Ashok Haldia , Director, PTC India Financial Services

The conundrum of huge power deficit while a significant generation capacity stands stranded or is awaiting commissioning for want of fuel or tariff allowed albeit based on competitive bidding does not allow recovery of even variable cost, or is backed down in the absence of demand or spot rate on exchange is not being remunerative, or is subject to burdensome time and cost overrun because of implementation issues, best explains current scenario of power sector in India. The long-term prospects for power however remain strong despite the heightened risks in last two-three years which present a disheartening short-term view. To highlight a few - capacity commissioned but stranded stands at more than 30,000 mw due to lack of fuel. Distressed asset in power sector is mounting with total exposure of scheduled commercial banks in such assets exceeding `1 lakh crore. Viability of state discoms would be in stress in case tariff petitions which are before various state regulators do not lead to significant tariff hike post on-going elections. Viability of coal-based power projects is severely dented on account of non-availability of domestic coal linkages and their inability to pass through higher cost of imported coal. Out of 427 stalled projects worth `21 trillion for monitoring before the Cabinet Committee on Infrastructure projects, 45 per cent relate to power sector stalled due to lack of fuel, environment / forest clearances and land related issues. There has hardly been any new coal based power project announced during 2013-14. Fresh credit sanctions by banks during the year have been at all-time low. Growth in supply of power, on an average, has been only 6 per cent in recent years despite the potential in terms of gap between demand of electricity and supply thereof ranging between 7 to 11 per cent and peak deficit ranging between 10 to 13 per cent during the last decade. Adding to the discomfort, power generation is expected to grow at a faster pace of 7 per cent-7.5 per cent than the demandgrowth at 5.3 per cent due to sluggish growth of Indian economy in general and of manufacturing sector in particular. Investors’ sentiments, as a consequence, remain pessimistic. Power sector shares are trading at 1 x on price to book FY-15 (E) level and foreign investment in new power projects has almost dried. However, in the past 18 months, significant initiatives – policy, regulatory, and administrative have been taken by the governments and sector regulators at Central and state level. Improvement in supply of domestic coal, financial restructuring programme of some of the discoms improving their financial condition, hike in compensatory tariff by CERC accommodating increase in the cost for reasons beyond control of developers, tariff filings in most of the states despite parliamentary elections, bids floated by few states under new bidding forms, revised tariff norms issued by CERC incentivizing efficiency in generation, recent acquisitions of power plants, and amendments under contemplation in the Electricity Act, 2003 learning the lessons from its implementation in the last decade are some of the positive indications on the changing perspective of the sector. These, coupled with initial signs of improved sentiments of foreign investors on macro-economic stability of India, generate confidence. It is necessary to consolidate and strengthen the measures taken enabling a turn-around of the sector in medium to long-term. India has abundance of coal reserves. The country is ranked fifth globally and has huge potential for wind energy (more than 100 gw at 80 meter height), solar power (100 gw) and hydro power (1.48 gw). The opportunity lost so far now presents itself as vast potential available for growth and development of power sector, as the demand for electricity would pick up.

Despite reform unleashed since the beginning of nineties and given legal framework through the Electricity Act, 2003, the power sector in its present condition is not sustainable given the current level of fuel, counter party, regulatory and implementation risks. Developers’ risk bearing aptitude and entrepreneurial skills are all about managing and optimally mitigating risks inherent in project development. The challenge, however, arises when the sector risks or economy risks or country risks envelop the projects and affect investment climate or investors’ confidence or viability of the sector. The endeavor should be on eliminating the macro /sector level risks, and, thereby, enabling the developers, lenders and investors to focus on, and, base their economic decisions on underlying project risks. at optimum level is, however, relatively small, and may not require too much of developers interface Turn-around of power sector requires a paradigm shift, an out of box strategy away from conventional focus on fossil-fuel based options. First and foremost is to change the energy mix in favour of renewable including hydro of all sizes, promote smart grid applications, lay thrust on energy efficiency and conservation, innovate and incentivize distributed energy generation, implement cutting edge reforms for creating viable distribution sector, ensure independence and capacity building of regulators. Focus of policy and strategy should shift from generation and supply of power to provision of quality power at affordable price to consumers, the last and often neglected link in the supply value chain. Electricity Act, 2003 which provides for a comprehensive frame -work for a robust development of the sector, is required to be amended in the light of experienced gained in last 10 years to make open access a reality, separate wire from content business, make regulatory framework more effective in ensuring viability of the sector, promote retail market. Lastly, large scale structural reforms in the fuel sector are imperative to augment production and providing logistic support as the fossil fuel would continue to dominate energy mix in India in foreseeable future.

