Power for All: Let there be light

In India's bankruptcy courts, a clutch of electricity generators and ancillary companies are jostling for space. An unusual growth in capacity addition over the last few years that outpaced the demand had created stress in the sector, taking one after the other to the gallows.

Companies producing electricity, a quintessential booster of economic growth, are national assets. Nobody wants those long-gestation projects to be liquidated. This is why the government, lenders and the asset owners have been striving for a resolution for a few years now. But the light at the end of the long tunnel looks dim.

Look at the numbers. During 2012-17, the cumulative capacity addition of 99,209 megawatt (mw) or 99.2 gigawatt (gw) was achieved against a target of 88,537 mw. This increase in capacity has outpaced the growth in demand, resulting in a declining plant load factor (PLF). The overall PLF of thermal units has fallen from 78.8% in 2006-07 to 59.88% in 2017-18, indicating under-utilisation of thermal capacity.

In the last decade, a major share of capacity addition came from the private sector, up from 13% in March 2007 to 44% in March 2017. The contribution by private companies stood at 77,891 mw (77.89 gw) while the public sector contributed 73,402 mw or 73.40 gw. This aggressive capacity addition led to a widening gap between demand and supply.

What's causing stress?

The capacity addition without having tied up power purchase agreements (PPA) with distribution companies (discoms), coal supply related issues, the inability of discoms to pay to the generators, regulatory issues, promoters' failure to infuse equity, tardy implementation, slow growth in power demand and aggressive tariffs by bidders are some of the prominent reasons for the stress. As many as 34 coal-based thermal power plants totalling 40,130 mw are stressed. Most of them are private.

On March 22, 2017, the power ministry considered them as "stressed assets".

A year later, in July 2018, the government constituted a high-level empowered committee (HLEC) to address the issues. According to the latest draft report of HLEC, the many measures undertaken by the government to resolve the stress include fuel linkages under Scheme for Harnessing & Allocating Koyla Transparently in India (SHAKTI), pilot scheme to procurement 2,500 mw power, rationalisation of coal escalation index, pass-through of costs of meeting environmental norms, timely implementation of change in law, reforming discoms, reduction in power generation cost, transparency in payment by discoms and clearing of power dues by discoms.

Despite the government initiating multiple policy measures, the resolution of these companies is far off.

"All these government initiatives do sound good, but the fact is that discoms still continue to owe a lot to the power producers. In fact, highest dues are towards the independent power producers as compared to state-run bodies," says an industry official.

A look at power ministry's data shows that as on June 2018, the yearly outstanding from discoms for the state-run power producers stood at Rs 6,768 crore as against Rs 17,903 crore for the independent power producers. A year ago, that is on June 2017, the yearly outstanding for the same set of state-run producers like Damodar Valley Corporation, North Eastern Electric Power Corporation, NHPC, NTPC and SJVNL was Rs 3,527 crore as against Rs 8,630 crore for the independent power producers.

"Medium-term PPAs are expected to provide some relief to the stressed power assets by lessening the burden and improving capacity utilisation. But the move is unlikely to help banks in resolving these stressed assets as the PPA term of three years seems insufficient. Moreover, availability of coal would be a key challenge for many of these plants that do not have fuel supply agreements (FSA) in place. Even though buying coal auctioned under SHAKTI scheme is an option, the coal procured would come at a much higher premium," CARE Ratings said in a report.

Sale for a quick resolution?

Last month, Renascent Power Ventures Pvt Ltd signed a share purchase agreement (SPA) with a consortium of lenders led by State Bank of India to acquire 75.01% stake in Prayagraj Power Generation Company Ltd (PPGCL), which owns and operates a 1,980 mw supercritical power plant in Uttar Pradesh. This transaction is the result of stressed asset resolution process initiated by the lenders through a competitive bidding process.

NTPC, too, has been looking at some stressed assets to expand its portfolio. The state-run body is interested in getting its pie for operation and maintenance under Project Sashakt, according to a senior NTPC official. Project Sashakt involves a five-pronged strategy to resolve bad loans with the larger ones going to asset management companies (AMC) or alternative investment funds (AIF).

NTPC chairman and managing director Gurdeep Singh had told DNA Money that NTPC's focus, as such, would be on those assets that are in a good shape but are just stuck in bad contracts. "We have to be careful as to which assets to look for and it should be a very transparent method. It has to be a bidding process. If it is coming through National Company Law Tribunal (NCLT) or bankers are taking over and there is bidding, we will be happy to look at it," he had said.

Resolutions and haircuts:

According to Crisil Ratings, a 40-60% haircut, along with financial safeguards, can resolve as much as Rs 1 lakh crore of debt stuck in coal-based power projects and enhance their viability on a sustained basis. Lower debt and the consequent reduction in the cost of electricity generation will make these capacities attractive to new PPAs.

Subodh Rai, senior director, Crisil Ratings, said, "The haircuts and safeguards, if implemented, would ease debt servicing for these capacities and will, in turn, lower their cost of generation by around 30% to around Rs 3.7 per unit for the next five years. That would be well below the current average cost of power procurement for discoms."

