The power sector has recently stood out as a great investment story in a fast-developing power-starved country. But is the story for real? As of now, several roadblocks remain which could threaten investments in power generation, transmission and distribution.
The ministry of power’s commitment to power for all by 2012, and the stated capacity additions of nearly 170GW (gigawatts) by 2017, which is the end of the 12th Plan, have triggered investments into the sector mainly in generation. Credit to the sector has been expanding at around a 50% compounded annual growth rate from fiscal 2000 to fiscal 2009, which is the highest in the infrastructure segment.
But the concerns are not without cause. Against the targeted capacity addition of around 79,000MW during the 11th Plan period ending in 2012, the Planning Commission’s recent estimates are unsettling. The estimate is that 66,000MW is all that may come on stream by 2012.
The biggest drawback against achieving targeted capacity additions is the lack of availability of coal for large thermal power plants. “Land acquisition, access to coal mines and even water availability are cause for execution delays,” says Krishna Kumar, vice-president, equities, Sundaram BNP Paribas Mutual Fund. Given the existing deficit in coal, public sector companies such as NTPC Ltd are importing it.
The low power tariffs fixed by the state governments to keep voters happy continue to hurt, apart from some states restricting inter-state open access and the third-party sale of power.
What about utilities? The Central Electricity Regulatory Commission (CERC) fixes the return on equity for regulated power utility companies such as NTPC and Power Grid Corp. of India Ltd (now 15.5%, against 14% earlier). These companies can, therefore, reward shareholders through growth. However, that seems to be slipping, too.
Another key question is whether merchant companies (independent power producers, or IPPs) must be allowed to make the best of peak demand cycles, free from sporadic regulations. For example, during the power crisis in August, when the prices touched Rs14/kWh, CERC capped the tariffs at Rs8/kWh with a minimum of Rs0.10/kWh, for 45 days.
Now, the power spot tariffs on the power exchange have dropped to around Rs3/kWh given the high levels of hydropower generation. Going forward, while IPPs such as JSW Energy, Adani Power Ltd and Lanco Infratech Ltd are confident of profitability in the medium term, competition over the long term is likely to bring down power tariffs by fiscal 2014 to around Rs4/kWh.
Other hurdles include defaults by customers, mainly the electricity boards and the mounting pressure on carbon emissions by thermal power projects from the environmental perspective.
Unless these bottlenecks are addressed in the immediate future, there could be a backlash on the planned capacity additions in the sector. Lack of regulatory clarity could mar the profitability of smaller IPPs, too.
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