India’s power sector must hold its horses

Tags: Opinion
India’s power sector must hold its horses
A LONG WAIT: This undated picture shows the ultra mega power project near Mundra Port, Gujarat
Recently there was a lot of euphoria over a number of firms having entered the second stage for bidding of the long stalled ultra mega power projects (UMPPs). The interest shown by over half a dozen bidders each, for both the imported coal-based project in Tamil Nadu and the domestic coal-based project in Odisha, were touted as a sign that power firms are keen to capitalise on growth opportunities. Given the losses that the country’s only fully operational UMPP (Mundra plant owned by Tata Power) is facing and the travails facing the remaining ones, it seemed like the sector’s woes, are finally a thing of the past.

But a closer look at the macroeconomic situation begs the question: Whither effective demand? Consider for a moment the facts. In calendar year 2013, NTPC — the country’s largest generator and one of the lowest cost producers of power —disclosed that it had to back down generation by 16 million units between April-August that year (compared with three million units in the year ago period). NTPC chairman Arup Roy Choudhury attributed this to inadequate demand from state owned distributors. Data from the central electricity authority (CEA) reveals that the peak power deficit shrank to three per cent in October 2013 (versus 9.4 per cent in the year ago period). The deficit further shrunk to 2.9 per cent in November and ended December last year at 5,547 mw as per CEA data. The Load Generation Balance Report for 2013-14 of the CEA incidentally forecasts the peak deficit for the ongoing fiscal year at just 2.3 per cent.

Interestingly, peak power deficit denotes the deficit at the maximum point of time and not the deficit between the average demand and supply, which would be much less. Ideally peaking power plants tend to be gas-based and not coal-based as the former can be more easily powered up and down based on variance in demand during different time bands in the day and night. There is already 18,000 mw of operational gas-based capacity that is running at a plant load factor of close to 20 per cent on an average because there is no demand for expensive electricity that could be generated from imported liquefied natural gas. Media reports indicate that at least another 1,500 mw of gas-based generation capacity has been commissioned, but is stranded for want of cheaper domestic gas while another 8,000 mw of capacity is in the wings. In other words, the existing commissioned and idling gas-based capacity, itself is several times the peak power shortage.

This means that rather than an ability to supply, the real issue is what economists call effective demand, that is, demand backed by the ability to pay. In a reply to Parliament in December last year, minister of state for power Jyotiraditya M Scindia said the gap between the average cost of supply and the average revenue realised (including subsidies to be received from the government) increased from 40 paise per unit in 2009-2010 to 70 paise per unit in 2011-2012. In other words, for every unit of electricity sold, the state owned distributor has a loss of Rs 0.7 per unit. Selling something consistently below cost is the fastest way to go bust. No SEB loan recast scheme is going to make this problem go away unless we fix basic economics. At best, power can be supplied on a no profit or no loss basis.

The already operational gas-based plants have been putting a large amount of pressure on banks non-performing assets (NPAS). Lenders to one such plant, Dabhol-based Ratnagiri Gas & Power have petitioned authorities to intervene and save the GAIL and NTPC backed project, from turning into a NPA. KPMG, in a report titled ‘Recharging the power sector’ indicated last year that stranded power capacity with investments of over

Rs 1 lakh core will result in NPAs. With banks already struggling under the load of rising NPAs, we can ill afford to add further problem assets to their books.

Falling peak deficits, idling plants and bust SEBs are all symptomatic of overestimation of effective demand. Electricity demanded at prices where distributors cease to make losses may be much lower than what has been conventionally estimated. By pricing power to reflect full cost recovery, we may even encourage the adoption of renewable sources of energy and energy efficient devices, appliances and smart grids that will ultimately strengthen the nation’s energy security. Let’s use what is already built fully, before racing to build more capacity that joins the bandwagon of projects facing existential issues.

(The author, a former journalist, is an independent corporate watcher)


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