Despite the economic challenges that India is currently facing, there is no denying the fact that rapid economic growth since 1991 reforms has increased the burden on the nation’s infrastructure. An infrastructure deficit is widely considered to be one of the factors that could severely impede India’s economic growth. Much has been said and done since the past two decades and policy makers have made concerted efforts to accelerate infrastructure development. Power sector is the fulcrum of economic development in any country. Putting aside the success stories posted across the sector, the reality is that power sector in India continues to lag behind.
Shortages, tariffs and dependence on
imported fuel are on the rise while the poor health of distribution continues
to restrict the flow of investments. NTPC — the country’s largest generator and
one of the cheapest producers of power — disclosed that it had to scale down
generation by 16 million units between April-August last year (compared with 3
million units in the year ago period). The company attributed this to
inadequate demand from state owned distributors. Data from the Central
Electricity Authority (CEA) shows that peak power deficit shrunk to 3 per cent
in October 2013 against 9.4 per cent in the year ago period. The deficit
further shrunk to 2.9 per cent in November and ended in December last year at
5,547 mw as per CEA data. The Load Generation Balance Report for 2013-14 of CEA
forecasts the peak deficit for the ongoing fiscal at just 2.3 per cent.
Mixed
fortune in 2013-14
While there was some good news on capacity
addition front in 2013-14, the sorry state of open access even after 10 years
of introduction continues to pose a challenge for policy makers and likewise
industry segment decision makers. Capacity addition of 17,825 mw was posted in
2013-14 against a target of 18,432 mw. With 44,026 mw already commissioned or
under commissioning (including 6,578.30 mw of capacity synchronized but not
commissioned at the end of March) less than 40,000 mw of thermal and hydro
capacity remains to be executed during the next three years. This represents a
comfortable scenario for achieving the XII Plan target.
According to a statement by the
Confederation of Indian Industry (CII), the decision of two state governments
to ban the sale of electricity through open access system is unfortunate. Open
access transactions have been primarily used by state electricity boards (SEBs)
and distribution licensees to sell surpluses or to meet the short – term power
requirements in their respective regions.
Industrial customers still face problems in
accessing their choice of suppliers due to restrictions such as invoking of
Section 11/108 of Electricity Act 2003 imposed by several state governments /
SLDCs citing shortages or non – availability of transmission infrastructure.
The intention behind the series of reforms in the power sector over the past
decade, from opening up generation and distribution to the private sector to
breaking up state-run monopolies and freeing up power prices (albeit under
regulatory oversight) to allowing both producers and consumers ‘open access’ to
a modern power market was noble: allow market efficiencies to operate, thereby
offering consumers better quality of service at better prices. The reality is
quite the opposite. More than a decade after the reforms, all players find
themselves in some kind of a mess or another, largely of their own making.
Bottlenecks
While the funding requirements of power
sector are staggering, domestic banks and financial institutions have their own
constraints to meet such requirements in view of industry / group exposure
norms. Off-shore banks are generally averse to taking construction and
regulatory risks during construction period and they prefer to participate in loan
facility once the project is operational. The profitability of existing and
under construction generation assets has been severely impacted on account of
uncertainties emanating from fuel availability, volatility of prices of
imported coal and delay in clearances.
1. Fuel Shortage: Coal meets around 52 per
cent of primary commercial energy needs in India, against 9 per cent the world
over. Around 66 per cent of India’s power generation is coal based. As power
plants rely heavily on coal, its shortage contributes to decreasing electricity
generation. Indian power producers added 46 gw of coal based generation
capacity over 2011-2013; however, domestic coal output growth could not keep
pace with the capacity addition. During 2011-2013, domestic coal output could
only increase by 34 million tonne (mt). Hence, there was a huge demand-supply
mismatch which developers tried to bridge through imported coal, although its
use was restricted.
2. The gas story has also been bleak and
has led to significant stranded generation capacities (more than 15,000 mw).
Gas output from KG-D6 declined to mere 15mmscmd in March 2013 from the peak of
61mmscmd in March 2010. Gas supplies were completely stopped to the power
sector from March 2013. The government then evaluated the options for according
equal priority to gas-based power plants and fertiliser sector but it was not
accepted, being an economically inferior option. However, during August 2013,
the government decided to provide any additional domestic gas available over the
next three years to power sector. This policy is not likely to benefit
immediately as no additional gas is likely in the immediate future. However, as
new gas discoveries happen, supplies to power sector could see an increase.
