BW Communities

Running Low On Cash

Anup Jayaram Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The past two months have seen the Indian power sector limp from one crisis to another. Last month Damodar Valley Corporation (DVC) threatened to stop power supply to two distribution companies (discoms) — BSES Rajdhani Power and BSES Yamuna Power — in Delhi. Much to the relief of DVC, the issue was resolved after the Supreme Court's intervention which instructed the distribution companies to pay Rs 45 crore by November out of the Rs 141.24 crore the companies owed. This is the second time in past few months that the Capital has been on the brink of a major power outage. Both times, it was a payment crisis. In September, state-owned National Thermal Power Corporation (NTPC) threatened to stop supply of power to BSES Rajdhani and BSES Yamuna if dues of over Rs 900 crore were not cleared. BSES, later, agreed to pay the arrears within a month. The power payments crisis is not restricted to Delhi. Across the country, state electricity boards (SEBs) have accumulated bad debts amounting to over Rs 75,000 crore. It is estimated that by 2014-15, this will rise further to Rs 125,000 crore. Five states — Rajasthan, Tamil Nadu, Uttar Pradesh, Haryana and Madhya Pradesh — account for close to 70 per cent of the bad debts today. In effect, the power sector is heading for a crisis similar to the one it faced in 2001. That year, the government bailed out the utilities by writing off Rs 41,000 crore. <img src="/businessworld/system/files/SUPPLY_PROBLEM_187x245.jpg" style="float: right; margin: 10px;" height="245" width="187">Thanks to the payment crisis, banks have now imposed an embargo on fresh loans to power utilities and distribution companies. The risk that banks face is due to two reasons: rising losses and debt levels in power distribution companies, and the shortage of fuel availability for power generation. Most banks have hit the cap on lending to the power sector. Already Bank of India is set to restructure a quarter of its power loans while Allahabad Bank has frozen lending to the sector. Owing to subsidised tariffs, the mounting losses of distribution companies have, in fact, put the country's financial system under strain. What is surprising  is the fact that this is happening in an economy that is growing at over 8 per cent per annum. Insufficient Tariff Hike Power demand is rising at close to 10 per cent per annum. However, distribution companies do not have the freedom to hike tariffs which are still regulated by the state governments. While in most states farmers are provided free power, bulk users like industry end up paying more. That is in sharp contrast to what happens in other countries where industrial power is cheaper. As state governments subsidise power to domestic and farm users, discoms face the music of such anti-economic policies. Power generation costs depend, to a large extent, on fuel costs. In India, it ranges from a low of 28 paise a unit (where power plants have access to captive mines) to Rs 2.60 a unit in the case of imported coal. Therefore, a power plant that survives on imported coal would seek close tariffs of at least Rs 3 per unit. However, tariffs across the country are much lower. In many states, power tariffs are revised after a gap of several years. A classic case is Tamil Nadu, which is one of the biggest defaulters. Tariffs in the state ranges from Rs 1.10 per unit to Rs 4.05 a unit. The state offers free power to farmers and power looms that consume less than 500 units in two months. The power tariff in Tamil Nadu is an average of Rs 2.35 per unit. The gap between cost to serve and revenues in the state  is Rs 1.66 per unit. The power tariffs were hiked last in 2010 after a gap of seven years. In Delhi, power tariffs were increased by 21.7 per cent this August after a gap of five years. A BSES spokesperson points out that despite the recent hike in power tariffs in the capital, it is still incurring a loss of Rs 1.13 per unit. The problem of distribution companies  gets aggravated because the power generating companies (most of which are run by private players) threaten to pull the plug in case of non-payments. These power-generating companies refuse to lose money simply because states consider free power to be a part of vote-bank politics. As a larger chunk of power in the country is generated by private power plants, the pressure on distribution companies to meet payment commitments is bound to rise. Over the past few months, many states have finally begun to bite the bullet and increase power tariffs. In September, Gujarat raised power tariffs by 22 paise a unit. Punjab hiked rates by 7-12 per cent. Others like Rajasthan have not revised tariffs for years due to political compulsions. Moreover, high technical and commercial losses which stand at 28 per cent and inadequate subsidy payments from states have led SEBs to incur losses to the tune of Rs 68,000 crore in fiscal 2011 as per the estimates of the draft Shunglu Committee report. break-page-break Over the years, as the private sector added capacity, there has been a sharp rise in power generation. But payment problems are not restricted to distribution companies alone. The power payment crisis stems from the power generating companies which are bogged down by rising coal