www.thesuniljain.com

And the lights all went out PDF Print E-mail
Thursday, 30 July 2015 00:00
AddThis Social Bookmark Button

Why add power capacity when most of it is at risk?

 

The power ministry has been tom-tomming the fact that the generation capacity added in FY15 was the highest in any year and that, at 3.6%, the power deficit is the smallest ever. Unfortunately, neither of these metrics is relevant. Indeed, it might have been better for all stakeholders—the producers, and the banks in particular—had this capacity not come up. A large chunk of the 87,000 MW created over the last six years is no longer viable either because fuel linkages are absent or insufficient, or because there are no buyers for the electricity being generated. Approximately 10,000 MW of gas-based projects are completely stranded because gas production has been far lower than anticipated. Another 16,000 MW based on imported fuel is at risk since costs can’t be passed on; for 13,000 MW, the coal supply is inadequate—the list goes on.

The banks stand to lose the most as cash flows of generating companies (gencos), operating at sub-optimal levels, worsen and the financial condition of state discoms deteriorates. As Crisil says in its latest report, 46,000MW of capacity—or close to R1.8 lakh crore of bank exposure—can be considered to be at risk for one reason or another. The ratings agency has cautioned that unless power purchase agreements (PPAs) are signed soon—within the next six months or so—electricity generated from nearly 10,000 MW would need to be sold on the exchanges at relatively low rates, crimping cash flows further. Prices of short-term power have fallen sharply—from R4.33 per unit in October, 2014, prices fell to around R2.56 per unit in June. Given how most discoms are in dire straits, it is hard to see any of them committing to buy power in any meaningful quantities; in the last three years, PPAs have been signed for just 10,000 MW, which was the quantum transacted in FY11 alone.

Discoms are in poor financial shape because most state governments—including several of those that had signed up for the Financial Restructuing Programme (FRP)—have not raised tariffs to the desired extent and are, therefore, running up huge losses. The Rajasthan SEB, for instance, has cumulative losses of R81,000 crore. While separation of electricity feeders is important, as the power ministry keeps emphasising, it cannot be at the expense of not forcing states to raise tariffs—and that is something the power ministry seems to be ignoring. While pointing out that states like Andhra Pradesh, Rajasthan and Uttar Pradesh don’t even have the financial muscle to bail out their SEBs, Crisil talks of the need for a 10% annual hike in tariffs over the next 3 years and a 200 bps reduction in technical losses if discoms are to just break even. The problem, however, is that the Centre hasn’t come up with any concrete plan to either get state governments to raise tariffs or to repay the banks. If it is serious about reforming the sector, the Centre needs to ensure tariffs are raised and help banks—who have an exposure of close to R3 lakh crore to SEBs—to recover this by deducting repayments from the states’ share of central taxes; no solution short of this will work. It is also unreasonable on the part of the power ministry to not allow gencos—that have bid for and won coal blocks in the recent auctions—to recover the fixed charges. It sounds good politically, but leaves the producers worse off and unable to repay banks. If the power ministry doesn’t realise this, the finance ministry, which needs to ensure banks remain solvent, needs to explain this to it.

 

You are here  : Home Electricity And the lights all went out