Indian power plants find Rs1.2 trillion of capacity has no takers

New Delhi: At a time when almost a third of India’s 1.3 billion citizens have no access to electricity, power plants worth about `1.2 trillion are struggling to find customers.
High interest rates and weak industrial demand have coupled with India’s unusually cool summer and unseasonal rains to curtail electricity usage. That’s left some 20 gigawatts of capacity—enough to power New Delhi thrice over—without long-term supply contracts, according to Ashok Khurana, director general at the association of power producers, a lobby group based in the capital.
“New plant initiations have come to a grinding halt,” said Debasish Mishra, a senior director at Deloitte Touche Tohmatsu India Pvt. in Mumbai. “The situation is very discouraging for anyone planning to set up a power plant in India. If not addressed in time, we will swing from the current surplus situation to a major shortage in a few years.”
For JSW Energy Ltd, one of the affected power generators, almost half its capacity lacks long-term buyers, said chief executive officer (CEO) Sanjay Sagar. While Sagar blames tepid power demand on “a downturn in economic activity,” the situation also reveals structural problems afflicting the next link in the chain of India’s power market.
Power plants sell to electricity retailers, preferably on long dated contracts. And the financial health of those retailers, controlled by state governments and forced to supply power to farmers and the poor at subsidized prices, is worsening.
Accumulated losses
India’s electricity retailers have accumulated losses of `2.5 trillion and lose `70,000 crore every year, according to the first-year report card of Prime Minister Narendra Modi’s government. Reviving the distribution companies will be crucial to Modi’s election pledge of providing round-the-clock electricity to every household in the country by 2019.
“That’s the reason why good demand from industrial customers is so critical for distribution companies— because they are the paying customers,” said Khurana. “That demand is missing now.”
India’s installed capacity is 272.5 gigawatts, according to the power ministry. It costs roughly `6 crore to set up a megawatt, said Sambitosh Mohapatra, a partner at PwC India, so 20 gigawatts translates to about `1.2 trillion.
Subsidy payments
India’s electricity supply has improved in the three years since a major power failure darkened vast swathes of the country’s north. And the government has approved investment of `1.1 trillion to upgrade distribution and transmission infrastructure across the nation.
Major Singh, chairman at the power ministry’s central electricity authority, couldn’t be reached on his office phone for a comment.
Still, the electricity retailers lose about `1 on every kilowatt hour sold, according to the power producers association. And state governments aren’t always assiduous in making their subsidy payments on time, forcing distributors to cut purchases and forcing outages, said Mohapatra of PwC India.
India’s economic challenges are only bringing the problems out into the open.
High borrowing costs have affected purchases of houses, cars and appliances, hurting downstream industries that rely heavily on power such as steel, cement and aluminum.
Interest rate
Even after three reductions, the key rate at 7.25% is among the highest in Asia and the growth in power demand has lagged capacity additions in the past year. Steel mills, for example, are operating on average at only 80% of their potential, according to the steel ministry.
The challenge facing Modi’s government is pulling power distribution companies out of the debt trap, said Rajiv Kumar, economist and senior fellow at the New Delhi-based Centre for Policy Research.
“The government has taken several steps to revive the economy and the results would be visible in about six months,” Kumar said by phone. “A critical area that needs more attention is power distribution. Unless that is fixed, our power sector will continue to be in trouble.” Bloomberg
Source: Mint; 29 June 2015
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