Ultra muddles

Ultra muddles

Even as citizens continue to suffer with erratic power supply at home, the economy loses 2 precious percentage points in annual growth. It was to deal with the underlying problem of shortage in generation capacity that the government had initiated ultra mega power projects (UMPPs) two years ago. It was hoped that by cutting the red tape and offering government clearances on a platter, competitive investors would come in and electricity supply would be more reliable as well as affordable.

But, currently unfolding results of the third in the list of 10 proposed UMPPs indicate cracks in a programme whose success the government is banking upon.

The Krishnapatnam project finally received only three bids—half of what Mundra did, and one-third of what Sasan did. Does that indicate the initial euphoria about UMPPs is waning already? It would seem the private sector is turning away from large projects. There were no foreign bidders in the fray—just L&T, Sterlite and Reliance Energy. Ironic, as such projects provide economies of scale.

Government officials blame the tepid response on rising international coal prices— Krishnapatnam is a coastal project, based on imported coal. The tight market is reflected in NTPC being unable to bid because it failed to sew up its coal requirements.

Here, it may be unfair to compare the extent of investor interest in Sasan—this pithead project was won by Reliance Energy, which set a new price benchmark of Rs1.19 per unit on the strength of assured coal from the mines nearby. (Indeed, it would seem that pithead projects would be more attractive to investors, even as the Sasan bid implies much relief for consumers who would expect power tariffs in the vicinity of that number in the future.)

However, it was not too far back that the Tatas won the bid for Mundra, another coastal project, at a tariff of Rs2.24 per unit—on the strength of assured imports from an Indonesian coal mine in which they have a substantial equity stake. The Tatas, of course, may not have been keen on another imported coal-based project, especially as each project costs as much as Rs16,000 crore. But what kept other private players away? For, even as coal prices harden, an appreciating rupee will soften the hit. In any case, given the reality of rising coal costs, when the competitive bids for pricing of the power to be generated are opened later this month, the quotes will likely be higher than seen in Mundra.

The point is that UMPPs are a long-term proposition, and players in the business of thermal power would see more than just the prevailing trend in fuel prices to decide whether the project is viable.

So, is the slow pace of reforms undermining private sector’s interest in power generation in the country? After all, unless bills are collected and the technical losses curbed, growth in power consumption does not translate into investor interest. The reform task, however, is not an easy one due to the “dual citizenship" that power enjoys. It is a concurrent subject, with Central control limited to its dominance in the generation business. And, the Centre has not kept up with the need to evacuate power across regions. So, in case of a payment default, the seller’s access to alternative consumers is limited. Also, most importantly, the lack of political will among states to ensure metering and levy of user-based charges is lacking. Especially in the farm sector, that consumes about 25% of electricity in the country.

Surely, with nearly 40% of the 100,000MW new generation capacity planned for the next five years supposed to come from UMPPs, the government needs to get its reform story right. Unless that happens, its ultra mega goals for power generation may not be realized. And consumers will continue to suffer.

Will UMPPs solve our power crunch? Write to us at views@livemint.com