The Union Budget 2021-22, presented on February 1, 2021, has provided a major impetus to the power sector with an emphasis on discom viability to transform the power sector. Among other things, the budget has proposed a Rs 3 trillion reform scheme for the power distribution segment and has put in place a framework for allowing the choice of electricity supplier to consumers. The renewable energy segment also received some positive news as plans to launch a national hydrogen mission and notify a phased manufacturing plan for solar cells and solar panels have been proposed for 2021-22. Overall, the budget has elicited a positive response from power sector stakeholders.
A round-up of the economic survey and key budget announcements for the power sector…
Economic Survey 2020-21 highlights for the power sector
The Economic Survey 2020-21 was presented on January 29, 2021, as a precursor to the union budget. It showcased the state of the power sector. It also highlighted the issue of high transmission and distribution (T&D) losses plaguing the sector, among other things.
According to the Economic Survey 2020-21, the power sector has witnessed significant transformation on both the demand (universal electrification) and supply (integration of green energy) sides. The total installed capacity increased from 356 GW in March 2019 to 370 GW in March 2020. Further, the generation capacity reached 373 GW in October 2020. The capacity addition in the power sector was mainly driven by the government in the year 2019-20. However, India’s T&D losses have been declining since 2001-02, but are still substantial. As compared to the T&D losses of other countries, India’s T&D losses are very high.
According to the survey, the electricity sector has retained its momentum since September 2020, with power consumption registering a positive year-on-year growth. The sector is estimated to register V-shaped recovery with a growth of 7.1 per cent in the second half of 2020-21.
The survey highlights that the decline in energy deficit is partially attributed to enhanced energy efficiency and improved energy intensity (defined as the quantity of energy required to produce a unit of output) in India. The energy intensity of India (at 2011-12 prices) decreased from 656 tonnes of oil equivalent (toe) per Rs 1 million in 2011-12 to 554.3 toe per Rs 1 million in 2018-19. During the period under consideration, the per capita consumption increased from 0.47 toe to 0.58 toe. Further, the energy sector projects account for the highest share (24 per cent) in the Rs 111 trillion National Infrastructure Pipeline for 2019-20 to 2024-25. The rest of the investment will be contributed by the road, railway, urban and other segments.
In 2020-21 (April-October 2020), the all-India coal production stood at 337.52 mt, witnessing a year-on-year decline of 3.3 per cent. The contraction in production is attributable to the Covid-19 pandemic. The energy supply in India is heavily coal dependent. The government has been taking several measures to reduce the environmental impact of coal-based electricity generation while meeting the country’s power demand. Some of the measures are the creation of a carbon sink, and launch of coal bed methane projects and surface coal gasification projects.
The survey also notes that under the Integrated Power Development Scheme (IPDS), launched in 2014, projects worth Rs 309.91 billion have been sanctioned to the states so far, and distribution strengthening has been completed in 442 of the 546 circles till the end of September 2020. Further, the country has already accomplished two major landmarks in rural electrification – 100 per cent village electrification under the Deendayal Upadhyaya Gram Joyti Yojana (DDUGJY); and universal household electrification under the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya).
The budgetary allocation for the Ministry of Power for 2021-22 has declined to Rs 153.22 billion as compared to Rs 158.75 billion in the previous year. Of this, 72 per cent is for central sector schemes, including the IPDS (Rs 53 billion); the DDUGJY (Rs 36 billion); power system strengthening schemes for smart grids, green energy corridors and other crucial transmission components (Rs 14.55 billion); and the Power System Development Fund and energy conservation schemes (Rs 6.54 billion). The budgetary allocation for the Ministry of New and Renewable Energy remained constant at Rs 57.53 billion in 2021-22 as that allocated in the past year. Further, the budgetary allocation for the Department of Atomic Energy increased marginally by 0.2 per cent to Rs 182.65 billion in 2021-22, while that for the Ministry of Coal declined by 39.4 per cent to stand at Rs 5.35 billion.
