There is no shortage of schemes to rescue India’s stressed power projects. Samadhan, Pariwartan, coal swapping and the auction of power purchase agreements are all solutions being worked on by the government, lenders and power producers. Another proposal has now entered the mix – a National Power Distribution company that, at least one expert says, is the right solution for the right problem.
“I am one of those stakeholders who, for a long time, have been advocating a National Power Distribution Company as the real sledge hammer that is required to hit this sector and revive it,” said Vinayak Chatterjee, chairman of Feedback Infra, an infrastructure services company.
“It is for more than five years that I have been saying in discussions that it is the distribution sector tail that wags the power sector dog,” he said referring to the several power projects that are financially unviable on account of no power purchase agreement or delayed payments by state-owned distribution companies.
A parliamentary standing committee report recently estimated that 34 coal-fired power plants of just over 40,000 megawatt capacity are in financial stress, putting Rs 1.8 lakh crore bank debt at risk. A Bank of America Merrill Lynch report says the problem is twice as big – 81,000 MW of power projects impacting Rs 3.5 lakh crore. The factors contributing to stress range from lack of fuel linkage to no power purchase agreements compounded by a rush of new projects in the past five years.
Chatterjee explained that such a national distribution company could pick up surplus power, after state distribution companies have consumed what they need, and sell it to central government entities such as railways.
But Chatterjee’s advocacy is being met with caution at the Ministry of Power.
“If you take away the better customers or the best paying customers out of (state) discoms, then indirectly we will be shutting down the discoms,”said said Ajay Kumar Bhalla, secretary at the ministry.
We are not fighting against state discoms, let them buy all the power that they want to. After that there is still unutilised capacity because PLF is at 60 percent. So there is 25-30 percent available power on PLF terms. Since nobody holds that power why should you object if the central government buys it under a new dispensation called the National Power Distribution Company.Vinayak Chatterjee, Chairman, Feedback Infra
Railways overall demand may not be that high in terms of percentage of 171 GW of peak demand. It’s a miniscule demand vis-a-vis this, so we must look at a comprehensive solution. One single step of this nature might dislocate the present system and will not bring in reforms.Ajay Kumar Bhalla, Secretary, Ministry of Power
While Bhalla acknowledged that the government was giving the NPDC proposal serious thought, he emphasised that a basket of solutions was the better approach. At least three are work in progress, but without any defined timelines yet.
Led by State Bank of India—11 power projects of approximately 12,000 MW to be tackled under this proposal. Banks would convert their loans to equity and then auction up to 51 percent of that.
This has been devised to turn around those power projects that already have power purchase agreements, Bhalla said.
“They (the lenders) have already gone for the assessment of sustainable debt and once those ratings are available, then these assets can be put on auction with the restructured debt.”
Led by Rural Electrification Corporation Ltd., the proposal is that approximately 25,000 MW of stressed capacity be taken over by an asset management and rehabilitation company jointly owned and funded by financial institutions. State-owned National Thermal Power Corporation Ltd. would help maintain and run the power plants.
Bhalla said this was to rescue those power projects that had no PPAs.
“...setting up of this type of asset management company needs certain relaxation from the Reserve Bank of India, so once the model is acceptable to all lenders, REC would be moving that and seeking the relaxations,” he added.
PPA Auction Scheme
Led by central government – in which a pilot auction of PPAs was conducted last month and bids were received for 2,200 MW against the 2,500 MW offered. The auction was open to those power producers who have assured coal supply and are not undergoing insolvency proceedings.
Bhalla admitted the model is not very favourable to power producers; for instance, it offers no pass-through on account of coal price escalation. But the government is hopeful that modifications will help more such auctions succeed. The aggregate PPA demand from states is reportedly 5,000 MW.
Ashok Khurana, director-general of the Association of Power Producers, recommended the government go one step forward.
This bid came without the coal, now there is a clear cut provision in SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) which provides for giving coal linkages to aggregators. My suggestion is next bid should come with coal (linkage). This will widen the participation and get bids.Ashok Khurana, Director-General, Association of Power Producers
Khurana, also of the view that a basket of solutions was better suited to fix the myriad problems plaguing the power sector, listed a few more.
