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India’s Power Sector : Five Key Challenges and Solutions

Despite the encouraging growth trajectory in the energy space over the last few years, the Indian Power sector has still not been able to induce and sustain the required capacity addition matching the ever growing power demand of the country.

Five Key Challenges facing the Energy Sector

a. Fuel Security Concerns: Thermal capacity addition is plagued by the growing fuel availability concerns faced by the Industry. While a significant gas based capacity of more than 20,000 MW is idle due to non-availability of gas. Coal supplies by CIL is restricted to around 65% of actual coal requirement by coal based thermal plants, leading to increased dependence on imported coal with the cascading result of high power generation costs.

b. Financial Health of State Discoms: Years of populist tariff schemes, mounting AT&C losses and operational inefficiencies have adversely affected the financial health of State Discoms which are currently plagued with humongous out-standing debts.

c. Under-procurement of Power by States: Increasing power generation costs due to limited fuel availability, poor financial health of State Discoms, high AT&C losses have contributed in suppressed demand projections by State Discoms.

d. Inimical Financing Environment: Over the last 4-5 years, the leading rates have increased significantly from the time of project appraisal resulting in project cost overrun and hence higher end tariffs.

e. Policy Paralysis: The micro level policies governing the fuel cost pass-through, mega power policy, competitive bidding guidelines are not in consonance with the macro framework like The Electricity Act 2003 and the National Electricity Policy.

Five Solutions to Combat the Foregoing Challenges

a. Fuel Reforms: Various aspects like ramping up coal production by both public and private sector in a time-bound manner, increased participation of private sector in coal production and easing of regulatory framework, clearances and approvals for allocation and development of coal blocks & gas infrastructure need to be addressed while formulating such reforms.

b. Arriving at an optimal fuel mix: There is a dire need to develop both conventional and non-conventional forms of energy, wherein, three key factors must be kept in view for developing an energy mix: (i) the pattern of energy demand seen in the country (ii) the availability of fuels, and (iii)fuel production and import costs. It would be effective to adopt coal thermal as a fundamental component of the fuel mix for the next 20-30 years, with solar occupying 5-8 percent of the total mix.

c. Balanced Regulatory Interventions: Regulators need to be sensitized to the challenges faced by the sector and policy framework needs to be crafted and enforced to ensure a win-win situation for all the stakeholders. They must pro-actively intervene to resolve the immediate issues ailing the power sector.

d. Increased Financing Facilities for Energy Sector: A robust and sustainable credit enhancement mechanism for funding in Energy Sector needs to be put in place through increased participation by global funding agencies like The World Bank, ADB etc. in the entire value chain.

e. Public private partnership model: There is a strong need to push for wider-scale implementation of public private partnership models. The private sector has been playing a key role in generating power, a more supportive environment will help in bridging the energy deficit of the country.

This is the foundation of a functioning energy market and the sustainable, green growth economy that India should pursue.

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