Are India’s Thermal Power Plants Running Out Of Steam?
The grand blueprint prepared by Indian government to make the country power surplus, did not go down well for the coal based power generators in the nation.
During the past few years, new coal based capacities were announced, to feed the country’s power deficit and the growing economic activity, which today, sadly, has run out of steam.
India’s coal-fired power sector continues to suffer multi-faceted challenges posed. It’s a situation for a complete misery for these plants running on historic low Plant load Factor (PLF), eroding the ‘balance’ of these balance sheets amongst the pool of bad planning, unexpected regulations, lack of PPAs, slowdown in the economy and a very notable factor of cheap renewables.
Unrealistic demand equals over-capacity
There is no doubt that coal is and will be the mainstay of the power sector, but every additional penny spent on new capacity, needs to be in sync with the demand. Over the past five years, the Indian power sector witnessed rapid additions in anticipation of unrealistic demand. Capacity grew at a CAGR of 11 per cent over FY11-16, while peak load grew at a CAGR of only 4.6 per cent over the same period. These companies are now in muddle to sell their power, as the economy faces its low.
“Currently there is a supply glut. If you see the all India PLF, it was 62 per cent last year. This year it has come down to 59 per cent, which includes NTPC and all the private generation companies. While India is growing at 7 per cent say, the overall demand in the economy is not sufficient; hence the PLFs are going down”, mentions Sudhir Kumar, Senior Analyst, Care Ratings.
He also point out that the design of the private GENCOs is at 85 per cent PLF. In such a situation, where the funding of the plants is done at this figure, how are the companies supposed to recover their cost at 60-59 per cent PLF? The low figurers are anticipated to remain the same for the next few years and unlikely to see improvement, thanks to the over-capacity.
To add to their misery, comes the cost overrun (the overall project cost) which has increased the fixed cost for these companies. The project cost could spike due to varied reasons like land permissions or compensation, labour, change in the scope of work. The interest obligation would starts to pile up. There could be varied number of reasons when one is planning a 5000 crore project!
This further adds on the problem of the Non-Performing Assets (NPAs) that the RBI is scratching its head with. The economic survey mentioned how the revenue of these companies is lower than that required to service their debt. The cash flow for most private power generation companies fall far short of what is needed to service their interest obligations; put another way, more than 60 percent of the debt owed by the private power producers is with IC1 companies (interest coverage ratio less than 1). To cover these costs, these companies need to sell all the power they are capable of producing at high tariff rates. But the opposite is happening.
In some of the most recent examples, last month, Essar power had put its 2 GW Gujarat power plant in for a debt recast plan, citing un-viability of its import coal-fired power plants. Likewise, 2.3 GW of coal fired plants in Odisha, planned by BGR Energy systems and Kalinga Energy & Power were cancelled.
Squeezing margins of merchant trade
Even if the demand is low, you might not all be in shambles, if you have a 25 years security of Purchasing Power Agreement (PPA). For instance, Rattan India’s Amravati power plant has secured a long term PPA with the Maharashtra government and the bad conditions of the economy, doesn’t bother them, as they have a fixed source of supply. This is in contrast to the companies like JSW, JSPL who are unable to sell the power due to their lack for the same.
If not PPAs, then the companies are able to make hay by supplying power in the merchant market at particular tariffs. The highly attractive merchant market during 2007-2009, again took these companies on an over enthusiasm trip, where huge investments were rolled out by the private developers. Many did not care to even secure PPAs. Almost everyone kept some spare capacity for the merchant market, says Sanjay Jain, Senior VP, Research, Motilal Oswal Securities.
Today, the merchant market is at its all-time low. The merchant tariffs for electricity purchased in the spot market have slid to around Rs 2.5/kwh, far below the breakeven rate of Rs 4/kwh needed for most plants, let alone the Rs 8/kwh needed in some cases, elaborated Sudhir. An analyst of a domestic brokerage firm stated that with this level of merchant prices, it is extremely difficult to cover even the coal costs.
Even if the merchant market picks up, it is a highly variable source to depend on. The power supply needs more long term planning for survival. It’s therefore a multi-faceted problem. Even the security of long term PPAs is under threat, as one, the tariff rates slid down lower than their cost and second, the share of electricity purchased under PPAs is falling, as State Electricity Boards increasingly rely on the cheap and abundant power available in the spot market. Reliance Power has been pleading for higher tariffs for power generated from its Sasan project. To top all that, the states are in no position to sign new PPAs, due to their own financial stress and of course the demand factor.
In an evidence of the rate of change across India, the states themselves have been on a bid cancellation spree, as the news flouted of UP and Gujarat cancelling bid for 3.8 GW and 4 GW of coal fired power due to power surplus.
“Though UDAY has done its work by taking away the stress of the Discoms to increase their power buying capabilities, it is yet to foresee some on ground work”, says Sudhir, who anticipates the demand for PPAs to rise as the finances of the Discoms improve.
Coal Factor
Another issue arises in this situation is the condition set up by the government to have coal supply only to the companies with PPAs signed. The ones which have been selling power in the merchant market, apply for coal via e-auctions which is a costlier coal. The logic is that if you have a long term security, you would be supplied cheaper coal i.e. the linkage coal from Coal India limited. Therefore, there comes a difference in costs for both the situations, which puts these companies under worry.
Apart from demand, majority of the India’s ultra-thermal plants are designed to run on imported coal with an estimated capacity of 30,000 MW. The ugly battle between the Supreme Court and the country’s biggest UMPP (Ultra mega power plants) - Tata and Adani, presses on the fact that the profitability of a sound running unit could be challenged overnight with spike in the international coal prices. Adani Power discontinued 1,250 MW of power supply from Mundra plant due to unviability of running these units on imported coal.
“These plants will curtail production rather than lose money with every unit of production. It is a likely conclusion that a $1-2 billion write down of Adani Power’s $5 billion plant is on the cards. As it stands, this plant is a clear stranded asset,” said Tim Buckley, Director of Energy Finance Studies Australasia with the Institute for Energy Economics and Financial Analysis (IEEFA), last month.
Is Renewable a threat?
If all the above factors were not enough, renewables have jumped on to add to the woes. Record low tariffs and ‘must run’ status of solar plants are likely to hurt sentiment for thermal power sector. Though thermal remains the anchor for India’s power supply, with almost 60 per cent share in the total generation, renewable achieved a milestone this year by coming at par in terms of capacity addition. According to the Ministry of New and Renewable Energy (MNRE), India’s total renewable capacity including solar, wind, bio-mass and small hydro grew by around 11.2 GW in FY 2016-17, at par with thermal capacity addition, which registered a decline of 50 per cent in the year.
“We are witnessing a significant boost from the public investment front which will further dilute the position of conventional power producers, including improved policy environment like renewable power obligation, imposition of carbon tax etc.”, says Abhay Bhargava, Associate Director, Energy and Enviornment, Frost & Sullivan.
Having said that, there is another angle to it. Though there is a stiff competition from renewables, the conventional power comes with an advantage of base load. The country needs to have an optimum mix of base load and peaking load power to handle the 24 7 power supply. The peaking demand is met by renewable, but it comes with the disadvantage of 247 power and lack of storage, which makes conventional the only whole sole for meeting the base load demand.
The next five years would be crucial for the thermal giants. The experts view that the demand pick up in the coming years would help these companies come back on track. But the incremental capacities are unlikely to come, until and unless the companies have capacity utilisation of the existing plants.
However, as green becomes the new black and renewables become more efficient with tariffs and storage, these plants viability, despite for all the advantages might run out of steam?
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