2nd Power Today Round Table: "A bailout to discoms is necessary"But conditions should be imposed so that this sector becomes viable on its own, says Yashpal Singh, V-P, Project Advisory & Structured Finance, SBI Capital Markets. R Srinivasan reports.Beginning the debate on Do our discoms need a bailout? about the need for a bailout at the second Power Today Round Table discussion at IMC, Mumbai, and speaking about three challenges due to trifurcation of companies in Maharashtra, MK Deore, Director (Projects), MSEDCL, said, “First question is losses, second is how to improve services for customers and third is how to turn my company around.” Mentioning threats to discoms, he said, “The worst threat is the increasing cross subsidy or free supply to agricultural customers. In our state we are supplying power to agricultural customers for only 20 paise per unit below 3 HP and 50 paise per unit for above 3 HP. In Punjab they give free power and in Andhra Pradesh they give 7 hours free power. Second is infrastructure which needs to be revamped. Banks and financial institutions are wary of lending to discoms. Third is the question of whether discom will survive or not. A major threat at the present state is Open Access to the high value consumers more than 1 MW. We have these three threats. For these threats the Shunglu committee has suggested the franchisee model. In India franchisee was first done in Bhiwandi was done first where losses were around 60 per cent. Torrent has done a very good job and now the losses have come down to 20 per cent. This model is doing well for the last 4 -5 years. With this experience of Bhiwandi model we have done franchisee of Nagpur and Aurangabad town. These two are also doing well but they are having financial trouble. No bank is ready to finance these distribution franchisees. But these are franchisees and not discoms. They are like contractors and will collect money from consumers in any way.”To this, Shashidhar Nanjundaiah, Group Executive Editor, ASAPP Media, and the moderator quipped, “I was hoping that the discom here would say that states do need a one-time bailout but here we have one saying that we don’t need one.”About a bailout as a option or a turnaround in their financial health so that banks could continue to finance them, Yashpal Singh, Vice President - Project Advisory & Structured Finance, SBI Capital Markets, said, “This problem has accumulated over time for nearly last 10 years. We had a bailout in 2001 and SEBs dues to the extent of around Rs 40,000 crore were settled and the government came out with other schemes. It was implied that with this corrective action the sector will now perform well. But in 10 years’ time we are back to the same stage. Another important factor why the sector has come to this stage is the non-revision of tariffs. So we strongly feel that a bailout package or some support to discoms is necessary which will also help other segments that are dependent on discoms. But such conditions should be imposed on discoms and related entities that this sector becomes viable on its own.”Offering a way out other than a bailout, Ramesh Kelkar, General Manager, MSME, Union Bank of India, said, “So far banks were blindly supporting discoms by extending loans but were indirectly financing their losses. Tariffs have to increase, subsidisation has to be reduced and huge distribution losses have to be reduced otherwise whatever steps are taken will again be futile. Even if banks extend loans again, they will need to be repaid. How will they repay? So the loans can be restructured and instead of immediate payment the term can be extended up to 10-12 years and banks can assist discoms in this way.”Queried about securitisation, Amritanshu Mohanty, Deputy Vice President, Axis Bank, said, “Banks have something like Rs 50,000 crore to discoms. In a bailout situation we are talking about restructuring or refinancing of existing loans. Banks are not in a position to take up new exposures in the power sector. Also, Yashpal has also highlighted that it is an endemic issue. Now discoms are in problem because of which the transmission and generation companies are also in a problem. Banks also have huge exposure to generation companies. Because of mismanagement or non-recovery of bills or reduction of AT&C losses, discoms are defaulting on payment to generation companies. Banks already have funding lines which are being given to generation companies. The generation companies should be able to recover money from discoms and return it to the banks. The generation companies are unable to recover this money. Banks have already given money for capex and are now looking at funding the working capital requirements. It is a messy situation where not only the bank’s money is trapped in capex but we are also looking at a situation wherein we have to fund the working capital and we also have huge amount of exposure to the discoms. So I don’t think bank financing in a major way is the way out over here.”Throwing light on the issue, Umesh Agrawal, Associate Director, Advisory – Grid, PwC, said, “Instead of a financial bailout, if you do a bailout in terms of policy, in terms of bringing in performance and increasing tariffs, then the sector will become self-sustainable on a long-term basis. That is more important. Also, thankfully the losses