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Power Sector Hit by Falling Utilisation Levels
Mar 30, 2016

The power sector is going through troubled times. The State Electricity Boards (SEBs) that buy power from generators are reeling under huge losses and bloated debt. As a result, they have not been entering into power purchase agreements. Therefore, the capacity utilisation level or the plant load factor (PLF) of generating companies has been on a steady decline over the years. As per the annual report from the Ministry of Power, the PLF has fallen from a peak of 78.6% in FY08 to about 65% upto November 2014. Saddled with unused capacities that have hit earnings, power producers have been slow in adding new capacities. In fact, the capacity additions in the power sector have fallen by 39% in the last two years.

The government program 'Ujwal Discom Assurance Yojana' (UDAY) for SEBs holds hope to revitalise the power sector. This is because unlike the previous bail-out packages that were provided for debt restructuring, the UDAY offers a framework for the long-term revamp of SEB operations.

Under UDAY, states will have to take over 75% of the SEBs' debt over a period of two years against which bonds can be issued. The acquired debt will have interest rates restructured at around 8-9% (14-15% earlier) and will not be considered in the state's fiscal deficit until FY17. The respective states will have to bear any losses incurred by them from FY18 onwards. And they will do so in phases, starting with 5% of annual loss in FY18 that will gradually rise to 50% of yearly loss by the year 2020-21.

By making losses a part of the fiscal deficit target, states are expected to be more proactive in turning around the loss-making SEBs through measures such as quarterly fuel adjustment and annual hike in power tariffs. The UDAY scheme also provides for the reduction of SEB fuel costs through coal swapping. Seventeen states have agreed to join the UDAY scheme out of which six have signed agreements so far.

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