May 2017

EDITOR Devangshu Datta

The power sector has seen a key shift in the mix of capacity addition in the past year. Capacity additions in renewables exceeded that in conventional power. At the same time, the coal supply chain improved and fossil fuel prices stayed low, leading to a more comfortable situation for thermal generators. There was also considerable capacity addition in the transmission segment.

In terms of financials as well, UDAY seems to be making a positive difference to the balance sheets of discoms. The scheme has eased the burden of debt servicing for state distribution companies which have massive accumulated losses and find it hard to pay their dues. UDAY is also linked to the reduction of T&D losses and the gap between cost of supply and average revenue realised. These key metrics have improved across multiple states, though both are still below acceptable levels.

On the policy front, amendments to the National Tariff Policy, 2006 will mean that all transmission projects will henceforth be awarded via tariff-based competitive bidding. Amendments to the Mega Power Policy, 2009 have also taken place, with time extensions granted for equipment import certificates for mega projects.

However, while matters have improved, the sector still faces daunting challenges. There have been no financial closures for new conventional generation projects for two or three years. Private generators still face uncertainty in terms of offtake risks. The Supreme Court’s rejection of pleas by Adani Power and Tata Power to be allowed to charge compensatory tariffs (for their respective imported coal-based power plants in Mundra) brought clarity to analogous situations. But this judgment is not favourable to generators depending on imported fuel. Plants using imported gas rather than coal are unviable as well, with no subsidy scheme and no way to pass on higher fuel costs.

Investments into the sector remain muted, in part because there are still large sticky loans on the books of lenders. The cost-coverage ratio for most discoms remains below 1, meaning that losses are still mounting net of subsidies from states. To this end, UDAY has failed to deliver the desired outcomes with the ratio declining further in a number of states.

Sector health has certainly improved and that has led to easier conditions for consumers. But it would be an exaggeration to classify the power sector as “healthy”. While there is some cause for optimism, continued efforts on multiple fronts, especially towards implementation of the already laid plans, are required, before the sector could definitively be considered to be out of the woods.


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