Discoms at the heart of power crisis

PRATIM RANJAN BOSE | Updated on March 09, 2018 Published on August 04, 2013

Debt-ridden distribution utilities are unable to fork out viable tariffs to generators.

Sanjiv Goenka didn’t expect this.

A couple of years ago, when many in the industry were in a hurry to set up thermal power plants, without much regard to the risks associated with availability and cost of fuel, Goenka did not join the rush.

Instead, his CESC Ltd stuck to the time-tested formula of investing in projects enjoying assured linkage of cheap domestic fuel from Coal India.

But even a cautious approach failed to save the company from the perils of an unprecedented slowdown in demand for electricity. Scheduled for commissioning this year, CESC’s 2 X 300 MW project could so far enter into a firm supply agreement (power purchase agreement) with only one distribution utility for a mere 100 MW.

There isn’t much opportunity to explore the open market demand for electricity either. Goenka regrets that he would not enjoy supply of cheap domestic fuel for open market sales. And use of imported coal will make the electricity too costly to trade.

But it is questionable if availability of domestic coal alone would have made CESC’s investments viable. There is hardly any appetite for power priced over Rs 2.70 a unit, on the National Grid that excludes the four Southern States.

Leave alone the new facilities created at a significantly higher capital cost or the plants running on imported coal -- even the old domestic coal-based power stations, with low fixed cost, are finding it difficult to make money at this tariff.

The results are evident in idling of nearly 5,000 MW thermal capacities -- run by Central government-owned NTPC and the power-surplus States of West Bengal and Gujarat – for the last couple of months. NTPC is considered one of the lowest-cost producers of electricity.

Weak discoms

Goenka is caught in a problem arising not merely due to the shortage of domestic coal, but also due to the unwillingness of discoms to shell out a higher tariff.

After much brouhaha over the nation’s growth potential and projected rise in power demand, India is now saddled with stranded capacities.

And, most of the approximately 30,000 MW capacity created by the private sector since 2009, based on the flawed tariff-based bidding principles advocated by the Centre, are facing serious viability concerns. (The exceptions include approximately 2,000 MW facilities backed by captive mining.)

Leaving aside nearly 6,000 MW of imported coal-based capacities, (now lobbying for tariff escalation beyond the scope of tender terms), a substantial portion of the unutilised capacities were linked to domestic coal. They are in a problem, because no State distribution utility (discom) is ready to pay a higher tariff.

The power sector squarely blames the low purchasing power of discoms for the debacle. Having received bids for purchasing nearly 32,000 MW of power, the State utilities ended up inking pacts for a mere 2,500-3,000 MW of electricity purchases since 2009.

The problem, critics argue, lies in the business model (or lack of it) of discoms. Barring a few exceptions, like the State utility of Gujarat, the distribution sector in the country historically earned less money than its expenses. The cash shortfall was mitigated through bank borrowings, now aggregating over Rs 2,00,000 crore.

As an alarmed Reserve Bank of India tightened credit flow to such unviable businesses, beginning end-2011, the bankrupt discoms were forced to go slow on purchases.

Some of them, like Tamil Nadu or Punjab, were forced to increase consumer tariffs after almost a decade. But the increase is still insufficient to recover the costs.

A Central proposal for debt recast of the discoms – particularly in Tamil Nadu, Andhra Pradesh, Uttar Pradesh, Punjab, Haryana, Rajasthan and MP – did not make much headway. Except some interest shown by the Congress-ruled Andhra Pradesh and Haryana, no major State was ready to share the fiscal responsibilities of its distribution utility and brave a sharp tariff rise.

Discoms in Rajasthan and MP are separately working out refinancing plans with lenders. But it might bring only a temporary relief. Like earlier, discoms may run up a fresh set of debts now.

Hope against despair?

With restructuring of state utilities remaining a far cry, can there be much scope of a demand recovery for the generation sector in the short and medium term — when the entire economy is passing through a slowdown?

A section of industry believes the demand for power will start reviving with the onset of the election season, from the end of this year, as every ruling party in the States will try to keep its electorate happy.

Hopes are also pinned on linking the four Southern States to the National Grid. The Southern States can now draw only 1,000 MW of power from the grid, resulting in an artificial shortage and high regional tariff.

The much-delayed project, scheduled to enhance the power transfer capacity by another 2000 MW, is now expected to be commissioned in January 2014.

Goenka is hopeful that the grid expansion and the resulting rise in demand will help improve the electricity tariff in the grid to remunerative levels. Will it?

Critics point out that Delhi, one of the major consuming States to face assembly election this year, has already tied up requisite capacities.

With no structural change in sight to improve the finances of major discoms, as in UP, the total demand for electricity may go up by just a couple of thousand megawatts.

Add to this feeble demand-side impetus the idle generation capacities in the State and private sector, and there is little opportunity for tariff in the northern States to firm up substantially.

To add to the complexities, another 10,000 MW private capacity will be on stream in the next two years. NTPC plans to step up capacities by an average of 3,000-4,000 MW a year. DVC, which is already saddled with unutilised capacities, will bring another 1,200 MW capacity on stream any day.

Power capacities will not be a problem, unless, of course, India stages a dramatic economic recovery. Unremunerative tariff for the generators at current levels of output — due to supply (coal availability) and demand (from discoms) constraints — is the key issue.

Published on August 04, 2013
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