"Power Spend"—New Options for Bulk Customers in India
Deregulation and incentives transform India's power sector
Changes in the Indian power sector in terms of deregulation and capacity addition are opening up new opportunities for bulk customers. The strengthening of the pan-India transmission network and the growth of merchant power are opening new avenues for buyers and sellers. Renewable energy is emerging as a viable, cost-effective power supply source, aided by technological advances and favorable incentives. These developments are paving the way for a new era in India's power sector.
Most bulk customers across India face availability and price issues on power sourcing. They often have to depend on state-owned distribution companies, or discoms, that periodically revise tariffs upward without a corresponding improvement in supply. The unreliable power supply forces many customers to use expensive and polluting diesel generator sets or alternate fuel bases. To address these issues, large users of power (typically 20 megawatts or more) usually set up captive production units. Yet, now even these units face major problems with fuel costs and availability. What is the solution for all of these challenges? The answer lies in the ongoing deregulation in the power retail market.
India's Changing Power Market
Bulk customers in India have new opportunities to procure power. There are three main enablers:
The creation of a pan-India power market. The creation of the national grid has enabled users to purchase power from far-off locations, thereby creating a pan-India power market (see figure 1). This power market is supported by the addition of significant generation capacity, transmission improvements, and open access (OA).
The Indian power sector will add 50,000 to 55,000 megawatts of generation capacity during the ongoing five-year plan, with an additional 90,000 megawatts expected over the next four to five years. The private sector is contributing a significant portion of this expansion (roughly 37 percent between 2007 and 2012). Driven by increased competition, concerns regarding the financial health of state electricity boards (SEBs), and changes in the market structure, private-sector generators have become more amenable to evaluating newer supply models, including power tolling and power purchase agreements (PPAs) with bulk customers.
Changes in the Indian power market in terms of new capacity and retail market deregulation are opening up new opportunities for bulk customers and paving the way for a new era.
Another important step over the past few years has been reforms and investment in transmission. Pan-India transmission capacity increased from roughly five gigawatts in 2002 to 22 gigawatts in 2011. By 2015, capacity should reach 50 gigawatts, with the ability to evacuate roughly 20 percent of the country's total generation capacity (see figure 2).
Additionally, OA has been allowed for bulk customers (purchases greater than one megawatt) at the transmission and distribution level, giving them the flexibility to source power directly from generators and power exchanges. OA implementation has varied significantly across states, however. The states of Punjab, Gujarat, and Rajasthan have been quite progressive, for example, while states such as Kerala and Goa have seen moderate to low implementation. Nonetheless, OA provides customers an opportunity to explore alternatives outside SEBs.
Better availability and affordability of merchant power. Merchant power has emerged as an alternative opportunity for "selective procurement" in recent years. Power exchange-traded volumes increased more than five times between 2009 and 2011 as many generation units set aside 10 to 25 percent of their capacity for short-term power sales. At the same time, merchant power prices have moderated, with the average price of exchange-traded power falling from 7.5 rupees per unit in fiscal year 2009 to 3.5 rupees per unit in fiscal year 2011. This in turn has opened up opportunities for bulk customers to meet some of their needs through merchant power. The share of OA customers in the India Energy Exchange (IEX) increased from 2.8 percent in April 2010 to 36.6 percent in March 2011. Nevertheless, price volatility and a lack of adequate long-term products reduce the potential for complete reliance on merchant power.
The rise of renewable energy. Recently, the focus on renewable energy has increased considerably. The central government and many state governments have set aggressive renewable energy targets and rolled out many different incentives to attract investors. The advent of renewable purchase obligations (RPOs), favorable feed-in tariffs, and reduced OA costs for renewable energy (as much as 30 percent lower compared to conventional fuel) have given this segment a boost. Many bulk customers are now evaluating options such as biomass, wind, and small hydroelectric not only to meet their "green" aspirations but also to reduce total power costs. As per current trends, renewable energy will become an important component in the power portfolio for most bulk customers.
These three trends offer opportunities for customers to rethink their power procurement strategy, and to challenge the status quo. Many leading companies have already initiated the efforts and, in most cases, uncovered tangible benefits in terms of cost and availability.
For example, we were engaged by an industrial bulk customer in India to define an action plan to reduce its total power spend at four manufacturing sites. The engagement called for an assessment of the major deregulation trends in India's power sector and their applicability for the company's business. We defined various options across sites and at the overall business level, which were then evaluated in terms of business impact and ease of implementation. The optimal procurement strategy had the potential to reduce power costs by 10 percent and increase the use of "green" power after implementation.
Power Procurement Options
The current and emerging market scenarios offer five options—each with multiple sub-options—for sourcing power beyond the traditional state-owned discoms (see figure 3).
Buy conventional power directly from generators. Customers can purchase power directly from generators (through OA) that operate in the same state or in low-fuel-cost states such as Odisha and Chhattisgarh. This is the most commonly explored alternative among buyers and is favored for large-scale requirements.
Purchase from renewable energy sources. Depending on the location of the industrial site, customers can also use renewable energy as an alternative supply source. Biomass and wind energy in particular provide attractive tariffs based on location and the amount of power required. Buyers can also expect pass-through benefits from renewable energy certificate (REC) credits given to renewable energy producers.
Source power from exchanges or through bilateral agreements. Power exchanges present potential opportunities for "selective" power purchase. Customers need to time the market well to gain from price volatility and ensure the total delivered cost of power is lower than alternative options.
Set up in-house power units based on conventional fuel. Most large industrial customers have explored this option for power security and cost reasons. Before taking this step, players must evaluate the suitability of doing this, based on the necessary investments and potential benefits. Various sub-models may also work, including a cogeneration-based plant for power and steam, a group captive plant within an industrial region, or a mega-captive plant located at one site that "wheels" power to multi-site customers' other sites.
Establish renewable-based power generation units. Customers that select this option are typically those that prefer control over generation units while also benefiting from the cost and environmental benefits of renewable power. RECs have made this a very attractive option.
The Power Portfolio
The right sourcing model will vary by customer, location, and requirements. Taking a portfolio view to power requirements allows customers to determine the best way to reduce their overall costs of procurement. In many cases, multiple alternatives may be necessary to ensure availability, business impact, and ease of implementation. In our experience, an optimized power portfolio not only reduces total power spend by 8 to 10 percent but also improves long-term operational advantage in terms of secured supply and "green power" aspirations.
Authors
Vikas Kaushal is a partner in the Gurgaon office.
Abhishek Poddar is a principal in the Gurgaon office.
Saurabh Singh is a consultant in the Gurgaon office.
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