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The socio-economic impact of COVID-19 considerably affected
energy markets during 2020. Negative electricity demand, lower
utilization of coal-fired capacity, growing financial stress in the
distribution and generation segment, reduction in power prices, and
challenges for renewable and thermal additions marred the
performance of the power and renewables sector. Similarly, the
domestic coal market witnessed demand constraints, which resulted
in higher inventory costs and a lowering of imports. On the other
hand, natural gas demand remained buoyant as it was supported by
lower LNG spot prices, making it attractive in the power and
fertilizer sector.
Year 2021 is full of hope. Hope for a rapid recovery and hope of
getting relieved from the effects of pandemic. At the outset of the
year, there are numerous questions that run through us as sector
enthusiasts. Below are the some of the pressing questions that are
likely to determine the energy markets' trends in India for
2021.
Will the power sector recover from the damage done by
COVID-19? What are some of the key market reforms expected in
2021?
Electricity demand: Electricity demand
contracted by 2.6% in 2020. Demand from the industrial and
commercial segments dropped significantly, while the demand from
the household segment increased, as most of the commercial activity
transitioned to the virtual work-from-home setup. In 2021, with the
ease in lockdown restrictions and rapid rollout of the vaccination
campaign, electricity demand is expected grow aggressively (higher
than seen in past years).
Capacity addition: In 2020, India managed to
add only 7.2 GW of total capacity against the 20 GW additions in
2019. With the revival of demand, in 2021, coal-fired generation is
expected to recover while momentum in the capacity additions will
continue at a slower pace given the market challenges and
risk—financial health, grid availability, power purchase
agreement (PPA) cancellation, import duties, and overcapacity.
Capacity utilization: A decline in demand,
coupled with higher gas generation, resulted in lower utilization
of coal (52% in 2020, versus 57% in 2019). Further, the month of
April registered the lowest utilization of coal plants, averaging
about 42%. On the other hand, gas-fired generation improved on the
back of lower spot LNG prices and could find off-takers. In 2021,
the PLF of coal plants is expected to improve to about 58-60% in
2021, however, gas plants may see drop in PLF.
Power prices: Excess generation availability,
lower demand, and lower fuel prices (for both import coal and LNG
spot) led to a significant reduction (of ~16%) in the spot power
prices on the power exchange. The scenario, however, is expected to
improve in 2021, given the demand recovery and boost in coal-fired
generation and thus projected to be in the range of $44-46/MWh
(3.3-3.5 rupees/kWh), although prices will continue to be under
pressure owing to subdued international coal prices.
Policy and regulatory: Despite the
unprecedented damage of COVID-19 to the power sector's performance,
policy and regulatory development with the implementation of some
key market reforms continue to provide an impetus to the market. In
2020, Indian power sector witnessed a number of policy and
regulatory changes. IHS Markit expects more sectoral reforms in
2021 with some policy measures taking a more definitive shape. The
distribution sector continues to be the Achilles' heel, therefore
IHS Markit expects that the majority of reforms in 2021 will focus
on DISCOMs with the purpose of improving their financial viability,
streamlining their operations, and reducing their cost of power
purchase
What will be the future of technology-specific tenders?
What will be the key challenges for renewables growth in
2021?
India awarded 2.1 GW of hybrid wind solar capacity in 2020 and
an additional 1.6 GW capacity in hybrid tenders with storage
requirements. As of January 2021, more than 6 GW of hybrid
renewable tenders are open with requirements of storage or thermal
bundling to meet assured peak power and round-the-clock supply
requirements. It is expected that more such hybrid tenders will be
invited in 2021 as the government of India plans to set up
ultra-mega hybrid renewable energy parks.
India is slowly emerging from the aftermath of COVID-19, as the
pandemic hurt renewable additions significantly in 2020. India has
a healthy pipeline of over 50 GW, including about 21 GW of
renewable projects with expected commissioning in 2021. However,
there are several implementation challenges, which may affect
future additions including the challenges in land acquisition,
timely grid availability, high policy risk of PPA renegotiation or
cancellations, delays in signing PPAs, payment delays, and poor
credit rating of state-owned DISCOMs. Additionally, there may be
short-term volatilities in the solar photovoltaic (PV) supply chain
in 2021 as India plans to impose import duties on solar modules
from Chinese and Southeast Asian markets, in order to boost
domestic manufacturing.
Will India's thermal coal imports rebound in 2021? Will
the new reform measures help encourage foreign participation in the
coal mining sector?
COVID-19 constrained India's coal demand, consequently softening
coal imports in 2020. In 2021, IHS Markit expects coal demand to
increase as economy recovers from the effects of lock-down and
pandemic in 2020. However, the demand for imported coal may remain
subdued due to various reasons. Growth in domestic supply capacity
against weaker demand levels, regulatory changes that favor
domestic coal, and high inventories mean that although the imports
are expected to grow again in 2021, they will not return to 2019
levels until the late 2020s.
