The Power Finance Corporation Limited (PFC Limited), the leading financier to the power sector, is the nodal agency for various government schemes, including the Revamped Distribution Sector Scheme (RDSS). In an interview with Power Line, Saurav Kumar Shah, executive director, PFC Limited, shared his views on the power sector, the company’s increasing funding exposure to the distribution segment, and the progress on the RDSS. He also spoke about the outlook for the sector and PFC’s future priority areas…
What are your views on the current state of the power sector?
India is the third largest consumer of electricity in the world today. This is further complemented by a growing per capita consumption on account of sustained economic growth and the 100 per cent electrification rate achieved under various government schemes. Post-Covid-19, the demand for electricity has picked up significantly, resulting in peak power demand reaching new highs. The ministry has responded well to the scenario and various policy-level directives including a price cap on exchange prices and a blending mandate on imported coal have been issued to tackle the challenges.
The power sector’s transition to renewable energy is progressing well, with the country’s current renewable energy capacity standing at around 166 GW, accounting for nearly 41 per cent of the total installed capacity. On the distribution reforms front, the RDSS is progressing smoothly. With most of the states getting on board under the late payment surcharge (LPS) scheme, the sector, which has been reeling under high legacy dues, is showing improvements through timely payment of past dues in equated monthly instalments. These are all long-term positives for the segment and will attract fresh future investments. The sector’s optimism is also driven by the government’s bold policy initiatives over the past few years. On the demand side, initiatives such as the Right of Consumer Rules are empowering consumers and encouraging discoms to focus on providing reliable services and quality electricity. On the supply side, there has been a policy focus on financial discipline through statutory mechanisms for timely payment to generators and opening up investment avenues in the new and renewable energy sectors through initiatives such as the green open access rules and guidelines for battery energy storage.
Having said that, there are challenges to be mitigated across the value chain. Integration of an increasingly higher variable generation capacity into the main grid is one such challenge. While we have to meet our net zero commitments, we have to do so keeping overall systemic costs at an affordable level. The inadequate performance of discoms is also a major focus area. However, the reforms ushered in by the government will contribute hugely towards the improvement of the sector in the near term.
What is your assessment of the performance of the power distribution segment in the last one year?
There has definitely been an improvement in financial discipline. Now almost all discoms are submitting audited accounts in a timely manner and have started publishing unaudited quarterly accounts, which give a clearer picture on subsidy accrual, receipts, etc. A similar improvement has also been registered in regulatory discipline; tariff orders for 2022-23 have been approved for the majority (about 50) of discoms and a substantial number of discoms have already filed their petitions for 2023-24. There has been a marked reduction in aggregate technical and commercial losses, from 22 per cent in 2020-21 to 17 per cent in 2021-22, which translates into roughly Rs 200 trillion in saved power purchase costs for discoms. The performance of the utilities may be appreciated in the backdrop of the Covid situation prevailing during 2019-20 and 2020-21, which impacted collection efficiency, and exerted pressure on state government finances.
PFC’s exposure to the distribution segment is on an upward trend. Are there any concerns on the quality of distribution assets?
Distribution is a crucial segment of the power sector value chain as it is the segment facing the end-consumers and is the primary source of cash flow for the entire sector. Given the increasing focus of the government on reforming the power distribution segment, it is natural that PFC’s exposure in terms of distribution assets is increasing in its total loan portfolio.
PFC, as the nodal agency for the implementation of various central government schemes including the liquidity infusion scheme (LIS), the RDSS and the LPS, is funding different state discoms. Due to this, the company’s exposure to distribution has gone up to nearly 35 per cent of its portfolio, as of September 2022. The entire exposure under Government of India (GoI) schemes (LPS, LIS) is covered by state government guarantees. Seventy-two per cent of our state discom exposure is backed by state government guarantees and enjoys the highest levels of security. PFC has been enabled to lend to the logistics and infrastructure sectors, which will help reduce its risk through the diversification of asset classes. Further, additional assets towards the distribution segment being funded under the RDSS have limited risk exposure owing to proposed tripartite agreements with the Reserve Bank of India along with the state government and claw back conditions in case of a lack of achievement of targets/performance parameters.
