Economic reform has few friends. This truism is visible today as the 2003 de-licensing of power generation capacity is being unfairly fingered as the culprit for the Rs 1 trillion bank debt turning delinquent due to pending or actual bankruptcy of the power projects.
De-licensing of power generation delivered what it was supposed to – capacity addition in thermal generation exceeding the planned capacity addition over the period 2012 to 2017 by 30%. Fingers are also being pointed to low coal production or the prohibitive price of imported gas as additional culprits. This is disingenuous.
Drivers of stranded power assets
The primary reason why installed generation capacity remains underutilised is that distribution utilities have failed to develop new markets for electricity and are stuck at unreasonably high levels of operational inefficiency. The CRE/ICRA 6th Annual Rating for Distribution Utilities July 2018, rates just 7 out of 41 distribution utilities with a satisfyingly high performance. But remember that rating standards in India are contextually determined to offer an incentive for improvement. Lowering transmission and commercial loss below 25% accrues incentive points. International standards would be way better.
The average loss in distribution utilities, during FY 2016, after accounting for subsidy received from government, was Rs 0.65 per unit (kWh) sold. Is it any wonder then that distribution utilities have failed to absorb the available supply of electricity. Actual users have to undergo forced power outages till the utilities can generate cash to pay for purchasing electricity from the grid. Constraints on the supply side have been unplugged by reform. The problem lies in stodgy utilities failing to aggregate potential demand.
SHAKTI a transparent, effective resource allocation mechanism
Union government steps for reducing financial stress in the power sector date back to 2017. SHAKTI (Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India) skillfully used the auction methodology to allocate up to 80% of the assessed need for coal supply to 11 generators (31 entities applied but only 14 were found to be at a reasonable stage of project completion) . Generators without any coal linkage, bid for coal supply from Coal India Ltd. by agreeing to reduce their approved levelized tariff , thereby sharing the gain with their customers. Bids for reducing tariff by 4 to 1 paise per unit (kWh) were received. This was commercially smart rationing of coal supply to favour the most efficient generators.
RBI shakes complacent defaulting promoters awake with looming insolvency
Why has the debate around stressed power assets gained currency today? Election time, which we are clearly into, is a good time to press for benefits. This applies to requests for extending the time period beyond the 180 days allowed to promoters to rectify a loan default. Under the Insolvency and Bankruptcy Code 2016, promoters or their associates, become ineligible to bid for the assets during resolution proceedings. This severe penalty is meant to spur promoters to fulfil their loan repayment obligations and pay banks back on time.
Timely negotiated settlements better than the judicial option
Draconian penalties are of little use when the default is due to a systemic shock. The Enron private power fiasco 1992-1999 was sparked by spiralling of imported gas price. Negotiations, rather than judicial options, finally resolved matters. In 2005, NTPC, GAIL and MSEB acquired the assets in Dahbol, Maharashtra abandoned by the bankrupt US company.
Enron solution redux- neither desirable nor feasible
Dahbol involved only 2GW of abandoned assets. Today, 10 GW of gas generators are stressed, like Enron. In addition around 12GW of coal fired generators are also stressed after excluding those which have benefited from the SHAKTI initiative. The stranded asset problem is more than 10X of the Enron problem. The bank loans – mostly of Indian banks – at stake are around Rs 1 trillion. Is there a way out causing the least disruption to embedded economic incentives?
Reduce the cost of coal based generation by lowering the implicit and explicit “tax” imposed on it.
The most direct route would be to end the extortive levies on coal production and transportation by rail. Rahul Tongia and Puneet Kamboj of Brookings India recommend making the railway freight charges cost reflective. This would also make Indian Railways competitive with road transport, to which it has been losing market share.
Currently, coal transport by rail is charged more than the cost of service. This is an implict tax on freight which subsidises passenger traffic. The resultant excess freight cost feeds into the cost of electricity generated. This increases the cost of electricity by Rs 0.21 per unit (kWh) amounting to Rs 108 billion per year.
In addition, there is an explicit tax on coal via royalties, levies and coal cess. These increased from Rs 200 per tonne in 2011 to Rs 800 per tonne in 2017 pushing up further the cost of coal based power.
Why should electricity consumers pay to subsidise rail passengers?
Quite unfairly, it is the honest electricity user who is indirectly subsidising rail passenger traffic – that too in a poorly targeted non-merit way. Freight charges should become cost reflective and the levies on coal production reduced to Rs 400 per tonne. IR should generate the additional revenue required for keeping passenger fares reasonable, from commercial development of their physical assets.
Subsidise rail passengers explicitly via the budget
There is also a good case to use the revenues from coal cess and other levies for this purpose. Rail transport is more efficient and environmentally less toxic than road transport. Switching to electric rail from road, reduces the import burden imposed by using petro products. A direct subsidy of Rs 150 billion should be allocated to IR specifically for adopting cost based freight charges in the 2019 budget. Lowering the cost of coal based power will improve the finances of distribution utilities and enable them to buy more power, which would feed into the financials of coal based generators.
Spread the pain of low availability of domestic fuel across all thermal power generators
Why not replicate the SHAKTI auction template to allocate a portion – say 50% – of the annual coal demand to all generators (those owned by the Union, state governments or the private sector) whilst retaining the existing allocations for the remaining one half. Electricity prices at the grid would reduce. The principle of price competitiveness (electricity supply) as the door to preferential access to scarce domestic coal will incentivise all generators to become efficient.
Grandfathering existing contracts is the gold standard of contracting norms. But extraordinary circumstances call for innovative options. When the available resources fall short of demand, the principle of efficiency of resource use overrides historical rights in a merit order system. New generators win the efficiency battle, hands down.
Adapted from the authors opinion piece in TOI blogs, August 9, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/equitable-grandfathering-needed-in-thermal-power/
Opinion India 