<p>It will be sometime before the light shines on the country’s power sector. A Crisil report says that 46,000 mw of thermal capacities face viability risks; and that the sector will be constrained by discom’s weak financial health and coal-block auctions. Worse still, it says nearly Rs 75,000 crore of loans — or nearly 15 per cent of the aggregate debt to power generation companies — are at risk of turning delinquent in the medium term. And close to Rs 1.9 lakh crore of loans to six weak discoms, for which the moratorium ends in the next 18 months, are at risk if timely support is not extended by the central or state government.<br><br>What went wrong? Exactly a year after Crisil warned on the state of affairs of the power sector, on 5 October 2012, the centre announced a financial restructuring package (FRP) for discoms under which short-term debts were converted to long-term loans backed by state government guarantees. The FRP was for regular tariff hikes and reduction in AT&C (aggregate technical and commercial) losses. “While tariff hikes were high in the first two years following the FRP, things have fizzled out since then. On the AT&C front, there has hardly been any progress,” says the Crisil report.<br><br>It lists how a vicious cycle was set off. Because discoms remain financially fragile, they are chary of committing to long-term power purchase (PPA)agreements; lower power purchases by discoms, and inadequate coal and gas supplies, have led to suboptimal plant load factors at generating companies, especially the new projects. Further, tariff aggression shown during competitive bidding has resulted in poor cash flows, which has cramped their ability to service debt despite lower cost of imported coal. The weak generating companies with no long-term PPAs defeat one of the objectives of FRP, which is to progressively reduce short-term power purchases by state discoms.<br><br>It also highlights the “winner’s curse” in coal block auctions. Post the de-allocation of coal blocks by the Supreme Court in September 2014, the centre went in for auctions where companies bid very aggressively for the nine coal blocks that had fuel to fire around 6,500 mw. “This approach showed strategic fuel security had become more important than profitability,” notes Crisil. Bidders who had agreed to a zero fuel charge in their PPAs, thus foregoing mining costs, also agreed to pay a forward premium of Rs 100 to Rs 1,010 per tonne to the concerned state government. With mining costs and forward premiums not recoverable through the variable charge component in PPA, bidders were exposed to the risk of under-recovery.<br><br>All this will now come home to roost in the financial sector. The Reserve Bank of India’s Financial Stability Report released in June had given a heads-up: Rs 53,000 crore of loans to seven state electricity boards have a “very high probability” of turning into dud-loans at end-September 2015. Acche din, indeed!<br><em>— Raghu Mohan</em><br><br>(This story was published in BW | Businessworld Issue Dated 24-08-2015)</p>