This article originally appeared in The Hindu Business Line.

India has made significant strides in the power sector over the past few years. It is the fourth largest country in the world in terms of generating capacity, and achieved close to zero energy deficit in FY17. In distribution, the Government’s ambitious UDAY programme has seen widespread adoption with 27 States and UTs signing up for financial restructuring. Similarly, the transmission sector has been energised with significant expansion, a vast improvement from the days of the infamous blackout in 2012.

However, a few challenges still need to be addressed if India is to achieve its ambitious vision for the power sector—24x7 power for all, 175 GW of renewable capacity, and viable and self-sustaining distribution companies (discoms).

Principal concerns

First, the power sector continues to underperform with stagnating returns and limited new investments. Second, there is significant stranded capacity on account of demand not growing as fast as generating capacity, leading to declining plant load factors (PLF) for conventional plants. The situation is likely to become more challenging as ‘must-run’ renewable capacities come online.

The third issue, and the focus of this article, relates to stressed discom financials. Even though discom finances are expected to show improvement, we expect total losses in FY17 (as per UDAY MoUs) to be at around ₹25,000 crore for 27 States/UTs which have signed up for the UDAY scheme. Strained discom financials have a cascading impact on the overall sector: there is continued load shedding due to high aggregate technical and commercial (AT&C) losses and high unmet ‘latent’ demand. So, despite being surplus in power, India’s per capita power consumption of 1,000 kWh per annum lags countries such as Brazil (2500), China (3600) and South Africa (3900).

Today, one of the key issues facing discoms is the significant quantum of capacity tied up in long-term Power Purchase Agreements (PPA) with durations of 12-25 years. Many PPAs are legacy high-priced, long-term contracts that continue to drain the financials of discoms. Such PPAs will continue to hinder UDAY’s objectives.

Read the full article at The Hindu Business Line.

Amit Sinha is a partner and Parijat Jain is a principal at Bain & Company’s New Delhi office.