Renewable energy capacity is closing in on thermal capacity

Installed capacity includes power plants installed in Gujarat, owned by the state generation company (GSECL) and privately owned plants. It also includes out-of-state plants (mainly NTPC) whose power share is allocated to Gujarat.

The visual shows two key developments. Power capacity has gone up from just over 13 GW to 48 GW, a near quadrupling of capacity. More starkly, these twelve years have seen a rapid rise in renewable energy (RE) deployment in the state. Total RE capacity has jumped from 2 GW to over 20 GW in a span of 12 years, making it a highlight of this period. 2024 may be the year when total renewable capacity shall exceed in-state thermal contracted capacity, underlining the fact that the energy transition is truly under way in the state.

Thermal capacity addition and retirement have both slowed

Thermal capacity addition has drastically slowed down during the period. The last major addition was a 800 MW new unit (unit 8) at the Wanakbori Thermal Power plant in Kheda District close to Ahmedabad. Meanwhile, gas power plants, which is a vital energy transition technology, remains marginal in Gujarat. There have been no new gas plants commissioned after 2015 mainly on account of high cost of generation.

There has been close to 1 GW of retirement of older plants, mainly coal but also one diesel plant.However, the average age of most of the state run Gujarat Power Corporation Limited(GSECL) is unusually high(see next visual).

An ageing state thermal fleet

Several GSECL plants are above the 25 or 30 year mark, making them prime candidates for retirement. These include three units of Ukai, six units of Wanakbori, two units of Gandhinagar and all three units of Kutch Lignite Power Plant (KLTPS). The cumulative installed capacity of plants above 25 years is 2.5 GW.

Retirement of coal power plants are complex issues that straddle technical, economic, political and sociological(i.e.jobs) aspects.There are also environmental norms that coal fired plants must meet by installing Flue Gas Desulphurization(FGD) units.However, the deadline has been postponed once again to 2027.

Solar PV becoming the dominant renewable energy source

The renewable energy growth story has been the highlight of Gujarat’s power sector in this period. Capacity has gone from a meagre 300 MW in 2010 (only wind) to over 17 GW of wind and solar in 2023. Further, solar PV appears to be the technology of choice over wind power. Total installed solar PV capacity overtook wind for the first time in 2023. This trend is expected to continue over the foreseeable future.

There is no significant change in bioenergy or hydro power, indicating the challenges with these technologies in terms of feedstock availability and viability(biopower) and hydrogeology and environmental impacts of hydro power.

Growth in rooftop PV has accelerated in recent years

We have already seen that solar PV remains the dominant renewable energy technology in Gujarat. Historically this growth was heralded by ground-mounted projects, usually in large solar parks. However, since 2018, owing to a favourable state solar policy that provided copious incentives for the installation of rooftop solar PV systems, the distributed solar segment has taken off. Total rooftop capacity has increased by 16X over the last five years i.e. between 2018 and 2023.

This augurs well from a grid management perspective, but also has financial ramifications of the distribution supply business.

Renewable energy in the electricity mix is now more than a third

While installed capacity of renewables is likely to exceed total installed thermal capacity, the share in the final energy mix of renewables remains significantly lesser owing to the lower capacity factors of these plants. However, as of 2023, renewables already contribute to 38% of energy supply in the state, up from just 5% in 2014 - a remarkable progress.

Thermal assets available yet mostly underutilized

Thermal assets have more or less maintained their availability to close to the normative levels (85%). However, the actual plant load factors (a measure of whether these plants were dispatched or not) are extremely low. The average PLFs for 2022 was as low as 50%, indicating that these plants are not being fully utilised, perhaps owing to renewable energy purchases and exchange purchases.

Lignite power plants have traditionally been very problematic with availability factors reducing over time to a mere 36%. The main challenges are plant problems associated with the quality of lignite (mined in Gujarat). This implies that although lignite is one of the cheapest sources of energy, its utilisation remains muted.

The PLFs of gas plants on the other hand are abysmally low (7% in 2022). Indicating that gas remains the choice of last resort.

Generation costs are increasing largely due to operations and maintenance costs

Coal power has seen significant increases in variable costs (i.e. fuel). Costs have nearly doubled over twelve years from an average of Rs. 2.0/kWh to about 4.0/kWh, growing between 5-6% per year.

Fixed costs are usually reported in absolute terms (i.e. Rs. Cr), however for the purposes of understanding its impact on per unit energy terms, we have divided it by the energy produced in that year. Because energy produced each year varies based on the PLF, there are wide variations in the per unit fixed costs. A much more reliable way of understanding how fixed costs have played out over time can be viewed in the next sections.