are not uniformly spread across the country. The right bailout package should be more to incentivise discoms, rather than giving them financial assistance.”About restructuring as the right thing Shishir Tamotia, Vice-Chairman and MD, Sumer Energy, said, “Unfortunately in our country we restructured transmission, distribution and generation but we did not restructure retail. The main part as YP Singh was saying is collection. There are two responsibilities lying with the distribution company today. One is wire industry and another is retail. He is responsible for both and that is not the right thing to do. Maharashtra has a single distribution company. It is the largest power generating and also in terms of distribution. There is a scope of at least 20 retailers in Maharashtra. When we have retailers separated from the wire industry automatically things will improve.”Nanjundaiah: You are advocating two-three things here. One of them is that people who are in that house cannot solve the problem they created. The other thing is there is a very good scope of splitting the discoms even further and tariffs can be reduced by competition. Going further, will the PPP or franchise model work to cut losses and make revenues?Behram Ardeshir, Consultant (PR, Media and Marketing) Cooper Corporation, said, “We have come down to this sorry state of affairs because the system has many serious defects in it. If you want to restructure, bailout or have a new system [PPP or franchisee model], if the overall system still has defects, none of this will be successful. What we need to do is come down to the basic facts, where does the problem lie and how are we going to address those problems. Once you have identified them and know what you are going to do with them then you can take a decision on what model is more suitable. You may need to use both. There may be different circumstances where in one case the franchisee model may be more useful or in another case the PPP. In franchisee model, the franchisee cannot change power tariffs whereas in the PPP model the generator has the right to change tariffs. You may have a situation in a particular state where there are different locations with different tariffs. How that will impact the power situation? So we need to consider all these things.”Amod Khanorkar, General Manager & Rating Head, Care Ratings, said, “Unless there is improvement at the grass-root level nothing is going to work. The issue is of a couple of things. Executing what really needs to be done and there has to be a political will and there has to be some spine shown by a lot of people to take things forward. Today, you can bailout then later you are going to throw good money after bad. When you speak to electricity boards, now most of them have been split. A few years ago they used to say that those who have been split see where they are. So what is the real benefit of splitting them [electricity boards] up? You split them and we are back at the same issue. For the last 15 years I have been looking at this sector and we continue to discuss the same issues.”Tejas Bakhai, Director, Triangle Simulation, said, “Deore says that the farmer gets electricity for 20 paisa. The cost is Rs 3.90. There are 32 lakh pumps in Maharashtra and there was a point in time there was a state-level decision whether we should change the freebies. Even the Rs 50,000 crore for discoms should not come without strings attached.”Deore: The PPP model will not work in India. In Mumbai we have MSEB, MSEDCL, BEST, Tata Power and Reliance Infrastructure. Four companies have different tariffs. Tata Power is supplying at a cheaper rate, then BEST, then MSEDCL and then Reliance. A person living in Napean Sea or Peddar Road pays Rs 3.50 to Tata or Best whereas his driver staying in Dahisar is paying Rs 5.50. So there must be a uniform tariff for all customers… I do not agree that there should be 20 or 40 licenses in a state. In Rajasthan there are these three distribution companies (Ajmer, Jodhpur and Jaipur) and there is no co-ordination between the three discoms. They can’t take decisions jointly because of which the R-APDRP project completely failed in Rajasthan.Tamotia: Discom is a wire business. You are not retailer alone. You are retailer plus wire business. I said separate the retailers from wire business. I was supporting you. There should be a discom company to manage wires and there should be a separate company which can be retailers. They buy power and sell power. They do not work on wires. AP has five distribution companies and they are better managed than Maharashtra.Deore: I do not agree. Maharashtra is better managed.Agrawal: It [The act] does not provide for separation of wires and retail, which might be better to rein in efficiency in the long term.Ashutosh Dravid, Assistant Vice President – Business Development, Power Exchange India, said, “It (separation) is already operational in Mumbai. Customers who wish to opt for supply from competition can very well opt from the same wire. It is there in UK.”Singh: Any model [franchise or PPP] that works to increase the efficiency of the system is welcome. If you yourself can do it then you have done a good job. In that case you may not need any model.Nanjundaiah: Maharashtra does not feel the need for an outside intervention at all and different states