Power Sector

Abu Sahabuddin

Key Findings

Coal shortages, scams, hike in prices of imported coal, lack of land availability, shortage in supply of equipments for new capacities and policy logjam have together paralyzed the prospects of power sector in India over the past two years. So much so that the sector that cornered a bulk of the 5 year plan infrastructure outlays for decades, is now a forbidden one. Not just for investors but even for bankers and financers that a sector like power heavily relies upon.

The key problems hindering the growth of the power sector are land, fuel, environment, and forest clearances. Even the government is finding it very difficult to get the required land for allotting to power projects. One of the key problems in getting land is Naxalism in the eastern and central states, where a large number of projects are being planned owing to abundance of fuel resources.

Central institutions like National Thermal Power Corporation Limited(NTPC) and the State Electricity Boards (SEBs) continue to dominate the power sector in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 65% of the total power generation capacity in India. This is followed by hydro-electricity (22% share). The rest comes from nuclear and wind energy.

Average transmission and distribution losses (T&D) exceed 25% of total power generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing and high pilferage.

Losses of India's State Electricity Boards have once again assumed disproportionate levels, thus coming full circle since the Electricity Act of 2003 which tried to make these entities more efficient. The average cost of supply for all power companies has far exceeded the average revenue realized. Not surprisingly, the accumulated losses of SEBs were estimated at Rs 1.8 trillion at the end of FY12, from Rs 1.2 trillion in FY11. The non-receipt of subsidies from cash-strapped state government coffers affected the finances of distribution companies. Subsidies from state governments were estimated at 19% of the total revenue of state utilities in FY10. Although subsidies booked have grown at 30% YoY, cash received stood at only 14%.

TAKEAWAYS Supply Many projects have been planned but due to slow regulatory processes and inadequate equipments and fuel, the supply is far lesser than demand. Currently, India needs to double its generation capacity over the next decade or so to meet the potential demand. The long-term average demand growth rate is 7-8% per annum and is expected to grow at faster rate in the future. Barriers to entry are high, especially in the transmission and distribution segments, which are largely state monopolies. Also, entering the power generation business requires heavy investment initially. The other barriers are fuel linkages, payment guarantees from state governments that buy power and retail distribution license. Not very high as government controls tariff structure. However, this may change in the future. Bargaining power of retail customers is low, as power is in short supply. However government is a big buyer and payments from it can be erratic, as has been seen in the past. Getting intense, but despite there being enough room for many players, shortage of inputs such as coal and natural gas has dissuaded new entrants.

Demand Barriers to entry

Bargaining power of suppliers Bargaining power of customers Competition

The demand for coal is expected rise to 980 m tonnes by 2017. The domestic availability of coal has been pegged at 795 m tonnes. This demand-supply gap of around 200 million tonnes is expected to be made up substantially by imports by 2016-17. Power utilities, he said, have reported a generation loss of 8.7 billion units in 2011-12 (up to February, 2012) due to shortage of coal. As many as 11 plants of state-owned NTPC lost 7.8 billion units because of shortage of coal during current fiscal. Total power generation stood at 877 bn units (BU) in FY12, as compared to 811 BU in FY11. This represented a growth of just around 8%, when the requirement is anywhere around 10-12% per annum.

The average PLF in the Central Public Sector Undertakings and private sector companies was much higher than that achieved by the SEBs as a whole in FY12. Wide inter-state variations were noticed in the average PLF of thermal power plants with southern and northern zones having better performances. As far as T&D segments of the sector are concerned, there was little that actually happened in FY12. The country continues to reel under the pressure of higher T&D losses and with the government going very slow with the reforms process in these segments, the long-term sustainable growth of the sector seems doubtful. After the massive grid collapse in August in 2012, the problems of the transmission segment have resurfaced to government's attention. Investments in this segment have, however, moved rather slowly. The existing inter-regional power transfer capacity was targeted to be raised to 37,150 MW by the end of the 11th Plan period. Power Grid was the only company from the power sector to have met its investment target during the 11th Plan. Its pace of investment was higher compared to the generation sector. Post FY14E spot coal imports to either remain stagnant or decline. No significant shortage of domestic coal, if seen from the angle of power capacities required to cater to incremental electricity demand and power deficit. However, huge shortage if all projects, coming up, need to be fed. Do not see significant risk in CIL supplies post FY14E.

Retail tariffs in India notably higher vs. China/US (except agri) and therefore, further tariff hikes would be very difficult for SEBs. The focus for SEBs now will shift to lower power purchase cost as against tariff increases and It will take at least 3-5 years to bring down losses meaningfully (despite tariff hikes, losses in the range of Rs600bn in FY13E). We foresee Rs2.5-3.0/unit as the comfortable range of power purchase cost for SEBs over next 3 yrs - expect lots of PPA cancellations/termination/dispute from SEB side now.

Power purchase cost for SEBs to marginally come down vs. general perception of increase. This will be driven by increasing share of cheaper power (UMPPs, increase in captive coal). There would be surplus power situation post FY14E which is likely to last for two years and than the next cycle of capacity additions will start, till then not much hope for merchant power producers or projects waiting for bids. Though sectors issues will take some time to resolve but some good businesses available at attractive valuations. While we believe that impending storm will claim several casualties, there will be survivors.

Thank You