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Power 2001: Glimmer of hope - Views on News from Equitymaster
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  • Jan 11, 2001

    Power 2001: Glimmer of hope

    Ever since the Narsimha Rao government initiated power sector reforms in the early 90’s to attract foreign capital for investment in power generation, the nation’s hopes have soared and dipped with the passing of each year. Calendar year 2000 too, stirred many hopes. The year was eventful and saw some positives but many disappointments. Let’s recap.

    The poor financial health of the state electricity boards (SEBs) has been the bane of power sector in India. Subsidies, power thefts, non-payment of dues and a huge number of employees have taken the wind out of the SEB finances. In short the SEBs became a burden on the state exchequer. Year 2000 saw tentative steps being taken towards reorganizing these SEBs.

    The reorganisation of Orissa’s power distribution network was one such important beginning. The state became the first in India to pass on distribution management to private companies. After this, many states like Maharashtra, Haryana and Andhra Pradesh indicated that they were considering privatizing their respective SEB distribution networks. This however, was not without its share of hiccups. In 2000, the employees of the erstwhile Uttar Pradesh SEB revolted against the breaking of the board in three parts. Next it was Maharashtra’s turn. The SEB’s 90,000 employees went on strike to protest against the restructuring of the board. Despite this, the fact that some churning was taking place gave hope.

    Miniscule private participation
    (MU) FY99 FY00 % increase
    Total SEBs/EDs 244,177 260,294 6.6
    Total Central Sector 172,777 181,033 4.8
    Total Private Utilities 20,401 21,488 5.3
    Total Private IPPs 11,304 16,993 50.3
    All India 448,367 480,011 7.1
    Source: Central Electricity Authority

    The main hindrance for investments in the power sector is the level of risk mitigation. The poor financial health of the SEBs in the past forced many foreign companies to back out of investing in power sector in India. Year 2000 too, had its share of backtrackers. In the latest setback, Alstom and UK-based National Power pulled out of the 2,000 MW Pipavav project bidder’s list in Gujarat, over the lack of adequate payment guarantees.

    As a confidence building measure in 2000, the union power ministry started work on a new agreement involving the centre, state, financial institutions and the power supplier, which would enable the SEBs divert their entire revenue flows into a single account, from where the Independent Power Projects (IPPs) can be paid. Till now, the SEBs demarcated their zones geographically for each IPP and created a separate escrow account for each one. This was fraught with its own pitfalls, as one geographical area might have more industrial users than the other and hence, the pool of money coming into each escrow can differ greatly. So the revenue inflows for each IPP differ.

    The new policy in that sense would take care of this discrepancy. But it will also mean new set of agreements, a lot of paperwork and so on. On top of that, one can surely expect a wave of disagreement coming from IPPs who have already achieved financial closure or are nearing financial closure. For some IPPs, the financial institutions are likely to delay their approval and wait for this new set of laws to come into effect. However, in the long run, the four way agreement between the centre, state, financial institution and the power generator is likely to pave the way for faster financial closure of IPPs.

    Though positive changes are happening both at the policy level and at the industry level, the slow pace of reforms put some investors off for entirely different reasons. For example, PowerGen of UK decided to sell off all its assets in India in a bid to acquire the US-based LG&E Energy Corp. This was probably because it found the US markets more lucrative and less political than in India. Increasingly, foreign companies that were looking to India for investments simply find the wait too time consuming.

    But if some western companies looked for an exit, some of their Asian counterparts wanted in. PowerGen finally sold its assets in India to Hong Kong based China Light & Power International (CLP). By doing so CLP edged out the largest domestic private supplier Tata Power, who was also in the race for the acquisition. In effect, CLP has become one the largest private IPPs besides local companies such as Tata Power, BSES and Reliance Industries.

    The power story of India will not be complete without special reference to Maharashtra. The state acquires prominence due to several firsts. Its capital Mumbai, is perhaps the only city in India, which gets uninterrupted power supply throughout the year. Two of the country’s most efficient companies, BSES and Tata Power, have their base in this city. The state also has the distinction of allowing the country’s first IPP, Enron promoted Dabhol Power Company to go on stream.

    The year saw a lot of action centred around Maharashtra and in particular its state electricity board (MSEB). First came the Rs 1.8 bn stand by charges dispute between Tata Power and BSES. While BSES steadfastly refused to pay up these charges, the electricity regulatory commission finally ruled in favour of Tata Power. This brought relief to the cash starved MSEB.

    That was not all. One of the most controversial issues in the sector was highlighted towards the fag end of 2000. The Maharashtra government started rethinking on Phase II of the Enron backed Dabhol power project. it realised that it cannot go on paying Rs 5 per unit of power produced by Enron, and guarantee 90% off take (as it has done for the Phase I project).

    Let’s look at the scenario in Maharashtra. The state has 3 main power producers, Tata Power, BSES and Enron. Out of the three, the cost of Enron’s power is the highest, followed by BSES and then Tata Electric. But since MSEB is obligated to buy 90% of Enron’s power production, it is forced to curtail buying power from Tata Power. In effect, Tata Power is saddled with unutilised capacity as the MSEB keeps on asking the former to back down its power units, even though its costs per unit are lowest in the grid.

    But if the state government backs out from the Enron Phase II project, as per the agreement the Maharashtra government may have to pay Enron a whopping Rs 355 bn as compensation. This will send the state’s finances in a tizzy. A catch – 22 situation for the state government, the MSEB, and in effect for all the other utilities involved. It is likely that both Enron and the state government will sit across the table, compromise and come to a workable solution, considering the stakes involved for both. But the issues that came to the fore because of this have highlighted what the SEBs ought not to do. If this is the situation in one of India’s best managed SEBs one dare not imagine the financial health of other SEBs.

    This in effect sums up the happenings in 2000. However, the outlook for the sector is very encouraging. Both the listed companies Tata Power and BSES have unveiled very ambitious investment plans. While BSES envisages a significant Rs 30 bn investment in the next three years, Tata Power’s investment targets are equally ambitious at Rs 48 bn during the same period. Both companies are looking at acquiring stakes in other IPPs, investing in transmission, communications and Internet services. Added to this the new Electricity Bill is likely to simplify power investment norms in a bid to speed up investments. In short, year 2001 and beyond will be exciting times for this sector.

    But before we go overboard, a grim reminder. As per estimates, India has to generate an incremental 10,000 MW of electricity every year for the next 10 years to plug the demand-supply gap. More importantly it has to bring transmission and distribution (T&D) at par with power generation. India’s T&D to generation ratio stands at a dismal 0.3:1, as compared to an international benchmark of 1:1.

    Considering the roadblocks the sector faces, India has a long, long way to go before it can achieve the above targets. However, with private participation on the rise the sector offers immense growth potential.



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