And the lights all went out: Why add power capacity when most of it is at risk?

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Updated: Jul 29, 2015 7:30 PM

The power ministry has been tom-tomming the fact that the generation capacity added in FY15 was the highest in any year and that, at 3.6%, the power deficit is the smallest ever.

power ministryDiscoms are in poor financial shape because most state governments – including several of those that had signed up for the Financial Restructuing Programme (FRP) – have not raised tariffs to the desired extent and are, therefore, running up huge losses. (Reuters)

The  power  ministry  has  been  tom-tomming  the  fact that the generation capacity  added  in FY15 was the highest in any year and that, at 3.6%, the power deficit is the smallest ever. Unfortunately, neither of these metrics is relevant.  Indeed, it might have been better for all stakeholders – the producers,  and  the banks in particular – had this capacity not come up. A large  chunk  of  the 87,000MW created over the last six years is no longer viable  either  because fuel linkages are absent or insufficient or because there  are  no  buyers  for  the electricity being generated. Approximately 10,000MW   of  gas-based  projects  are  completely  stranded  because  gas production  has  been far lower than anticipated. Another 16,000MW based on imported  fuel  is at risk since costs can’t be passed on, for 13,000MW the coal supply is inadequate, the list goes on.

The  banks  stand  to  lose the most as cash flows of generating companies, operating  at  sub-optimal  levels,  worsen  and the financial condition of state  discoms  deteriorates. As CRISIL says in its latest report, 46,000MW of  capacity  –  or  close  to  Rs 1.8 lakh crore of bank exposure – can be considered  to be at risk for one reason or another. The ratings agency has cautioned  that  unless  power purchase agreements (PPAs) are signed soon –
within the next six months or so – electricity generated from nearly 10,000 MW  would need to be sold on the exchanges at relatively low rates crimping cash  flows  further. Prices of short-term power have fallen sharply – from
Rs  4.33  per unit in October, 2014, prices fell to around Rs 2.56 per unit in  June.  Given how most discoms are in dire straits, it’s hard to see any of  them  committing to buy power in any meaningful quantities; in the last
three  years,  PPAs  have  been  signed  for  just 10,000 MW, which was the quantum transacted in FY11 alone.

Discoms  are  in  poor  financial  shape  because  most state governments – including   several   of  those  that  had  signed  up  for  the  Financial Restructuing  Programme  (FRP)  –  have  not  raised tariffs to the desired extent  and  are, therefore, running up huge losses. The Rajasthan SEB, for instance,  has  cumulative  losses  of Rs 81,000 crore. While separation of electricity  feeders is important, as the power ministry keeps emphasizing, it cannot be at the expense of not forcing states to raise tariffs – that’s something  the power ministry seems to be ignoring. While pointing out that states like Andhra Pradesh, Rajasthan and Uttar Pradesh don’t even have the financial muscle to bail out their SEBs, Crisil talks of the need for a 10% annual  hike  in  tariffs  over  the next 3 years and a 200bps reduction in technical  losses  if discoms are to even break even. The problem, however, is  that  the  Centre  hasn’t come up any concrete plan to either get state governments  to raise tariffs or to repay the banks. If it is serious about reforming  the  sector,  the  Centre needs to ensure tariffs are raised and help  banks – who have an exposure of close to Rs 3 lakh crore to SEBs – to recover  this  by  deducting  repayments  from the states’ share of central taxes;  no solution short of this will work. It is also unreasonable on the part  of the power ministry to not allow gencos – that have bid for and won coal  blocks  in  the  recent  auctions  – to recover the fixed charges. It sounds  good  politically, but leaves the producers worse off and unable to repay  banks.  If  the  power  ministry  doesn’t  realise this, the finance ministry  which  needs to ensure banks remain solvent needs to explain this to it.

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