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Power Point | October 2016

Stranded in Debt

There are very important issues facing coal-fired power plants, especially since they have to comply with stricter regulations.

India has come a long way in addressing unmet power demand. Deficit has fallen from 8.7 per cent in 2012-13 to 2.1 per cent in 2015-16. In the last three years, the power sector saw capacity addition of 80 GW, of which 57 GW were coal-fired Thermal Power Plants (TPPs). As on date, India has an installed capacity of 303.12 GW, of which coal-fired TPPs contribute 186.21 GW. Contributing approximately 61 per cent of the total power generated, they thus play a major role in the Indian power generation space.

Power demand has grown at a CAGR of 3.4 per cent in the last decade and is expected to grow at over 4 per cent in the forthcoming decade. However, despite the deficit in supply and growing power demand, there are still a lot of coal-fired power plants which are stranded due to various reasons. As much as 22 GW of capacity, which is almost nearing completion stage, is yet to see the light of the day due to these issues. As per a status report from CEA, a total 72 GW of cCommercial Operation Dateoal-fired power plants under construction, were scheduled with Commercial Operation Date (COD) before March 2016. However, most of the assets under construction are stranded due to lack of funding from lenders, which was stopped following uncertainties regarding the economic viability of the projects. These doubts rose due to time delays and cost overruns, and the reasons for this are multiple, which will be covered a little later in the article.

Project Finance
First and foremost, the debt structure of power project financing in itself is not appropriate, this combined with interest rates as high as 13-14 per cent affects economic viability. The moratorium of 12 months is not adequate as most power plants take at least two years to stabilise operations and secure full off-take through Power Purchase Agreements (PPAs). The repayment profile is so heavily front-loaded that these companies struggle to service the debt leading to a situation where the accounts turn substandard very soon. If project construction and commissioning is delayed, the interest gets accrued and one would be staring at an unviable project cost in which 20û25 per cent is interest during construction.

In situations where promoters or developers have failed to bring in the required equity, banks need to take a decisive position and take control. There is no point in repeatedly putting conditions on promoters or developers, knowing fully well they cannot fulfil the same. This way, at least the bank´s exposure is protected and losses controlled. Banks need to look at sustainable debt structuring at the first instance itself rather than waiting for the account to become substandard. Valuable time is lost in this process and project becomes unviable. If one were to look at the reasons impacting time, cost and project viability there are many - fuel security, PPAs, land acquisition and so on. Let´s look at some of the major ones a little closely.

Fuel Supply
Assured fuel supply is a major concern for coal-fired TPPs. In FY2014-15, the demand for coal from power utilities stood at 581.14 Million Tonnes (MT), of which less than 10 per cent is served by captive mines. The coal mine cancellation in 2014 has also delayed captive block allocation process, while the recent re-auction process is yet to begin full-fledged operations. Plants which started commercial operations have also been affected by these changes as most of them are now dependant on e-auction of coal or imported coal to continue operation. This impacts both availability and price, especially the cost of coal transportation. Without an Fuel Supply Agreements (FSA) or captive mine, the generators are not qualified to bid under Case - 1 PPAs, thus strangling them further.

PPA
Secondly, signing a long term PPA is essential for the TPP to be operationally viable. Given the deteriorating financial health of distribution companies (discoms), they are better off resorting to power cuts than procuring power and not paying for it. As a result, not many bids (Case-1) have been issued for procurement of power. Even the few that were bid have run into problems due procedural issues leaving the PPAs worthless. The volume of energy sold in the power exchange market has also been dropping with lower demand from utilities despite the low price. This clearly shows the inability of discoms to pay for power. Transmission corridor constraint is another factor limiting off-take by utilities.

Land Acquisition and Environmental Issues
Land acquisition and environmental issues have been a perennial problem for power plants and industries at large. Failure to pass the land acquisition bill by the Centre, and states having been given absolute autonomy over changes in the land acquisition bill resulted in further confusion. There are cases were issued clearances were cancelled, and other cases where work order was issued, land was provided by state but the project was blocked by the Centre citing environmental issues. By this time the PPA and FSA signed if any would have become old and will be in a period of uncertainty where the discom has the first right of refusal. This again raises concerns over the viability of the project.

Land acquisition issues in India are driven by poor compensation structure, undervalued market price, tough resettlement and rehabilitation laws, difficulty in obtaining contiguous land and complicated compensation plan driven by land acquisition act and national policy of resettlement for project affected families. Additionally, through the process of acquisition, laws and rules keep changing leading to uncertainties on time and cost.

The recent notification on emission standards is another example of ad-hoc changes in regulations and policies. The notification states that all units to be commissioned on or after January 1, 2017, would be required to follow revised norms. Some industry analysis reports quantify the impact on under-construction projects as nearly Rs.20,000 crore on capital expenditure required to meet the new norms, besides the time delay.

Execution Capability
The execution capability of developers and contractors is another major roadblock in the development of such large TPPs. Improper planning, inadequate contractor capability, lack of proper project management and construction practices are some of the underlying factors in overall project execution.

Where do we stand today? There has been no new coal-fired power project that´s started development or begun construction in the past five years; also no private sector player has plans of doing so going forward. Investor appetite to fund green-field power projects has completely dried up. This has led to a situation where there is no equity available to complete the mid-way constructed stranded projects. A solution would be for each of these projects to be tackled individually, with combined efforts from the Centre, states and Banks, who will be required to bail them out.

Author: R Venkataraman, Senior Director, Alvarez and Marsal. Views expressed in the article are personal.

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