Is Worst Behind For Power Sector ?

India, which is one of the fastest growing economies is suffering from a big nuisance: shortage of power, the most important thing for the economy to grow. Power sector has been struggling for various reasons, of which the most important being financially unsound power distribution companies, delay in government clearances for power projects and the improvement of fuel supply is required.

Coal being the most important raw material required for generation of power, is mostly imported which adds to the cost of producing power and ultimately this cost is passed on to the consumer. Despite this, the full cost cannot be transferred to the consumer which affects the profitability of the power companies. India’s domestic production of coal is not enough, and hence India needs to depend on imported coal for its fulfillment of power production. The coal producing titan Coal India (CIL) is falling short of its targeted output which gives an indication of how grieve the situation is.

Another grieve problem is that the power companies are not financially sound and the main reason is that they are not being paid by the state governments on time, which in turn affects the operational efficiency. An operationally and financially weak company ultimately affects the power production.

India has become the third largest importer of coal after its imports crossed 140 million tons this year despite having one of the largest reserves of coal. India is not able to utilize its fullest potential only because of delays in clearances. Also, another reason for increase in imported coal can be attributed to decrease in coal cost per ton. Coal was at a peak of $ 86 per ton in 2012 and is now trading at around $ 59 per ton. Indonesian coal consists of the largest percentage of the overall imported coal in India. Furthermore, the demand from China has also slowed down due to decrease in industrial production.

The total installed capacity in India is 2, 28,721 mega watt, of which coal as a fuel in percentage comprises of 58.75%, gas 8.91%, oil 0.52% and rest is hydro and nuclear with 17.39% and 2.08% respectively. The Merchant rate i.e. the rate at which the power producer sells power at market rate (without any previous contract); with the seller stands at Rs. 4.50–5 per unit. The idle capacity of the Indian energy sector is 20000 MW.

With increase in number of power producing plants, the demand for coal is increasing as ever but, again due to deficit production of coal, imports are largely on increase.

The banking sector has also been affected with energy sector problems. The exposure of the banks has been disappointing. The total loan to power sector amount to Rs 3 lakh crores and the power companies will need to go for Corporate Debt Restructuring (CDR) on the existing loans. Additional concern is that, if energy producers require extra funds, it will be a herculean task to raise funds.

The Fuel Supply Agreements (FSAs) signed between the power generators and the coal suppliers have helped too little as the suppliers themselves fell short of their production targets. The government, in order to cope up with these problems has taken up the initiative of Public Private Partnership (PPP) with TATA, Reliance Industries etc who have helped to bring down the problems mentioned. But the biggest concern which remains is that of coal and gas which is of paramount importance and needs to be coped up with if India wants to continue its growth story as an emerging market and become a developed player on a global scale.