The Indian energy sector has been rapidly evolving and has witnessed several changes in recent times. One can say that it's undergoing a transformation and disruption at the same time. A record capacity of over 75 GW was added over the last three years leading to over-capacity in thermal power. Industry doesn't see new thermal capacity being planned for some time, however, the existing capacity close to commissioning, or under construction will come to grid. Renewable (RE) has become an irreversible trend with successively lower tariff discoveries i.e. Rs 2.44 per unit being the lowest tariff. Rooftop solar is yet to achieve critical mass, but is poised to pick up. Wind power has recently exhibited competitiveness with solar tariffs as low as Rs 2.643 per unit have been discovered through recent competitive bidding processes. Overcapacity and weak demand growth (4.5 per cent) have led to stress in the sector - thermal to a large extent, and renewable seeing some signs. Recent cases of reneging of Power Purchase Agreements (PPA) have further added to the spectre, needing system-wide resolution to the stressed asset problem. Transmission segment Project development through competitive bidding has been made mandatory. FY16 witnessed projects worth Rs 21,000 core being awarded on public-private partnership (PPP) route. The pace dropped in FY 2017 to Rs 9,800 crore due to weak uptake by the states. The sector has seen increased private participation especially the inter-state corridors. The pace of adoption at the state level has been slow, and needs stronger focus. Even at the Centre, experts have seen a slow-down of bids, despite interest from private sector in this segment. Oil and gas market The Government of India (GoI) has set out a vision of 10 per cent reduction in energy imports by 2022 in order to move towards a self-sufficient India. The policies in the upstream sector are driven with this vision and target. In 2015, a new policy for small fields known as Discovered Small Field (DSF) policy was brought out offering improved fiscal terms viz. no oil cess applicable on crude oil production and moderate royalty rates. In the most recent DSF Bid Round 2017, a total of 134 bids were received for 34 contract areas from 47 companies. Incorporating the learnings of DSF, in March 2017, the GoI introduced the Hydrocarbon Exploration and Licensing Policy (HELP) which aims at boosting the oil and gas production in India, through the participation of domestic and international companies under the significantly simplified fiscal and administrative regime. The GoI has also set up the National Data Repository (NDR) to facilitate diligent exploration of India's sedimentary basins, where interested investors can access, visualise and purchase exploration and production data. Energy mix Oil demand grew at unprecedented rate of ~8 per cent over the past two years. The International Energy Agency (IEA) has projected a 4 per cent average growth demand till 2040, backed by economic growth and corresponding strengthening of transport sector demand. Natural gas demand growth was robust in 2017 (9.2 per cent) in contrast with shrinkage (-6.3 per cent) observed in 2015. However, on an overall basis, gas demand has weakened on the back of domestic gas production constraints, which have limited gas availability for power sector. Around, 14 GW of stranded gas based projects were partially resuscitated with Re-gasified Liquefied Natural Gas (RLNG) auctions. While share of city gas distribution is currently small, future demand is likely to come up. Going forward, RE is likely to have a major influence on energy. Coal though for some period of time is likely to remain the predominant fuel in the Indian context. Similarly, in the case of oil, the transport sector is the largest user, wherein oil is expected to increasingly be replaced by electricity from RE as the prime mover. While sources such as coal and natural gas are likely to retain presence in energy mix, the convergence is bound to replace a large share of these fossil fuels in favour of RE. The energy sector globally as well is undergoing significant disruption, and India is no different. Key trends that are redefining the energy sector landscape include -Decarbonisation, Decentralisation and Digitalisation. Various policy and other developments indicate India's energy sector already being significantly influenced by these trends. Decarbonisation India has committed to RE targets of 175 GW by 2022. As a signatory to Conference of Parties (COP) 21, India has further pledged to reduce emissions intensity by 33-35 per cent by 2030 from 2005 level and have 40 per cent share of non-fossil fuel based sources in the total supply mix by 2030. In parallel, the GoI has indicated plans to supplement conventional vehicles with Electric Vehicles (EVs) in near future, which has large implications on energy and allied sectors. This transition will surely happen, but the pace may be different then what is being laid out by government, and more importantly will require number of key things at the policy and government end to make this journey less painful for the sector as a whole. Bio-fuels have a role to play, but again requires government support. Clean coal technologies are likely to find their way into the system as well going forward. Decentralisation India aims to install 40 GW of solar rooftop by 2022. Several states in India have shown their commitment to the goal by announcing solar roof-top policies and regulations. An eco-system for rooftops is a work in progress including the channelisation of low cost funds, technical innovations, new business models, etc. With storage prices declining rapidly, rooftop solar could clearly bring the next disruption and further support decentralisation. Viable models will certainly complement nation-wide electrification drives and aid in achieving energy access targets. Alongside, with the advent of electric vehicles the fungibility between fuels (electricity from coal, renewable and other sources), and oil and gas (for transport) is likely to be more pronounced. Such decentralisation will bring its own set of opportunities and challenges. Digitalisation Digital disruption in the utility sector can become a magnet for innovation. Consumers will be much more empowered as they will have the means of generating and/or actively managing their own services through smart grids, smart instruments and mobile applications. Utilities will become more operationally efficient and grids more resilient. Upon introduction of retail competition, digital will play a vital role in managing operations, consumer switching and provision of value added services, etc. These services have implications beyond the power sector, into other utility services like city gas distribution, water and EVs. A vision for the future of the sector will need to embrace the above trends, and will need to support movement of sector towards these through more organised sector structure and operations. Below are key points that are important going forward. Structural changes Carriage and content segregation is now back on priority. Potential models for segregation, structuring options, and the role of various entities and