Coal costs have increased steeply, in particular imported coal

Coal costs have seen steep increases in price over the last twelve years, with average prices of all plants and all types of coal going up 2.3X. Note, that coal prices for all plants are not uniform owing to different distances the coal has to travel to reach the plants. Imported coal costs are nearly 50% more expensive than domestic washed and unwashed coal.

There have been significant changes in coal mix post 2020, owing to the fuel supply rationalisation policy from the Ministry of Power. This is clearly visible in plant specific fuel mix data.

Fixed charges increase continue to be led by increasing employee expenses

This visual shows the fixed charges displayed on a normative basis (i.e. normalized to the plant capacity per MW). This helps us compare plant specific per MW O&M costs. The data shows that the fixed costs have also been steadily increasing over time. The most significant contribution of the fixed charges (> 50%) is from operations and maintenance, which primarily includes employee expenses and repairs and renovation of these plants. Note that fixed costs are paid by the consumers regardless of whether these plants are utilised.

Sales growth has been strong at close to 8% per annum

Electricity sales in Gujarat have grown nearly 3X since 2010. Most of this growth is from the government owned distribution company that caters to most parts of the state. DGVCL, which covers the southern parts of the state, has seen the strongest growth with roughly 9% per year followed by PGVCL, UGVCL and MGVCL. Torrent distribution in Ahmedabad and Surat in contrast have grown the least. Nearly all discoms show strong post-COVID recovery. Both TPL Surat and Ahmedabad were most impacted by COVID, largely owing to the fact that they primarily serve urban areas.

Industrial sales have seen the highest growth, fueling Gujarat's manufacturing hub status

The industrial sector has been the fastest-growing sector in terms of electricity consumption, with demand jumping 4X over the period. No other segment has seen such a surge, highlighting Gujarat's potential as a manufacturing hub for India. Interestingly, Torrent discoms in Ahmedabad and Surat haven't experienced similar industrial growth, likely due to their focus on residential customers. All four state-owned discoms have witnessed strong industrial growth.

UGVCL remains the only discom with agricultural sales surpassing industrial, but this is expected to shift soon. MGVCL and DGVCL have the lowest share of agricultural sales due to water availability and fewer agricultural consumers. Agricultural sales have increased 1.6X, with the strongest growth seen in PGVCL, followed by UGVCL.

Distribution losses drop below 10%, except for PGVCL

Distribution losses have seen a significant decline, bringing them under 10% across most DISCOMs in Gujarat. This progress is admirable, but losses remain higher compared to international benchmarks. Theft contributes to a substantial portion of these losses. PGVCL faces the highest loss (~16%), while other DISCOMs fall below 7%. DGVCL boasts the lowest losses among state-owned companies. This variation is attributed to historical and cultural factors influencing perceptions of "free" power. However, all DISCOMs have shown commendable progress in reducing losses, suggesting a shift towards acknowledging the value of electricity.

Strong revenue growth fuels Gujarat's power sector

Gujarat's power sector has witnessed impressive revenue growth over the past decade, with a 3.5X increase. The four government discoms now bring in a total of 60,000 Cr (almost 2.5% of the state's GDP!), highlighting a robust financial performance. Fuel adjustment charge (FPPPA) has seen the most significant growth compared to tariff increases, indicating effective fuel price passthrough in Gujarat. Notably, the reported agricultural subsidy from the government has remained unchanged at Rs. 1,100 Cr for the past decade. This potentially allows for increased cross-subsidization recovery through both tariff and FPPPA.

Fuel costs bite: Gujarat DISCOMs struggle with revenue gap

Gujarat's government-owned DISCOMs face a recurring challenge: almost half the time, they fall short of their revenue targets. This "revenue gap" is primarily driven by increasing fuel purchase costs, especially for coal, highlighting the difficulty in accurately predicting these volatile prices. While most of the shortfall is recovered through annual adjustments, 2022 saw the highest revenue gap ever, further exposing DISCOMs' financial vulnerability to fuel price fluctuations. Despite the partial cushioning provided by the fuel pass-through mechanism (as explained in the previous section), the pressure on both consumer pockets and DISCOMs' working capital is evident.

Fixed costs rise, fueled by soaring employee expenses

Fixed costs for Gujarat's DISCOMs have climbed significantly over time, with employee expenses leading the charge. These expenses have skyrocketed threefold in just 12 years, highlighting intense pressure from rising wages. In contrast, other components like depreciation and interest costs have shown much slower growth. Consequently, O&M expenses now account for nearly half of the total fixed costs for DISCOMs.