What has been the progress under the RDSS? What progress can be expected in the next one year or so?
Projects have already been sanctioned under the RDSS for 46 discoms across 28 states and union territories. Around Rs 1.19 trillion is the sanctioned outlay for loss reduction works. A total of 204 million smart prepaid meters and 5.6 million smart system meters for distribution transformers (DTs) and feeders have been sanctioned across the onboarded states, with a total estimated outlay of Rs 1.35 trillion. Tenders have been issued for distribution infrastructure/loss reduction works worth Rs 788.27 billion. Tenders for smart metering works, covering nearly 103 million prepaid smart meters for consumer metering and 3.8 million system meters (DT and feeder) have been issued. I am quite hopeful that the majority of the tenders floated will be awarded within this fiscal year and physical progress will start on the ground.
What are your views on the draft Electricity (Amendment) Bill, 2022 and its implications for the sector?
The Electricity (Amendment) Bill, 2022, introduced in the Lok Sabha in August 2022, is currently under review by the Parliamentary Standing Committee on Energy. The proposed amendment is envisaged to address the existing challenges in the sector, through improvement of both the financial viability of discoms as well as sectoral governance. The proposed bill empowers electricity consumers to choose their suppliers while enabling market forces to drive competition and efficiency in the sector. Various provisions aimed at timely determination of tariffs, recovery of prudent expenditures, and establishment of a payment security mechanism and a cross-subsidy balancing fund have been incorporated in the bill, which will effectively mitigate the risks and lead to the financial sustainability of the distribution segment. Further, the bill proposes the strengthening of the regulatory commissions and stricter penalties to enhance discipline and governance in operations. Overall, the proposed amendments are aligned with the intent to improve the feasibility and viability of the sector, which is currently stressed under legacy issues and challenges. However, proper planning, frameworks, market design and guidelines are extremely vital to ensure proper implementation of the proposed changes and reap the intended benefits.
What is your outlook for the power sector in the near to medium term?
Sustainable growth of the power sector will be key to the government’s ambition of making India a $10 trillion economy by 2030. According to the Central Electricity Authority, India will need to build 817 GW of generation capacity by 2030. In line with the country’s COP26 commitment, about 500 GW of this capacity will come from non-fossil-fuel sources. Considering our current non-fossil fuel-based capacity of about 173 GW, we need to grow by almost three times. The industry will present immense growth opportunities to renewable energy developers.
As the variable composition of the grid increases, there will be increased opportunities for frequency and voltage control support services, broadly termed as frequency control and ancillary services. The operational and financial performance of discoms is also envisaged to improve under the RDSS in the near term. This will free up discoms’ financial resources and enable a more customer-centric approach, opening up opportunities in value-added services for customers. Smart metering and related advanced metering infrastructure will play a crucial role in enabling this. As the above trends take shape, policymakers and regulators will have a crucial role to play to protect end-consumer interests.
What are some of your top priorities for PFC going forward?
We will continue to consolidate our existing strategic areas of financing transmission and distribution infrastructure, providing renewable energy financing and partnering with the GoI in its reform initiatives in the sector. We prioritise our role as an instrumental financial partner in government reform schemes for the power sector. Being the nodal agency for the RDSS, we consider this one of our top priorities and are making products to suit the requirements of meter manufacturers, metering infrastructure service providers, etc. PFC is also in the process of finalising the Integrated Rating and Ranking exercise, which aims to reflect a true, fair and dynamic picture of the financial health of distribution utilities. Additionally, PFC is spearheading India’s energy transition by financing e-mobility, energy storage, waste-to-energy projects, etc. We are looking forward to being a development finance institution (DFI) in the near future for funding India’s net-zero ambition. As part of our diversification strategy, we have funded infrastructure projects in the irrigation, water treatment sectors, etc. PFC has recently sanctioned financial assistance to projects in the infrastructure sectors including metro rail, bioethanol, manufacturing, ports and nuclear energy. We hope to continue this journey of venturing into financing of new infrastructure areas.