Not much hope for power sector in 2014
There has been a flurry of reforms activity surrounding the power sector but many of these will not provide immediate relief
There has been a flurry of reforms activity surrounding the power sector in the last six months. The Cabinet approved a methodology for auctioning coal blocks, the power ministry agreed to additional sops for states to accept the restructuring package for their electricity boards and cost pass-through has been allowed for imported coal, etc. But many of these are for the long term and will provide no immediate relief.
The main problem faced by power producers is the slow growth in demand. The monthly average power deficit in fiscal 2013 is 4.5% (till November) compared to 8.7% for the preceding year. The reason for this statistic is not an improvement in supply, but the reluctance of state electricity boards (SEBs) to buy power because of their financial weakness.
An improvement in the financials of state electricity boards is key to reviving the fortunes of power producers. Yes, there has been some improvement in the cash flows of distribution companies in Tamil Nadu and Uttar Pradesh, among others, but if the states don’t adhere to the operational efficiency norms suggested in the restructuring package, the gains may not last.
Moreover, the financial health of these entities won’t truly improve unless transmission and distribution losses are cut and tariffs raised. But that is easier said than done in an election year.
This slow pick-up in demand will also hurt private power producers since merchant rates are also depressed. Despite assembly elections in the third quarter, merchant tariffs remain in the range of ₹ 3 per unit, much lower than the historical trend. The excess capacity in the market also means that prices are unlikely to touch the highs of ₹ 8 per unit seen at the time of the previous general election in 2009.
Coal availability seems to have improved; Coal India Ltd has signed contracts with power producers for almost 78,000 MW of capacity commissioned since 2009, but note that demand has fallen. As for gas-based plants, it will be a long while before availability improves.
In summation, there isn’t much likelihood of any improvement in the power industry in the medium term. Sure, there seems to be a buzz of acquisition activity in the sector, but that’s mainly from distress sales.
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