The idea is good, but the big question is whether such a law can be passed
A High Level Empowered Committee (HLEC), chaired by Cabinet Secretary PK Sinha, to address the issue of stressed thermal power projects in India has made far-reaching recommendations. The big question is, will the recommendations be effected? In view of the expected disruption in the power sector, they ought to be.
As many as 34 thermal power plants in the country with a combined capacity of 40,130 MW are stressed. Assuming an average cost of Rs 6 crore per MW (in many cases it is much higher), this means that Rs 2.4 lakh crore of investments are in jeopardy. Since banks contribute at least 75 percent of a project's cost, it could mean that at least Rs 1.8 lakh crore of bank funds are under stress. That explains why banks were included in the panel apart from representatives from the power, finance, railways, oil and petroleum and coal ministries.
Although the report does not mention it, there are three kinds of stressed power plants. The first, clearly a result of collusion at the highest levels, are those set up in places where no fuel linkages had been planned.
The second category is plants that were either not designed well, or had substandard machinery. It is the third type of plants that are salvageable, although the panel's report doesn't mention such a list. These are reasonably well-designed plants, but could not reach commercial viability either because they were set up without power purchase agreements (PPAs), or because of PPAs that are disputed now due to a change in ground realities, or because coal mines that generators thought they would have access to are no longer available. This could have been because of the Supreme Court verdict that had overruled out-of-turn and non-transparent allocation of coal mines to private players.
That could explain why the first issue the panel's report addresses is fuel linkage. The report mentions that priority would be given to providing those linkages. This facility could help salvage some of the power plants; indeed, eight such plants have already achieved resolution.
The issue of PPAs is equally vexing. Some entrepreneurs decided to set up merchant plants to sell their power directly on energy exchanges. They were seduced by high energy prices on energy exchanges, before the regulator stepped in to put a cap on (mostly) collusively-rigged high prices. Once that windfall was lost, some entrepreneurs hurriedly persuaded state governments to ink irregular PPAs, while others thought that they could ride out the storm. Both types of plants could be in trouble. Once again, it is not yet certain how many plants are in this category.
The panel has recommended measures to alleviate this problem such as allocation and supply of coal for short-term PPAs, resuming coal supply in case of termination of PPAs due to default in payment by distribution companies (discoms), getting PSUs to work as aggregators of power, increasing the quantity of coal for special forward e-auction for the power sector and the retirement of old and inefficient plants.
The phasing out of old plants will have the salutary effect of allowing the sector's plant load factor (PLF), a measure of capacity utilisation, to go up.
The committee clearly spelt out that the net revenue generated by the suggested measures shall be used entirely for servicing debt in the first place. It has also recommended issuing advisories to discoms and fuel supply companies for not cancelling any PPA, FSA (fuel supply agreement) and transmission connectivity, environment clearance/forest clearance, even if a project is referred to the National Company Law Tribunal (NCLT).
The recommendations relating to the outstanding of state governments are most crucial. The panel observed that the viability of generators gets hurt severely due to delay in payment by discoms (most of them are state-owned). It recommended that the Ministry of Power should advise power regulators to monitor payments by discoms and frame appropriate regulations.
The panel has sought to curb the tendency of state discoms of not paying applicable late payment surcharges/penalties (LPS) on delayed payments, despite this being specified in the PPAs. It wants the Power Ministry to advise power regulators to ensure that LPS is mandatorily paid by discoms in the event of a delay in payment.
Another issue is the inability of state discoms to make timely payments to generators because of their poor financial health. One recommendation is that public financial institutions (PFIs) such as REC and PFC may discount the receivables from discoms and then make upfront payments to generators. The PFIs can realise their dues from the state discoms after charging interest for the period of delay in payment. However, PFIs expressed little confidence in recovering such dues. They want the bill discounting facility to be covered by a tripartite agreement involving the generator, discom and the Reserve Bank of India (RBI). In event of a default, the RBI could step in and recover the dues from the account of state governments and reimburse the PFIs. A proposal to this effect is to be made.
The idea is good, but the big question is whether such a law can be passed.
One way out of this mess could be to dismantle state power grids for rural areas. Instead, allow private entrepreneur-driven distributed clusters of de-centralised power generation and distribution using solar and methane.
Thermal power generation companies could still provide power to the industry and high-tension users. That would reduce India’s need to set up additional thermal plants. The country could then focus on rooftop solar – a cleaner fuel. It would address the employment problem, reduce the import bill, and even solve the problem of discoms being reckless in paying power generation companies.
Since power generation companies will be allowed to directly supply power to nearby industries and businesses, this could mean lower costs for industry and business. This, in turn, would spur economic activity and bring about a resolution for stressed assets.
The problem, as always, is 'Who will bell the cat?'The author is Consulting Editor with moneycontrol.com