Recent India Updates

2017-07-26 / Regulatory & Industry Trends

Develop Sustainable Power Infrastructure Through Energy Diversification

Why Renewables:

With India’s rising population and climate changes, resource availability is becoming a prime concern to achieve food, energy and water security.

Given that India is a net importer of oil & gas and 65 per cent of India’s total power production capacity is thermal power. In fact, 50 per cent of industrial water used in India is for energy production. Oil & gas is widely used in modern life. Be it fueling the transportation, running factories, producing electricity/ fuel for cooking or as a by-product for fertilizers in agriculture.

By 2050, India is expected to be the world’s most populous country with 1.7 billion people, and the world’s second largest economy with a GDP of $42 trillion (in PPP terms). It is estimated that India would require to increase its annual food production by 30 per cent, to 333 million tonnes. In addition, more than 880 GW of new power generation capacity would be required by 2040.

Thus a paradigm shift is needed to manage our natural resources better. Addressing the food, energy and water nexus is being considered increasingly important without compromising sustainability. 

India has ambitious plans for renewables, unfortunately it constitutes on a smaller chunk of the energy security pie, at present. To achieve 175 GW, Government is pushing for sustainable energy for all. The point is, when there is not enough energy for all, sustainable energy is a long shot. Access to clean power, green power is likely to open up newer avenues for sustainable economic growth.

Indian Economy Deconstructed:

It is apparent that the traditional approach of managing either food, energy or water components independently is not viable. A holistic approach would increase overall resource-use efficiency, and improve productivity.

Indian rural economy accounts for about 70% of employment and 50% of GDP with agriculture being the main driver. The main workforce is dependent on a single crop round the year resulting in their low incomes. This single crop phenomenon causes distress into the system in case it fails.

Adding to their irrigational woes, is vagaries of monsoon. While a good monsoon brings cheers to farmers, it is not the case always. A sustainable solution so that farmer has income for three crops in year will result in doubling income of farmers. Today’s biggest bottleneck of not having three crops / year is lack of adequate electricity, water and other employment opportunities for their extended family. To improve productivity in irrigation, affordable power is crucial. To run pump sets using diesel is an expensive proposition. The recent scheme of loan waivers by state is not contributing to a sustainable solution, it is becoming more of a political upmanship.

Given the unique sectoral challenges, FEW security must be deconstructed to find effective solution. Governance challenges are at the heart of this issue in every region.

Complex Governance Challenges:

The waiver of farmer loans in majority of the states, dramatic protests by Tamil Nadu farmers in Delhi and a warning from the RBI Governor against loan waivers — have once again questioned the outcome farm loan write-offs.

Will farm loan waivers impact rural credit culture? Are these used by politicians as bait to win elections? Will it affect the national balance sheet?

A 2014 World Bank study on the farm loan waiver announced in 2008 by the United Progressive Alliance government found that the scheme had no significant effect on productivity and investment in agriculture, and, in fact, worsened loan allocation in districts with greater exposure to the debt waiver.

Unless farmers are given the right incentives to shift to more sustainable farming options, Indian agriculture will not be able to overcome its current crisis.

The (Source: State Bank of India) report states that the total cost of farm loan waivers to states that have announced them adds up to INR 1.31 lakh crore. Of this, the largest (INR 36,359) is by Uttar Pradesh followed by Maharashtra (INR 30,500). Andhra Pradesh, Telangana and Punjab are the remaining three states.

A report by Kotak bank estimates that around INR 1.6 lakh crore of farm loans (0.9% of GDP) could come up for waiver. Consequently, slippages to consolidated fiscal in FY2018 is likely to be around 0.2-0.4% of GDP. The report says that the loan waivers could increase to INR 2.2 lakh crore if other prominent agricultural states Bihar, Haryana and West Bengal also opt for it.

On the other hand, intent of government with UDAY scheme was ‘carrot and stick’ way of cleaning up the books of electricity distribution companies. The power ministry is anchoring this reform, which will not only resolve the debt issues of these companies, but will also improve their efficiency in services and bill collection.

The state power distribution companies have started reporting handsome savings and improvements in operational efficiency after local authorities refinanced utility debt with over INR 1.6 trillion worth of state bonds under the debt restructuring-cum-turnaround scheme, the Ujjwal Discom Assurance Yojana (UDAY), rolled out more than a year back, according to a review by the Union power ministry.

