Thermal power sector faces bleak scenario post-Covid situation

Covid-19 may have served a lethal blow to India’s stressed private thermal power generation sector, accounting for 37 per cent of 198-gigawatt coal-based generation capacity.

Dominated by independent power producers (IPP), who do not have distribution rights; the sector tops the chart on loan defaults. The situation may complicate further post-Covid; unless the Centre takes a fresh look at the coal-energy value chain.

Cash-draught

Stung of a series of policy failures; IPPs were suffering from huge payment backlog by stressed State distribution utilities (DISCOM) as well as weak offtake scenario vis-à-vis capacity, for many years now. The power ministry just initiated measures to regularize DISCOM payments, when India went under lockdown.

Faced with the dramatic decline in demand from the profitable commercial and industrial consumers vis-à-vis drop in a collection from the vast, non-profitable residential sector; DISCOMs deferred payments to generation utilities.

The reaction was not unexpected, and the Union government took measures to allow the State and Central gencos running based on deferred payment toCoal India (CIL).

But, IPPs didn’t have that advantage. They get coal at advance payment. To solve the riddle, the Centre asked CIL to supply fuel against usance LC (letter of credit), that would allow IPPs to buy fuel on bank credit.

Ashok Khurana, director-general of Associated Power Producers (APP), a body of private sector power developers, has doubts if it would resolve issues. “Looking at stressed balance-sheet of IPPs, it is doubtful if 15 per cent companies will be able to get credit from banks,” he said.

Khurana felt it was easier for CIL to raise cheap working capital loan and offer suppliers’ credit to IPPs at a minor premium. IPPs have little reason to default as CIL holds the key to the fuel supply. His proposal is yet to find positive a response from the government.

Alarming trend

The problem, however, doesn’t stop here.

Over the last few days, nearly one-third of the DISCOMs - including the ruling and Opposition ruled States - invoked force majeure against IPPs.

Some States asked IPPs to pull shutters and not expect payment for the period. Some others said they would regulate deliveries according to demand in future. Some want a waiver of fixed costs that accounts for the capital cost of generation units.

Such actions challenge the very basis of competitive tariff bidding to enter long term power purchase agreement (PPA) between DISCOM and IPP. DISCOMs can deny taking delivery, on payment of a fixed charge for the guaranteed volume.

It is questionable if the force majeure decisions are legally tenable. But the trend is alarming. Because IPPs cannot afford to get into any protracted legal battle sacrificing production, at this juncture.

Mess in the making

States do not have anything in particular against IPPs. They are only looking at every option to cut cash requirement and give remission to electricity consumers to survive the economic onslaught.

Odisha wants to surrender “costly” power from select NTPC units and requested waiver of fixed charges for central pool power which is not utilized. However, it is not easy to take unilateral action against the central sector. IPPs are picked up as the soft target. This is not the mark of a rule-based society.

The actions are not always in larger economic interest. Over the last decade, India became a capacity surplus in power, which is prerequisite for assured supply. In such a situation, utilisation is bound to be low, and subscribers must pay the fixed charge.

Also, States are giving preference to their archaic generation units - which consume more fuel to generate the same quantity of electricity - over the efficient IPPs. This is partly to take advantage of the low fixed cost of old units and somewhat to live on deferred payment. It is not easy for CIL to stop supply to state gencos of either U.P. or Odisha.

Restructuring needed

IPPs paid a heavy price for policy bungling over the last one-and-half-decade.

UPA encouraged investors to set up a power station. National Coal Distribution Policy (2007) promised to meet fuel demand. But in 2008 the government silently stopped holding meetings for coal. Even those who received a letter of assurance from CIL were later kept stranded.

The levelized tariff-based competitive bidding was a recipe for disaster. The tariff Policy (2006) mandate to move over to tariff-bidding for PPA from 2011, was implemented only for the private sector. Central and State sectors kept selling electricity at the cost-plus basis

States exploited the desperation of IPPs. Plants which were set up with a long-term view are offered tariffs on short term perspective. Barely 3,500 MW worth of long term PPAs are signed in the last six years.

Modi government offered fuel to stranded power stations through SHAKTI scheme, but at discriminatory terms. Any further discrimination at the pretext of Covid-10 may only add to the national loss in terms of piling up of NPA.

It might be better to take a fresh look at issues and bring the entire generation sector at par by way of cost and tariff restructuring. It might cost the nation a bailout package but will end the problem forever.