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Financial distress in India's thermal power sector
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SME Times News Bureau | 18 Aug, 2018
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.
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.
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.
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.
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