Caught in a Limbo

The traverse of India’s power sector is packed with more than enough lessons to make for a brilliant case study. The journey from being the driver of an aspiring economy to the doomed passenger of a sinking boat, power sector has seen it all in the last three years. The growth of Indian economy is rather strongly correlated to the growth of its energy sector. According to a statement issued by the Planning Commission, for the GDP to grow at a steady 9%, the power sector must grow at 8.1%. Although it would surely be quite interesting to attempt to determine the contribution of one towards the downfall of the other as the correlation works both ways, the causality, per se, is a matter of another discussion.

Natural Gas and Coal Crunch

India has clocked record capacity additions during 2011-12, 2012-13 with 20+ GW in each year. This feat, however, fails to veil the possibility that the ground situation might prevent us from attaining a similar figure in the near future. Close to 75% of India’s 225 GW of generation capacity is thermal fuel based (65% coal and 10% Natural Gas). In the last few years, the fuel supply situation has witnessed a plethora of negative developments. Both Natural Gas and coal supplies have taken serious hits.

For the gas-based capacities, the epicenter lies in the Bay of Bengal. Production from the KG-D6 basin has fallen by over 70% from its peak of around 69 mmscmd. Most the gas-based generation capacities that were being developed on the back of the promise of a close to 80 mmscmd of gas production from the basin, are facing an uncertain future today. Burning it further is the shooting-through-the-rooftop R-LNG prices. The situation has gotten so bad that the Ministry of Power has vetoed any new gas-based project till natural gas production improves.

The coal-based plants aren’t much better off either. Right from the revision in prices of Indonesian coal to the continued failure of CIL to meet its supply commitments, going has only gotten tougher. They have had to resort to higher imports of coal to bridge the production-demand gap, which has nudged the Cost of Generation north. Recovery in the supply of indigenous coal is yet many years away, and till then the generating companies will have to put up with the costlier alternative.

Gloomy State of Economy

As if the intrinsic problems weren’t bad enough, the macroeconomic factors too started uprooting the early shoots with the slightest amount of chlorophyll. The economic downswing has brought along several unfriendly forces. For example, the persistent inflation has forced RBI to tighten liquidity in the market by keeping interest rates high. This, in turn, has made accessing cheap capital difficult for the capital-intensive power sector, where the debt component is, normatively, as high as 70%. Many proposed generation projects are at a standstill for want of lenders, several are scouting international destinations for more economical options.

Discoms in Distress

All the above mentioned difficulties would still have mattered only so much, had our State Discoms been in a better shape. Factors like imported coal, R-LNG and higher interest rates essentially mean higher costs, which is not such a big problem as long as it does not exceed the affordability of the buyer. Unfortunately, our Discoms are in a way worse state. Their messed-up financial standing makes even current prices of electricity look like hard to sustain, let alone absorbing any increase in it.

The worst factor kicking the already down power sector is the pessimism among prospective investors. It is not as though lenders and developers have suddenly decided to look away from the India growth story. Everyone still seems to believe that the fundamentals of a strong demand are still intact, but they have surely turned cautious. ‘Wait & watch’ is the popular approach now.

Government Initiatives

Unlike most of the ministries under the current regime of the UPA government, Ministry of Power has been doing a commendable job, regardless of the unfavourable outcomes. It has taken many policy initiatives to improve the coal supply situation, to mitigate fuel price hikes and to help Discoms improve their financial state. As the sentiment of private investors is not exactly jubilant, the Ministry must ensure that the government companies don’t fall into a slumber and keep the wheels rolling.

The Way Ahead

There is no apparent quick-fix to these problems. Coming out of this situation will require a balance yet spirited symbiosis between the Ministry, regulators, government companies and the private players. Fuel production needs to see steady augmentation from domestic sources for which the CIL has already drawn a roadmap, and the nation hopes they manage to meet the milestones set. The longevity of the high interest rates is contingent upon many factors related to the Indian economy and most of which are outside the purview of power sector players. Only thing to be done here is to hope for the government to reduce the CAD, improve the supply chain of goods and products, curb inflation… the list goes on. Improving the health of Discoms is perhaps the most difficult problem of all. The central government has recently launched the Financial Restructuring Plan for State Discoms to salvage some of the worst performers. However, unless the basic issues like high AT&C losses and subsidies don’t receive a more effective addressal, a profit-making distribution sector will continue to elude us. Nonetheless, the optimistic school of thought would want us to believe that the sector has bottomed-out and the sombre is over.

                                                                      
                  Infraline Energy Oil & Gas Knowledgebase Team