phasing of competition need to be actively debated to make the transition more amenable. There are a number of other considerations envisaged under the Electricity Amendment Bill 2014, such as Open Access in Distribution, Provider of Last Resort (POLR), role of intermediary entities, elimination of cross subsidies, and treatment of regulated assets, etc, that will play a key role in shaping the next level of reforms. It is well understood that the transition will happen in phases however sector entities will need to gear up to respond to the challenges and opportunities that are likely to emerge. Planning and design paradigms Both are likely to change as variability and flexibility planning becomes critical with increased influx of RE and decentralised resources such as battery storage and EVs. An integrated view of the sector will be required to give signals for capacity addition (technology, phasing, location and quantum), evolve power markets and take policy decisions on areas such as tariffs and subsidy designs. Future role of 'utility' Under retail competition, utilities may evolve as network integrators, and serve to integrate a diverse mix of generators, transmission entities and retail/customer demand. Agility in response and consumer orientation will be key. System operation at distribution level will most likely become a necessity, leading to the creation of more vibrant Distribution System Operators (DSO). The transition will require stronger distribution level planning and operations. Contract structures RE may not only put more pressure on the viability of new generation capacity (having higher fixed costs) but may also marginalise the operations of old plants (with high variable costs). As the pattern of use changes, discoms are likely to become averse to long term contracts. Investors however will seek long term agreements for assured debt service and returns. This calls for a fresh look alternative contract structures to ensure a win-win situation for buyers and investors alike, for e.g. limiting maximum PPA term to 15 years (approx. debt term) with the first seven years as traditional PPA with regulated prices and the next eight years with market-based prices. Stressed assets resolution Failure of under development projects to secure fuel and power linkages can further aggravate the stressed asset situation. Investment cycle needs to be rekindled and investor's interests safeguarded with swifter actions. Some of the low hanging fruits could be renegotiation of existing PPAs to get them to sustainable levels of tariffs aligned to resized capital structure. There needs to be delinking of coal supply and PPA requirements. Commercial mining needs to come in at the earliest. Other decisions can be around retirement of old assets instead of mothballing new plants and creation of a stressed asset fund under National Investment and Infrastructure Fund (NIIF). Demand increase needs to be created by getting diesel generation based costly capacity out of the system. Power markets The power sector is tightly regulated with inflexible tariffs which typically don't change more than once a year. Transition to markets with high share of RE, integrated energy storage/EVs, advanced ancillary services, etc will necessitate flexible tariffs to accommodate these technologies. Further, introduction of capacity market need to be considered for delinking the investments from electricity markets. Stronger ancillary services market also needs to be enabled for better grid resilience. Transmission capacity too needs to be made tradable to ensure full flexibility in resource deployment. Oil and gas markets Reducing energy imports would require increasing India's indigenous oil and gas production by maximising the potential of already discovered hydrocarbon resources in India. Infusing state-of-art Exploration and Production technologies, investments and best-in class management practices would help in production enhancement from existing mature fields. Further, for the development of gas markets and moving towards country's target of becoming a gas-based economy, competitiveness and transparency is critical. Dense pipeline network, city gas development ecosystem, competitive prices and fiscal and policy incentives for gas consumption would be the key enablers to ramp up the share of gas in the country's energy basket from the present 6.5 per cent to 15 per cent. Serving the rural connected A large population is being connected through existing GoI programmes however serving these may not be economical. Innovative business models around Distributed Renewable Energy (DRE) to serve rural loads in an efficient manner will need to be evolved. Key enablers will be availability of low cost finance, effective modes of integration, co-existence with grid and community participation. Obligation to serve The 'Power for All' programme aims at provision of 24x7, quality and reliable electricity to all consumers. Electricity Act, 2003 provides an overall construct for this programme, which obligates utilities to supply electricity on request. However, the obligations are weakly adhered to and instances of penalties are limited. The recently-launched Saubhagya scheme aims to electrify 30 million un-electrified households which will bring many more consumers into the fold, stretching the utilities further to meet the obligation. Over and above capex planning and operational discipline, policy and regulatory measures are equally needed to fulfill the obligation. One way is to embed the 'Obligation to Serve' in the utility filings, where transparent and timely disclosures of load shedding hours and eventually reaching a zero load shed state should be the objective. Cybersecurity As technology adoption increases among the utilities, the number of digital transactions and processes is likely to increase significantly. It is of utmost importance to understand the risk of such cyber exposure and preparedness required to safeguard the grid, assists, and consumers. Concepts of cyber governance, cyber operation and resilience, cyber awareness, and compliance management will need to be embedded into the utility organisational processes. At the same time, customer privacy and data protection will need to be ensured in all transactions. Skilling Fast changes will necessitate the quick recognition of emerging trends and continuous skilling and re-skilling of manpower to adapt with the evolving requirement of the sector. While data analytics and automation are expected to be at the core of power sector operations, other areas requiring manpower readiness will be integrated resource planning, distribution planning, technology, energy storage, advanced system operations, etc. It is critical that the vision for the future, underlying policies and strategies while taking note of the current state of the sector also take into account the evolving state, and embed the above aspects into its design. The GoI has demonstrated tremendous initiative and leadership in resolving current sector issues, and even as that remains in progress, it must lay clear pathways to ensure a well-functioning and vibrant energy sector in times to come. - Manish Aggarwal, Head, Energy and Natural Resource, KPMG
