India’s power sector, expected to attract an investment of Rs 11 lakh crore during the 12th Plan period, is in crisis. Procedural and regulatory uncertainties, rising fuel constraints and deteriorating health of distribution companies have raised questions over the health of a sector that saw huge investment even during the 2008 downturn.
The sector has always been a laggard in infrastructure. Even if the Prime Minister’s target of 18,000 Mw capacity addition happens this year, it may not make much of a difference to the sector, stranded with fuel constraints.
India added 55,000 Mw generation capacity against the original target of 78,000 Mw and created an inter-regional transmission grid of 28,000 Mw against the planned target of 37,000 Mw during the 11th Plan period that ended March 31. However, the rising mismatch between demand and availability of coal and gas has put a question mark on the survival of existing capacities.
The PMO intervened to better the coal supply situation by directing Coal India Ltd to sign fuel supply agreements with power companies. That has brought some hope but with domestic production not expected to match demand, CIL may have to resort to imports or take a hit on its revenue through cutting of e-auction quantities.
Companies that opted for imported coal to meet the deficit, are also in trouble, as a result of high international coal prices. Regulatory issues in Indonesia and Australia have made imports expensive. Those who kept their plants running on imported coal had to incur losses, as there were no buyers. Even state electricity boards prefer to shed load instead of procuring costly power fuelled by imported coal.
Take the case of ultra mega power projects. An uncertain environment has made the government delay the request for qualification for two UMPPs for the last two years. At the same time, an imported coal-based power plant like Tata Power’s Mundra UMPP is idling capacity, Reliance Power has put on hold the implementation of its Krishnapatnam UMPP.
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Ashok Khurana, director general, Association of Power Producers (APP) says the existing generation capacity of 11,780 Mw and upcoming 57,680 Mw are expected to remain largely unutilised, as power rates have become unviable. The generation companies, which had entered into long-term power purchase agreements (PPAs), are yet to recover the difference in cost and many are negotiating to recover those regulatory assets. Against this backdrop, industry players see no incentive for the new capacities, especially in the high interest environment, to justify the risk and returns. This has prompted the power ministry to refer the issue to the Central Electricity Regulatory Commission, as power producers have insisted that a change to the concluded PPAs with various distribution companies was essential.
The power ministry itself has issued an advisory on the non availability of gas till 2015, which has dampened the investor mood. There are several power plants with total capacity of 8,770 Mw, in stages of commissioning and another 15,000 Mw, already operational, which are the victims of lack of assured gas supply. Industry associations such as Confederation of Indian Industry and APP believe nonoperational gas-based projects would have significant repercussions on power availability in several states and therefore made a case for a comprehensive package to gas-based power projects pooling and fiscal incentives.
The other key issue is the dismal financial health of distribution utilities, struggling to meet the widening gap between demand and supply. Most of these under the garb of demand management are resorting to load shedding. Their accumulated financial losses estimated at Rs 70,000 crore in 2010–11, are projected to grow to Rs 1,00,000 crore by 2014. CII argues the practice of cross–subsidising domestic and agricultural consumers by higher rates for commercial and industrial customers and the railways has distorted balance sheets. "In addition, lack of rate hikes and mounting Aggregate Technical and Commercial losses have led to under–utilisation of generation capacity.”
Industry players are hopeful that a relief package for distribution companies, based on recommendations of the Shunglu Committee and the Chaturvedi panel and rate rises will give the much needed boost to distribution reforms. Distribution companies in Tamil Nadu, Madhya Pradesh, Odisha, Bihar, Tripura and Andhra have revised rates by 7-37 per cent. They are now concentrating on seriously addressing their cash flow issues.
However, Jayant Deo, MD & CEO, Indian Energy Exchange, suggests the only way out is to create national bulk market for 1 Mw and above consumers (industrial and commercial consumers). “In such a scenario, the regulators will not determine their tariff nor distribution companies procure power from the generation companies, All these 1 MW and above consumers will come to the day ahead market, where the generators will sell un-requisitioned power at market-determined prices,” he concludes.
Pramod Deo, chairman, Central Electricity Regulatory Commission, believes “The Regulations of connectivity long-term, medium-term and short-term open access have already provided the framework for market access for the generators. This framework acts as an alternative payment security mechanism and also mitigates the default risk substantially.” Further, he informs that CERC seeks to address the issue of congestion in inter-state transmission, one of the irritants having the potential of rendering the generation capacities stranded and adversely impacting the price of electricity for consumers.
(This is the sixth in a series of reports on the challenges before the infrastructure projects identified by Prime Minister Manmohan Singh for fast-track implementation, in a meeting on June 6)