1. Reviving stranded power plants: Here’s why Piyush Goyal has done well

Reviving stranded power plants: Here’s why Piyush Goyal has done well

Power minister Piyush Goyal has done well to set up a committee that is looking at ways to revive stranded power plants since this is also adding to the woes of public sector banks—Goyal has said the committee is close to coming up with some solutions soon.

By: | Published: June 14, 2017 5:34 AM
Piyush Goyal, NTPC, Power minister, SEB, power minister Piyush Goyal, piyush goyal news Power minister Piyush Goyal. (PTI)

Power minister Piyush Goyal has done well to set up a committee that is looking at ways to revive stranded power plants since this is also adding to the woes of public sector banks—Goyal has said the committee is close to coming up with some solutions soon. Any solution that emerges, it is likely, will have to be specific to each power plant, though some broad guidelines can be prescribed by the committee. These guidelines will have to be carefully thought out and, given that it is either NTPC or various state electricity boards (SEBs) that are likely to emerge as the main buyers of assets, it would be a good idea to put them out in the public domain for comment. The broad parameters are well known, as are the solutions. As per plan, if a private sector power producer is finding a problem servicing a loan or getting SEBs to buy its power, the owner will take a complete or partial haircut on the equity; the banks may or may not also be asked to follow suit. Naturally, the price of the electricity from the plant will fall—in such a situation, an SEB or an NTPC may be roped in to buy what will be billed as an attractive asset.

This is where the guidelines come in. Many power producers would be more than willing to write off their equity in order to get the debt off their books, but the question is whether the electricity cost is low enough for an SEB to take it over. A guideline could, for instance, say the electricity cost has to be within the bottom 50-60% of the SEB’s current purchase profile—if an SEB is buying 60% of its power at under Rs 2.5, the plant it is taking over cannot have a cost of over that. At the end of the day, the reworked fixed tariff has to be high enough to service its debt while the total tariff has to be low enough to get chosen in the merit-order-dispatch system—the cheapest power gets sold first, the most expensive last. One way to justify the takeover is to point to increased demand in the future, but given how horribly wrong projections have been in the past and how tariffs are collapsing, this is a bad idea—you can’t have the power minister exulting over falling tariffs on the one hand but presiding over NTPC/SEBs buying high-cost power plants on the other.

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Obviously solutions will be easier in the case of projects with low tariffs such as the Tata’s Mundra project. With the SC ruling out a 40-paise-per-unit compensatory tariff even after the regulator okayed this, the plant is in trouble. If, however, SEBs that are buying power from Mundra were to take over 51% of its equity for one rupee, they could be amenable to bilaterally negotiating a hike —since the PPA is for 20 years vs the plant’s life of 40 years, the SEBs stand to get cheap power over a longer period. Were this to be done, the 90 paise capacity charge would be enough to service the debt and more while, at Rs 2.7, the electricity would be competitive while paying the full fuel cost. It is possible, even after this, the deal may not be good enough for the SEBs, but it is precisely because of this that each situation needs to be tailor-made.

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