Key budget announcements
Scheme to reform power distribution: The finance minister announced a Rs 3,059.84 billion scheme for five years to reform the country’s power distribution segment as part of the Union Budget 2021-22. The scheme will provide assistance to discoms for infrastructure creation, including prepaid smart metering and feeder separation, and upgradation of systems. To get funds under the scheme, discoms will have to bring down financial losses to zero. If discoms are making losses, they will not be eligible to get financing from the scheme unless they work out a tangible plan to reduce the losses over four to five years, and get approval from the states to get funds for strengthening distribution systems. The advantage of this scheme is that it will be tailored to the requirements of the distribution companies. The aim is to ensure 24×7 power supply. The scheme will disburse funds for replacing the human interface in metering, billing and collection with smart meters. The other focus areas will be energy accounting, and feeder and transforming metering. The disbursement will start as soon as the discoms submit a plan.
Framework to choose power distribution companies: The Union Budget 2021 also announced putting a framework in place for allowing a choice of electricity supplier to the consumers. The government plans to delicense distribution, the way it delicensed generation in 2003. The existing discoms will remain and continue to function, but now they will have to face competition. Any company that wants to take up distribution can now do so, anywhere in the country. The objective is to empower the consumer and eliminate discom monopolies. It wants consumers to have choices by removing restrictions. The regulator will only determine the ceiling prices. The ongoing parliament session will consider the Electricity (Amendment) Bill, 2021, which has proposed amendments including measures such as delicensing of the power distribution business to bring in competition.
Equipment manufacturing zones: The budget also provided for three power and renewable equipment manufacturing zones under the scheme titled Manufacturing Zones under the Atmanirbhar Bharat Package. The concept note has been circulated. It will first go to the expenditure finance committee and then to the cabinet. These zones are divided into three categories – coastal, landlocked and hilly states. The scheme will call on states to submit applications to set up these zones; the state that offers land and power at the lowest price will get the zones. The government will provide Rs 5 billion for each zone. A power equipment testing facility will be set up by the Central Power Research Institute, and renewable energy equipment testing facilities will be set up by the National Institute of Solar Energy and National Institute of Wind Energy. The centre is also planning to provide open access power supply to these zones in case the selected states are unable to supply cheaper electricity.
Asset monetisation: A national monetisation pipeline of potential brownfield infrastructure assets has also been proposed for monetising operating public infrastructural assets, including those owned by Power Grid Corporation of India Limited. To this end, transmission assets worth Rs 70 billion will be transferred to Powergrid’s InvIT.
Green energy boost: To give an impetus to the non-conventional energy sector, an additional infusion of Rs 10 billion to the Solar Energy Corporation of India and Rs 15 billion to the Indian Renewable Energy Development Agency has been announced. Another announcement was regarding a phased manufacturing plan for solar cells and modules. To further encourage domestic manufacturing, customs duties on solar inverters were raised from 5 per cent-20 per cent and on solar lanterns from 5 per cent-15 per cent. Customs duty of 2.5 per cent was also introduced for the import of lithium-ion battery parts. Meanwhile, the exemption of customs duties on all items of machinery, instruments, appliances, components and auxiliary equipment used for setting up solar power generating projects was revoked. To improve the ease of access to finance, debt financing of infrastructure investment trusts by foreign portfolio investors will be allowed, subject to amendments in the legislation.
National Hydrogen Energy Mission: The government has announced the Hydrogen Energy Mission 2021-22 for generating hydrogen from green sources. It has proposed to manufacture green hydrogen using solar power and to use it to make ammonia. The price may be higher initially, but it is proposed to have certain purchase obligations for green ammonia. Similarly, purchase obligations on steel and oil refineries for using green hydrogen have been proposed.
The Union Budget 2020-21 has largely delivered on the expected lines, and has tried to reform the weakest link in the power value chain, that is, the power distribution segment, besides furthering green growth. “The plan for power distribution sector reforms, with an outlay of Rs 3 trillion over five years, is critical to address the weak operational and financial position of state-owned distribution companies, subject to effective implementation. Discoms’ timely payments will benefit power generating companies and attract investments as the government plans to introduce competition in the distribution segment and enable electricity connection portability for consumers over the medium term,” notes Fitch Ratings.
That said, much will depend on the successful implementation of these reforms. Industry watchers note that despite the provision of a liquidity package infusing Rs 1.2 trillion, the financial viability of discoms is still a serious concern. Recently, attempts to privatise power distribution in the union territories have not seen much progress. That said, plans around hydrogen, renewables and battery technologies will promote energy security, help in meeting the climate change commitments and indigenise manufacturing.