Power sector, the way forward

PTC India Financial Services conducted a conference call yesterday (Wednesday, January 18, 2012) to collate views on the power sector. We have outlined the key takeaways from this conference call.

• Currently, T&D losses are to the tune of Rs 60-65 thousand crore. This has caused financial stress on the state electricity boards (SEBs) which in turn are not able to buy power. It has also impacted the power generating companies which are not producing extra power. For this to reduce, tariffs need to go up by 30-35 per cent which will increase the profitability and efficiency of the companies.
• The state governments are not able to provide money to the SEBs. Many lenders are skeptical to lend money to the power companies. In such a scenario, state governments need to bail out the SEBs until they are able to generate profitable cash flows.
• The current issue of the power sector mainly revolves around the domestic coal availability and imported coal. The domestic railway infrastructure, including the railway rakes and sidings, is inadequate to transport the coal to the coastal power projects. Also, domestic coal production will only rise when very aggressive efforts are made collectively by the state and central governments.
• The new power projects being built are with the boilers which can consume both imported coal and blended coal (mix of domestic and imported coal). The existing projects, however, cannot consume imported coal but can take only the blended coal. The coal lying with the coastal projects and on the ports therefore can be swapped with the mainland power projects which may increase the coal supply to some power stations.
• Open access will be good for the companies if they can maintain reliable power supply. Any company losing such customers will have an impact on the revenues of the company. Therefore, a reliable power supply is required in order to attract the high-end customers.
• In cases where there is no reliable power supply, the customers (even in rural areas) source electricity generated through diesel generators, which is about Rs 15 per unit, indicating that Indian consumers are now learning that electricity is a commodity and its price will increase. After the recent hikes by the SEBs, it is clear that the politicians in the respective states were aware of the hikes and hence it can be assumed that the tariffs will go up periodically.
• The merchant power rates have dropped close to Rs 3 per unit due to the lower demand. These rates will remain in the range of Rs 4-5 per unit. If the rates go up, customers will stop buying power because there will be cheaper power available in the market.
• New projects will have to ensure that they have a long-term view and lower cost of generation as Indian consumers favour lower prices.
• The power sector can expect some good action by the government soon. Though 2012 may not be a good year, 2013 would prove to be a better year where we can foresee some improvement taking place. All the political parties are aware that the tariffs need to be hiked.
• Given the size of the country, the power distribution sector calls for huge investments. Distribution franchisees would also need to bring new technologies that can cut down T&D losses. It will also dilute the resistance of the local politicians and will improve billing.
• In the coming 12^th Year Plan, 50 per cent investment is expected from the private sector. However, for this to happen, the clearance process needs to be improved. New projects should be planned on the basis of the location of coal mines. Going ahead, competitive bidding will also be renewed which will allow passing on the fuel prices. It will however take some time to resolve the issues of low tariff for the existing projects.

Our View

• We are of the opinion that the financial position of the SEBs is very vulnerable. Considering the massive amount of accumulated losses, tariff hikes are not enough to cover it. Our politicians are mainly reluctant to approve tariff hikes and hence 30-35 per cent of the hike will be countered with political as well as public agitation. The government may take some action but we are again not very sure of the execution.
• The only way out of this imbroglio would be to ensure better execution of the projects and effective management of the available resources. The government, on a priority basis, should make sure that the new projects are strictly awarded with respect to the coal supply. For imported coal, power producers should be allowed to hike tariffs that will also give confidence to new companies who wish to enter the sector. We are still not very positive on the sector and advise our readers to invest their money elsewhere.