may probably need different models.Kelkar: The question is not PPP or franchisee. People were saying that franchisee is not actually franchisee it is only the contract for collection. PPP in road projects are most successful. So far as the government is collecting toll that road is also not maintained and revenue loss is also there. But wherever private participation is there it has been successful. But what is essential is how distribution losses can be reduced and how the tariff will be cost-related and market related. If these two issues are addressed, this discom problem will be solved.Agrawal: The world over there is no franchisee. It [Franchisee] is unique to the Indian situation. When you look at loss-making and inefficient areas the debate is not between franchisee or PPP, the debate is that you improve efficiency and franchisee is probably the easiest way to do that because the privatisation process takes at least 3-4 years for preparation. Franchisee can be prepared in six months’ time, a transaction done and handed over to the private party. You improve performance, bring it to a world class loss level and then sell it.Mohanty: In PPP you not only transfer the assets but also the liabilities of the company to the particular company where the company is supposed to take up the development of the implementation work and the operations of the company. That is the conflict. When you transfer the assets and liabilities are you actually assessing the assets correctly? If you see the balance of discoms comes after nine months after the closing of the financial year. The asset valuation must be actually true. When they get transferred to a private company that is the biggest issue that the bankers may have.Singh: Most banks have come to lending for generation sector in the last 3-4 years and most of these projects are now coming on stream. Construction risk can be mitigated to some extent but post construction is a huge risk because you are unsure about coal supply and you never know which discom may default.Khanorkar: During construction the risks are higher and post construction risks are lower. In power sector unfortunately the counterparty risk becomes a big thing and delays and defaults have been happening always. They may not be as bad but the ratings were always capped on generating companies because of the quality of counter party which is the electricity boards or discoms. Where ratings for power sector companies are concerned, in the last one year, the downgrades are much higher vis-a-vis the upgrades.Queried about open access, Rajeev Ketkar, Assistant Director- PR & Membership Cell Indian Electrical and Electronics Manufacturer’s Association (IEEMA) said, “As a representative of IEEMA, we are keen for open access. It is very easy to flow power from one zone to other zone. The transmission line sector will get more benefit from that. So we are looking from a positive point of view. Transmitting power from heavy generating states like Orissa and Chhattisgarh to West and some of south then perhaps people are going to gain. These states are keen to transfer power in view of UMPPs and with the help of PGCIL, their government wants better infrastructure in transmission lines and in a speedy manner. It also has to help the national power grid and the one nation-one grid concept.”Kelkar: “The open access policy is a good policy but it needs to have practicality behind it.”About the chinks in the armour, Ardeshir said, “Any new policy is going to have that so there should be enough thought put in and they should be tried out on a smaller scale. That is where you can find where the chinks in the armour are without too much of an impact.”Mohanty: Open access will greatly benefit the renewable energy sector because there are many states which don’t have to commit to their RPO obligations. If in those states there are enough resources then I as a developer have an opportunity to sell it to different states.”Dravid: “We [Power Exchange] are advocates of this particular open access across the country. A few states like Punjab, Tamil Nadu, Karnataka, MP and now Gujarat have started permitting open access to buyers above 1MW. We have seen couple of advantages of open access. The first advantage in a power shortage scenario, the country is bleeding. There is no power that any SEB can give to all industrial customers. In Maharashtra there is a one day power holiday and in Tamil Nadu in peak hours they are giving only 10 per cent of their contract demand. So in such a scenario customers should be allowed to get power from outside so that they can keep their economy running. In Punjab it is also an energy-efficient mechanism which has evolved out of their practice. They have shifted their activity in night time where power is in a surplus state. In Punjab everyday if you see on the exchanges around 1,000 MW per hour has been guzzled by open access customers. So they have shifted their entire production activity to night time. So this should be seen as an opportunity for SEBs.”Deore: “Regarding open access there are advantages and disadvantages. In Punjab about 192 consumers have shifted from SEBs to open access. Their bankers and financial institutions must think on this issue. The condition of SEB’s or distribution companies will worsen if all these consumers over 1 MW go for