With the approaching
timeline of the Government
of India's target to provide
"Power for All by 2012" and to
support a growth of the economy by 8
per cent, the Indian power sector is
under the direct limelight among all
infrastructure sectors in the
upcoming financial year.
With a planned investment of
Rs.13 trillion in the sector for the XII
plan period, it has been in focus of
both policy makers and investors
alike. The sector has got the interest
of not only Indian private investors
but also as a signal of bullish
sentiment among global investors,
with FDI inflows into the power
sector touching $1.3 billion during
the first six months of the current
fiscal, just marginally short of what
came in during the entire 12 months
of each of the previous two financial
years. However, some major inherent
factors and the policy and regulatory
infrastructure may increase the risks
of such hefty investments.
On the generation side, power
sector is under increasing pressure to
demonstrate a tangible commitment
to green energy, coal-fired
generation plants will still represent
more than 60 per cent in the capacity
mix and around 80 per cent of the
actual generation. With a mandate to
maintain 22 days of coal in stock for
thermal power plants, around 60 per
cent of existing plants do not have
enough coal to last even a week, with
some holding less than a day's stock
or with no coal stock at all.
The coal availability is hindered by
primitive mining techniques, delay in
allocation of mines (the Standing
Linkage Committee last met in April
2011, while the last allocation was in
August 2009), leakage through
inefficiencies, along with missed
production targets by the state controlled
Coal India Ltd.
Last month, CIL announced that it
has lowered its production target for
the current fiscal year to 440 million
tonnes, down from the 452 million
tonnes initially outlined in the
company's annual plan which
consequently would mean a deficit of
30 per cent of total requirement to be
filled from imports. Even with large
private players scrambling to
investing in coal mines outside India
to securing fuel linkages, the
Government's intervention is needed
in terms of long-term contracts to
reduce the effect of international
policies on coal availability and
price, case in point being the rise in
fuel costs due to change of
regulations in Indonesia, and the
threat of the nationalization policy
for the mining industry being debated
in South Africa.
Another crisis looming is the water
availability. Power plants require a
substantial amount of water for
cooling purposes and for operations
but nearly 67 per cent of power plants
are located in water-scarce areas and
nearly 80 per cent plants planned for
the future will be located in such
areas. This conflict illustrates the importance of taking water related
risks into account when planning future
developments.
On the policy side, delays in
environmental and forest clearances
are another risk factor. As of last
month, the ministry of environment and
forests (MoEF) has put 203 coal blocks
on "no go" zones, thereby banning
mining in these, and in turn affecting
660 million tonnes production. As per
coal ministry estimates, these blocked
reserves have potential to generate
approx. 1.30 lakh mw power. (The Go-
No-Go system limits mining for coal,
with activity in areas of dense forest
being banned completely). Many
thermal plants currently under
implementation, including the
ambitious ultra mega power projects
(UMPPs), are dependent on allotted
captive coal mines, which have yet to
get forest clearance, with a result that
the two UMPPs on the bidding anvil,
viz. the Alkatara UMPP in
Chhattisgarh and Sarguja UMPP in
Orissa having an uncertain future.
In the power supply value chain,
distribution utilities continue to be the
weakest link and are also facing major
risks of higher losses, while the revenue
top-line continues to be almost constant
with hardly any increases in revenue
tariffs. Operating at huge losses
(according to the recent report of the
Shunglu Committee estimate the
accumulated annual losses of utilities at
Rs.179,000 crore over the last five
years, with the losses amounting to
around Rs.57,000 crore inFY11 alone),
they are buying costly power and giving
away huge amount as free supply to
farmers, partly to curry political favor.
[These figures do not include
government subsidies and are reflective
of the actual losses of the sector.]
Upcoming elections in major states in
the next couple of years are also not
helping the case. The distribution side
also suffers from rampant theft,
inefficient collection and disallowances
of expenses by regulatory commissions,
which widen the gap between average
cost of supply (ACoS) and the tariff,
thereby increasing losses. Non approval
of expenses by state regulators
due to non-achievement of efficiency
targets and lack of investment by
utilities due to poor financial health has
resulted in a vicious cycle, which the
Discoms have been unable to address.
Due to funding of these losses by debt,
the cumulative debt of state power
utilities, including distribution entities,
has risen to an estimated Rs.3 lakh
crore by March 31. Recent estimates by
rating agencies envisage almost 12 per
cent of the total debt exposure of
Rs.4,80,000 crore to the power sector
to be potentially risky (including banks,
PFC and REC).
It would seem that raising tariffs
might be a solution for these
distribution companies to meet their
long overdue liabilities but power, being
a concurrent subject, is charged with
political will and is a sensitive issue with
already existing high levels of inflation.
Many believe that private
participation through distribution
franchisee (DF) will help to mitigate
these risks, case-in-point being the
success of first input and investment
based DF in the Bhiwandi circle in
Maharashtra with AT&C losses at levels
of 63 per cent at the time of award of DF
(FY06) being brought down to 19 per
cent in December 2008. This has
attracted the interest of a lot of private
players, including both traditional
distribution players as well new players
with hardly any background or
experience of the power sector. However,
recent developments in Aurangabad and
Nagpur circles suggest that these PPP
initiatives are often rushed without a
proper understanding of business by the
private players, which results in inflated
and unsustainable bids, exposing the
entire process to risk of failure.
Mitigation is to be done by developing
simpler and standard models, bidding
documents and transparent evaluation
criteria and processes. Two major
challenges hampering the progress of
DFs are inadequate power supply despite
guarantees from the licensee and
rehabilitation of existing employees of
the utilities.
The outlook for the sector has been
portrayed as being bleak over the last 6-
12 months, but with major lending
institutions like the PFC and REC
resuming their lending to the sector,
albeit with higher securities, one hopes
that the government takes cognizance
of these difficulties and acts swiftly to
address the concerns and risks faced by
investors and utilities.
(Chandan Mishra is Associate
Director at PwC India)