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Power: Where are we heading? - Views on News from Equitymaster
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  • Mar 10, 2004

    Power: Where are we heading?

    "When you think of digitizing India there will be a massive amount of power required and I pray to this government that you have to push and push and push to invest in infrastructure Mr. Jack Welch"

    The problem...
    Power is a critical infrastructure to achieve a sustainable long-term growth for any economy. Investments in the power sector depend on the financial and commercial viability of the power sector. Will I receive money for what I generate? What is the payback period? Is the government in favor of providing a level playing field? However, the financial health of State Electricity Boards (SEBs) in India has become a matter of grave concern considering that their losses reached an alarming level of Rs 330 bn in FY03. The accumulation of outstanding dues to the central power sector units grew to over Rs 400 bn, hampering the capacity addition program.

    The basic reason for this is the poor state of transmission and distribution system of SEBs and other electricity utilities. Just to give a real picture, the average plant load factor (similar to capacity utilisation) for the Indian power sector stands at 54%. So that means, of the total installed capacity, actual production stands at 54%. Out of the total power generated, only 55% in billed and just 41% realised. Though industrial customers bear a part of losses by paying higher tariffs, SEBs lose around 110 paise per unit sold (as farmers generally do not pay charges). Ultimately, it results in huge losses for SEBs and results in a financial crunch. Consequently, they are unable to spend on improving the T&D infrastructure for distribution of power and unable to pay fully to the central power generating units, thus hampering their capacity addition plans.

    The remedy...
    In order to improve the condition of the Indian power sector, through Electricity Act 2003, the government has announced various measures. The prominent ones include:

    • Under APDRP (accelerated power development reform program) scheme, the government has earmarked a fund of Rs 400 bn for the tenth five year plan. Out of this, Rs 200 bn will be utilised for improving the T&D infrastructure (the Govt. would fund 50% of the project cost). And another Rs 200 bn will be utilised for providing an incentive to SEBs for reducing their cash loses.

    • The Electricity Act has also started Securitisation scheme, through which, the dues of various central power generating units like NTPC will be paid back in the form of bonds to be issued by RBI on behalf of the state government.

    • Considering the power shortage of around 12% in peak hours, the Electricity Act has also eased the licensing norms required to set up power plants. The power generating company will have the right to enter into distribution business and vice-versa. In order to increase the efficiency of the SEBs, the provision has been made to privatize the SEBs. The implementation has already started from Delhi and will move on to the other parts of the country soon.

    The likely impact on the sector...

    • APDRP will improve the T&D infrastructure, as the government has shown interest to fund the projects and provide incentives.

    • Securitisation scheme will ensure the timely repayment of dues to generation companies and they will be able to carry out expansion plans smoothly.

    • Removal of stringent licensing requirements will definitely attract private investment in the sector. As a result, apart from Tata Group and the Reliance group, others like AV Birla and Jai Prakash Industries are also foraying into power generation.

    How are Tata Power and Reliance Energy going to benefit...

    • The reforms introduced through Electricity Act 2003 have been able to attract fresh investments in the sector. Private companies like Reliance energy and Tata Power have laid down huge capex plans of around Rs 200 bn and Rs 120 bn respectively over the next five years.

    • The privatisation of the Delhi circle (both Reliance Energy and Tata Power have participated in the same) has reduced the T&D losses of the Delhi region by around 2% in last nine months. Apart from generation, the privatisation of distribution will provide significant growth opportunities for both these companies in the long term.

    • Both these companies are planning to increase their generation capacity significantly. Moreover, given the distribution license, the saving on T&D part will directly filter down to the bottomline of the company.

    However, we would like to conclude that it would take some point for these benefits to filter into higher profitability. Otherwise, investors may in for some disappointment.



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