Who will solve India’s bad utilities problem?
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As renewable energy and competitive tariff bidding transform the Indian power sector, the big question is the future of several troubled thermal plants.
A study by JM Financial Institutional Securities Ltd shows that power plants with cumulative capacity of about 14,000 megawatts (MW) are highly stressed. They have high capital cost, and lack power and fuel agreements for even half of the capacity.
“We find these plants to be at high risk with an estimated debt of Rs607 billion (Rs60,700 crore) due to lack of PPAs/FSAs and higher fixed costs,” JM Financial said in a note. PPA is short for power purchase agreement and FSA is fuel-supply agreement.
Separately, a report from India Ratings and Research Pvt. Ltd notes that debt stress is high in the sector if one excludes the top nine coal power generation firms. “The reason behind this is that these (non-top 9) entities have not been able to enter into PPAs or have not been able to achieve commercial operations for their capacity, leading to challenges with regard to debt servicing,” adds India Ratings.
The Ujwal Discom Assurance Yojana or the UDAY scheme can help improve power demand and lift some capacities out of financial stress. But it may not fully resolve the current logjam as the incremental demand should not only suffice to take care of the current idle capacities but also be sufficient for the 50,000MW of new plants under construction, which is difficult. “Demand has to catch up with the bunched up capacity addition done over FY12-9mFY17. Though UDAY could result in improving the demand, there is still capacity which does not have PPAs, and they might find it difficult to find off-takers,” says Vivek Jain, associate director at India Ratings.
Even if one assumes a quantum jump in demand, a significant portion of the stressed assets will not be able to compete in the current competitive tariff bidding due to its high cost structure. According to JM Financial calculations, tariffs from these stressed power plants average at Rs4.3-5.5 per unit, significantly higher than recent competitive tariff bids where they fell below Rs4 per unit.
Of course, as JM Financial points out, the total of the highly stressed power loans are less than 1% of bank credit, posing a limited risk to the system. But that does not mean one should let the Rs60,000 crore worth of loans lent to these projects go down the drain. A better option for the lenders would be to take over these stressed projects and find a solution with the government’s help.
“Bad bank is only one of the measures for taking care of this situation. But the problem in the sector is simply too big to be handled by one bad bank. Hence, additionally, the government would have to (a) consider shutting old plants (of around 30,000-40,000MW capacity), (b) ensure that discoms do not opt for power outages even when reasonably priced power is available (c) ensure new PPA bids roll- out for thermal projects just as the government is facilitating PPA bids for solar and wind projects (d) look at supplying power to neighbouring states and (e) making structural changes in the market such as open access for consumers, creating a market for peaking power,” said Kuljit Singh, partner and industry leader (infrastructure) at audit and consulting firm EY.
These measures are not easy to enforce, but are an essential part of reforms in the power sector.