Out of the INR 48,800 crore DISCOM debt, about INR 23,900 crore was repaid till the third quarter of FY17 under UDAY and another INR 9,000 crore was repaid by Tamil Nadu recently, resulting in 65% of DISCOM debt being repaid, the analysts wrote in the report (Source: Edelweiss Securities). Farm loan waivers will amount to 2 per cent of gross domestic product (GDP) ($40 billion, or Rs 2,57,000 crore ) by the 2019 polls, as other states are also likely to follow the BJP’s Maharashtra and UP governments, according to a Bank of America Merrill Lynch (BofA-ML) report.

Although according to finance ministry, states have to fund their own farm loan waivers that is scarcely possible. Even after waiver in states, their balance sheet is stretched. States want to support irrigation by offering affordable power. While savings in interest cost from the debt restructuring is evident, consolidating the turnaround will hinge on how utilities make sharp cuts in losses from transmission and theft and close the gap between their cost of supplying power and the revenue realised. The revenue gap of DISCOM will persist, as real cash on the table is not available. With thermal operating at 55% PLF, and more and more renewables being added to the grid, DISCOM need to pay the developers. Unfortunately states have not been paying wind projects for 4 – 6 months and solar projects for 2 months – 1 year.

The disaster of combination of farm loan waivers and UDAY scheme will virtually shut off capital for any other social schemes and sustainable development of human index in states. Often there are huge trade-offs between the short-term wins of individual stakeholders and long-term holistic solutions. At each level, governance affects the choice of policies and outcomes for addressing these formidable challenges.

Are we falling back into the trap where state agriculture waiver will undo the good work of UDAY? Will productivity factor in delay in payments in bidding? Will loan waiver directly or indirectly affect power sector in the country? What is the solution to a sustainable way forward in resolving water, agriculture and power cycle?

As We Move Forward:

Is oil & gas the answer or are there any other sustainable solutions? India has more than 19 million installed water pumps – 7 million are run by diesel generators while the rest are grid-connected. As a result, more than 4 billion litre of diesel and 85 million tons of coal are consumed per annum to support water pumping for irrigation. India’s geographical advantage makes solar-powered water pumps an excellent alternative to diesel powered pumps in particular. Studies estimate India’s potential for solar PV water pumps for irrigation to be 9 million to 70 million pump sets. As many as 62,000 solar water pumps have been installed so far in the country. Hence there is a huge potential of solar pump installation in the country.

If partially subsidized ‘Use and pay’ model is introduced by state government authorities at local level for solar powered water pumps, very soon agriculture loan waiver will be a thing of past.

Any free power, free water is never a solution. The Government may provide Direct Benefit Transfer (DBT) to eligible households who use electricity for irrigation purpose. The power subsidy may be directly transferred to eligible households.  As the household alleviates from the set criterion, subsidy can be waived off.

Government should rope in Private players who would work towards offering affordable power to rural population. Affordable power is sustainable only with storage.

Decentralized solar solutions like micro grids can be deployed to address the last mile access challenge in areas with population over a lakh.  Studies convey that an average Indian rural household (monthly net income of INR 4000 – 5000) is willing to spend INR 150 per month on electricity, provided he can avail it. With reducing costs and increasing efficiency of solar technologies, Solar based Mini and Micro grids are being perceived as a durable solution. Since there are no variable costs in these projects, it will go a long way. The economic power of farmers to double and it is likely to offer them diversification of income. Micro grids would not only in help in reduction of health hazards but also help in overall sustainable development of the nation as a whole. At the next level, solar powered water ATMs if installed, will result in providing clean water for villagers, contributing to a significant lifestyle improvement.

The new energy security is in electric vehicles. Done right, there can be synergy between EVs and the grid. EVs are efficient with regenerative braking capturing energy otherwise wasted. The cleaner vehicles can be compensated through reduced registration charges, or we can even aim for mandating EVs for taxis and selected (urban) public transport vehicles. Using conventional sources for charging EV is not desirable and have to be replaced by solar, wind, hydro and hybrid technologies. Innovation is already happening in these areas.

Other considerations are India’s crude oil import bill was USD 80.3 billion this fiscal, we have also imported 28.3 million tonnes of petroleum products worth USD 10 billion in FY16. The transport sector in India consumes about 16.9% (36.5 mtoe: million tonnes of oil equivalent) of total energy (217 mtoe in 2005-06). The resultant of rising population is increased consumption of electricity, as we are at the bottom of per capita consumption. With usage of sustainable sources of energy, the import bills are likely to crash by 20%.

While renewables is the key driver of energy and economics in India, one question still remains unanswered is how will the pressure of land requirement for energy sources vis a vis land requirement for food security be handled by the government.

Contributed by Sunil Jain, CEO, Hero Future Energies





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