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Cover Story | October 2013

Turnaround for Power Sector?

Over the past three months, the government has tried to phase out the most pressing irritants for the power sector such as project clearance and fuel linkages. Will this jumpstart a quiet reversal of the small tailspin that infrastructure in general, including the energy sector, has been witnessing? While policy makers and government agencies seem certain, the question is whether the sentiment, rather than action on the ground, will drive the sector. Pradeep Pandey shares insights and connects the dots.

The central government's decision to clear 36 infrastructure projects worth Rs 1.83 lakh crore will bring a smile to the face of people from the power sector. Of the 36 projects, more than were power projects, which were stalled due to various regulatory hurdles: Of the 36 projects cleared by the government, 18 have been from the power sector with a total investment of around Rs 85,000 crore. Even the second most hitting issue of fuel supply is also being taken at upper hand by the government in a bid to revive investments in the ailing power industry.

Given the government's proactive approach on reviving the sentiments, can the industry hope for a turnaround? Clearing these major hurdles should make the industry hopeful. But do the industry people think the same. Power Today reached out to some of the policy makers and independent observers to find out what it means.

Finance Minister P Chidambaram gave out a clear message: 'We are very keen to get investment cycle restarted. The cycle has started and we are pushing it even further.-ö His message can be considered as disruptive to the currently moribund sentiment in the power sector, with most of the private players complaining about long-drawn project delays owing to fuel and clearance issues. The question, however, is what it will mean to capacity addition and real cash flows.

On the issue of fuel supply, the government took a firm stance and directed the country's largest coal supplier Coal India Ltd (CIL) to ink a fuel supply agreement (FSA) with as many as 146 new power projects aggregating a cumulative capacity of over 65,000 MW. Policymakers, industry observers and government officials are convinced that this means a turnaround. Gajendra Haldea, Principal Adviser- Infrastructure, Planning Commission, said, 'We expect a turnaround in power sector for sure as most of the issues have been settled. However, we have to focus on target participation for which we have made a transparent and attractive framework.'

P Umashankar, Former Secretary in the central power ministry, said, 'Prominent issues like project clearances and fuel supply, which have been hurting the sector, have been sorted out. The bidding documents for case I and case II, too, will be finalised soon. So, we definitely see a better scope ahead.'

Although some sector analysts believe that these developments are helpful to projects that are already in the development stage, they won't necessarily galvanise projects that are yet to take off. Rajesh Samson, a Partner with Ernst & Young's Transaction Advisory Services Group, is of the opinion that the initiatives are helpful for the projects that are in advanced stage: 'I think the slew of initiatives over the last year will go a long way in turning around the power generation sector. The biggest beneficiaries will be IPP's which were fundamentally viable to begin with but started looking unmanageable on account of shortfalls in actual coal delivery, delayed payment recoveries from DISCOM's, difficulties in selling power across regional grids or other such externalities. However, we still need to see what will happen to other projects that are locked into power purchase agreements that were priced unsustainably low and projects on the anvil where key development milestones such as securing coal linkages in the first place or acquisition of large tracts of land are pending.

Fuel assurance
With agreements already in place for projects commissioned before March 2009, the impetus on signing the FSAs is slated to go on stream by 2015. The 78,000 MW target entailed a total of 173 coal supply pacts.

The success in pushing through the fuel pacts has largely been possible with the power ministry's continuous pressure for an easy go-through with the coal ministry and CIL. The issues that were in limelight were: a commitment on the annual contracted quantity of coal, penalty for lower supplies and the issue of third-party sampling.

The decision of the Cabinet Committee on Economic Affairs (CCEA) in July approved a pass through mechanism for compensating for the higher cost of imported coal for private power projects. This was a welcome move for the industry.

Another big development was the decision by Empowered Group of Ministers' (EGoM) clearance of the amendments to the standard bidding documents for new thermal power plants offered under the tariff-based competitive bidding route (Case II projects). Bidding documents for UMPPs have been already cleared for Odisha and Tamil Nadu. 'We can expect that, by next month, bidding norms for Case I and Case II will soon be finalised,-ö said Umashankar.

In addition to this, a decision by the Group of Ministers in August has assured that any additional domestic gas available in the next three years would be allocated to the power sector and not diverted to the fertiliser sector. This means that about 10-11 million standard cubic metre per day (mmscmd) of additional natural gas, estimated to be produced in the country during the next three years, would go to fuel-starved gas stations. Last fiscal, the country added 20,622 MW of capacity, over 2,600 MW higher than the 17,956 MW targeted during the year. An additional 2,512 MW of capacity was subsequently added in the quarter ended June 2013, which means that cumulative capacity of 23,134 MW has been added in the first 15 months of the Twelfth Plan period. Of this, nearly 60 per cent is accounted by the private sector.

Finance: A tough nut
The Planning Commission has already slammed banks for their infrastructure lending practices. Recently, in a scathing letter addressed to the Indian Banks' Association, Haldea said that the reckless lending to the infrastructure and power segment will lead to asset quality issues, resulting in a lack of future lending towards these sectors.

'Indiscriminate lending by commercial banks has led to gold plating of infra projects that may either raise consumer tariffs or cause defaults in debt service,' said Haldea in a discussion paper dated June 12. He added that this sub-prime lending, predominantly by public sector banks, reflects inadequate due diligence and malfeasance, as does the persistence of policy logjams, impeding project implementation.

The annual growth rate of credit to the infrastructure sector was 42 per cent between 2001-02 and 2010-11. It stood at Rs 146,700 crore. However, between 2011-12 and 2012-13, the growth slowed significantly to 6.8 per cent. As on 31 March 2013, the exposure of the banking system to the infrastructure sector (excluding power) stood at Rs 110,614 crore.

The total exposure of banks to the power sector alone exceeds Rs 3 lakh crore, the bulk of which relates to generation projects, Haldea notes. He also remarked that the banks evidently lent enormous sums of money to power producers who were encumbered by the fuel price risk as well as the fuel availability risk. He says that it is not so that only policy was responsible for delay in projects but also the negligence of private players was responsible for slow growth.

Cautious optimism
Although the government has taken enough initiatives for removing the bottleneck, the industry can be hopeful that positive developments are taking place. The issues, which were being hyped for the last one and half years, have been sorted out. Will it only benefit those who have already started the projects or will this help those who are yet to venture?

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