Positive Investment Climate will provide necessary impetus to the Indian Energy Sector

India is undoubtedly and irrevocably integrated into the global energy market. It relies on significant amounts of energy from foreign sources and, as such, India is a price taker, not a price setter. India can reduce its vulnerability to energy price fluctuation through a flexible and competent energy market, but it cannot isolate itself from price volatility. At the same time, to expand its energy supply capacity to meet the rapidly growing energy demand of its people, India needs more investment. A significant portion of the required investment must come from foreign investors, for whom it competes with other countries. This implies the necessity of integrating India’s energy institutions and policies with global practices.

In the last two years, we have seen international strategic investors (power utility companies) showing an interest in the Indian power sector. Their entry is much needed, not least because of operational capabilities, but also to bring in the much needed equity financing into the sector. In terms of the general investment environment, the doing business index (DBI) by the World Bank ranked India at 132^nd out of 183 countries in the world (World Bank, 2012). The areas in which India performed particularly poorly were “Dealing with construction permit” (ranking at 181^st) and “Enforcing contract” (ranking at 182^nd), both of which are critical for infrastructure and energy investment. One of the bigger concerns today is lack of new pipeline of projects since most of the existing set of players are stressed (aggregate debt-equity of 2.64 and cash losses of INR 124 Crore) and would not be in a position to bring much equity. The capacity addition target for XIII plan is 100 GW and private sector is expected to contribute at least 64 GW. This will require equity capital of INR 1,27,050 Crore.

To enable strategic and other large financial investors like pension funds, to view the sector favorably, the Government should quickly resolve various uncertainties such as position on coal block allocation, implementation of imported coal pass-through, policy on M&A related to allocated mines and have a war-room approach to resolving issues related to some stuck up projects. Longer term clarity on some of the above issues will also bring in more confidence for investors looking to acquire operational projects and running them for cash flow yields. Further, the domestic lending community is precariously poised towards the sector due to potential Non-performing assets (NPAs) on account of various projects that have got delayed or have been unable to achieve COD due to fuel or PPA related issues. What is needed is a special dispensation liberating provisioning norms for such loans to avoid them getting classified as NPAs. This could be done only for those projects which are facing loan restructuring on account of uncontrollable factors such as coal supply related issues and issues related to environment or forest clearances. This will help unlock the financing logjam and enable a positive investment cycle to commence. Further, the Government should enable takeout financing for banks by strengthening institutions such as IIFCL to undertake the same. This will help partially address the sectoral exposure caps that banks would otherwise be constrained by.

To complete the transformation of India’s energy sector into an open and functioning energy market, the country needs strong political leadership to convey clear policy messages. Frequent populist remarks, which, for example, promise free electricity, are not conducive to creating the right public perception of energy as a commodity, not an entitlement. Furthermore, in the context of an increasing need for investments and the integration of India’s energy sector into the global energy market, India needs to align its energy policies and institutions with global practices.

On a safer note, let’s use what is already built fully, before racing to build more capacity that joins the bandwagon of projects facing existential issues!

            Infraline Energy Power Knowledgebase Team