This analysis is based on the assessment of 16,000 mw power assets that account for nearly two-thirds of stressed and operational coal-based capacities.

The reduced cost of generation is expected to enhance the competitiveness of these capacities, making them amenable to new PPAs, provided fuel supply remains adequate. With power demand expected to grow at around 6% over the next four years, these capacities may possibly benefit from the potential new PPAs.

Smooth transmission?

Of the five stressed assets that have coal linkage under the SHAKTI Scheme, Adani Power's Tiroda Thermal Power Station is already out of stress. While others like GMR Kamalanga, GVK Goindwal Sahib and KSK Mahanadi have also seen improvement in operating performance. All these thermal power plants had signed coal linkage under the SHAKTI Scheme.

Industry players are of the opinion that faster implementation of the second round of SHAKTI is expected to partially assist the resolution of an estimated 2.6 gw of stressed power capacity not having PPAs.

Through the support of SHAKTI Scheme the stressed power assets are expected to revive on their own or at least fetch a good value for the lenders, if liquidated.

On the other hand, Crisil Ratings in its latest report shared some concerns pertaining to coal linkages under SHAKTI-II. "Our assessment of the 34 power plants suggests that around 19 gw of the 40 gw capacities do not have medium or long-term PPAs, and hence, can participate in SHAKTI–II provided they meet other eligibility criteria set by Coal India Ltd for participation in the auction. However, successful bidders under SHAKTI-II may find it difficult to secure long-term PPAs, given the high fixed cost of many of these projects," states the report.

Of the approximately 19 gw that do not have PPAs, only 2.6 gw commissioned capacity has a good chance of resolution provided these plants secure linkage through SHAKTI-II and sign long-term PPAs.

For the rest 16.4 gw, some other measures will have to be undertaken as the fixed cost continues to remain high. Around 2 gw of the 16.4 gw that are without PPAs and under-construction may not get commissioned at all due to over-supply in the system and suspension of work at site due as well as lack of financing.

The latest report by Institute for Energy Economics & Financial Analysis states that the thermal power capacity has reduced by 1,100 mw during April-October 2018. The addition of 600 mw at the Mahan Super Thermal Power project was more than offset by the closure of 1,799 mw of capacity, principally at two other plants of Badarpur Thermal Power station (705 mw) and Ropar Coal Power Station (420 mw).

Time to reach the final stage:

"In the current circumstances, even some of the cases where there was a debt resolution evident, the interested investors are holding back on term sheets till there is further clarity on the process to be followed for debt resolution due to strategic reasons," Sandeep Upadhyay, managing director and CEO of Centrum Infrastructure Advisory, told DNA Money.

Upadhyay added that unless the current crisis is resolved there is no way that one can expect the banks and financial institutions to start infusing fresh capital in the sector.

For over a year now, PFC has been working on resolving the stressed power assets outside NCLT, however, there still is some time left before the projects are revived.

"We are still in the process of resolving stressed power assets financed by us and some of them would happen soon," said a senior Power Finance Corporation official, without specifying a timeline.

As on June 30, 2018, PFC has provided for Rs 17,238 crore for its exposure in the stressed assets. For government projects, PFC is the sole lender as compared to private assets wherein apart from the state-run body there are banks and other lenders involved too, thereby making it important as well as time-consuming to take everyone on board. The government has now constituted a Group of Ministers headed by finance minister Arun Jaitley to vet the recommendations by HLEC on stressed power projects.

More sops on the way:

• In the last meeting of HLEC, authorities have come up with recommendations to provide more oxygen for the financially sick power plants by way of providing coal linkage even for short-term PPAs, increase in supply of coal for forward e-auction, generator having to bid only once and linkage being provided at notified prices without bidding, non-accrual of short supply of coal, among other things.
   
• "NTPC may also act as an aggregator of power to procure power through transparent competitive bidding process from such stressed power plants and offer the same to discoms," said an HLEC member on the recommendations made.
   
• The same committee has recommended that old and inefficient power plants of about 10 gw capacity be retired in the next three years.
   
• In order to provide relief to the power generators, it is being mulled to mandatorily levy late payment surcharge on discoms erring on timely payments. At the moment, this penalty does exist, but the discoms insist that the power producers forgo the same, which affects the viability and financial obligations of the generators.

Stressed Power Assets

Total assets – 34

Total capacity – 40,130 Mw

Commissioned capacity – 24,405 Mw

Capacity under construction – 15,725 Mw

PPAs tied up – 18,516 Mw

Without PPAs – 21,614 Mw

Coal linkages available – 29,190 Mw

Coal linkage needed – 10,940 Mw

Resolved projects – 8

Resolved capacity – 8,820 Mw

POWER GENERATION CAPACITY

As on Sep 30,18 – 344,718 mw

Nuclear 2% – 6,780 mw

Hydro 13% – 45,487 mw

Renewable 21% – 70,648 mw

Thermal 64% – 2,21,803 mw

Gas 7.21% – 24,867 mw

Diesel 0.24% – 838 mw

Coal + Lignite 56.9% – 1,96,097 mw