India - Generating Trouble (G.Read)

Sunil Jain


With a 78,000 Mw target for setting up fresh power generation capacity in the current Plan period, it’s clearly good days ahead for the country’s power supplying companies and equipment suppliers, even though getting finances for these plants promises to be more of an uphill task now given the global financial meltdown. What will help, as far as the debt is concerned at least, is that it’s likely that government-owned banks and financial institutions will do their best to ensure this is available.

What’s worrying, however, is that in a business-as-usual scenario, and there is little to indicate otherwise, much of this could just be money down the drain or, in the case of power plants, money up the electric chimney, since those who are to pay for this electricity remain as bankrupt as ever. State electricity boards (SEBs), with the honourable exception or two, are deep in the red despite all the years of so-called reforms, accelerated power reform packages and other incentives from the Centre. As compared to a rate of return of minus 12.7 per cent in 1991-92, the figure was almost double at 24 per cent in 2006-07 — revised estimates for 2007-08 are 18 per cent, but it’s safer to wait for the actuals to come out. In which case, it’s safe to assume every extra unit of power generated will mean an equally large hike in annual losses.

Even if you assume just around half the target, or around 40,000 Mw of fresh capacity comes up in five years, at an 80 per cent plant load factor, that’s around 280,000 million units of power being generated in the fifth year. Depending upon the under-recovery per unit of power (it’s Rs 1.6 for Uttar Pradesh and 90 paise for Haryana), that’s an annual loss of around Rs 35,000 crore! With such projected losses, how are those who’re supposed to finance such projects planning to get their money back?

In the case of the Uttar Pradesh SEB, for instance, current cash losses on the existing 56,000 million units of generation are around Rs 5,200 crore — this does not include the Rs 1,500 crore of subsidy payment made by the state government or the huge pension and provident fund payments. So, when the SEB adds another 40,000-odd million units (kwh) of generation in another five years, cash losses will rise another Rs 6,000 crore or so — that is, to over Rs 11,000 crore. Even if you assume the SEB is able to increase its tariffs by another 10 per cent (it has raised them a little less than this in the last five years) in the next five years and reduce losses marginally, cash losses will still be over Rs 7,000 crore. Assume now that the SEB is able to reduce losses by 10 percentage points, which is something even the best SEBs are not able to do, its aggregate loss levels will still remain at over Rs 4,000 crore! So how’s the SEB going to repay the money it borrows to set up power plants and don’t the lenders see this? (Ditto for Haryana, where the additional 3,500 Mw that’s likely to come up by 2012 will result in an extra cash loss of over Rs 2,000 crore.)

All of which begs the question as to why people are setting up power plants. First, thanks to a combination of state government finances being in pretty good shape and the settlement of SEB dues to central PSUs at the beginning of the decade, SEB finances look better and they’re actually getting their subsidy payments on time. Second, as far as projects like the Ultra Mega Power Projects (UMPPs), where the tariff will probably be the cheapest in comparison with other sources, the merit-order dispatch system implies that SEBs will have to buy this electricity first — so, these plants are virtually assured they’ll find buyers. But UMPPs account for just a fraction of the 78,000 Mw that is being planned.

Does this mean that there should be no expansion in generating capacity then? Not at all — fresh power generation is vital to any sort of electricity reform. If someone doesn’t pay (or pays less) for using electricity today, there’s no real reason to expect him to start paying; or to expect him not to protest when electricity rates are hiked. The only way tariffs can be hiked is when they’re accompanied by visible signs of power supplies becoming more reliable and/or plentiful. Theoretically, you can get more power when theft levels come down, but that takes time and in the interim period there is no substitute for pushing in more generation through the system.

Such reforms, in the case of the West Bengal SEB, for instance, resulted in T&D losses falling from 27 per cent in 2004-05 to 23 per cent in 2007-08 and collection efficiencies rising from 65 per cent to around 98 per cent — all told, the SEB raised generation capacity by around 2,500 Mw but saw its losses of a few hundred crore change into a small profit in just three or four years.

In other words, anyone planning to finance fresh generation capacity needs to keep an eye on the operational transformation of the SEB. If this is not happening, it’s time to prepare for yet another bailout package, of the SEBs who have to pay for the power generated or of the banks who financed the power projects in the first place.