The investor interest in the power sector is petering out, with lenders now starting to apply the brakes on funding of new private generation projects.
The big concern is about adequate coal supplies for new projects, amid signs that developers of projects close to commissioning could default on their loan repayments due to fuel shortage. A crash in merchant power rates and reluctance among cash-strapped State Electricity Boards to buy power from the spot market are adding to investors' jitters.
NO FIRM AGREEMENTS
“Investors are reluctant to fund new projects… There are a number of projects where Coal India Ltd has not converted the Letter of Assurances issued to developers into firm Fuel Supply Agreements (FSAs),” Mr Ashok Kumar Khurana, Director-General of Association of Power Producers (APP), a lobby group of private developers, said.
This, he said, has resulted in question a mark over their commissioning and subsequently meeting their debt servicing obligations. APP represents an upcoming project portfolio of around 120,000 MW and has Tata Power, Reliance Power, Essar, Jindal Power, GMR, GVK and Adani among its members.
In the last two years, close to 35 thermal power projects adding up to over 14,000 MW have been commissioned, where Coal India is yet to ink FSAs with project developers.
According to a Central Electricity Authority official, while supplies of coal to these plants are on for now, in the absence of a firm FSA, CIL is not bound to maintain a minimum supply round the year. This is a big worry for investors.
The Power Ministry has already sounded the alarm, projecting a sharp dip in coal supplies from CIL for projects that are entirely dependent on linkages. Besides, a group of former power secretaries roped in by the Ministry to address viability concerns has also warned the Government of a “clear possibility of default in payment by developers” on account of underutilisation of upcoming capacity due to a fuel crunch.
An official with state-owned lender Power Finance Corporation admitted that fuel risk had made them cautious while evaluating projects. Edelweiss, in a recent wrap-up on the power sector, too attributed “serious business risks” for power developers, cascading down to their lenders, due to coal shortfall. These fuel risks, it said, were bigger than the risk arising out of lower or less remunerative merchant sales.
APP's Mr Khurana said while imports are an option to tide over domestic supply shortages, they cannot be the solution. That is because there are limitations in the maximum blending of high-calorific imported coal permissible in the typical boilers used in projects in India. So, without adequate domestic coal supplies, stranded capacity is a clear possibility, he said.
WORSENING SEB FINANCES
The other problem is the worsening financial position of the SEBs — their losses are pegged at Rs 55,000 crore — which has begun to affect the generators.
While NTPC Ltd saw its bottomline dented last fiscal due to lower offtake by SEBs, private developers also face the same risk.