prices, burgeoning SEB losses and the inability of distribution companies to hike tariffs. Inadequate Coal Availability One of the biggest problems faced by power generating companies relates to inadequate supply of coal. Over the past few years, coal production by state-owned Coal India has been largely static. During 2010-11, Coal India produced 431 million tonnes, which is just marginally more than what was produced in the previous fiscal. As the country added 8 per cent to its generating capacity during the fiscal, the pressure on supply of coal has increased. After all, over 55 per cent of India's power generation is fuelled by coal. Therefore, the shortage of coal has begun to bite power generating companies. <table style="width: 200px;" align="right" border="0" cellpadding="10" cellspacing="10"> <tbody> <tr> <td><img src="/businessworld/system/files/NTPC-Dadri_BW-Archive_200x200.jpg" style="float: right; margin: 10px;" height="200" width="200"></td> </tr> <tr> <td>AT A LOW: Powergeneration companies are running short on coal (BW Archive)</td> </tr> </tbody> </table> Getting adequate coal supply is critical for power generation because over half of India's 182 GW (182,000 MW) power generation capacity is coal-based. To cover up the shortfall in supply, many private power utilities have invested in acquiring coal assets in Australia, Indonesia and South Africa. Over the past couple of years, domestic power companies have invested over $8 billion in acquiring coal assets. However, blending imported and domestic coal raises the cost per unit to Rs 4 as opposed to just Rs 2.50 per unit in case of domestic coal alone. J. Suresh Kumar, chief financial officer, Lanco Infratech, says, "SEBs are aware that input costs are rising. That is why we are seeking an increase in tariffs." He adds that over the next 3-4 years, coal supply for power plants will  continue to be an issue. The problem is not restricted just to the higher price of imported coal. As India seeks to tie-up with the coal assets abroad, countries are imposing restrictions on its exports. Recently, Indonesia has said it would not allow exporting companies to sell coal at prices below notified rates. Earlier, there were no restrictions by the Indonesian government on coal pricing. Australia, too, has issued a draft mining law to impose tax on coal and iron ore projects from next year. Says Anil Sardana, CEO, Tata Power, "For projects based on imported coal, we are exploring alternatives to salvage this situation. We believe blending of coal can control the price to some extent. Therefore, we are sourcing low-grade coal from Indonesia, Africa and other existing mines and will do trial runs to find if they would be capable of reducing the cost of power for our ultra mega power plants." <table style="width: 250px;" align="left" border="0" cellpadding="10" cellspacing="10"> <tbody> <tr> <td>WHAT IS THE WAY OUT?</td> </tr> <tr> <td> <ul> <li>Initiate distribution reforms across states</li> <li>Stop provision of free power to farmers</li> <li>Allow distribution companies to increase tariffs</li> <li>Increase production of domestic coal</li> <li>Improve coal linkages to power plants</li> </ul> </td> </tr> </tbody> </table> Even if imported coal is available, there is no running away from the fact that fuel prices — be it coal or gas — are only going to rise. That will, in turn, lead to an increase in power generation costs. Currently, the power payment issues are largely restricted to five states. "We are experiencing delays in payment from Tamil Nadu and Uttar Pradesh. Andhra Pradesh and Karnataka are paying up," says Kumar. Here too, while earlier the states paid up within a fortnight to claim early payment discounts, now they seek a month-long credit period to make payments. For utility companies, while input costs are rising, margins are on the decline. Distribution Reforms The acute payment crisis has prompted banks and financial institutions to stop disbursing credit to the state electricity boards. Sambitosh Mahapatra, executive director, PricewaterhouseCoopers says, "We are heading towards a crisis quite similar to what happened in 2001. Now the need is to extend distribution reforms to other states." In 2001-02, the Central government had bailed out state electricity boards after they defaulted on payments to NTPC and NHPC. Mahapatra points out that after distribution reforms in Delhi, aggregate technical and commercial (ATC) losses fell sharply from 60 per cent in 2002 to 17 per cent now. Once distribution losses come down, much of the problems of discoms will come down. Need To Hike Tariffs The answer to the crisis is quite simple. There is no choice but for power companies to hike tariffs. If need be, there should be a mandated annual hike in tariffs. However, as power is a concurrent subject, each state will have to take its own decision. It is unlikely that there will be consensus. But for the power distribution companies to survive, tariff hikes would be imperative. There are simply no short cuts here. Despite the current situation, the power sector is quite confident that all contentious issues will be sorted out by December. That could be quite a relief to the government, the power sector  and the investors alike. anup(dot)jayaram(at)abp(dot)in (This story was published in Businessworld Issue Dated 21-11-2011)