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November 14, 2012

Power Crisis Looms as Private Sector's Enthusiasm Wilts

Businessworld has recently covered the crisis in the Indian power sector and the problems facing private sector investments in the sector.

From the Cover Story titled "Burn Ambitions":

If there is an apparent sliver of hope, it’s over discoms — the Cabinet Committee on Economic Affairs’ nod to recast their debt of Rs 1,20,000 crore. Matters had come to head. In the absence of cost-reflective tariffs (a political hot potato), discoms financed the interest on loans through more of the same. The RBI asked banks to apply the brakes on loans to discoms. “We have decided to stop generation, but we cannot afford to take a deferred payment as 80 per cent of our cost (of power) is for buying coal. We pay CIL through a letter of credit and cannot afford this. We can’t compromise,” says NTPC’s Choudhury.

...According to Crisil, nine states — Tamil Nadu, Andhra Pradesh, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh, Madhya Pradesh and Jharkhand — account for 85 per cent of discoms’ losses; their combined debt accounts for 80 per cent of all such debt. And these nine states can swing fortunes at the hustings; they send 292 MPs to Parliament, 53.77 per cent of the total.

(Saya Essar Energy’s CEO, Naresh Nayyar) “We do not want to commit capital unless we have more clarity on regulatory approvals.” A senior banker admits to a “moderation in investment plans”. State Bank of India has turned selective — major sanctions in 2011-12 were to Neyveli Lignite Corporation (Rs 2,500 crore) for 1,000 MW and to Meja Urja Nigam (Rs 2,000 crore) for 1,320 MW.

...Balakrishnan says there was good interest from PEs for two years (2009-11). “They have invested around $2-3 billion with another commitment going up to $5 billion. But PE funds have also gone shy (of the sector).”
Interview with Montek Singh Ahluwalia on the immediate and long-term implications of bailout for State Electricity Boards (SEBs)

From the article by Anil Razdan former secretary, Ministry of Power:

Distribution being entirely in the state sector, the restructuring scheme will serve as a reminder to state governments to assume ownership of utilities as the states are required to take over the loans as equity, and securitise the bonds to be issued by the discoms. FIs have been asked to provide a moratorium on loan repayments so as to give the discoms some time to get their act together and avoid penal interest. The move would also require strict discipline on the part of states because they are already guided by the overdraft constraints mandated by the Fiscal Responsibility and Budget Management (FRBM) rules. The states will then have no option but to resort to an increase  in tariffs as they will be obligated to pay interest on the bonds they issue. However, it is better to increase tariffs than to have a power crisis.
Debt apart, the extent of aggregate technical and commercial (AT&C) losses is unacceptable, even if we assume the national figures to be 27 per cent. The figure should be brought down to at least 15 per cent over the next two years and, in cities, this should come down to single digits, as is the norm in the developed world.

...The power minister is reportedly drafting an Electricity Distribution Responsibility Bill for enactment by states. If all these measures to work, fuel supply must be assured to generating companies so that they achieve maximum capacity utilisation. There is also need for consumers to be regularly educated on the economics of the power business. 
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