A brighter tomorrow for the power sector

Finally, the long-term mess of the beleaguered Indian power sector is being given a complete makeover, and not just a fresh coat of paint to hide the cracks.

The Atmanirbhar Bharat Abhiyan—the government’s ₹20-lakh crore relief package to make India self-reliant—which was announced on May 13; the draft Electricity (Amendment) Bill, 2020 of April 17; and the yet-to be-announced National Tariff Policy, promises to carry out structural reforms that promise to change the face of the power sector and across the entire electricity value chain.

Take the case of the Atmanirbhar scheme, for instance. It opens up coal mining to private sector participation without any end-use restrictions, by removing the distinction between captive mines—which are reserved only for certain sectors—and non-captive mines, This and other measures were announced in January 2020, through the Mineral Laws (Amendment) Ordinance 2020.

The Atmanirbhar scheme plans to invest up to ₹50,000 crore for improving coal-mining-related infrastructure, like the transportation of coal through conveyor belts over a longer distance, which would help Coal India Limited (CIL) achieve its target production of 1 billion tonnes by FY24. As much as ₹18,000 crore worth of investments will help transfer coal from mines to railway sidings efficiently and reduce environmental pollution.

It will also help to reduce the import of coal (primarily non-coking) which touched 240 million tonnes in FY20 (up from 235 million tonnes in FY19), resulting in a foreign exchange outgo of ₹1.7 lakh crore ( of which non-coking coal was 183.4 million tonnes with a forex outgo of ₹98,800 crore. Coal demand in the country during FY19 was 960 million tonnes (of which 602 million tonnes was supplied by CIL), which is expected to increase by 4%-5% despite significant renewable capacity addition.

More importantly, the scheme has addressed the biggest bugbear of the power sector for years—challenges faced by the entire power sector because of bankrupt state-owned and private power distribution companies (discoms). Distribution companies have been provided a lifeline through a liquidity booster dose of ₹90,000 crore in the form of loans in two tranches from Power Financial Corporation (PFC) and Rural Electrification Corporation (REC), backed by state government guarantees.

These funds will be made available, according to finance minister Nirmala Sitharaman, on the condition that discoms make digital payment facility for consumers, liquidate the outstanding dues of the state governments, and also make plans to reduce financial and operational losses. “And the ₹90,000-crore fund infusion has come at an opportune time, and will help 9.4 gigawatt (GW) of private thermal coal capacities from defaulting in the post moratorium period,’’ says a recent report by credit rating agency CRISIL.

After all, there has been a substantial fall in electricity demand from high-tariff paying industrial and commercial consumers and collection efficiencies of discoms have also dropped because of the lockdown. “This has raised the risk of discoms either curtailing electricity purchases, or delaying payments based on high-cost power purchase agreements,’’ adds the CRISIL report.

The move is a big positive, say experts, because it will ease the liquidity pressures on generators and transmitting companies, but appropriating structuring of bond issuance against guarantee will be critical to raise funds in the current tight liquidity situation. “Besides, this is certainly a short-term measure. The longer issue of discoms financial stability and turnaround remains a matter of concern,’’ says Vivek Sharma, senior director, energy, at CRISIL Infrastructure Advisory.

Loans from the first tranche for state discoms under the Atmanirbhar scheme will require additional and irrevocable guarantees from the state governments covering the loan amount, plus interest and other charges. The second tranche of loans will be conditional on loss reduction and performance improvement. The PFC/ REC may offer a moratorium (only on principal), not exceeding three years, but the interest will have to be serviced regularly (monthly). Interest rates will have a spread of up to 150 basis points (bps) over the cost of funds.

In a bid to ensure that state discoms show improved performance, the government plans to privatise the distribution of power in Union Territories such as Chandigarh, Puducherry, Dadra and Nagar Haveli, and Daman and Diu, and thereby set a precedent for states. “While these measures will provide much-needed liquidity support to power generating and transmitting companies and some relief to discoms in the form of reduced procurement cost, they need to be backed by structural reforms like the proposed Electricity Act (Amendment) Bill 2020, which would usher in major distribution reform,’’ says Swarnim Maheshwari, analyst at Edelweiss Securities.

Similarly, the draft Electricity Act (Amendment) Bill 2020 has ensured the sustainability of the discoms by proposing that the tariffs announced reflect the true cost of buying power or what is called cost-reflective tariffs. By proposing uniformity of tariffs between residential and industrial and commercial customers, the amendment hopes to end one of the biggest bugbears of the power sector—the challenges emanating from cross-subsidising of power. In order to subsidise residential customers, the regulator has been forced to hike the cost of industrial and commercial power thereby making the manufacturing of their products uncompetitive in the international market.

Another important reform among a host of others includes ensuring the sanctity of contracts, which has been coming under pressure because many states have been reneging on the contract. Hence, the Bill proposes the establishment of an Electricity Contract Enforcement Authority, headed by a retired judge of the high court “with the power to enforce contracts related to purchases, or sale or transmission of power between a generating, distribution or transmission companies”.

Even if some of the measures are implemented and the Electricity Bill is passed in Parliament, it will improve the viability of the electricity sector by reducing unscheduled power cuts by discoms, provide the aggrieved sector a definitive recourse by upholding the sanctity of contracts, and ensure the long-term profitability and sustainability of the whole sector.