Energising a tripping industry

The mood in the power sector turned sombre in 2011-12, which was reflected in a lull in the announcement of new power projects, after 3-4 years of significant capacity addition announcements. The lull is driven by concerns over the viability and profitability of the power generation business in the backdrop of declining plant load factors (PLFs). There has been a significant decline in coal-based PLFs from 78 per cent in 2009-10 to about 72 per cent in 2011-12 (April-January) due to inadequate coal availability and lower offtake by State distribution companies (state discoms). Further, many newly commissioned plants are operating at lower PLFs of 60-65 per cent against 70-75 per cent needed for viable operations. Uncertainty in coal availability and weak financial health of state discoms could put the brakes on fresh capacity addition in the sector.

Coal trouble

Adequate availability of domestic coal at half the price of imported coal is vital for most newly announced power capacities. Almost 80 per cent of these capacities are based on coal. Domestic coal availability remains inadequate on account of the inability of Coal India Ltd (CIL) to ramp up production, in the backdrop of delays in obtaining environmental and forest clearances. CIL’s production has been almost stagnant in 2010-11 and 2011-12 at close to 400 million tonnes while demand has grown at a compounded annual growth rate (CAGR) of 7.3 per cent in the same period. Consequently, CIL has not been signing binding fuel supply agreements (FSAs) with power generation companies since March 2009, though it has signed letter of assurance (LoA) for supply of close to 250 million tonnes. LoAs provide lesser certainty on fuel availability as they do not impose penalties on CIL for non-performance.

High proportion of expensive imported coal usage is not a viable proposition as power purchase agreements (PPAs) with state discoms do not provide adequate flexibility to pass through higher fuel prices. Captive coal production from mines allocated to end-users, too, is expected to be bogged down. Lack of clearances on mining or linked end-use projects is impeding the progress of these allocated mines. To complicate matters further, power producers face a host of logistical hurdles related to transport of coal, as slow progress in many railway projects is constraining rail transportation capacity. Nearly 75 per cent of the coal is transported by rail.

To address the uncertainty over coal availability, the government has directed CIL to sign FSAs with power producers who have entered into long-term PPAs with state discoms, and are likely to commission their plants by March 2015. These FSAs will cover 80 per cent of the fuel requirement of the power producers. This move increases the certainty of fuel availability to power producers, boosting the confidence of lenders to coal-based power projects, but will require the government to expedite clearances and CIL to fast track production. Weak financial health of state discoms is the other big issue facing power producers. Crisil Research expects state discoms to record accumulated losses of Rs.1.80-lakh crore by 2011-12, with a negative net worth of about Rs.75,000 crore. The huge magnitude of the losses will put pressure on the cash flows of state discoms, increasing the instances of disruption in electricity supply to consumers. The losses are an outcome of a widening gap between average cost of supply and average revenue realised, driven by rising fuel prices and inadequate tariff hikes due to political compulsions. We estimate a gap of 47-50 paise per unit in 2011-12 on an average tariff of Rs.3.07 per unit (which excludes government subsidy of 45 paise per unit). Crisil Research believes average power tariffs will have to be increased by over 15 per cent for the state discoms to break-even.

The level of losses has also been high on account of inadequate investment in infrastructure (distribution lines, transformers). The continuously rising losses have meant that enough funds are not available for upgradation of infrastructure resulting in high technical losses. Also, inadequate metering and high power theft have meant that the aggregate technical and commercial (AT&C) losses are close to 27 per cent in 2009-10 as compared to less than 10 per cent in most developed countries.

To restore the financial health, state discoms will need to make frequent and timely tariff revisions in line with the cost of power purchased. States such as Tamil Nadu did not revise tariffs for seven years (from 2002-03 to 2009-10), leading to accumulated losses of Rs.27,094 crore and negative net worth of Rs.22,728 crore as on 2009-10. In contrast, a State like Gujarat which has seen near-annual tariff revision has a relatively healthy financial position with profit of Rs.49 crore in 2009-10 and positive net worth of Rs.2,790 crore. Also, state discoms must adopt measures which enable auto pass-through of fuel price revisions to end consumers. The discoms in Maharashtra, which have a relatively healthy financial position, have a provision to partly pass on higher fuel charges without requiring a fresh tariff order.

Equity infusion

The Central and State governments, on their part, will need to infuse significant equity into state discoms, as they reported a negative net worth of about Rs.61,000 crore in 2009-10 despite average equity infusion of Rs.12,000 crore in three years up to 2009-10. Further, the government will need to provide incentives to encourage investments for upgradation of infrastructure, which is necessary to reduce AT&C losses.

Therefore, the Central and State governments, and CIL will together need to address these issues urgently to enable power producers to add fresh generation capacity and lenders to fund these capacities. How quickly and how effectively they act will determine whether the country will have adequate electricity available to meet its large, growing demand and avoid blackouts.
Source: BL


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