Scarcities dim power sector's shine

Agencies | New Delhi | Updated: Dec 21 2011, 13:54 IST

Discoms presented a dismal picture, with projected losses of Rs 70,000 crore last fiscal. (Reuters) SUMMARYFuel

scarcity, regulatory inefficiency and funds paucity hurt discoms and sector at large.
Saddled with shortages, the power sector lost its promised sheen this year as fuel scarcity, regulatory inefficiency and funds paucity ushered in developmental gloom. With a forgettable 12 months coming to a close, what remains are hopes of "reforms and restructuring" in the power sector in 2012. From delays in the flagship Mundra UMPP and other projects to bleeding power distribution companies (discoms) hurting lenders, a persisting uncertainty has also hurt investment flows into the sector. Besides fuel shortages, political and business sensitivity on the issue of tariff hikes as well as the proposal to impose duty on imported power equipment, especially from China, contributed to the uncertainty. Nevertheless, 2011 began on a relatively positive note, with Power Finance Corp's stake sale mopping up over Rs 1,145 crore. But then, a raft of negative news began to trickle in, including pricey fuel posing the proposition of a Rs 500 crore annual loss for the Mundra UMPP in the first year of operations. Discoms presented a dismal picture, with projected losses of Rs 70,000 crore last fiscal. The high-level Shunglu Committee has

come out with a slew of suggestions to absorb their losses, such as creation of a Special Purpose Vehicle (SPV). All these factors have hurt overall investment flows into the power sector, especially in the second half of 2011, according to experts. "This was the year when all the risks, mainly coal shortages, surfaced, affecting many projects. There were regulatory, policy and investment hurdles, among others. The power sector seems to have almost hit the bottom in 2011," said Salil Garg, the Director of ratings agency Fitch's Asia-Pacific Utilities team. "Next year, we expect to see restructuring and reforms happening in the power sector," he added. Eyeing 9 per cent economic growth, the country is well short of meeting its power capacity addition plans. The target of 17,601 MW for the current fiscal, ending March next year, is unlikely to be achieved, thanks to slippages and shortages. Depending mostly on thermal plants for energy, inadequate availability of coal has been a recurring theme in the Indian power sector. The problem has been accentuated by environmental hurdles and soaring international fuel prices. A combination of inclement weather and the Telangana agitation in the latter part of this year resulted in a steep fall in coal production that even snapped power supply to some states. Going by Central Electricity Authority data till December 11, as many as 46 thermal power stations nationwide have only seven days of coal supply stocks. Despite multiple ministerial panels and high-level panels looking into various issue concerning the sector, the regulatory regime virtually hampered progress, as visible in the inordinate delay in the launch of the second round of bidding for the 4,000-MW Bedabahal Ultra Mega Power Project (UMPP) in Orissa. The standard document for bids is being reworked, mainly to have better clarity on tariffs against the backdrop of soaring coal prices. In addition, two of the already awarded UMPPs -- Mundra, in Gujarat, and Krishnapatnam, in Andhra Pradesh -- are faced with

the prospect of higher fuel prices making them commercially unviable at the moment. Even though, private power producers including Reliance and the Tatas -- are pitching for higher electricity tariffs for their upcoming projects to balance pricier fuel, an immediate solution is not in sight. In addition, the UMPPs also came under the scrutiny of the CAG, which found certain discrepancies in the award of these projects, especially the Sasan project in Madhya Pradesh. The project drew flak from the CAG over diversion of surplus coal from the plant's captive mine to another same-size plant in the state. An Empowered Group of Ministers suggested seeking the Attorney General's opinion on the issue. Power Finance Corporation, which is the nodal agency for UMPPs, had prepared the bid documents for this project, which was awarded in 2007. The CAG reportedly said the excess coal from the mines allotted to the Sasan project cannot be used for another project. Adding to the woes, many discoms were short of cash to pay for power purchased from entities such as state-run NTPC. At least twice this year, the country's largest power producer NTPC had served notices to Delhi discoms -- BSES Rajdhani and BSES Yamuna -- for non-payment of dues. of the discoms stood at a staggering Rs 1,79,000 crore before subsidy during the 2006-10 period. The poor financial health of the discoms also set off alarm bells in the banking sector, with reports suggesting that many financial institutions have become extremely cautious in lending to the power sector. Official data revealed that public sector banks had extended loans of more than Rs 2.97 lakh crore to the power sector at the end of September quarter. Estimates showed that the losses of power entities in the states of Rajasthan, Tamil Nadu, Madhya Pradesh, Uttar Pradesh and Bihar alone accounted for over 70 per cent of the overall loss incurred by state power utilities in the 2010 financial year.

While the delays and financial headaches play out, a tussle is intensifying between the government and private power producers over the proposal to slap 14 per cent duty on imported equipment. As the 14-member Association of Power Producers put it, "The power sector in the country is passing through a very challenging phase with significant headwinds..." Entering 2012, there are hopes that the sector sees less turbulent times.