Problem: About 9,000 MW projects are suffering due to under recovery of government dues worth about Rs 22,000 crore.
Solution: If only the government could pay up.
Problem: Another 19,000 MW projects have coal supply, but are in trouble due to no PPAs.
Solution: PPA auction, as explained earlier. And coal swapping. In which coal linkage and PPAs are transferred from old inefficient plants to new ones. Gujarat and Maharashtra have already done it, said Khurana, and power is being supplied at 2.85 per unit.
Problem: Over 10,000 MW projects are in trouble due to no availability of gas.
Solution: Find a solution such that payment of principal amount is deferred and only the interest and overheads are paid.
Chatterjee is no fan of this “bits and pieces” approach. The other problem is the time taken to discuss, finalise and implement each of these solutions.
Timelines are critical not just because of the deteriorating financial status of these projects but also because the Reserve Bank of India’s February 12 circular gives banks 180 days to resolve a stressed asset, failing which it must be referred to insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. Depending on whether the power asset finds any takers, this would entail large haircuts for the lenders involved. A recent effort to stall the RBI action is in court.
Watch the full discussion with Bhalla, Chatterjee and Khurana here.
Edited excerpts from the discussion.
I understand 2,500 mw of PPAs was put on auction and you received bids for 2,200 mw and there is a possibility of putting 5,500 nw of PPA on auction ?
Bhalla: This was an effort which we started last year. That, as long term PPAs are not coming through can we design a model which is more favourable to distribution companies? We tried a pilot of 2,500 MW. Of course discoms showed lot of interest so we have little bigger demand than 2,500 but in the first round offers only for 2,200 MW have come. Basically from the people who would be having some sure coal linkages available to them and some capacities which are not linked with PPAs. So as it is a pilot, we expect it to go through quickly and there is definitely demand from the state governments in the medium time frame and they would not like additional liabilities to be created in terms of fixed cost and all. So we designed a model which may not be very much favourable to the generators but I’m calling it a beginning. If its succeeds then we will modify the model, make it more balanced and then come out with more such bids in the days to come.
Can you give specific details on what modifications you intend to make? Because those power companies that did not have a coal supply agreement or those that were admitted to the NCLT were not permitted to participate, which is why I believe there was not as much participation as expected ? How are you hoping to fix that? When will the next auction happen?
Bhalla: There is no concrete plan on the table as such, but as I said, after success of this model, and issues raised by certain generators, we need to modify the methodology a little bit. Like, there is no escalation linked to the coal, it’s a three year agreement but generators have mentioned that coal prices will escalate so you will have to give that kind of pass through. So we will improve upon this system after this round and come out with it as quickly as possible. Definitely the demand is there and on that side I am not worried but we will have further discussions with the association of power producers and modify the methodology a bit and then come out with a more balanced approach.
This deals with a very small part of the problem, whereas the capacity that seems to be under stress is estimated to be anywhere between 40000-80000 MW. The government seems to have floated a few other ideas as well, the Samadhan scheme, the Pariwartan scheme and is also discussing the possibility of creating a national distribution company. Can you tell me which one is likely to be a reality?
Bhalla: Samadhan scheme has been brought by State Bank of India and they have singled about 10 or 11 assets which are operational assets where, with the little bit of restructuring, the assets will turn around. They have already gone for the assessment of sustainable debt and once those ratings are available, then these assets can be put on auction with the restructured debt. These are operational assets with PPAs and there are certain other problems, which can be solved with the debt restructuring. So we expect a set of assets which are operational can be resolved by Samadhan scheme.
Pariwartan scheme is basically an asset management company which REC has suggested and we have been discussing this model with the ministry of finance. it basically says house the assets for some time till further demand comes. So assets which do not have PPAs as of now and are stressed can wait for some time and wait for the demand to pick up and those can be turned around and sold in the market. So that’s a scheme on which REC has made certain suggestions. We have been discussing with the ministry of finance and we expect once some issues get resolved, because setting up of this type of asset management company needs certain relaxation from the RBI, so once the model is acceptable to all lenders, REC would be moving that and seeking the relaxations. Once that happens, some of the assets other than ones which can be solved with Samadhan would be moving into this basket.
What is the timeline for these schemes to become operational?
