Supply bottlenecks, bleeding distribution and expensive imports may plunge the sector into tumult.
If there is one thing that the power sector repeatedly stresses each time planners sit down to write growth prospects for the next five years, it is of being in big trouble. While the addition in installed generation capacity has been the highest during the current Eleventh Plan period, supply bottlenecks, losses in distribution and rising prices of coal imports augurs a bleak future for private power producers. Power professionals say that the situation is similar to what it was ten years ago when distribution losses and lack of paying capacity saw distribution companies backing out of power purchase agreements (PPAs).
Signs of a Meltdown
There may still be some time left before a flashpoint is reached but signs of a meltdown are easily noticeable. Just this month, Maharashtra Electricity Regulatory Commission (MERC) rejected a JSW Energy plea that sought a higher tariff under a PPA it had signed with the state. JSW Energy had earlier argued that since their Indonesian fuel supplier, Sungai Belati Coal, had used the clause of ‘force majeure’ with them following a fresh Indonesian government diktat on pricing, it could seek an escalation in the power price.
No such luck. The regulator asked JSW Energy to assume the risk of the project itself—an ominous sign for the company, and the industry. “If a person enters into a contract on the basis that the raw material available to the person on the date of the contract is Rs X, such a person cannot rescind the contract on the basis that the raw material on the date of performance of the contract or during the performance of the contract has increased from Rs X,” the MERC order says.
Similarly, ultra mega power projects (UMPPs), Mundra and Krishnapatnam, whose business plans are based on importing coal, are finding it difficult to offer the same level of tariffs that they had bid with at the time of bagging the contracts.
In some sense, the industry is at the receiving end of a double whammy. On one hand, infrastructure bottlenecks prevent domestic coal from reaching power plants. On the other hand, imported coal is becoming more and more expensive and this trend is not being cushioned through a higher tariff. “We have more or less reached the same situation which was there 10 years back. Many of large projects are under construction. We had committed to bring in the private sector but now we cannot abandon them,” says Pramod Deo, chairman, Central Electricity Regulatory Commission (CERC).
Bleeding Distribution
The problem may have its origins in the high cost of fuel but the buck stops with distribution companies who are not allowed to raise tariffs because of political pressures. According to a recent report by Fitch Rating, out of the three pillars of the power sector—generation, transmission and distribution—distribution is in the most delicate situation and incurring huge losses. “The state power distribution sector is characterised by high AT&C losses and is unable to recover the cost of power supply through tariffs,” says the report.
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Data from Power Finance Corporation reveals that the aggregate losses of state public utilities for selling power to consumers without subsidy from the state governments increased to Rs 63,550 crore in 2009-10 from Rs 26,730 crore in 2008-07. Currently, distribution companies in Tamil Nadu, Andhra Pradesh and Uttar Pradesh are in the worst financial condition. “These are difficult times but we almost have a two-year window before the general elections in 2014,” says Deo hinting that there is a scope of tariff revision to give comfort to the distribution companies.
Desperate For Hikes
Arup Roy Choudhury, chairman and managing director of country’s biggest power producer, NTPC Ltd, admits that the situation is worrying though his company hasn’t been impacted much by the industry crisis. Drawing a distinction between what faced the sector five years ago and now, Roy says that “at that time, the challenge was more for the government to consider addition of capacity. The focus was how to ensure that those engaged in capacity addition are motivated to add capacity. Now, you need to look at the distribution companies and states which need to come out with a one-time solution that is sustainable.”
Deo warns that investment in the power sector will slow down, and with projects under construction, the situation can be salvaged only in some time. In the case of UMPPs, the issue becomes even more complicated. “The projects were given out through competitive bidding. Now, the beneficiary states have to agree to the new tariff which is being asked by the developers. They can come to CERC either for a dispute or arbitration but nobody has approached us yet,” adds Deo.
For companies like NTPC that run their operations from a position of strength, cost and sourcing of fuel are not immediate concerns. Yet, there are larger issues at stake—the future of independent power producers depends on it, especially since a lot of those players sell power through merchant power sales which saw rates drop to an average of Rs 4.16 a unit in 2010-11 from the high of Rs 7.09 in 2009-10.
As far as long-term PPAs are concerned, power sector experts underscore the need to have regular tariff hikes for sustainability of the sector. “The government achieved a 20,000 MW capacity addition in the 10th Plan. We might again miss our target of capacity addition of 62,000 MW in the 11th plan, but still we will end up adding over 50,000 MW, which will be a big achievement,” says an analyst. Capacity addition without appropriate action on the distribution side—in other words, a tariff hike to the consumer—could render a lot of these projects unsustainable.
A tale of two tariffs
ENTER THE DRAGON
One of the reasons for power sector capacity addition falling short in the Tenth Plan period was the inability of equipment suppliers to deliver on time. The suppliers, primarily Bharat Heavy Electricals Ltd (BHEL), blamed the bunching of contracts by project developers. Now, the situation seems to have remedied itself, but with unintended consequences.
Annual domestic manufacturing capacity for power equipment suppliers is expected to rise to 35,000 – 40,000 MW by 2014-15. In fact, domestic suppliers fear over capacity in equipment manufacturing and say that competition will keep prices in check. Domestic suppliers have been given a boost from bulk contracts being offered by NTPC with the condition that the suppliers establish a manufacturing facility in India. Consequently, eight joint ventures have come up. These include ones between Larsen & Toubro and Mitsubishi Heavy Industries, JSW Energy and Toshiba, Bharat Forge and Alstom, BGR Energy Systems and Hitachi Power, and Gammon and Ansaldo. Now, they want protection from cheap imports, primarily from China, through imposition of customs duty.
A committee under Arun Maira, member, Planning Commission, recommended 10 per cent customs duty and 4 per cent special additional duty on power equipment. A committee of secretaries favoured 5 per cent customs duty, 10 per cent countervailing duty and 4 per cent special additional duty. Though rupee devaluation is a cause of concern for importers, BHEL, in a presentation to the government, recently said that artificial control of Chinese Yuan gives advantage of 30 per cent to Chinese manufacturers. However, private power project developers already committed to buying equipment from abroad during the supply crunch years ago can hardly reverse their commitments. About 23 per cent of about 75,000 MW orders for the Eleventh Plan have been tied up with foreign suppliers. Any increase in duty upsets their tariff calculations and could render their projects unviable.
WINNING BIDS REVISITED
In a bid to give the industry a big capacity push, the Union government devised the ultra mega power projects with 4,000 MW capacity, each involving an investment of over $4 billion. Under the plan, projects are given out through tariff-based bidding. A total of 16 UMPPs have been envisaged but no fresh projects have been awarded since 2009.
| BEHIND SCHEDULE | |||
| UMPP | Type | Tariff (Rs /KwHr) | Developer |
| Sasan, Madhya Pradesh | Pithead | 1.196 | Reliance Power |
| Mundra, Gujarat | Coastal | 2.264 | Tata Power |
| Krishnapatnam | Coastal | 2.333 | Reliance Power |
| Tilaiya | Pithead | 1.77 | Reliance Power |
Moreover, work on the already awarded four is not progressing on schedule. The first unit at Sasan UMPP, being developed by Reliance, was initially expected to come up in December this year, but according to a Central Electricity Authority update, it will only reach completion in 2013. Similarly, Mundra UMPP of Tata Power is all ready to start generation but higher price of Indonesian coal which was not factored in at the time of bidding has created uncertainty for the developer. Sustainability of low tariffs offered in order to bag these projects were questioned by many in the industry when these projects were handed out and government-owned NTPC even received flak for not bagging even one of the four. Suddenly, those wins are now being seen in a different light.