Government has to focus on ensuring fuel linkages and getting SEBs to sign PPAs with stranded power plants
With over 40,000 MW of power plants already unviable for want of fuel or power purchase agreements (PPAs), and likely to be sold for a song if they turn into non-performing assets on banks’ books and end up in the NCLT, it is understandable the government is seriously concerned. In fact, what’s worrying is that some of these expensive plants may end up being liquidated because lenders would resist selling them at big haircuts, fearful of being questioned by the investigative agencies. Which is why union power minister RK Singh is trying to convince RBI it should provide lenders some forbearance for these assets. Whether the central bank will make exceptions for one sector is not clear. What is more important, however, is that it won’t really solve the issues faced by these plants and will, at most, help postpone the day of reckoning.
Currently, a little over 6,000 MW of power capacity is stranded without linkages to coal; while around 9,300 MW was allocated coal linkages under the Shakti scheme announced in May 2016, some plants are yet to get the coal. Again, another 12,000 MW of capacity is stranded for want of gas and, in all, 19,700 MW of capacity doesn’t have PPAs. Any successful resolution has to ensure both adequate fuel supplies as well as getting the SEBs to sign PPAs. Getting gas-based power projects to take off will be difficult since, with gas prices at around $10 per mmBtu after all costs are taken into account, the power is too expensive. Fixing coal-based plants should be relatively easier with the right policies. Since a large part of the problem is due to Coal India’s inability to supply coal, if the balance coal is imported at higher prices, regulators have to be instructed to allow this to be passed on to consumers.
Part of the problem, of course, will also be eased at the NCLT if stressed assets are sold at discounts. Assuming the cost of setting up power capacity is Rs 7-8 crore per MW, with Rs 5 crore as debt and Rs 2 crore as equity, the capacity charge works out to Rs 2-2.25 per unit. If the plant is sold at NCLT, the equity value becomes zero and it no longer needs to be serviced via capacity costs. If lenders take a 20% haircut, the overall capacity charge comes down to around Re 1 per unit. Assuming a fuel price of Rs 2.25 paise per unit, the power costs would drop to a reasonable Rs 3-3.25 per unit from Rs 4-4.25 per unit earlier.
While the government has already said its 24×7 electricity plan will need another 28,000 MW of capacity, more affordable tariffs will make it easier for discoms to sign more PPAs, especially if the UDAY reforms result in their finances improving. In fact, once the government cracks down on load shedding, the discoms will, in any case, be compelled to buy more power; also, electricity demand is expected to grow by around 7% every year till 2022. Should the government therefore, deliver coal linkages, the stressed assets will fetch much better valuations and the lenders will be spared big haircuts. Given the large number of stressed plants, however, the government needs to take a call on whether new capacities should be encouraged for now, more so given their relatively higher costs. NTPC’s Bongaigaon unit, for instance, set up in April, 2016, has one of the highest tariffs of Rs 5.71 per unit because the fixed cost is Rs 3.4 per unit. In comparison, both of Jaypee’s Nigrie’s units in Madhya Pradesh, set up in 2010 and 2015, have a tariff of Rs 2.86 per unit and the fixed cost is Rs 2.02 per unit.