Bhalla: It has to be done within the present timelines of the RBI circular of February 2018 and in case there is visibility of resolving these assets then matter can be raised with RBI for any relaxation.
Samadhan scheme, they have already gone into assessment of sustainable debt so that should be already available with the lead bankers and then they have to take a call on how they will dispose these assets with the revised debt as per the sustainability structuring.
The other one, REC would be discussing with the lenders in Mumbai and discussing with RBI also and thereafter only it will move further for what time frame it can be resolved in. As I said, it needs certain relaxation from RBI for setting up that kind of a company where assets presently are proposed to be housed on book value.
What kind of relaxations are you seeking from the RBI because RBI so far has not been willing to offer any relaxations to its February 12 circular?
Bhalla: Discussions are on with RBI regarding relaxations. If RBI relaxes then some of these assets can be resolved. Otherwise within the time frame available, as per RBI circular, whatever can be resolved will be resolved.
There is talk of a National Power Distribution Company that the government is considering in order to do what the state discoms are not able to do. I would like to confirm if this is the thought process of the central government?
Bhalla: Suggestions have come from various stakeholders for forming a company like that but it needs to be further discussed. What could be the outline of the company under the Electricity Act, how would it function as a distribution company. Presently we have 2 PSUs which are doing distribution strengthening and funding. REC and PFC and most of the government schemes are also being routed through these companies and schemes like UDAY have been implemented with their assistance to strengthen, build capacity and to sustain the discoms which are not performing upto the mark. The suggestions from different stakeholders have come which are under examination of the government.
If you were to build this out, what would it involve ? Do you have any kind of preliminary architecture in mind for a National Power Distribution Company ?
Bhalla: At this stage, I will not be able to say what kind of infrastructure or outline it will have.
Do any of these solution resolve the key problems that have caused this crisis? Or do they just fix the symptoms?
Chatterjee: It is for more than five years that I have been saying in discussions that it is the distribution sector tail that wags the power sector dog. And it is the travails of the distribution sector which if removed can see the stressed assets, the generation side buzzing again. So the problem is not of some scheme X or scheme Y or scheme Z that will affect some 2,500 MW or 5,000 MW of generating capacity or discussion with RBI - the time for that is over. We had the time for the last 5 years to do all of that, the problem is not today’s. The size of the problem is humungous, depending on which estimate you take, it is 30,000 MW to 70,000 MW of stressed generating capacity. It’s an extremely paradoxical situation that here you have a country which is crying out for power - the last statistic that I know is that the average power cut in urban India on the Urja website is 7 hours 52 minutes, some 7 minutes more than last year. So power cuts have increased in urban India and for rural India it is anybody’s guess how many hours they are. So you have got a sector that is crying out for energy and you have got capacity that is unable to sell the power. What is the problem, the problem is the distribution sector and with this size of the problem, tinkering around with experiments and pilots of 2,500 MW, the time for that is over.
I am one of those stakeholders who for a long time have been advocating a National Power Distribution Company as the real sledge hammer that is required to hit this sector and revive it. The transformation of discoms, the tinkering around with stressed assets is a medium term phenomenon. The country cannot wait. I strongly advocate that the government immediately set up the architecture for a National Power Distribution Company. It is the only sector where the central government is not present. It is present in fuels, it’s present in generation, it’s present in transmission. It’s surprising that with all the stress in the distribution sector the central government is still making up its mind as to what impact it can have on the distribution sector.
I strongly advocate a National Power Distribution Company which after all the state discoms are done with their PPAs all the balance surplus capacity can be picked up. The question is where can you sell it? Do whatever is required in the Electricity Act to solve the problem. Send it to all the utilities which are owned by the central government, starting with railways moving on to PSUs likeSAIL and various others, such as the army, ports. The central government has a huge number of establishments where it itself is the purchaser of power.
It will take time for a National Power Distribution Company to be devised. In the interim we are going to see the RBI circular timeline kicking in. So there needs to be a solution there too. What will work, a bad bank/ARC or the insolvency process?
