Financial distress in India’s thermal power sector (Comment)

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The thermal power sector accounts for $40-60 billion of potentially stranded assets that are continuing to trouble the Indian banking sector. Fifteen GW out of the stressed 40 GW has not yet been commissioned, as identified in the report of the Standing Parliamentary Committee on Energy earlier this year.

Some 16.2 GW of coastal power plants designed to operate on up to 100 per cent imported coal are severely affected by the doubling of prices since 2016. Another 6 GW of gas-fired projects are stranded as India’s limited domestic gas production is not able to cater to the plants to operate at the required viable utilisation rates. Just like coal, imported LNG is an extremely expensive option best reserved for peaking power generation.

Delays in project implementation due to challenges such as land acquisition, approval of required permits and environmental clearances have all resulted in cost overruns. Another key underlying issue that is common across these stranded assets is the unavailability of coal linkages or affordable domestic gas.

About 80 per cent of India’s coal production comes from a concentrated region of central-eastern India. Given that coal transportation often forms a prohibitive part of the delivered price, finding a suitable linkage for the power plants remains a huge challenge.

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For example, the coal-fired fleet in Karnataka (with no in-state coal mining capacity) operated at an extremely unviable utilisation rate of 35 per cent in 2017-18.

The absence of long-term PPAs has restricted many of these projects from moving ahead. Projects that had signed higher-cost PPAs a few years back have now been stalled as state discoms have either requested cancellation of PPAs or downward tariff renegotiation. On the other hand, there are projects that have entered PPAs with aggressively low tariffs insufficient to allow financial viability.

To make the stranded asset risk worse, many of these projects in the coal-fired sector are based on poor quality imported and out-dated subcritical technology. Water availability is another major constraint to financial viability of a number of proposals.

In the past 15 months, solar and wind power tariffs have landed between Rs 2.5-3.0/kWh with zero indexation through reverse bidding auctions. Coal-fired power is increasingly losing market share as states are rightfully opting for the cheaper renewable energy option. As per India’s Central Electricity Authority (CEA) estimations, the tariff for a new emission controls compliant pit-head supercritical coal-fired power plant should be Rs 4.39/kWh.

Increased prices of domestic and international coal in recent years have intensified stranded asset risks. Combined with rising railway freight charges for coal transportation over the distance of more than 500 km, this has inflated the variable generation cost for many coal-fired power plants. All non-pithead coal power plants should be seriously re-evaluated, if high rail costs make the plant unviable, non-coal states should invest in renewables and if need be, import electricity by wire instead.

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The Reserve Bank of India (RBI), in February, set August 27, 2018, as the deadline for settling proceedings for defaulting power plants to avoid being referred to an insolvency court. This deadline is almost on us.

The Power Ministry had urged the RBI to extend the deadline by six months to give the concerned lenders more time to switch over management to new and better capitalised promoters. RBI has denied the deadline extension request.

Two of the largest stranded assets are the ultra-mega power plants in Mundra, owned by Adani Power (4.6 GW), and Tata Power (4.0 GW). After both were offered for sale for a token Rs 1 each in May 2017, neither have yet found a solution 15 months later. Adani Power has reported a net loss of Rs 825 crore ($120m) in the first quarter of 2018-19, a near doubling relative to the previous period, highlighting the magnitude of the equity writedown required. In the meanwhile, the unplanned idling of Adani Mundra has significantly cost the state of Gujarat as it had to rely on power from the more expensive open market.

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In the view of the Institute for Energy Economics and Financial Analysis (IEEFA), merely switching promoters for these stressed assets is not a panacea for the problem that is caused by the structural inefficiencies in the Indian coal-fired sector.

There is no easy fix to the power sector-specific problems, but these stressed assets should not be allowed to remain unresolved. To move forward, India needs to avoid crony capitalism and giving in to taxpayer funded bailouts; promoters must be forced to take up to 100 per cent write-offs on their equity and in the worst cases permits revoked and land returned so as to force the abandonment of projects now worthless as surplus to current needs.

(Tim Buckley, is Director of Energy Finance Studies, Australasia, at IEEFA. He can be contacted at [email protected] <mailto:[email protected]>. Kashish Shah is a Sydney-based Financial Analyst at IEEFA. He can be contacted at [email protected] <mailto:[email protected]>. The views expressed are personal)

–IANS

tim-kashish/vm

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