Is the worst behind India's power sector? - Views on News from Equitymaster

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Is the worst behind India's power sector?

Jul 3, 2015

India has made a reasonable progress in adding power generation capacities. As cited by the power minister the installed capacity for power generation increased 8.4% in the last year. Previously the power plant units used to remain idle due to scarcity in the supply of coal. This constraint was eased by the government through auctioning of coal mines. The assurance of coal linkages has brought life back to the power generation units. However the worst is hardly behind the sector as it continues to deal with demand supply gap and distribution losses.

Demand Scarcity

Due to low demand for power, India's average plant load factor (PLF) has dropped to a 15 year low at 65.1%. The new Central Electricity Regulatory Commission (CERC) norms provides incentives to the generation and distribution companies based on their PLF. Lower PLF will lead to lower incentives and will have an impact on the net profits of the companies in the sector.

Distribution losses

State Electricity Board (SEB) is involved in the distribution of power. They procure power from the power generation companies and distribute it to the consumers. They have accumulated losses of Rs 2500bn and lose Rs 700bn every year as per the first year report card of National Democratic Alliance (NDA) government. The SEB's do not have enough resources with them to enter into Power Purchase Agreement (PPA) with the power generation company. They have been partially responsible for the weak demand prevailing in the power sector. The past 24 months have seen no power purchase agreement, due to the poor financial health of the distribution companies. Moreover the distribution arm of SEBs, succumb to the political pressure and are not able to conduct tariff revisions.

There are huge Aggregate Technical & Commercial (AT&C) losses posted by distribution companies due to outright theft, unmetered supply to the farmers and lack of technological upgradation. As per Central Electricity Authority (CEA) report, theft alone causes loss of about RS 200bn annually.

The way ahead

Certain ways to curtail losses would be to open the power distribution sector to private sector and have free market competition. Radical reforms would be required to revive the state run SEBs and the power sector at large.

Power financing companies like PFC and REC will also have to sustain the quality of their assets to be able to fund long term generation projects.

Meanwhile investors need to ensure that their selection of stocks, in a ROE regulated sector like power, is based on not just the companies' growth prospects but also profitability.

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