Allow suspension negotiations in power sector

Updated: Apr 30, 2020 5:16 PM

Allowing discoms to negotiate suspension of offtake from plants with poor dispatch and low PLFs by extending the PPAs for the period of suspension.

discoms, distribution companies, suspension of negotiationThe prices of solar power have fallen much below the thermal power generated by newer capacities.

Sunil Wadhwa

The Indian power sector’s generation-capacity grew very rapidly in the last decade, 70,000 MW of thermal capacity added in the 12th Plan. Unfortunately, this was followed by two adverse developments. Power demand didn’t pick up during this period by as much as anticipated while adding the capacity. And, there is now a push towards increasing the renewable generation, given India’s resolve to rapidly increase the green component. The prices of solar power have also fallen much below the thermal power generated by the newer capacities. The impact of these factors is reflected in the significantly low utilisation of thermal plants.

Now, most of these plants are contracted for 25 years by discoms and have a two-part tariff, i.e., capacity charge and energy charge. The discoms continue to pay capacity charges to the thermal plants, which are now being asked to back down due to the demand being lower than contracted supply. The idling capacity charge being incurred by discoms could be to the tune of Rs 70,000 cr annually, assuming 80 GW capacity idle on average thru through the year, and a capacity charge of plants idling being somewhere between Rs 1-1.5 per kwhr.

This is further compounded by the dip in demand due to the corona lockdown, and demand is not likely to come back to pre-corona levels any time soon. Discoms are now trying to wiggle out of having to honour payment of capacity charges on the pretext of Covid 19 being a force majuere. They could argue that if solar players want to term this a force majeure and seek extension of deadlines, they should be also allowed to do this.

The sanctity of contracts is paramount, but given the problem of excess supply in the Indian power sector, there is a need to mitigate the impact of this on the ultimate cost to consumers as well as on the financial health of the power producers, discoms and banks.

The oil & gas sector had faced a similar situation in the mid-1980s, when crude prices crashed $10 a barrel, and oil companies had long-term contracts with drilling companies for chartering of offshore and land rigs. Many companies had successfully restructured their contracts and survive while a few simply wound up. I am proposing below a similar restructuring for the Indian power sector.

The main stakeholders of power purchase agreements (PPAs) are the independent power producers (IPP), the discoms & their consumers, and lenders to projects. In the current scenario, all stakeholders are bleeding. In their costs, discoms have to account for the capacity charge they owe gencos, but don’t have the ability to pay, IPPs suffer from having to incur costs that can’t be recovered even as capacity idles, such as interest on delayed repayments, extra fuel oil every time they are asked to restart after having suspended operations of part of their capacity, impact on the plant’s life and fuel efficiency, etc, and finally, banks have to contend with loan defaults, having to go to NCLT where they mostly have to take huge haircuts.

It may make sense for discoms to make scenario-based projections of demand and identify PPAs that can be suspended for short, medium and slightly longer terms. A bilateral suspension can be negotiated on a voluntary basis, keeping the sanctity of returns intact to a large extent. The voluntary recasting of such PPAs could on the following lines.

Negotiate terms for a short/medium/slightly longer-term suspension of some thermal plants that have low-offtake schedules, while increasing the PPA period by the agreed number of months of suspension (the suspension period, or SP). Banks must also consider principal and interest moratorium for the SP and/or convert interest payable during SP to additional loan amount. The IPPS can offer a reduced fixed charge fr the SP, after factoring in savings from the suspension due to reduced O&M costs on stacked plants, reduced debt servicing obligations. The return on equity could be relaxed a bit if the total PPA period is extended by the discoms. For the banks, the revenue-earning period of the PPAs would remain 25 years in such a case.

India-wide PLF of the remaining thermal plants will go up, leading to better heat rates, plant efficiency and lower cost of generation. The suspended plants canbe brought back into operation, once we cross, say, 200 GW renewable energy (RE) capacity. The resumption date though can be kept flexible, say, within a range. Resumption can actually be synchronized with RE generation ramp up. The overall cost of REpower to discoms and consumers will also come due to reduced fixed charges of idling thermal capacity.

The key imperative for the success of this proposal is making a strong business case for the suspension agreement keeping in mind the interests of all stakeholders. In my view, it is quite strong for many idling plants. Even the transmission corridor used by these plants that will get freed up because of the suspension can be put to alternate use. It will make for a demand-driven capacity adjustment exercise in a sensible manner.

But, we will need to do this exercise keeping in mind the need for a benchmark for harmonised RE scaling up. We can’t have a situation like Germany, where the thermal sector got killed because of heavy scaling up of RE.

Suspension presents an ideal solution for power plants which are ranked low for dispatch and are also suffering from very low PLFs, with associated take-or-pay obligations for coal supply, including logistics and aren’t getting easily paid the capacity charges owed to them. Many of these may also be facing IBC proceedings.

Suspension-based restructuring of loans could also present a decent resolution plan to the Insolvency Resolution Professionals and banks that otherwise would have to contend with huge haircuts. It also gives promoters a way out of losing their entire equity and avoids a situation where the projects land in the lap of a new promoter for a laugh, but soon becomes sick again due to low offtake.

Sunil Wadhwa is former MD, Tata Power Delhi discom & former MD, GE T&D India Ltd. Views expressed are the author’s personal. 

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