Power plants are not suffering because of bad operations: Expert

The central government is considering the creation of a special purpose vehicle (SPV) by NTPC, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). This SPV will operate stressed assets in the thermal power space.

In an interview to CNBC-TV18, Ashok Khurana, Director General of Association of Power Producers and Harshvardhan Dole, VP-Institutional Equities at IIFL discussed the implications.

Khurana said that majority of the thermal power plants are suffering because of factors beyond their control like no offtake agreement, there is no coal supply etc.

He further said that an SPV won't solve power plants' operational problems. These plants are not suffering because of want of good operations, in fact their operational parameters are by far the best.

According to him, power plants are not suffering by the factors which are controlled by the government.

Government has to tackle the factors leading to power stress, said Khurana.

Dole of IIFL said that power sector will get a lease of life if State Electricity Boards (SEBs) are capitalised.

He further said that SEBs have taken some proactive measures, but most issues still persist.

Below is the verbatim transcript of Ashok Khurana’s interview:

Latha: I believe you have already written to the power ministry and you all have had discussions. Can you update us on what the thinking is?

A: We have apprised them that all these projects, let’s say we have about 80 gigawatts in thermal space on the private side of which about 50 gigawatts is the stressed assets. Majority of them are suffering because of factors beyond their control like there is no offtake agreement, there is no coal supply, are they imported coal plants because volatility of international coal pricing is so high that anytime it goes beyond USD 70 they become unaffordable and cannot be dispatched. These issues cannot be resolved by opening a new SPV, as you said for operation of these plants. These plants are not suffering because of want of good operations, in fact their operational parameters are by far the best.

They are suffering for these factors which are controlled by government. These transfer them to SPV will not solve the problem. The problem will only be solved if you remove the factors underlying for the stressed which are coal, offtake agreement and volatility of commodity prices. You need to find a way how you can make them affordable.

Latha: You said 50 gigawatts is stressed. How many number of plants would that be and how much amount is stuck there?

A: 50 gigawatts safely puts about Rs 2.5 lakh crore if you put 5 crore megawatts and each project is about, on an average, 1320; you will have about 30 odd projects over there. These projects are operational, they have achieved their commissioning but they are not running either full capacity or they are idling for these reasons. So their operational change of ownership is not going to resolve the problem because they will have the same problem, NTPC has same parameters like we have it, in fact in many cases like Mundra, Tata and Adani, they have much better professional parameters.

Latha: What can one do in the NCLT? The committee of creditors (CoC) can take a haircut, let us assume they take a haircut of about 70 percent on their loans, will that make the cost of power fall from Rs 4 to Rs 2.50 or Rs 3, will they become viable, is there a chance that if they go to NCLT and banks take a 70 percent haircut, some of these will find buyers?

A: My idea is at 70 percent haircut we will find buyer. That means it reduces its power tariff about 70-80 paisa. Now this power tariff gets reduced but once you take that power, it substitutes other power. The question there is your other capacity is running at 55 percent. So the earlier speaker rightly said, you need to take the demand to that level where these power can be absorbed and there is no issue of demand because probably the people want power.

The only issue is the intermediary which is taking power from us and supplying. The gross reflective tariffs are not there so he makes loss per unit he sells. You need to resolve that distribution company weakness and financial and the symbolic is – as on today also, the payables by these companies – if I count the NTPC private and the coal companies, about Rs 40,000 crore is pending for payment more than three-four months. That is the symbol of the financial health.

So they are buying power and a private developer or an NTPC for that matter, we pay for coal in advance, railways in advance and for transmission in advance and then we wait for another four months for getting a payment. Not that they want to be a defaulter, so unless we are able to resolve the ecosystem, which works in a commercially viable manner is no way you can find a solution to these problem of stress in the power sector.

Sonia: One more number you told us Rs 40,000 crore is the receivables for SEBs. What are the total losses that the SEBs are sitting on as of today and what is your own view on the possibility of recapitalisation of SEBs?

A: We have already recapitalised SEBs. UDAY scheme was nothing when they lessened their balance sheet by transferring most of the debts to the state and lowering it about 4 percent on the interest rate. But the answer lies in the tariffs, in the loss control. The latest UDAY report, which we have read also about 28-29 percent losses and worst is the states which are five-six worst performing states, they have not shown much improvement and if you see the demand also, demand profile of the increasing customers, it is agriculture and the household, which is also the subsidised sector. That is also a double whammy for distribution companies. So unless we have a cost reflective tariff, the demand growth on the commercial and industrial side, there would be problems.

Latha: Adani Power has not been able to operate Mundra profitably. Is it true that the plant is not operating at all and likewise Essar Power’s plants, so it is possible that these two big companies can also file for NPA at least at the project level?

A: I know about Adani Mundra, they are not defaulting.

Latha: I am not saying they are defaulting but how long can you run an unviable plant?

A: They are not running. They have offered to sell their equity at Re 1. Tata also. They all have offered. So for NTPC, if they think, they can improve the operations, first should be these three plants, please take them because here the developers are offering you and taking their equity only at Re 1.

Latha: I have spoken to a lot of bankers and they said they have even met state governments asking them to buy and met NTPC but at the moment, everyone is so scared that nobody is touching any plant especially if there is a marquee owner. That is what I understand from the bankers.

A: I must add that if the pronouncements made by the new minister – one is that in the tariff calculations, the maximum loss you will factor is 15 percent, if you do not supply power when available, you will be punished. At least they can put the reasons in writing and regulator can correct those reasons. So if you implement these two reforms, which we have told please include in new tariff policy, something will come up because the tariff will become affordable and those states which are giving more than 15 percent, there is an average loss of country is 28 and Gujarat is running at 10-12, that means there are many states who have 40-42 percent loss also. So then this 27-28 percent loss goes to budget.

For entire discussion, watch accompanying video...