In its last cabinet meeting before the general elections, the Centre cleared a slew of proposals to support stranded thermal power projects. Measures such as fuel linkage for power producers with short-term power purchase agreements, continuing fuel linkage if thermal power producers cancel purchase agreements with State power distribution companies (discoms) due to non-payment of dues, short-term coal linkage for thermal power producers are among the many measures that were approved to rescue nearly 34 thermal power projects.

These measures are aimed at helping the banking sector reduce their power sector NPAs, make the power generators channel their produce to the short-term power market and ensure that they have sufficient fuel to generate power.

While the intent appears good, experts say that lack of demand from industrial customers can throw a spanner in the works. Unless demand picks up significantly, the power sector may not be able to emerge from the woods.

Short-term power market

State discoms have been shying away from signing long-term power purchase agreements over the last couple of years due to a rapid fall in renewable prices. This has made them buy power from the short-term market because they do not want to be locked into long-term contracts at a higher price. The price of short-term power has also trended downwards, despite the usual seasonal spikes. And there has been a surge in volumes in FY19, according to India Ratings & Research.

“There are 15-16 GW of thermal power plants that are fully operational, but they don’t have PPAs,” says Sabyasachi Majumdar, Senior Vice-President of ICRA. “They will be able to supply short-term power at a much more reasonable rate, compared to the past. There is a possibility that some demand may come their way.”

Demand is the key

India Ratings calls power purchase agreements an “elixir” for servicing debt. That’s what the government presumes to have given to the stranded thermal power projects. But there is one thing that might upset the apple cart: demand for power.

“Despite improving connectivity under Saubhagya scheme, the demand growth continues to get curbed by rising energy efficiency, AT&C loss reduction, industrial and commercial customers looking at off-grid sources and continuing discom losses,” says Rahul Prithiani, Director at CRISIL Research.

This means, despite the valiant efforts to save thermal power producers, reliable demand for the power produced from these plants is not a given. The power deficit in India in January is only 0.5 per cent and thermal power production in January fell one per cent year-on-year, according to India Ratings. Plant load factor (a measure of actual power produced vs the total capacity) in January slipped to 60.5 per cent compared to 62.9 per cent a year ago.

Coal linkages can help

The government’s move to allow coal-linkages to power plants which sew up short-term power purchase agreements or sell power through power exchanges, which wasn’t allowed before, will help power generators source coal from Coal India Ltd directly, instead of buying fuel at e-auctions. This had led to higher fuel costs, which meant State discoms didn’t find the power price attractive.

To increase the supply of coal available at auctions, Power Minister RK Singh said that 50 per cent of coal will be earmarked for power projects. This is expected to reduce the cost of fuel, and in turn, will make the power cheaper. A nodal agency will procure bulk power against pre-declared linkages and act as an aggregator of power for State discoms.

Can all this help thermal power producers claw their way out of trouble? Well, it all depends on the discoms.

“The extent to which it will lead to a desirable outcome will depend on whether the discoms are able to supply power 24X7 to customers,” says Majumdar. And hopefully, Coal India can increase its production to supply coal to these power plants.

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