on the estimated electricity demand amid heatwaves and amped-up manufacturing activities.

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IBT: India is facing prospects of power shortages this year. What are the major reasons for this alarming situation?

CRISIL: During 2022, a significant increase in electricity demand was observed due to the early onset of a heatwave in India, coupled with increased industrial activity. The high demand, combined with supply-side constraints caused by geopolitical disruptions, resulted in power shortages in the country.

Due to a spike in the price of imported coal, generation from imported coal plants of ~17.5 GW was almost negligible during fiscal 2023 (till Jan 2023), which led to high dependence on domestic coal. Despite increasing coal production, insufficient rake availability led to inadequate coal dispatches to plants, which were reeling from increased power demand.

Peak power demand has surged in line with the base power in fiscal 2023 YTD driven by extreme weather conditions coupled with buoyant industrial and manufacturing activities. While intense heat waves in the summer months lead to peak demand touching record high levels of 216 GW in April 2022, winter chills pushed the power demand to 213 GW in January 2023. The generation has struggled to keep up with the booming demand, resulting in an increased peak deficit of 4.0% in fiscal 2023 (April 2022 to January 2023) as compared to 1.2% for the same period during fiscal 2022.

IBT: With the demand expected to only accelerate further, what kind of demand-supply gap are we anticipating in the coming years?

CRISIL: Energy demand is expected to clock 5.0-5.5% CAGR over fiscals 2023 to 2028, significantly higher than the ~3.8% CAGR over the past 5 years.

Underserviced regions (mainly northern, northeastern, and eastern) are the main reason for the expected continuation of the pan-India deficit in the medium term despite an oversupply situation in terms of generation. India’s per capita electricity consumption estimated at 1,200-1,220 kWh in fiscal 2022 is only one-third of the world average. This clearly indicates that the lower power demand is on account of lagging rural electrification and sub-optimal distribution infrastructure, as well as the absence of last-mile connectivity in some cases.

On the other hand, healthy conventional capacity additions in the past (gross capacity additions of 33.5 GW between fiscals 2017 and 2022) and upcoming 27-28 GW over the next 5 years would add to supply over the forecast period. This, coupled with expected healthy investments in T&D infrastructure, is expected to support rising demand. However, the base deficit is expected to persist, though remaining negligible at 0.3-0.5% over the next 5 years, as the deficit is expected in under-penetrated areas due to weak distribution infrastructure, with underserved populations expected to gradually come onto the grid in the long term.

IBT: To what extent can renewable sources of energy bridge this growing demand for power over the coming decade?

CRISIL: Renewable energy sources are an important pillar for securing sustainable energy. In recent years, the country has developed a sustainable path for its energy supply. Renewables became the second most significant source of power generation in India. As on Feb 2023, India’s total RE capacity including large hydro is ~168 GW which is around 41% of the country’s total installed capacity. India is aiming to attain 500 GW of non-fossil fuel-based capacity addition by 2030 which includes 280 GW of solar power and 140 GW of wind power. As a result, 50% of the installed capacity is expected to come from clean energy. Considering India’s announcement to reach net zero emissions by 2070, most of the growth in energy demand would be met from low-carbon energy sources.

However, the pace of developing additional transmission infrastructure to integrate upcoming capacity with the grid is a key monitorable. Moreover, the addition of storage technology through the development of pumped storage and battery storage plants is critical to provide round-the-clock supply and to bring stability and flexibility to the grid as RE supply is available only for a limited period in a day.

IBT: Will the renewed emphasis on coal-based power be a setback to India’s efforts on reducing carbon emissions?

CRISIL: The world is focusing on environmental issues, especially climate change and therefore the idea of growing sustainably has taken center stage globally. The share of thermal power in India’s total power generation is ~78% which is likely to fall below 60% by 2030 when India will meet the target of adding 500 GW of non-fossil fuel-based capacity by 2030. Nevertheless, coal is expected to remain the mainstay in the power sector going forward.

Further, as per the renewable generation obligation (RGO), the GoI has mandated all upcoming coal/lignite-based power plants to source/establish a minimum of 40% of their capacity from RE. The mandate is expected to aid renewable capacity addition, considering 27-28 GW of coal-based capacity is expected to be commissioned over the next 5 years. Hence, it is pertinent to note here that despite the emphasis on adding coal-based power plants, the govt is taking equal measures to reduce GHG emissions.

IBT: What challenges is India facing on adding new power capacity in terms of coal/hydro-based power at present? How can they be addressed?

CRISIL: In the past 5 years, net addition in the coal-based power plant was only ~11 GW, whereas merely 1.9 GW of hydropower plants was added during the same period. Several issues have impacted capacity addition in the thermal power sector over the past years. Non-availability of regular fuel supply arrangements, lack of power purchase agreement (PPA), the inability of the promoter to infuse the equity & working capital, aggressive bidding by developers, and regulatory and contractual issues have put the thermal power sector under stress, putting ~40 GW capacity under stress by 2018. Considering the structural issues in the thermal power sector and the impetus to add non-fossil fuel-based capacity, the overall outlook on thermal capacity addition, especially by the private sector, remains unattractive.

However, around 27-28 GW of new coal-based power plants are expected to get commissioned over the next 5 years by central or stale-owned generation companies.

As far as the hydro-based project is concerned, it has some unique challenges such as the construction of large dams which creates disputes between neighboring states and sometimes with neighboring countries. Apart from this, the project requires forced relocation which causes local agitation. Moreover, the lengthy process for getting environmental, forest, and techno-economic clearance adds up to more delays in the project. Other challenges could be geological uncertainties, lack of basic infrastructure like roads, bridges, and communication networks at the site, power evacuation issues due to remote locations and difficult terrain, etc.

The GoI has taken several steps to address these challenges. The govt. has implemented measures to streamline the environmental and other clearances process for hydropower projects including the creation of a single window clearances mechanism, prepared guidelines for conducting environmental impact assessments, and introduced policies to address the R&R of affected communities.

IBT: How successful has India been in controlling transmission and distribution losses over these past 2 decades (since Electricity Act 2003)? To what extent can they help bridge the demand-supply gap?

CRISIL: The T&D loss during the enactment of EA 2003 was around 32.53%, and as of 2022, the T&D loss stood at around 20.73%. The T&D loss has reduced by ~36.27% over the last 20 years and it is expected that by fiscal 2027, the losses would be reduced to 15%. Although the losses are still substantial compared to other countries.

Any reduction in the T&D loss level would help India to reduce the energy deficit scenario. For instance, a 1% reduction in the T&D loss level from the existing level would eliminate the energy deficit (-0.42%) position and in fact, result in an energy surplus position (1.69%) in fiscal 2022.

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