Rejoicing about the recent slew of cleared power generation projects? Not so fast. Here is the ironic truth about our power sector: On the one hand, the Cabinet Committee on Investments (,) and a special Commission in the Cabinet Secretariat are busy clearing stuck power and other infrastructure projects over Rs 83,000 crore of generation projects included. On the other, generation companies are finding it increasingly difficult to find buyers for their already operational plants.

The reason? State distribution utilities are preferring to cut down purchase of power rather than increasing the cost burden of additional electricity. This is in the face of an electricity supply crisis, and as most of the states in the country having power supply of less than 12 hours. It has been observed that state distribution companies in various states, especially in the Northern grid such as Uttar Pradesh, Haryana and Punjab, as well as a few in the South, have preferred to extend the load shedding hours rather than buying costly power. Now, how much cutting down power purchase will help discoms meet the criteria by the financers to avail them fund or enhance their grading, proposed by the Ministry of Power, has yet to be assessed. The trend to curtail demand may help discoms keep their expenses in check to some extent, but it has created a major concern for the power producers, who are already grappling with cost overruns due to delay in projects and availability of the fresh funds in the market.

The country's largest power generator National Thermal Power Corporation (NTPC) has claimed that nearly 5,000 MW of its capacity is lying idle due to lack of demand. NTPC Chairman Arup Roy Choudhury admitted that the demand has been falling, and told this reporter that a better financial health may help discom improve the situation. Choudhury said, 'In order to cut down their losses, discom are buying less power.' With an installed capacity of 41,184 MW and despite being the country's lowest-cost power producer, the public sector giant is already feeling the pinch.

Blatant flouting
Pramod Deo, former Chairman of CERC, said, 'This is a serious violation of regulatory norms. Discoms need their state regulators' approval for cutting down power supply or increasing the load shedding period.'

It is time for those regulators to now intervene, says, RS Sharma, former chairman of NTPC and now MD of Jindal Power Ltd. 'State Electricity Regulatory Commissions (SERCs) should step in to direct the discoms to follow the 'standard performance'. Otherwise, setting up new capacity does not make any sense,' said Sharma.

The real reasons: In November last year, the finance ministry had cracked down on discoms, granted a Rs 1.9 lakh crore restructuring plan and advised banks to stringently monitor the conversion from red to black on discoms' balance sheets. Lending to which discoms came under scrutiny.

According to industry sources, many private independent power producers (IPPs) face similar problems. When approached, however, they declined to talk on the issue. JSW Energy, Adani, Essar Energy, Lanco and others had earlier planned to keep free a considerable capacity for short term supply through exchanges, but now they are in a fix as rates at exchanges are exceptionally low, between Rs 3 and Rs 4 per unit.

'With the falling rates at the exchanges, private players were planning to get into short and long term power purchasing agreements with the discoms, but with the falling demand they might face challenges,' said Kunal Sheth, a senior research analyst with Prabhudas Lilladher. Power generators are troubled not only with the problem arising due to the shortage of domestic coal, but also due to the unwillingness of discoms to spend more on power purchase. In addition, many of the approximately 30,000 MW capacity created by the private sector since 2009, based on the tariff-based bidding principles advocated by the Centre, have plant load factors (PLFs) hovering between 50 and 60 per cent, and are facing viability challenges, and a demand decline is the last thing they would be hoping for. Costly power is another factor that is contributing in the demand decline. There is pressure on the distribution utilities to bring down the losses and rise in power cost due to recent increase in fuel prices, both coal and gas. Recently, CERC allowed the generation companies to pass on the cost overrun due to costly imported fuel after noting that facilities developed at a significantly higher capital cost or the plants running on imported coal, with low fixed cost, were finding it difficult to sustain.

