With more power, comes more stressed assets. Will government’s bailout plan work?

Kalpataru Power Transmission | Company incorporated wholly owned subsidiary in Republic Of Senegal.

Shishir AsthanaMoneycontrol Research

Are we coming to the end of a nearly long dark tunnel? The Power Minister would surely like us to believe so. In a high-level meeting yesterday chaired by Piyush Goyal, senior power ministry and financial institution officials discussed strategies to tackle stressed assets in the sector.

Reports quoting Power Minister Piyush Goyal said, among other things, the meeting thrashed out ways to deal with companies whose promoters have not willfully defaulted on loans.

Analysts say that out of the 28 GW of power projects that are stuck nearly 14 GW are in the very risky category. The news report points out that out of the Rs 10 lakh crore of non-performing assets of the banks, nearly Rs 4 lakh crore are from the power sector.

Bankers would be a relieved lot if the power minister manages to resolve the issue of stuck power projects. But the journey is unlikely to be easy and would result in all parties taking some hit, assuming that a logical conclusion is reached.

Various approaches are being considered by the government to tackle the issue of bad loans in the power sector.

One route discussed is for state-owned or private sector entities to operate the projects that have been taken over by banks. But it will be a stop-gap arrangement which will be valid till the lender finds a potential buyer. This is where the problem starts.

These plants have been set up without a proper power purchase agreement in place. Those companies that would be operating them would be most likely running them to recover only the operating costs, in order to keep the plant in a running condition and meet its fixed costs.

Accumulated interest on the bank loans would have increased debt levels to such an extent that the project would either require a very high power tariff to break even or a big hair-cut on the part of the lender.

The report says that the central and state governments will support in rationalising fuel supplies and in tying up power purchase agreements to improve operational efficiency. But this is easier said than done.

Most state electricity boards are not even in a position to buy cheap power that is available on the grid. It is wishful thinking that they would accommodate these power plants.

Their stubbornness in dealing with wind power generating companies, where they have asked for lower revised rates despite a power purchase agreement in place, highlights their reluctance to accommodate power producers.

Reviving these power plants would require higher cost of power which is undesirable by consumers. The only way the projects can take off is when supply overshoots demand. That is unlikely to happen anytime soon given the low plant load factor (PLF) of thermal plants during FY17 was at 59.8 percent. Average PLF of private players was at 55.7 percent. Further, with normal monsoon thermal power generation might take a further hit as supply from hydel power plant increases.

Another approach on the anvil is to set up a dedicated asset reconstruction company (ARC) which will take over all stressed power generation assets from lenders. The projects would then be auctioned. Though this seems to be a better idea as the lenders and the promoters would have already booked their losses and the ARC would be holding the asset at a lower value, the main problem will be in nudging the bankers to take a big hit on their books.

In a nutshell, though the intent of the power ministry is right, the problem will be in implementing the proposal as it involves lot of compromises. With all stakeholders not being in the best of financial health, it is unlikely that there would be much movement on the ground.