Meanwhile, the government is also exploring pooling of imported gas with
domestic gas and a subsidy on imported LNG to restart stranded gas-based power
assets. A poor policy framework on gas
allocations is to blame - priority was given to capacities which were ready and
this led to capacity creation before gas allocation!
3. Project Financing: 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. We can reduce our vulnerability to energy
price fluctuation through a flexible and competent energy market, but we cannot
isolate ourselves from price volatility. At the same time, to expand 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 India competes with other countries. This
implies the necessity of integrating India’s energy institutions and policies
with global practices. In the past 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 132nd 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 181st) and “Enforcing contract” (ranking
at 182nd), 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 `124 crore) and would not be in a position to bring much equity.
Positive
signs
Positive trends have begun to emerge in the
power sector in terms of payments being made to traders, generators and capital
goods suppliers, thus lowering debtor days and improving cash flow from
operations of these entities. Recently, CCEA also approved changes to the mega
power policy which would allow an additional 15 projects to be classified as
mega power projects thus providing the benefits of zero import duty. Most steps
initiated by the government have long-term implications. However, some positive
impact is likely in the short term. Financial restructuring plan (FRP) of
discoms is progressing well. In order to achieve planned growth target and to
sustain the growth momentum, the power sector needs large investments. The
contribution of private sector in capacity addition has increased from 10 per
cent in X Plan to 42 per cent in XI Plan and during XII Plan it is expected to
be more than 50 per cent. In the XII Plan projected investment requirement for
power sector is `15,01,666 crore which is more than double the level of
`7,28,494 crore in XI Plan. There have also been major developments on foreign
investment front. In past couple of months the following acquisitions have been
reported.
Way
to go
Following short-term solutions can be
adopted for sustainable growth in power sector:
▪ The domestic lending community is
precariously poised towards the sector due to potential on 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.
▪ Immediate implementation of fuel cost
pass-through can improve the PLF of coal based power plants to 85 percent,
resulting in efficient utilization and financial turnaround of upcoming coal
based capacity of 62 GW in XII plan period and commissioned capacity of 40 GW
in XI plan.
▪ Allocate new coal blocks to private
sector and utilities under the proposed competitive bidding process by FY14.
Coal blocks with reserves of ~8 BT are identified for power sector which can
produce ~195 MTPA at peak production. At least 25 percent of this, i.e. ~50
MTPA should be made possible by FY20.
▪ With Adoption of modern technology and
FDI in mining, CIL should be able to ramp up the underground mine production from the
estimated 54 MT to 64 MT by FY18.
Proposed
Long-term solution for sustainable growth in Power Sector:
▪ 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.
▪ Amendments to the Electricity Act, with
respect to pass-through of fuel costs, open access, stricter implementation of
renewable purchase obligations, enhancement of grid security, co-existence of
tariff determination and competitive bidding regime, thrust to hydro power among
others.
▪ Reliable fuel supply: Reliable fuel
supply in turn hinges on availability of timely clearances, a transparent
framework for fuel production, and adequate quality of supporting
infrastructure such as ports and railroads for transporting fuel.
▪ Greater private sector participation in
power transmission and distribution. It would support on-going maintenance and
upgrades of essential infrastructure.
▪ Operational efficiency linked
incentives: The Discoms should be given the incentives, bailout packages and
other financial support on the basis of their operational efficiency.
Power sector has achieved a lot over the
last decade in the areas of policy reforms, private sector
participation in
generation and transmission, new manufacturing technology and capabilities, but
there is still much to achieve and a number of challenges have to be overcome
before then opportunities can be leveraged. There is no doubt that the sector
is going through a very testing time as it juggles increasing power demand, the
poor paying capability of power distribution companies, inadequate domestic
coal / gas availability, inefficient power tariff mechanism and rising
financing costs. But there are reasons for optimism in 2014-15. There is also
an expectation that the new government will introduce additional reforms to
revive the economy providing impetus for power demand and help mitigate
prevailing issues in the power sector. A holistic reform of the sector is
imperative to put the country on a strong growth path. The future growth of our
country critically depends on Power sector development along healthy lines.
By
InfralineEnergy Power Knowledgebase Team
Disclaimer
The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the Infraline Technologies (India) Pvt. Ltd. (organization). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.
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