Discoms' plight
Tata Power in its Annual General Meeting this year remarked that high aggregate technical and commercial (AT&C) losses and the SEBs resorting to load shedding during peak hours are the major challenges in the distribution segment. Already grappling with weak financial health, many states are not able to raise tariff in line with the costs of generation. Earlier this month, Power Minister Jyotiraditya Scindia had said that states should take the liability of electricity subsidies on their balance sheets instead of burdening the distribution companies. The liabilities of discoms were estimated to be more than Rs 2 lakh crore when the government decided to bail them out. However, it is yet to be implemented across the country. Debt recast of the state utilities in Tamil Nadu, Andhra Pradesh, Uttar Pradesh, Punjab, Haryana, Rajasthan and Madhya Pradesh did not make much headway as most of the states were not ready to share the fiscal responsibilities of its distribution utility and implement a sharp tariff rise. (The elections ahead are also said to be responsible.) Sector analysts believe that financial restructuring is no long term solution. Rather, discoms should work on bringing down the losses and gaining profitability. As state utilities realise that bank finance will be no cakewalk any longer, they are reportedly working on cutting down lossesno overnight task. The decline in offtake is a result of this thinking. 'Every utility has to bring down the losses by about 40-50 per cent, which is not an easy task. On the other hand, cost has to be covered by the consumers because liquidity flow in the market is tight and credit is not available in the market for loss making companies,ö said Ajoy Mehta, Managing Director, Maharashtra State Electricity Distribution Company Ltd (MSEDCL).

Remedy failure
Subsidies for state electricity distribution utilities is expected to rise to a staggering Rs 60,000 crore by the end of this fiscal even after financial restructuring, according to rating agency, ICRA. Besides, the power sector remains increasingly vulnerable to both the rupee-dollar exchange rate and international coal prices, mainly due to rising dependence on overseas coal to fire generation plants, the agency said in its latest report. The overall absolute level of subsidy dependence for discoms on an all-India basis to increase to estimated Rs 60,000 crore for the 12-month period ending 31 March 2014. A key reason for the poor financial health of discoms is the mismatch between the cost of generation and the rate at which electricity is supplied.

The projected Rs 60,000 crore subsidy comes even after the implementation of the restructuring package and anticipated improvement in overall cash flow profile of utilities over the next 2-3 years. According to ICRA, a major factor for the projected increase in subsidies is a rise in the approved cost of power. SERCs have approved the higher costs on account of increases in power purchase and other fixed expenses.

Even though tariffs have been hiked for subsidised consumers in states such as Rajasthan, Tamil Nadu and Uttar Pradesh, the respective governments have borne the burden of tariff hike for such consumers.

Another factor would be continued low tariffs for certain sections of consumers (mainly agricultural consumers), which remain heavily subsidised, including a free power policy in some states, the agency noted. Regulators in as many as 21 states have issued tariff orders for FY2013-14, with resultant hikes of 5-14 per cent. Noting that progress in rationalisation of electricity tariffs has been slow, the report said, 'Utilities in many states continue to delay filing for fuel and power purchase adjustment petitions.'

However, banks that have maintained a tight leash believe the performance will improve soon. 'There is a perceptible improvement in discom's functioning, there is a perceptive change in the attitude of state governments such as UP, Haryana, Bihar, Tamil Nadu and Rajasthan, we have observed more seriousness in them to improve efficiency, and increase the tariffs,' said RK Dubey, Chairman and Managing Director of Canara Bank, adding that the discoms sense a compulsion to improve their functioning and governance.

What next
Distribution utilities, barring a few like Gujarat, have been running up losses for decades. So with only the bank's part of the restructuring of state utilities happening but states still reluctant to help in the restructuring, there cannot be much scope of electricity demand recovery for the generation sector in the short and medium term at a time when the entire economy is passing through a rough phase.

Many industry practitioners believe that the power demand may revive by next year as elections are ahead and the ruling parties in the states are expected to ensure maximum electricity.

It is estimated that about 10,000 MW of power capacity will be on stream in the next two years by the private players, while NTPC plans to add 4,000 MW by the end of the current fiscal. With the government clearing energy project in one sort this month, the country expects a huge generation capacity will be added further. The question remains where this excess capacity will go.