Interview with Saurav Kumar Shah: The RDSS will contribute hugely towards the improvement of the sector

Power Finance Corporation Limited (PFC Limited), the leading financier to the power sector, is the nodal agency for various government schemes, including the Revamped Distribution Sector Scheme (RDSS). In an interview with Renewable Watch, Saurav Kumar Shah, executive director, PFC Limited, shared his views on the power sector, the company’s increasing funding exposure to the distribution segment, and the progress on the RDSS. He also spoke about the outlook for the sector and PFC’s future priority areas…

What are your views on the current state of the power sector?

India is the third largest consumer of electricity in the world today. This is further complemented by a growing per ca­pita consumption on acc­ount of sustai­n­ed economic growth and the 100 per cent electrification rate achieved under various government schemes. Post Covid-19, the demand for electricity has picked up significantly, resulting in peak power demand reaching new highs. The ministry has responded well to the scenario and various policy-level directives in­cluding a price cap on exchange prices and a blending mandate on imported coal have been issued to tackle the challenges.

The power sector’s transition to renewable energy is progressing well, with the country’s current renewable energy ca­pa­city standing at around 166 GW, accounting for nearly 41 per cent of the total ins­ta­ll­ed capacity. On the distributi­on re­forms front, the RDSS is progressing smoothly. With most of the states getting on board under the late payment surcharge (LPS) scheme, the sector, which has been reeling under high legacy dues, is showing improvement through timely payment of past dues in equated monthly instalments. These are all long-term positives for the segment and will attract fresh future investments. The sector’s optimism is also driven by the government’s bold policy initiatives over the past few years. On the dema­nd side, initiatives such as the Right of Co­n­sumer Rules are em­powering consumers and encouraging discoms to focus on providing reliable services and quality electricity. On the supply side, there has been a policy focus on financial discipline thro­ugh statutory mechanisms for timely pay­ment to generators and opening up in­vest­ment avenues in the new and renewa­ble energy sectors through initiatives su­ch as the green open access rules and guidelines for battery energy storage.

Having said that, there are challenges to be mitigated across the value chain. The integration of an increasingly higher variable generation capacity into the main grid is one such challenge. While we have to meet our net zero commitments, we have to do so keeping overall systemic costs at an affordable level. The inadequate performance of discoms is also a major focus area. However, the reforms ushered in by the government will contribute hugely towards the improvement of the sector in the near term.

PFC’s exposure to the distribution segment is on an upward trend. Are there any concerns on the quality of distribution assets?

Distribution is a crucial segment of the power sector value chain as it is the seg­me­nt facing end-consumers and is the primary source of cash flow for the entire sector. Given the increasing focus of the government on reforming the pow­er distribution segment, it is natural that PFC’s exposure in terms of distribution as­sets is increasing in its total loan portfolio.

PFC, as the nodal agency for the imple­men­tation of various central government sche­mes including the liquidity infusion scheme (LIS), the RDSS and the LPS, is funding different state discoms. Due to this, the company’s exposure to distribution has gone up to nearly 35 per cent of its portfolio, as of September 2022. The en­tire exposure under Government of India (GoI) sc­he­mes (LPS, LIS) is covered by st­a­te government guarantees. Seven­ty-two per cent of our state discom exposure is backed by state government guarantees and enjoys the highest levels of security. PFC has be­en enabled to lend to the lo­gistics and in­fra­structure sectors, which will help reduce its risk through the diversification of asset classes. Further, additional assets towards the distribution segment being funded under the RDSS have limited risk exposure owing to proposed tripartite agreements with the Reserve Bank of India along with the state government and clawback condi­tions in case of a lack of achievement of targets/ performance parameters.

What has been the progress under the RDSS? What progress can be expected in the next one year or so?

