• Centre adding to power sector stress instead of alleviating it

    Effecting quantum changes in policy while maintaining continuity of incumbents is one of the challenges of governance. In all key infrastructure sectors, our country has grappled with this challenge as we have moved from one generation of policy to another. In one of the recent interviews, former revenue secretary NK Singh talked about how telecom policy was migrated to revenue share in the Atal Bihari Vajpayee government. While this would solve the issue of future telecom licences, the major issue was about migrating existing licences to the revenue-sharing regime.
    Singh talks how the then Attorney General and telecom minister were “morally” opposed to allow the existing licences to be migrated. PM Vajpayee, realising the magnitude of the problem, immediately ordered for the telecom minister to be changed and a new Cabinet Note to be put up. Needless to say, given the new facts and the implications of stalled telecom story—perhaps also the implication of not cooperating—the Attorney General was only too pleased to change his opinion and recommend revenue sharing. The rest, as they say, is history. All telecom licences were migrated to revenue-sharing model, and today we stand with over 1.2 billion telecom users and some of the cheapest tariffs on the planet.
    The above story is not just about how policy is to be adapted to incumbents, it is also about how national interest can sometimes be served by helping incumbents come out of stress and make investments in the future. The ministry of power perhaps need to learn an important lesson from such pivotal experiences in governance. There are far too many instances where policy stagnation has resulted in stress in the power sector, and many of the incumbents are not in a position to make any further investments in capacity addition. The implication of this could be grave, and the government needs to wake up to the threat of over 50,000 MW going the NPA way.
    A conventional thermal power project typically has three legs that needs to work in parallel for the plant to attain viability—coal, a power purchase agreement (PPA) and transmission. Given the breakneck capacity addition in 11th Five-Year Plan (2007-12), most of these linkages have not kept pace with the plant and these assets face the threat of turning NPA.
    For instance, there is a substantial capacity in the country that has a Coal India Ltd (CIL) coal linkage and a coal mine, but does not have access to a PPA. The capacity with a CIL coal linkage without a PPA is cumulatively about 26,300 MW, and the capacity with a coal mine but without a PPA is about 4,250 MW. Unfortunately, the prerequisite for availing linkage and coal mine coal is a long-term PPA, and states appear in no mood to call for PPAs for coal-based plants. In the past two years, only Andhra Pradesh and Kerala have completed bidding for an aggregate capacity of 3,250 MW. There is no visibility of any more long-term PPA in the near time-frame. If this situation is not corrected, these projects will turn into NPAs soon. It is ironical that Jharkhand, while reneging from PPAs signed with thermal plants citing lack of demand, called for over 2,000 MW of solar bids in the last three months alone. The power ministry has to create an enabling framework for states to procure stranded thermal power, else we are likely to see larger stockpiles of CIL coal and more plants turning NPAs.
    In the coal-based power sector, the Cabinet Committee on Economic Affairs approved a landmark list of 78,000 MW (scheduled for commissioning by March 2015) for obtaining coal linkage from CIL. But some of these plants have been delayed beyond their scheduled commissioning, and there are others that have been commissioned but were not a part of the original 78,000 MW. Total capacity, amounting to over 16,700 MW, is lying stranded, waiting for linkage coal to achieve operations.
    In addition to the two above categories, there is about 14,600 MW of power capacity that has a PPA but no long-term coal source. There is another 9,925 MW of power capacity that has been set up with neither a coal source nor a PPA in place.
    That this power capacity is becoming stranded comes in the backdrop of NTPC and state distribution companies being freely allowed to sell power from linkage coal in the spot market, and also being provided bridge linkages where their coal mine is taking time for commissioning. NTPC also enjoys the unique privilege of signing PPAs on a regulated tariff basis (without tender) with state-owned utilities long after the national tariff policy deadline of 2011 has expired.
    This unequal level-playing field for NTPC is the final nail in the coffin. The fundamental issue remains that the policy for a PPA requirement for coal linkages, or an approved restrictive list of coal linkages of 78,000 MW, was drafted in the context of a coal scarcity scenario. We are in an era of coal surpluses, and CIL seems to be contemplating exports. It is imperative that such policies change and ensure that coal, whenever and wherever available, be provided to domestic plants to prevent them from turning NPAs.
    It is imperative that such policies change and ensure that coal, whenever and wherever available, be provided to domestic plants to prevent them from turning NPAs.
    The plight of gas-based power developers is no different. The policy for gas-based power projects (providing power system development fund support) was announced with great fanfare in 2015—subsidy was announced on imported LNG, provided states agreed to buy the power. An absurd stipulation of requiring the developers to commit to “zero” return on equity was also agreed to by the industry, and bids were called. However, after the bids were completed and the states consumed the power, and after submitting the due documentation by the developer to obtain the subsidy, the government failed to release the subsidy in time. Out of the blue, and after about four months of delay in release of subsidy, in October 2015 the power ministry added additional conditions for release of subsidy. These included an approval from the state regulatory commission for the tariff provided to bidders. This new condition created a massive delay in the release of subsidy, and contributed to further deterioration of the financial health of the power plants. Due to these new conditions, the Power System Development Fund subsidy of R450 crore was delayed by over eight months and the plants had to face financial distress in the intervening period.
    To make matters worse, in June 2016, the government proposed to release subsidy as per the original conditions, subject to the developer providing bank guarantee of the same amount until this fresh documentation has been completed. It is impossible to expect developers of gas-based power plants to provide such large bank guarantees, particularly when these plants have already been delayed by years and needed this scheme to start operations.
    For public servants, the challenge of providing relief to incumbents is always fraught with the risk of a potential audit or enquiry. Recent judicial pronouncements (in the telecom spectrum case and coal block allotment case) confirm that a transparent auction process has to be followed to ensure equitable distribution of scarce natural resources.
    However, a transparent auction process for resources always leaves incumbents on the back-foot—power plant developers have already invested thousands of crores in allied power plant infrastructure, and need coal mine/linkage/PPA to attain viability. The scenario of not winning the auction is dire—turning an NPA, enforcement of share pledges, securities and, worse, personal guarantees. With such a bleak scenario, one cannot blame developers for going aggressive on bids. In the coal block auction, such aggressive bidding has resulted in not a single coal block being operationalised, and several cases pending in courts. Particularly in the power sector where demand is stagnant and PSUs like NTPC are above all rules—particularly with respect to allotment of coal mines and linkages—a transparent auction needs to ensure a sustainable price for incumbents.
    In all these cases, it appears the power policy has been either stagnant for two years or has been moving swiftly but inconsistently. Policy in this complicated sector, with several incumbents and the potential of over 50,000 MW of stressed assets, needs to be deliberated and certain concessions need to be made in the interest of viability. It is best we appreciate, sooner than later, that the power sector policy cannot and should not be handled in 140 characters. Caleb Benenoch Jersey

    Share This