Power crisis: 60,000-MW plans run on empty

Across the power sector, alarm bells are ringing, threatening to short-circuit the already unravelling growth story. Manufacturing has pulled down to its lowest in three years, export growth is petering out, while rising input costs and a significant fall in capacity utilisation across sectors have stymied hiring and investment outlook further.
At least five states have declared power holidays and another eight have load-shedding plans lined up.

An all-pervasive fuel shortage threatens to derail upcoming projects and has already spooked private sector project developers and investors. Add to this a distribution sector that is haemorrhaging cash, a widening demand-supply gap, a flagging reforms agenda, and missed generation capacity addition targets.

Result: An estimated 12,000 MW of existing capacity and 48,000 MW (fresh capacity) face the prospect of running on empty. Reflecting the seriousness of the situation, at least five crisis management meetings have been convened in the past couple of months, three of them by the Prime Minister’s Office. Each ended with broadly the same conclusion — that while a long-term solution to the power sector mess needs to be found, the villain of the piece for now is Coal India. The state-owned miner has been singled out for some harsh treatment, primarily on the charge that the virtually stagnant coal output over the last couple of years has precipitated the impending fuel crisis.

On the whole, a slew of superficial quick-fix measures have been tried out over the last decade. But governments, both at the centre and the states, have been interested in merely kicking the can down the road. There is now serious talk of another bailout for the power sector, including a clean-up of the balance sheets of power utilities by writing off cumulative losses, with an announcement to this effect likely in the budget this week.

Ironically, less than a decade ago, in 2003, two key interventions aimed at stemming the rot in the sector were announced with much fanfare. One, the losses of state electricity boards (SEBs) were taken over through RBI-guaranteed bonds as a “one-time” financial clean-up exercise. Plus, the landmark Electricity Act 2003 simultaneously heralded a booster dose of fresh reforms, including the unbundling of distribution utilities, limited “open access” to consumers, state power regulators and a platform for independent tariff fixation.

“But the sector is back in mess, probably in a much worse position that it was 10 years ago,” a representative of the Association of Power Producers, a lobby group that represents an upcoming project portfolio of around 120,000 MW and has Tata Power, Reliance Power, Essar, Jindal Power, GMR, GVK and Adani among its members, said. A view echoed by Edelweiss, which, in a recent wrap-up on the sector, attributed “serious business risks” for power developers, cascading down to their lenders.

The biggest worry is fuel shortage that’s worsening by the day and threatens to derail the new-found enthusiasm among private developers to set up generation projects. The key reason is that Coal India Ltd (CIL) has simply not been digging fast enough to meet burgeoning demand. Result: over the last three years, an estimated 12,000 MW of coal-fired capacity, most of it in the state and private sectors, has come up without bankable fuel supply assurances. And another 48,000 MW of fresh capacity slated to come up over the next three years (till March 2015) faces an uncertain future in the wake of shaky coal supplies.

Following an intervention by the PMO earlier this year, Coal India was directed to convert all preliminary fuel supply pacts inked with thermal project developers into firm and legally-binding fuel supply agreements (FSAs) and ensure sufficient fuel supplies, even if it is forced to import coal. The move, according to the PMO, would provide fuel supply certainty to projects totalling 50,000 MW in cumulative thermal capacity. But power companies say that they are not getting their quota of supplies and even that which comes is of indifferent quality.

At last count, as of March 5, 10 of the country’s key power stations running on domestic coal were grappling to maintain normal operations with a day’s coal or less, and over a third of the 89 major coal-fired stations were straddled with critical fuel stocks of less than a week. And it’s not even summer yet.

Analysts believe that even if pushed to the limit, CIL will not be able to meet fresh supply commitments. A former Union power secretary, who is now working with the industry, said that to meet future demand, CIL will have to ramp up output by at least 6 per cent annually over the next five to seven years, up from the current 3 per cent growth — which is “next to impossible”.

Says Anish De, CEO-Asia at consulting firm Mercados EMI: “Just from domestic coal, the supply commitments are way too steep. Even if CIL were to pull up its socks, imports would be needed to bridge the gap in the short-term… From a country perspective, we need to look beyond CIL.”

On the ground too, there is cautious optimism on how much difference the PMO’s intervention can make in terms of a fuel boost at the station level. Nothing captures this better than Farakka (West Bengal) or Kahalgaon (Bihar), where two of NTPC Ltd’s super-thermal stations figure prominently in the list of projects with critical coal stocks, despite sitting right in the heart of the coal-mining hub.

Even new projects, like the two mega thermal plants coming up right opposite each other near Jhajjar (Haryana), exemplify the struggles faced by upcoming projects to maintain operations with less than adequate fuel.

While domestic coal production is undoubtedly in a mess, the issue of running power plants on imported coal, the only fallback option, is proving to be an entirely different challenge altogether, as is being experienced by two of the country’s largest projects coming up in the country’s western outpost, Mundra in Gujarat’s Kutch region.
Source: FE


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