As the Tamil Nadu Government kickstarted the process of unbundling its energy distribution company with the formation of three companies, a major challenge awaits pertaining to the breakdown of accumulated losses of the power utility as the financial restructuring has not been done yet.

Last week, the state Energy Department issued an order for the restructuring of TANGEDCO (Tamil Nadu Generation and Distribution Corporation Ltd) into separate generation and distribution companies and the formation of Tamil Nadu Green Energy Corporation Ltd (TNGECL) by integrating the renewable energy wing of TANGEDCO and merger of TEDA (Tamil Nadu Energy Development Agency) with the new green power company.

It said TNGECL should not only be helpful to fast-track the energy transition plans but can also give access to funds that will help ease the liquidity concerns and reduce the overall borrowing cost of the state energy sector.

After the state government’s approval for the incorporation of TNGECL as a wholly-owned subsidiary of the holding company TNEB, transfer schemes shall be finalised with details of the company’s opening balance sheets, HR issues, pension liabilities, etc.

TANGEDCO accumulated losses

Meanwhile, industry analysts point out that as the unbundling process has commenced without cleaning up the balance sheet of TANGEDCO, there are big questions related to funding the losses and pension liabilities of the company.

According to estimates, TANGEDCO carries accumulated losses of about ₹1,50,000 crore and loans of about ₹1,60,000 crore.

“The state government doesn’t have the fiscal leeway to fund the losses and pension liabilities,” said an industry analyst.

Energy transition funding hurdles

He, however, pointed out that the Green Energy Company may not be allowed to carry the burden of any share of accumulated losses when the financial restructuring is taken up.

“It will be helpful if the Green Energy company is made to have a clean balance sheet without any loss amount. A clean balance sheet will help the Green Energy Company raise funds at competitive rates and set up large solar or other clean energy projects as part of the energy transition goals, he says.

Currently, hydro operations account for a major portion of TANGEDCO’s renewable energy. As of March 31, 2023, its hydropower stations had an installed capacity of 2322 MW. In the wind segment, it has only 6.2 MW of capacity.

The unbundling process of TANGEDCO is a long pending one, as most of the other states have unbundled the State Electricity Boards into generation, distribution, and transmission. In 2010, TNEB was split into two entities — generation and distribution under TANGEDCO and transmission under TANTRANSCO.

The unbundling of TANGEDCO was meant to bring in efficiency while cutting down losses as both businesses – generation and distribution – are different and require different management bandwidths. Also, no clarity exists on which business is doing well or incurring losses. Going by the records, most of the losses in some periods were incurred by generation businesses, while in some other years, generation businesses posted losses.

Separate companies for distribution and generation may lead to better governance and operational efficiency. For e.g., the distribution entity need not buy from the generation company if their costs are higher than what is available in the market. Likewise, generation companies will also be able to sell the power at better rates on exchanges.

Also, it will be easier to borrow with different limits. PSU lenders such as REC Ltd and Power Finance Corporation have limits for exposure to a single party. Now, TANGEDCO is hit by that limit in borrowings. 

Meanwhile, a massive tariff hike effected by the entity last fiscal has not yielded any big dividends as the higher cost of power chase during FY23 has pulled down the performance of TANGEDCO.

An industry analyst said poor planning in power purchase without a forecasting tool and lower PLF (plant load factor) of TANGEDCO’s thermal stations (the average PLF is about 60 per cent) could be the major reasons for such losses in FY23 despite tariff revision.

“Along with unbundling, there should be a stronger focus on demand forecasting to economise power purchase and boost own power generation, states the analyst.

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