A High Level Empowered Committee (HLEC), chaired by Cabinet Secretary PK Sinha, to address the issue of stressed thermal power projects in India has made far-reaching recommendations. The big question is, will the recommendations be effected? In view of the expected disruption in the power sector, they ought to be.
As many as 34 thermal power plants in the country with a combined capacity of 40,130 MW are stressed. Assuming an average cost of Rs 6 crore per MW (in many cases it is much higher), this means that Rs 2.4 lakh crore of investments are in jeopardy. Since banks contribute at least 75 percent of a project’s cost, it could mean that at least Rs 1.8 lakh crore of bank funds are under stress. That explains why banks were included in the panel apart from representatives from the power, finance, railways, oil and petroleum and coal ministries.
Although the report does not mention it, there are three kinds of stressed power plants. The first, clearly a result of collusion at the highest levels, are those set up in places where no fuel linkages had been planned.
The second category is plants that were either not designed well, or had substandard machinery. It is the third type of plants that are salvageable, although the panel’s report doesn’t mention such a list. These are reasonably well-designed plants, but could not reach commercial viability either because they were set up without power purchase agreements (PPAs), or because of PPAs that are disputed now due to a change in ground realities, or because coal mines that generators thought they would have access to are no longer available. This could have been because of the Supreme Court verdict that had overruled out-of-turn and non-transparent allocation of coal mines to private players.
That could explain why the first issue the panel’s report addresses is fuel linkage. The report mentions that priority would be given to providing those linkages. This facility could help salvage some of the power plants; indeed, eight such plants have already achieved resolution.
The issue of PPAs is equally vexing. Some entrepreneurs decided to set up merchant plants to sell their power directly on energy exchanges. They were seduced by high energy prices on energy exchanges, before the regulator stepped in to put a cap on (mostly) collusively-rigged high prices. Once that windfall was lost, some entrepreneurs hurriedly persuaded state governments to ink irregular PPAs, while others thought that they could ride out the storm. Both types of plants could be in trouble. Once again, it is not yet certain how many plants are in this category.
The panel has recommended measures to alleviate this problem such as allocation and supply of coal for short-term PPAs, resuming coal supply in case of termination of PPAs due to default in payment by distribution companies (discoms), getting PSUs to work as aggregators of power, increasing the quantity of coal for special forward e-auction for the power sector and the retirement of old and inefficient plants.
The phasing out of old plants will have the salutary effect of allowing the sector’s plant load factor (PLF), a measure of capacity utilisation, to go up.