Impetus given by the government for promoting renewable energy particularly solar and wind through favourable policy, and fiscal regime should be continued with a greater certainty. There are issues related to project execution and policy implementation, investment in wind and solar projects at optimum level is, however, relatively small, and may not require too much of developers interface in development, implementation and operation. Nature of dimensions of the risks faced is also capable of being mitigated at financial institution level or manageable at project level given the policy and regulatory certainty, and evacuation infrastructure. A large number of renewable projects are, therefore, being set up by power sector and other professionals with innovative structures facilitating equity participation from diverse range of investors. With rising cost of fossil fuel, and innovation in renewable technologies, cost parity with conventional sources of power is expected to be achieved much sooner than expected. Renewable sources of energy thus have the potential of becoming main-stay of developmental strategies for power sector in future.

Once the fuel risk, counter party risk, implementation risk, and regulatory risk are suitably addressed, the sector would unleash plethora of opportunities in generation, transmission and distribution. Twelfth Five Year Plan envisages investment requirement of `18 lakh crore in the power sector. Percentage share of private sector has increased from 48 per cent in the Eleventh Plan to 55 per cent in the Twelfth Plan. This is a gigantic challenge requiring innovations in institutions, policy framework, approaches, and products in financing power projects. These have to be different than those existed for financing non-infrastructural projects and currently being used with modulation for financing infrastructure projects. Risk profile of every infrastructure project is different and thus requires tailored-made approach for risk mitigation while structuring a financing product. In this direction a specialized category of NBFC, namely, infrastructure finance company (IFCs) was created. Regulatory, policy, and fiscal measures for financing infrastructure were also expected to be routed through these IFCs. The institution of IFCs needs to be strengthened by allowing these to raise tax free bonds and preferred access to pension funds and insurance companies giving these status of public financial institutions and coverage under Sarfaesi Act. IFCs should be treated at par for governmental support with governmentpromoted NBFCs/ financing institutions. Need for corporate bond market having requisite breadth and depth for being an alternative source for longer tenure and cost-effective funding for infrastructure projects from concept to developmental to operational stage, is being felt for long. Almost all the infrastructure groups in the country have stressed balance sheet and are looking to sell their assets to sustain. Private equity players sullen by investment earlier made at higher valuation are not keen to infuse equity. Further consolidation through mergers and acquisitions of companies under distress is gaining momentum. Challenge is to evolve newer approaches and financing products compatible to emerging needs as the sector churns itself out through turbulence.

Yes, distribution sector reforms hold the key for development of the power sector in short term as well as long term. While AT&C losses have significantly reduced from 35 per cent in 2003 to 25 per cent in 2013, discoms continue to incur heavy losses. Their accumulated losses have exceeded `2 lakh crore. The gap between average cost of supply (ACS) and average revenue realized (ARR) has increased from `0.54 per kWh in 2008 to `1.08 kWh in 2012. The amount of unfunded subsidy was `4,410 crore as at the end of 2012. The situation is certainly unsustainable. Cost effective tariff and balanced risk return profile is essential for viability of not only discoms but also the entire value chain. Despite the policy in place and efforts made in some of the states, private sector response to proposals for distribution franchise has not been encouraging due to operational, financial, and business risks involved, and, privatization of distribution is yet to have larger acceptability. Focus is needed on separation of agriculture feeders, separation of content from career business, ensuring open access, linking of central government incentives to financial and operational performance, exploring payment of subsidy directly to consumers, measures for promoting private sector participation in distribution to bring investment and drive efficiency, allowing automatic adjustment for escalation in fuel cost, and regularity and reasonableness in tariff revision annually.