Chatterjee: To be honest with you it’s not either or. I think solutions have to be case specific. there are some stressed assets for whom a restructuring of the loan is an ideal solution because it gives breathing time for the same group of promoters at the plant who actually get back into the production cycle and move away from being an NPA. There are other plants which will necessarily have to go to the NCLT. So i would pick plant by plant and there are not so many of them. There would be 11-30 plants, you can sit across the table, come to a decision and i think the banks, ministry of power, ministry of finance and RBI should sit together in a closed room and not leave that room till you have sorted out a solution for each power plant, case by case.
Okay, what will the national power distribution company do? How will it work?
Chatterjee: This idea is getting traction. It has taken some time for the idea to sink in. I myself had the opportunity to present the idea to the Prime minister, various senior members of the cabinet and to various others. I am not the one to finally say what the architecture is but the Central Electricity Act does provide for central intervention across all lengths of the power chain. People who study economic history in power will recall that when NTPC was set up the states had protested saying that electricity is a state subject, we have state-owned power plants, why is the centre setting up NTPC? But the centre has very clearly taken a major position in fuel, coal, gas, oil, they are all under central government’s overarching regulations, ownership and dispensation. On distribution, why does everybody put up his hand? And say, though it’s a very complex situation, you can cut through the complexity with a knife, sit around the table, see what the amendments in the Electricity Act enable you to do.
This government has shown boldness in many, many big schemes whether it is GST or demonetisation etc. Surely the ability to set up a National Power Distribution Company falls in that same league of boldness, in a situation that demands very very serious attention.
We are not fighting against state discoms, let them buy all the power that they want to. After that there is still unutilised capacity because PLF is at 60 percent. So there is 25-30 percent available power on PLF terms. Since nobody holds that power why should you object if the central government buys it under a new dispensation called the National Power Distribution Company. After it buys the power, whom does it sell it to? After all the railways is a deemed licensee, it can sell it to the railways which is the largest consumer of electricity that is owned by the central government. So what great complexity is there in the architecture if the decision to move forward is there.
Why is it taking time to be able to come up with a lasting solution? Is it your fear that if you take pressure of state discoms to reform, that they never will because even the UDAY scheme has been met with marginal success?
Bhalla: I won’t say it has had marginal success. It’s not reached the ultimate figures which we had anticipated. Average AT&C (aggregate technical and commercial losses) losses have come down but then some of the states need to do better than others and figures are still higher that what average is expected. Even the ACA-CRR gaps (gap between cost of power supplied and revenue realised) have come down and if we sum up the overall total losses from their profit and loss accounts, even that has reduced very remarkably. The culture of setting up tariff has come in, we are pushing all those kinds of reforms.
If you take away the better customers or the best paying customers out of discoms, then indirectly we will be shutting down the discoms. Then National Power Distribution Company should take over the whole country which I don’t know whether it would be a practical issue or not. But if you keep on picking the best customers out of existing distribution network, then we are indirectly damaging the discoms.
Why not look at improvements of the systems at the discoms itself, a national discom can come and assist these discoms where ever required, in building infrastructure, in distribution, in capacity building and yes the possibility of what Mr. Chatterjee is suggesting, in some of the customers like railways. Railways overall demand may not be that high in terms of percentage of 171 GW of peak demand. It’s a miniscule demand vis-a-vis this so we must look at a very comprehensive solution. One single step of this nature might dislocate the present system and will not bring in reforms. Definitely the idea of separation of carriage and content came in the draft bill which was introduced in the parliament, that is one solution which can be looked at by the state governments. Generation and transmission got separated from the power distribution sector, now supply should also be separated from the wire. Those kind of steps can also be taken which are already envisaged in the planning. I am not opposed to that idea.
There is no time left. Is the government going to take any time bound decision between now and the next three months to be able to resolve this? Whether it’s the distribution company, plus the ARC, plus the further auction of viable projects...
Bhalla: Government has taken various steps. 40,000 MW is only the coal based plants that we are looking at, there is another 20,000 MW of gas plants that we are looking at. Government can subsidise the gas for two years and try to revive these plants but today when we have more coal capacity, if i subsidise this site, then I push out some more capacity.