Projects have already been sanctioned under the RDSS for 46 discoms across 28 states and union territories. Around Rs 1.19 trillion is the sanctioned outlay for loss re­duction works. A total of 204 million sm­art prepaid meters and 5.6 million smart system meters for distributi­on transformers (DTs) and feeders have been sanctioned across the onboarded states, with a total estimated outlay of Rs 1.35 trillion. Tenders have been issued for distribution infrastructure/loss reduction works worth Rs 788.27 billion. Ten­ders for smart metering works, covering nearly 103 million prepaid smart me­ters for consumer metering and 3.8 million system meters (DT and feeder), have been issued. I am quite hopeful that the majority of the tenders floated will be aw­arded within this fiscal year and physical progress will start on the ground.

What are your views on the draft Electricity (Am­endment) Bill, 2022 and its implications for the sector?

The Electricity (Amendment) Bill, 2022, introduced in the Lok Sabha in August 2022, is currently under review by the Pa­­rliamentary Standing Committee on Ener­gy. The proposed amendment is en­­­vi­sa­ged to address the existing cha­ll­en­ges in the sector, through improvement of both the financial viability of dis­coms as well as sectoral governance.

The proposed bill empowers electricity consumers to choose their suppliers whi­le enabling market forces to drive competition and efficiency in the sector. Various provisions aimed at timely determination of tariffs, recovery of prudent expenditu­res, and establishment of a payment se­cu­rity mechanism and a cross-subsidy balancing fund have been incorporated in the bill, which will effectively mitigate the risks and lead to the financial sustainability of the distribution segment. Furth­er, the bill proposes the strengthening of the regulatory commissions and stricter penalties to enhance discipline and governance in operations. Overall, the propo­sed amendments are aligned with the intent to improve the feasibility and viability of the sector, which is currently st­re­ss­ed under legacy issues and challenges. How­ever, proper planning, fra­me­works, mar­ket design and guidelines are extre­mely vital to ensure proper im­plemen­ta­tion of the proposed changes and reap the intended benefits.

What is your outlook for the power sector in the near to medium term?

Sustainable growth of the power sector will be key to the government’s ambition of ma­­king India a $10 trillion economy by 2030. According to the Central El­ectricity Authority, India will need to build 817 GW of generation capacity by 2030. In line with the country’s COP26 commitment, ab­out 500 GW of this capacity will come from non-fossil fuel sources. Considering our current non-fossil-fuel-based capacity of about 173 GW, we need to grow by al­most three ti­mes. The industry will present imm­en­se growth opportunities to renewable energy developers.

As the variable composition of the grid in­creases, there will be increased opportunities for frequency and voltage control support services, broadly termed as frequency control and ancillary services. The operational and financial perfor­ma­n­ce of discoms is also envisaged to imp­rove under the RDSS in the near term. This will free up discoms’ financial reso­ur­ces and enable a more customer-centric ap­pro­a­ch, opening up opportunities in value-added services for custo­me­rs. Sm­art me­tering and related advanced me­tering infrastructure will play a crucial role in en­abling this. As the above trends take sha­pe, policymakers and regulators will have a crucial role in protecting the end-consumer interests.

What are some of your top priorities for PFC going forward?

We will continue to consolidate our existing strategic areas of financing transmission and distribution infrastructure, providing re­newable energy financing and partnering with the GoI in its reform initiatives in the sector. We prioritise our role as an instru­me­ntal financial partner in government re­form schemes for the power sector. Being the nodal agency for the RDSS, we consider this one of our top priorities and are ma­king products to suit the requirements of meter manufacturers, metering infrastructure service pro­vi­ders, etc. PFC is also in the process of fi­nalising the Integrated Rating and Ran­king exercise, which aims to reflect a true, fair and dynamic picture of the fin­ancial health of distribution utilities. Additio­nally, PFC is spearheading India’s energy transition by financing e-mobility, energy storage, waste-to-energy projects, etc. We are looking forward to being a de­velopment finance institution (DFI) in the near future for funding India’s net zero am­bition. As part of our diversification strategy, we have funded infrastructure projects in the irrigation and water treatment se­c­tors, etc. PFC has recently sanctioned fin­ancial assistance to projects in the in­fra­structure sectors including metro rail, bio­ethanol, manufacturing, ports and nuclear energy. We hope to continue this journey of venturing into financing of new infrastructure areas.