Power sector: What's cooking in the 12th plan?

According to a report by DNA, the power ministry has cut down its 12th five year plan target from 1 Lakh MW to 75,785 MW. Such a move is quite surprising as the government itself wants to increase power generation in the country. In the market current situation, investors are completely bearish on the sector and we at DSIJ have analysed how this development would affect the sector.

When we analyse the previous 5 year plans and their performance, we can see that that ministry has always missed the targets. In the tenth plan, for example, against the target capacity addition of 41,109 MW, only 21,080 MW of capacity was added (only 51 per cent of the planned capacity in the plan).

The story continues in the current planning period where the initial targeted capacity was 78,700 MW. This target was reduced to 62,374 MW in the midterm appraisal and now ‘with the best efforts’ total capacity that will get added in this period will be about 51,000 MW.

11th plan capacity addition targets (Revised)

The contribution of the private sector in the total capacity addition has been increasing. Private sector contributed only 9 per cent of the total capacity added in the 8th plan, which increased to 26 per cent in the 9th 5 year plan and is expected to touch 32 per cent of the total capacity addition in the 11th plan. But even though contribution has increased, profitability has been very weak for these companies.

Contribution of Central, State and Private sectors in previous plans

According to us, he major reason for reducing the targets could be due to the fuel shortage in the country. In the current plan more than 81 per cent of the capacity is thermal based (Coal and gas).

Coal is getting scarcer and expensive day by day, while gas production in the country has reduced as Reliance reported a decline in gas production from its KG basin. Also, the Ministry of Environment and Forest has taken a stringent approach for coal mining, due to which many mining projects have not received regulatory approval.

We believe that due to the shortage of coal and gas in the country, government would want to run all the existing plants on optimum capacity and increase generation. With reduced target, government would also want to break the story of missing targets, which will give them a ‘feel good factor’ by the end of the 12th plan. But we think that it won’t catch the investors' fancy.

Most of the current power projects under execution or planning are facing public agitation and it will be interesting to see how the government tackles the issues related to land acquisition in the 12th plan. The government would also need to explain how it is going to meet the fuel requirement when there is a severe coal deficit in the existing projects.

Besides that, there is the burning issue of the power tariffs which is hurting the profitability of the power producers. Also, one of the objectives was to reduce the huge power deficit in the country, which will still remain unsolved, even after cutting the targets.

We don’t see how all this would catch the fancy of investors unless the government addresses the above mentioned issues.