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Looking forward to scale newer highs in CY22

The power sector clocked several all-time highs in CY21: 1) peak daily demand crossed 200GW in Jul’21; 2) solar capacity was enhanced by a record 8.5GW in 8MFY22; 3) power demand increased by 10.4% YoY during 8MFY22 to 920BU; 4) all-India coal offtake was up 22% YoY during 9MFY22 to 539mnte; 5) as many as 1.1mn smart meters were installed to take the cumulative meter installations to 3.5mn. These record highs in CY21 have set the stage for the power sector to scale even newer peaks in CY22. Rise in power demand will continue to be the key driver. While conventional power generation and consequently coal demand is expected to remain robust, installed capacity addition will be driven by solar. We expect action in the RE space to pick up soon, with basic customs duty (BCD) on import of solar cells and modules to be a key factor. Recent 1.8GW SECI solar tender was oversubscribed >3x, indicating the huge appetite and competition in the RE space. Regulations/policies to improve sector dynamics will continue. NTPC, Coal India, NHPC, CESC, and Genus Power remain our top picks.

What we expect going forward:

* RE addition key for capacity push: RE, particularly solar, has been the primary driver of installed capacity addition. From FY18 till date, India has added 36.3GW of solar capacity and 7.7GW of wind capacity. Although during 8MFY22, 8.5GW of solar capacity has been commissioned, this is still below requirement. In order to cater to an annual demand growth of 10GW, and to reach the 300GW solar target by CY30, solar capacity addition has to be >30-35GW p.a. We estimate 12GW of solar capacity addition in FY22E, which may increase to 15-20GW in FY23E once the BCD on imported solar modules and cells is approved, after which we expect solar project auctions to pick pace as it will provide price stability.

* Power demand continues be higher YoY, but a more severe lockdown may hit daily/peak demand by 10-15%: On YoY basis, all-India daily/peak demand is higher by an average of 10.4%/10.2% YoY during FY22-TD (till 4th Jan’22). In comparison with FY20 too, all-India daily/peak demand is, on an average, 5.6%/5% higher YoY during FY22-TD. Peak demand during 1-7 Jan’22 has averaged >176GW, despite many states imposing restrictions. Drawing from the demand numbers clocked during the second wave in MayJun’21, we expect the current scenario to exert ~5% negative impact on peak demand. However, if the severity and duration of the lockdown further increases, we may witness peak daily demand declining 8-10% to 155-160GW levels and daily energy demand declining from the current 3,500-3,700MU levels to 3,300-3,400MU. Over the medium to long term, we expect thermal generation to continue to thrive until large-scale storage at viable rates are set up, especially to replace coal for catering to the base demand, which may be at least a decade away, in our view.

* Coal demand will remain robust: Analysing the daily load curve, thermal generation continues to be high during both solar and non-solar hours. Peak thermal supply at >135GW in the past few weeks indicates robust coal demand. During 9MFY22, India’s (CIL + SCCL) coal production was 469.5mnte, up 10.2% YoY, while offtake was at an all-time high of 538.6mnte, up 22% YoY. Cumulatively, 438.6mnte has been supplied to power plants, up 27.3% YoY. We expect FY22E domestic offtake (CIL + SCCL) to cross 700mnte as thermal generation continues to be high, hence keeping e-auction premiums elevated.

* Renewables space to witness more action in CY22: The push towards RE both globally and in India will result in developments in several areas, viz. government policies, import duties, costs and tariffs, domestic manufacturing, battery storage among others. Approval of BCD on import of solar cells and modules is a keenly awaited event for an all-round boost to the sector, from manufacturing to auctions. We expect more large-scale storage and green hydrogen projects to be announced in CY22 both by PSUs and private players as costs decline.

* Transmission projects worth Rs280bn approved: In the past one month, the GoI approved ISTS and InSTS projects totaling a value of Rs280bn. We expect tenders for these projects to be floated in FY23E and all the large players to participate. We also expect action on the Ladakh project and some elements of the project (worth Rs250bn) to be auctioned in FY23E. Another Rs260bn-worth ISTS assets have been identified in the latest NCT and are expected to be approved in the coming months.

* Smart meter push to gain momentum: All-India cumulative smart meter deployment stood at 3.5mn units by Dec’21-end, boosted by deployment of 546,000 meters in Q3FY22. Although, the ongoing/impending lockdowns in various states may lower the pace of meter installation, we expect tendering and installations to pick up significantly from Apr’22 onwards. Further, pace and number of installations should be relatively much higher in FY23E since the standard bidding document has been released and most states are on board w.r.t. implementation of the Rs3trn revamped distribution reform scheme.

* International Energy Agency (IEA) expects global coal demand to hit an alltime high in CY22: As per the IEA, global coal demand may hit a new all-time high at 8,025mnte in CY22, and will continue to be at similar levels up to CY24. In CY21, global coal production is set to rise 4.5% YoY to 7,889mnte and IEA forecasts an all-time-high production of 8,111mnte in CY22, but a slight decline to 8,014mnte by CY24. Between CY21-CY24, for India, IEA forecasts coal consumption to increase at a CAAGR of 3.9% to reach 1,185mnte, and production to rise at a CAAGR of over 6% to 955mnte by CY24. India’s coal imports are estimated to be up 12.9% over CY21 to 237mnte, and India will become the world’s largest met coal importer at 74mnte by CY24, overtaking China.

* Need more policy actions on the discom front: In 8MFY22, PFC and REC cumulatively disbursed a further Rs273bn (Rs154bn by PFC and Rs119bn by REC) to take the total disbursement to Rs1,029bn to state discoms under the Aatmanirbhar scheme. However, despite the temporary liquidity relief which these disbursals provided to the entire sector, we are again witnessing increasing overdue from discoms. As per the PRAAPTI portal, total discom overdue as in Jan’22 stood at Rs1,013bn. Top five states with highest overdue are: Maharashtra (Rs196.8bn), Tamil Nadu (Rs189.2bn), Rajasthan (Rs112.9bn), Uttar Pradesh (Rs87.4bn) and Andhra Pradesh (Rs77.3bn). Sterner, and structural, policy actions are required to improve the discom payment situation.

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