How to turn around the power sector and solve the coal supply issues

Updated: November 6, 2018 1:20 AM

Power-generating companies should not be saddled with the burden of cross-subsidising the renewable sector. Promoting renewable energy is laudable, but it has a cost. This has to be borne by the society through taxation

How to turn around the power sector and solve the coal supply issues (Illustration: rohnit phore)

By Anil Swarup

The power sector is in serious trouble. No, this is not 2014 when it was indeed in trouble. This is 2018. Look at the following indicators:
1. As many as Rs 1.74 lakh crore worth of stressed assets with the banks are from power-generating companies. This amount is increasing by the day.
2. Thirty-four power plants are stressed (32 in the private sector and two in the public sector). The capacity of these stressed thermal power plants is around 40,000 MW.
3. There is a shortage of coal supply and fuel supply agreements—the number of critical plants for want of adequate coal stands at 26 as on October 9, 2018, according to the Central Electricity Authority (CEA) data.

The causes
The Parliamentary Standing Committee has identified the following major reasons for the crisis:
1. Coal supply shortage: The reasons are (a) cancellation of allotted coal blocks in 2014 by the Supreme Court, and (b) setting up of projects without fuel linkages.
2. Insufficient number of power purchase agreements (PPAs) made available by states (of the stressed commissioned capacity of 24,405 MW, there are PPAs only for 16,129 MW).
3. Inability of the promoters to infuse equity and working capital.
4. Contractual and tariff-related disputes.
5. Inadequate funding by banks/financial institutions (there are instances where the projects are complete, but banks haven’t sanctioned working capital).
6. Delays in project implementation, leading to cost overruns.
In addition, there are some other aspects that have contributed to the current crisis in the sector. These include:
1. Aggressive and uneconomic bidding in coal block auctions by power-generating companies. In view of coal shortage and uncertainty about the future availability of coal, user entities did not want to take any chance. They wanted coal blocks “at any cost”, only to discover, subsequently, about the actual cost they had to pay.
2. Across-the-board cancellation of coal block allocation under the Supreme Court orders had a much greater impact than was expected. As it was subsequently discovered, there were no takers for a number of blocks because their viability depended upon the user industry existing in near vicinity.
3. Mining in a number of coal blocks was stuck up for want of clearances. This has always been a problem in the country and continues to impact progress.
4. Cross-subsidising for renewable energy—the coal-based thermal energy sector has had to bear the cost of the ambitious targets set out for renewable energy.
5. Variety of cess imposed on coal has
put additional burden on coal-based power plants.

The action so far
The focus, so far, has been to grapple with some of the issues for select few generating companies in the following manner:
1. Special linkages for some entities by Coal India;
2. The recent move to allow cost pass-through to some entities to relieve them of the burden of increased import price.

These piecemeal efforts are not likely to create substantial impact on the sector that is faced with serious crisis, though it would relieve some of the entities from the cost burden. This, too, would come at someone else’s cost.
Moreover, hydroelectric power generation has not kept pace with the requirement. The grid balancing that could have been done through hydroelectric power for renewable energy is now being “enforced” on coal-based power plants. They have been “asked” to back down at a substantial cost to “accommodate” solar energy transmission. There is a cost to it, and someone has to bear it. Unfortunately, thermal power plants have had to bear this cost.

The possible way forward

There are two sets of issues that afflict the sector: these are both demand-side and supply-side issues.

Demand-side: The demand for power exists, but the discoms (distribution companies) are unable to articulate this demand as they are themselves in financial mess. The Ujwal Discom Assurance Yojana (UDAY) needs to be implemented in letter and spirit to get the discoms out of the mess in a manner as has been done in Gujarat even before the dawn of “UDAY”. It is doable, but the same commitment and political will has to be demonstrated by other states. Some initiatives have been taken, but a lot more needs to be done. The discoms hold the key to the power sector.

Supply-side: These issues will have to be tackled differently and in a comprehensive manner.

Supply of coal will have to be increased by Coal India by following a strategy pursued during 2014-15 and 2015-16, when coal production saw an unprecedented increase. The factors that impact coal production relate to land acquisition, environment and forest clearances, and evacuation of coal. Most of the issues that impact the first two factors relate to the actions by respective state governments. Hence, the strategy will have to centre around going down to coal-bearing states to resolve such issues. It has been done in the past. There is no reason why it can’t be done now.

Facilitate various clearances for the coal blocks that were auctioned or allocated. These clearances haven’t moved forward in the past couple of years. Also, revive the Project Monitoring Group (PMG) at the Centre and pursue clearances aggressively. This, too, has been done in the past and can be done again.

Set up a high-level empowered committee to examine each stressed project and work out a rehabilitation package. Only financial restructuring will not help. The package has to be a comprehensive one. This could even entail change of ownership/management and/or adequate sanction of funds that are required for the projects. The committee should also be empowered to settle disputes, if any. Until and unless such a central mechanism is created, the issues will not be resolved.

Power-generating companies should not be saddled with the burden of cross-subsidising the renewable sector. Promoting renewable energy is laudable. But it has a cost. This has to be borne by the society (through taxation) and not by the entities that are already in trouble.

Time is of essence. With each passing day, the problem will become even more complex. All governments in the past have been notorious for delays. This government is different. The current team in the ministry is different. It comprises of members with proven competence. RK Singh was a highly-rated civil servant and Ajay Bhalla contributed substantially to the turnaround of the coal sector. They are capable of turning around this sector as well. Hopefully, they will be able to do that, in the interest of the country.

The author is former secretary, Government of India

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