Power sector: Ultra Mega Poor Planning? - Views on News from Equitymaster

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Power sector: Ultra Mega Poor Planning?

Jul 6, 2011

They were conceptualized by India’s Planning Commission to meet the ambitious 'power for all’ target by the end of the eleventh plan period (by 2012). But the much hyped Ultra Mega Power Projects (UMPPs) in India failed to live up to their heroic prospects of lightening up the lives of a billion people. The 4,000 megawatt projects have been anything but an example of timely execution.

Out of the 16 planned UMPPs, 6 have been awarded to companies like Tata Power, NTPC and Reliance Power. However, a host of critical obstacles have now threatened to not just jeopardize these projects but India infrastructure development prospects as a whole. Could this be accorded to lousy resource planning and absence of long term execution plans?

Coal shortages: A spectre of acute coal shortages looms large on the power sector. Several power generating companies have expressed their inability to honour the UMPP contracts. The tariff-based competitive bidding does not keep them insulated from increase in fuel prices, which have shot up due to the acute scarcity of coal. About 80% of these plants were likely to default on account of shortfall in domestic coal availability. Recent changes in regulations in coal exporting countries especially Australia and Indonesia have made the prospects of importing coal unviable. On domestic coal front, total deficit by end of 2017 is likely to triple to 226 m tones (83 m tones in FY11). The power ministry has also cautioned coal ministry that new power producers may default payments to banks if fuel supply does not improve immediately.

Funding constraints: Banks and infrastructure financing NBFCs that had the power sector as their most preferred borrowers until a year back are now scaling down the exposure. Lack of transparency and untimely execution of the proposed projects have made the funding institutions averse to extend loans to new players in the sector.

Environmental concerns: Clearance for the Orissa coal blocks has been languishing for an environmental clearance with the environment ministry for the last 11 months. Such regulatory hurdle for captive coal blocks has made even the prospects of timely execution for pit head projects (ones with captive resources) bleak.

Loss making SEBs: Although Indian companies have shown interest in the bidding for UMPP projects, the response from overseas investors has been lukewarm. This is because the financial health of state electricity boards (SEBs) has not improved much. With most of them running on huge transmission and distribution losses, the payment security for the foreign partners will not be very high.

Domestic incumbents like Tata Power and Reliance Power have their own power distribution networks. They can easily divert surplus power from their UMPPs in case an allocatee refuses to take committed supply. However, there is no such safety valve for foreign investors. In these circumstances, it is difficult to say how far UMPPs will answer the country's energy needs. Meanwhile, India's power requirement is rising at a much faster pace than the generation capacity addition envisaged by the government through UMPPs. McKinsey estimates that if India continues to grow at an average rate of 8% for the next 10 years, the country's demand for power will soar to 315-335 gigawatt (GW) by 2017 from the present 120 GW. This estimate is 100 GW higher than the government estimates. While renewable energy resources like wind, solar and nuclear power could come to India’s rescue the financial viability of the same remain questionable. Having said that, we hope the UMPPs do not turn out to be white elephants.

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