Indian State-run Discoms saddled with debt, inability to hike tariffs, under-recoveries linked to power theft.

More trouble may be lurking for India’s stressed power sector in the next three years as the nation crawls towards its renewable energy targets in search of blue skies. If the country were to achieve at least 130-gigawatt renewable capacity by 2022, that would hurt demand for coal-powered producers. The plant load factor—the proportion of output to installed capacity— of thermal units could drop to 35-40 per cent, according to a vision document of the Power Ministry. It’s lower than 55 per cent—the minimum required by the Central Electricity Authority. The thermal power industry’s plant load factor has already fallen from 77 per cent to 61.01 per cent in the last 10 years. And a further decline could mean less income for at least some thermal units. Already, financial institutions are grappling to find solution for 34 plants with a capacity of 40 gigawatt and Rs 1.8 lakh crore worth of loans. The Supreme Court’s relief from strict default and insolvency timelines has provided lenders some breathing space to find fuel linkages, ink new pacts with distribution companies and seek better tariffs.

Projects that have long-term purchase pacts won’t suffer much as these have a mechanism to compensate them, according to Kameswara Rao, partner (energy, utilities and mining) at PwC India. Electricity generators that don’t have such agreements and sell in the spot market won’t be able to find a market, he said. That will impact the return on equity—a measure of profitability. The Central Electricity Regulatory Commission’s tariff regulations for 2019-24 peg the return on equity for thermal power plants at 15.5 percent. But all this is predicated on one condition: renewable power generation capacity hits at least 130GW in three years.

Can India Achieve 130GW?

India is home to some of the cities with the world’s most toxic air, and coal-fired plants are the biggest contributors. The nation has committed to turn 40 percent of energy capacity away from fossil fuels by 2030 under the Paris Agreement, besides turning nearly 30 per cent private and 70 percent fleet taxis electric by then. Renewable power is at the core of the strategy. Prime Minister Narendra Modi’s government targets to install 175GW of renewable capacity —100GW of solar and 60GW of wind—by 2022.

About 80-gigawatt, nearly a fifth of the power the nation can generate, comes from clean sources as India added 8.53GW renewable capacity in 2018-19. Nearly 50GW of solar and wind projects are under various stages of bidding and implementation, RK Singh, minister of power with independent charge, said in response to a query in Rajya Sabha this month

Can Discoms Bear The Burden?

Inability to hike tariffs, under-recoveries linked to power theft and sops announced by governments ahead of elections left the state-run discoms saddled with debt. Ujjwal Discom Assurance Yojana, or UDAY, the third relief scheme in decade and a half, intended to push their debt onto states and set targets to cut costs, losses and theft. But after falling initially,  discom losses jumped 36 percent year-on-year to Rs 15,080 crore in the first half of 2018-19, according to a report from Conference of Power & New and Renewable Energy Ministers of States and Union Territories held in February 2019. That’s as much as they reported in the previous fiscal. And by December, 58 power distributors across India owed power producers Rs 47,462 crore.

In such a situation, expecting discoms to pay more would be difficult. Cost for utilities will increase because they will buy higher quantum of solar energy for the day and have to pay fixed charges to thermal power producers, Divya Charen C, senior analyst at India Ratings and Research Pvt. Ltd., said. If thermal power plants operate at a plant load factor of lower than 55 percent, prices for merchant power will be very low and they will also be at a loss, she said. The Power Ministry and discoms of Andhra Pradesh, Telangana and Karnataka that have been running into losses didn’t respond to BloombergQuint’s emailed queries. A senior Power Ministry official said if the peak demand comes in the evening and the difference between consumption during the day and evening is high, then a util lity is not contracting that much thermal capacity and loads can be managed, the person said on the condition of anonymity as the details are not public yet. Yet, there’s no doubt that there will be some impact on discoms, the official said.[Courtesy:BloombergQuint]