Column: Flickering power reforms

Mar 04 2014, 05:16 IST
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SummaryReforms will bear fruit only when growth gets back to the 6%-plus level and power companies' finances strengthen

In its widely-cited report, consultancy major KPMG has mentioned that commissioned-but-stranded power capacity of more than 33 GW was awaiting coal and gas linkages and could possibly result in non-performing assets (NPAs) in the banking system. The plant load factor of coal-based power plants has declined consistently over the years—from 77.98% in FY10 to 69.71% in FY13. To a large extent, this is attributable to the fact that domestic output from Coal India, which controls roughly 80% of the coal market, has not kept pace with the requirements of power generators nor has the natural gas output from RIL’s KG-D6 field reached its desired production levels. The government recognised that solving the fuel problem for projects at an advanced stage of completion, with substantial capital locked up, could provide an immediate solution, bringing such capacities back on stream notwithstanding the sector’s other woes. It has taken a number of steps to ensure that the power requirements of the 12th Plan (2012-17) are met. These included nudging Coal India through a Presidential directive, to enter into fuel-supply arrangements with a number of projects, aggregating 78 GW of power, likely to be completed by March 2015; restructuring the loan liabilities of the cash strapped distribution companies and revising the standard bidding documents to insulate developers from fuel-price risks. The recent ruling of the Central Electricity Regulatory Commission (CERC), giving relief to the Tatas' and Adani's UMPP projects, come as a welcome addition to the power ministry’s efforts to revive investor-confidence and restart the virtuous cycle of investment.

However, many of these fundamentally path-breaking measures will have to see actual implementation and an impact across the entire value chain, viz. from generation to distribution, before the sector can be deemed to have indeed metamorphosed structurally. In addition to the problem of inadequate fuel, there remain structural weaknesses across the sector for two reasons.

First, anticipating the relentless need for power in a growing economy, a large number of Indian groups ventured into this sector, including many who were historically inexperienced in managing such long-gestation infrastructure projects. Several over-stretched themselves by bidding aggressively, overlooking the risks—the chief one being the price of imported coal, not factored at the time of bidding. Companies, therefore, faced a situation of open-ended losses. The sector's capital intensive nature, however, meant that once a project was more than 80 % complete, it was better to run it and make

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