Capacity addition and investments in coal-based generation may have gone off the boil due to lack of power demand, but there is good news on another front. The transmission sector has emerged as the bright spot in the country’s power sector, witnessing an upswing in terms of capex from both public and private entities. If there is a problem it faces, it is in the public sector continuing to bag a large share of projects despite competitive bidding being the more consumer-friendly route to award projects.
Nearly R18,000 crore worth of inter-state transmission projects have been awarded since February 2016. And with the states likely to raise their expenditure under the head in the next two years, many more are in the pipeline. “State-level activity has picked up in YTD-FY2016 and this run-rate would yield R30,000 crore of new awards for the current fiscal, double the capex done by state utilities over the past few years. Actual capex plans shared by state utilities suggest such activity levels would sustain over the next few years,” a report by Kotak Institutional Equities has said.
As far as inter-state transmission projects are concerned, projects worth R14,000 crore are to be awarded in the current fiscal. As per the report, nearly 42% of these projects would fall in PGCIL’s kitty while the rest would go under the hammer.
Significantly, only 22 projects worth around R25,000 crore have been awarded under the competitive bidding route since 2010 when the sector was thrown open to private players. In the same period, PGCIL has been awarded projects worth over R30,000 crore on a cost-plus or regulated tariff basis.
To put the power transmission business in context, the share of the private sector in power transmission is a mere 5% of the total installed capacity despite the enabling provisions of the Electricity Act, 2003 which promote competition through bidding.
In comparison, independent power producers have now garnered nearly 45% of the total installed capacity in the country. This is somewhat of a paradox because unlike in the transmission business, power producers deal directly with debt-ridden state-owned electricity boards for payments, increasing the risk of a default. On the other hand, the counter-party risk in the transmission business is mitigated to a large extent due to the point of connection (PoC) mechanism of collecting transmission charges.
Introduced by the Central Electricity Regulatory Commission (CERC) in 2010, the PoC mechanism obligates the Central Transmission Utility (CTU), Power Grid Corp, to assume the responsibility of billing, collection and disbursement of money. The CTU disburses the money proportionally to the inter-state transmission system (ISTS) operators.
“Collection of revenue by PGCIL and sharing of shortfall among all ISTS licensees constitute reasonably strong processes that mitigate counter-party concerns to an extent,” India Ratings & Research said in its recent report and added that the debt of an operating transmission project was categorised as ‘high safety’.
The government has, however, decided to divest PGCIL of CTU status, prompted by industry cries of a conflict of interest. Power Grid has called the move a blessing in disguise as it would no longer be shackled by statute and can diversify into electricity distribution and even power trading. While private players have welcomed the move, they are unsure if this would mean more projects being available for bidding.
Despite the low counter-party risk and relatively high degree of return, the transmission sector has seen dwindling participation from private entities in the last five years. The private sector attributes this to the ‘overwhelming’ presence of PGCIL, the state-run behemoth, and the government’s policy of awarding several projects to the company on a nomination basis under the ‘compressed time schedule’ provision. From close to 12 bidders for transmission projects in 2010, the number of regular participants has shrunk to 4-5 this year with foreign companies choosing to stay away citing small project pipeline and a dominant incumbent.
Although both private power transmission companies and PGCIL have struggled in equal measure to get project commissioned on time due to factors ranging from land acquisition to environment and wildlife clearances, the private sector argues that nominating PGCIL for such projects undermines the scope of private participation.
The association of power producers, an entity that represents major private players, wrote to the power minister last month saying a comparison between tariff discovered under competitive bidding versus the cost-plus method had shown that the former was almost 30-45% lower than regulated tariffs. This left no rationale for awarding any project on a nomination basis, it added.
PGCIL has often countered the charge of smothering competition by arguing that given the nascent state of private entities in the sector, it was only prudent to assign certain projects that required operational experience to the state player.
While the government has invited bids for more projects in the last year than it did in the preceding four years, it continues to award high cost projects to the PSU. Last month, the power ministry approved the award of R12,000 crore worth of transmission projects meant to evacuate solar power from Andhra Pradesh and Rajasthan to PGCIL, much to the dismay of private sector players.