It may not be possible to envisage enhanced demand of 40,000 or 60,000 MW in the next 180 days. It may not be possible to have that kind of demand and yes we may not have the infrastructure at the lowest level to distribute that kind of power. We are building up infrastructure under the Deendayal Upadhyaya Gram Jyoti Yojana or under the transmission schemes which we have sanctioned for the north eastern states where the infrastructure is weak, to increase the demand, to reach the electricity in a much more comprehensive manner and better quality. These timelines, if you can solve some of the assets and resolve the restructuring, those are the assets which we should look at immediately and try to do it and that is what the government is trying to do it.
Out of these 34 assets we have tried to resolve 7-8 already. There are some assets in which hardly any construction has been made on the ground. There is nothing that can be done to these assets in the short or medium time frame. This requires lot of investments further to build these assets. At times, only a boiler construction has started, nothing else has come up. Those capacities are also counted, those are also part of this 40,000 MW. So one has to look at the sustainability part of it, where the asset is standing today and try to resolve accordingly. Each asset needs to be resolved in an independent different manner. There is no single solution for all the assets at one go. Each asset needs a different kind of treatment and that is what these lenders are working on together with full support of power ministry and finance ministry.
Several solutions may be on the table but they are nowhere close to fruition. In the interim what is going to happen to power companies? Are we substantial haircuts unavoidable? And who’s to blame for the overcapacity?
Khurana: Let’s not go into a blame game. Let’s talk about the future. First let me talk about the National Power Distribution Company. That idea has been on the table for the last 2 years and will need a lot of discussions and fleshing out to implement that idea. if I take Vinayak’s idea, you are only substituting power and as Mr. Bhalla rightly said, it will only put discoms in more stress. The discoms issues has been with us for the last 3-4 decades and i fully agree with Vinayak that that’s the main issue but that would need handling and long term solution.
Immediate problem is how to save these assets from going to NCLT. In addition to the projects which have gone to NCLT, we have about 50 GW of stressed projects.
Now if I categorise them - easiest to be cured.
The first step is those who are suffering from huge under recoveries - there are three main factors, that is the change in law, receivables and the faulty coal index. These all three combined today have impacted the cash flow of about Rs 23,000 crore to these 12 GW projects. Now the first thing which has actually to be done in flat 7-8 days, if they (policymakers and regulators) want to do it, is to ensure that money flows to these projects. It’s a really irony that I have defaulted to the bank because the government owes me money. Who is the defaulter, is it the government or the developer? These 12 GW projects are are asking for money for the power that they have supplied. They cannot get working capital. They arrange their own money to pay for coal in advance, pay for railway transport in advance and supply power and then don’t get money.
Let's come to the Samadhan scheme of SBI. if a project today has no PPA or no coal, there is no sustainable debt over there.
Can you share the quantum of projects that have no PPA or coal currently ?
Khurana: We have about 15-17 gw of those projects which have neither coal nor PPAs. Then you have 7GW of projects who have coal and no PPAs.
Their only option is insolvency?
Khurana: No. My contention is, we are told that there is still a demand of 5,000 to 7,000 MW (PPA auctions) because in that the distribution companies are really the gainers. The solution is on the table, that is, aggregating the demand of all the discoms and putting in the bids. This bid came without the coal, now there is a clear cut provision in SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) which provides for giving coal linkages to aggregators. My suggestion is next bid should come with coal (linkage). This will widen the participation and get bids. My idea is we need to find solutions by which these projects, the same owners can easily operate with no ROE, no principal payment, only on the interest. The country gains because you will get power at 2.84.
There is one more scheme which Mr Bhalla has not spoken which is the coal swapping scheme. They have already come up with a bid of 1,000 mw over there. We have 60GW of projects which have variable costs running beyond Rs 3.25-3.40 per kilowatt-hour because they are very old projects and their conversion rate is very high. Now there is a scheme by which this coal and the PPA both are swapped and given to new plants which are more efficient. Unfortunately that scheme has not gained traction, that scheme needs to be taken advantage of because it’s a win win situation for stressed projects and discoms. Discoms get cheap power, stressed projects get the coal and PPA. But we need to have a lot of advocacy with states because there is resistance in their minds to close their plants. Punjab closed its plant for sxi months and the private sector got the PPAs. These two issues of PPA, coal and the receivables can be solved within the given timeline provided all the stakeholders work together on this. This will remove 32 GW from stressed assets.
One gigawatt = 1,000 megwatts