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‘Big challenge renewable energy sector faces is financing’

According to reports, Siddhartha Nigam Partner, Lead Advisory, Grant Thornton India LLP, speaks on what ails India’s power sector and why we lag when it comes to harnessing renewable energy sources.

Q: What according to you is the single biggest factor ailing India’s power sector today?

A: Demand for power is surging in India driven by high economic growth and rural electrification however supply side is constrained both at generation end due shortage of fuel and high techno-commercial losses because of inefficiencies in transmission and distribution. The single biggest factor is the shortage of domestic coal given that almost 58% of electricity is generated from coal. This dependence may also not be sustainable given that at the current rate of growth, India’s coal reserves are projected to run out in 45 years and we already import about 10% of coal for electricity generation, and this is expected to reach 16% this year. Over the last 5 years, the demand for coal has grown at rate of 8-9% annually as compared to a 5-6% increase in domestic production. This has widened the demand/supply gap, leading to growing dependence on imported coal.

Q: Most of our power is thermally generated. Why do we still lag when it comes to harnessing renewable energy sources?

A: The biggest challenge facing the renewable energy sector today is financing. The high cost of debt is the most pressing problem currently facing the financing of renewable energy. Studies indicate that the higher cost and inferior terms of debt in India may raise the cost of renewable energy by 24-32% compared to similar projects financed in the U.S. or Europe. General Indian financial market conditions are the main cause of high interest rates for renewable energy. Growth, high inflation, competing investment needs, and country risks all contribute. A shallow bond market and regulatory restrictions on foreign capital flows also adds to the problem, while the cost of currency swaps and country risk negate the advantages that could come from access to lower cost foreign debt.

Q: Have the authorities acted upon the lessons from the July 2012 blackout or is there a high possibility of another such power outage in the near future?

A: The July 2012 blackout was caused largely due to four factors:

i. Weak transmission infrastructure: Two key lines, Agra-Gwalior-Bina and Kankrauli-Zerda, were down because they were either being upgraded or repaired. Thus key transmission lines connecting regions of the grid were weak

ii. Pressure from the North: States such as Uttar Pradesh and Haryana were drawing far more power than “scheduled”, leading to a heavier burden on already weak infrastructure

iii. Oversupply from the West: States such as Gujarat, MP and Maharashtra were supplying power to the grid far in excess of “schedules”, most of this power was flowing to the North

iv. Ignored warnings: States and power plants ignored warnings and requests from grid operators to reduce generation/demand from the grid

The biggest learning from the July 2012 blackout was the need for much tighter regulation, and the stronger enforcement of those regulations. Since the grid collapse, a series of changes have been put in place in the way the grid operates. Drawing or supplying more power than “scheduled” is now heavily frowned upon, and is less widespread than it used to be. The biggest lesson has been in terms of controls at each point, from the level of the individual power station onward, so as to be able to respond to fluctuations in demand. With South India likely to be integrated into the national grid by 2014, engineers and grid planners face a race against time to upgrade infrastructure and enforce regulations. The costs of any failure will now be much higher than they were last year.

Q: What do you think are some of the measures that policy makers need to take on a priority basis?

A: Some of the measures that policy makers need to take are: –Implement distribution reforms to reduce Aggregate Technical and Commercial (AT&C) losses –Create a deep and efficient wholesale electricity market in order to stimulate investments in plants –Increase focus on renewable energy in order to reduce dependence on thermal energy –Strengthen governance to drive implementation as currently accountability for the power sector is fragmented.

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