Director of PTC India Financial Services, Ashok Haldia shares
his personal views with Shakeb Ayaz about the ills plaguing the
power sector but remains upbeat on the long-term prospects of
the sector. Excerpts.
What is the situation of power
sector in India? Huge power
deficit continues to plague the
sector with industry facing acute
shortages as several megawatt of
power capacity remains stranded.
Have the risks in the sector
reduced in recent times?
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.
You have been associated with the
power sector for 20 years. What is
your assessment of the situation?
What strategy would you suggest
for turn-around and growth of the
sector? Has the Electricity Act,
2003 has stood the test of time?
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.
Do you feel that renewable
would be what towards which
the industry would be looking at
in the 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.
What are the issues involved in
financing power projects in the
changing context of the sector?
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.
Do you feel that distribution
reforms hold the key for
development of power sector?
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.