The Ministry of Coal (MoC) in November 2020 successfully
conducted the first of its kind auction under India's newly
introduced commercial coal mining. Out of the total 38 blocks that
were finally approved for auctioning, 19 blocks were fruitfully
auctioned. The success of the auction can be gauged from the fact
that the winners committed to sharing on average 28% of the accrued
revenue with the state governments, and even then, stand to earn
handsome returns on their investments. However, the only factor
that raises a question to this feat is the absence of any foreign
companies in the auction process. Apart from the COVID-19 pandemic,
various bureaucratic challenges, regulatory challenges, and
approvals required to start a mining project remain key concerns
for international investors. After evaluating the results of the
first round, the central government has already initiated various
changes to increase the project's attractiveness e.g. 'Single
window clearance portal', 'Amendments to the mining act' etc. It is
expected that the central government, in 2021, may come up with
more reforms and policy measures to further entice private
investors including foreign players to the commercial coal mining
sector.
Will domestic gas production growth affect LNG import
demand? What would be the impact on gas demand, of new reforms
being proposed in gas sector?
The domestic gas production declined by 11% y/y in 2020
primarily due to maturing gas fields and falling output from the
private sector entities. On the other hand, the natural gas demand
of India remained resilient despite the COVID-19 pandemic, reaching
pre-COVID-19 levels by the third quarter of 2020. Low LNG prices
coupled with other factors resulted in strong LNG imports, which
grew by 16% y/y to 26.8 MMt in 2020. However, in 2021, IHS Markit
expects tepid growth for LNG in India as the domestic gas
production rebounds (production increase and startup of various
domestic fields expected) and higher spot LNG prices (as seen in
some of the recent spot tender for month of February and March)
forcing the end-consumers switch to alternative fuels.
To achieve target of 15% of natural gas in India's energy basket
by 2030, the government plans to expand the gas transmission
network, adding more CGDs and increasing the compressed natural gas
(CNG) stations count. Further, there is a strong push for natural
gas sector reforms. In 2020, the Petroleum and Natural Gas
Regulatory Board (PNGRB) approved the country's first gas
exchange—IGX, which supported the development of a competitive
marketplace and brought transparency to the gas pricing mechanism.
Other key reform measures include—unified gas tariff mechanism,
and the unbundling of Gas Authority of India Limited (GAIL) into
standalone gas marketing and transmission entities (also announced
in Union Budget FY2022). Nevertheless, the implementation and
commercial challenges remain, and the proposed measures are being
continuously delayed. The uncertainty over these market reforms may
continue in 2021 as well. Hence, IHS Markit does not expect any
aggressive increase in demand from the reforms in 2021.
Will the focus on energy transition move from
renewables to other technologies?
Unlike some of the countries (like US, mainland China, Japan,
South Korea, UK, Sweden, Denmark), India has not committed to
'net-zero carbon emission plan' and is still working on a
sustainable development agenda to address climate goals and deliver
its commitment to energy access for all.
In 2015, India set an ambitious renewable target of 175 GW to be
achieved by 2022. A year later, under the Paris agreement, India
committed to voluntary targets of reducing the emission intensity
of its GDP by 33-35% (vis-à-vis 2005 levels), achieving a 40%
non-fossil fuel power mix by 2030, and creating an additional
carbon sink of 2.5-3 billion tons of CO2 equivalent.
Further, in the 2021 budgetary speech, the government of India
announced budgetary support (a fund of $300 million) to various
clean air programs across various cities and launch a "Hydrogen
Energy Mission" in 2021 to generate hydrogen from green power
sources.
These plans clearly state the government's intention to invest
in actions that address environmental concerns by diversifying its
overall approach to tackle the energy transition and meet its
commitment to reducing emissions.
Abhishek Rakshit, principal research analyst on the
Coal, Metals, and Mining team, leads the coverage of the coal
markets of the South Asian countries at IHS Markit.
Ankita Chauhan is a senior renewable analyst on the
Climate and Sustainability team at IHS Markit, covering research
and analysis for Indian and South Asian markets.
Ashish Singla, associate director with the Climate and
Sustainability team at IHS Markit, covering research and analysis
on Power and Renewable for South Asian countries.
Rashika Gupta, Ph.D., is a director on the Climate and
Sustainability team at IHS Markit, responsible for research and
analysis for the India, Sri Lanka, Pakistan, and Bangladesh energy
markets.
Vasu Goyal, senior gas analyst on the Climate and
Sustainability team, is an expert on South Asian gas and LNG
markets.