open access. If this sector goes away from the distribution company the losses in India will go over 60 per cent. Again discoms will go into the red and what will happen to financial institutions?”Khanorkar: “We need to look at why someone moves out of the grids of SEBs and clearly from that perspective open access is clearly a signal to SEBs that they should improve their performance. Once they improve, their cost to supply comes down. Once they reduce their cross subsidies, industrial customers will find that buying from the grid is good enough and they will not take any hassle to buy power from outside. So once you have reliable supply at an attractive cost the need of industrial consumers to move out of the grid is going to keep coming down.”Nanjundaiah (referring to Mohan Bajikar): You have a technology which can be usefully applied to off-grid. In local places it may be just the solution that discoms might be looking for.Mohan Bajikar, Owner, Fetchusbee, said: A paper by World Watch Institute has said that energy will remain a global challenge for the future and covered the Indian situation very well. Another newspaper report said that 2,500 MW will be in short supply in Maharashtra in view of the coal shortage. In this context, quite a few national and international companies in India are getting into bio-energy and biogas plants. Recently, Minister for New and Renewable Energy, Farooq Abdullah, announced a 25 per cent subsidy for distilleries wanting to set up biogas plants. We have over 650 sugar mills and around these mills nearly 50,000 – 1 lakh acres have gone completely saline where you cannot generate a single crop. My target is that area with a crop that tolerates salinity and with that we can produce biogas, electricity, cattle-feed and ethanol. By the need of this year based on sugar beet we are setting about four 1 MW plants in Maharashtra and Karnataka. Sugar beet can give you in excess of lot of methane content and the ethanol content is high. So the size of the digestor becomes smaller and your capex becomes less.”Tamotia: Off-grid applications are a poor man’s solution. If we are able to establish a grid in the country then we have done a great job. So all this exercise of PPP is for grid. When we are talking about PPP we are trying to get private players to invest into the electricity infrastructure and give them some revenue from the operations. The moment we start talking about off-grid we are doing a great damage to the country. Open access to me is a given.”Hiren Shah, Head, Corporate Strategy & Global Sales, Global Wind Power, said, “I can speak from a renewable energy standpoint. Our customers would like open access so they are not dependent on the local state utility. Wind mills are set up far away from where the consumption is so we do not have a choice but to rely on a grid to take power over there. Why is there not a question that why can we not extend the grid to where it is needed?”Bakhai: Open access will aggravate the problem that we are here to discuss today and that would not help. One of the things we need to cover is the legal implication.” He added that it may be detrimental since it may increase the cross subsidisation gap.Singh: “Open access is a welcome step and is badly needed to introduce competition at the distribution and retail level. My only request to discoms is not to create a hurdle by charging huge surcharges. Tactics by discoms such as, I will charge Rs 12 and all that should not be used or it will kill the purpose of open access.”Shashi: “We had a very interesting debate on various aspects of the financial health of discoms. We had eclectic perspectives from finance to technology and that is where the diversity came in even from the manufacturer’s perspective, all the way to wind generation. On the question on bailout there needs to be restructuring and even if there is a bailout it has to be done in a careful manner. On whether we need a PPP or a franchise model, we might be the first forum to discuss outside the government. It is not one or the other and in some cases we may need both and in some neither. Open access was another interesting angle to this debate of how it will impact the discoms’ health. The discoms’ health will be affected in a certain way. However, in the long term because of competition everybody will stand to gain including the SEBs. The question of off-grid and other applications as solutions to supplement the discoms efforts to reach electricity to various parts of the state is also welcome from a technology perspective and from a developers’ perspective. If you look at the running thread we have done an excellent job of discussing the elements that will constitute the SEBs health and how we are going to take it forward from the finance perspective.”The debate at the round table started out as a financial one but soon revealed that it also contained elements of technology and policy.(The detailed version of this article is available at our website: www.powertoday.in)
I wish to start pvc / pp electric wire unit in Delhi. What kind of information I can get if I subscribe for your magazine
Pls invite me all auction in gujarat
we are doing business developing for solar power ,thermal power , customer supporting and we have 45 mw splar power on hand needs investors.....
pls call +910842559230