Home India COMMENT: Stressed power plants need enforceable PPAs, everything else is hogwash
COMMENT: Stressed power plants need enforceable PPAs, everything else is hogwash

COMMENT: Stressed power plants need enforceable PPAs, everything else is hogwash

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Electricity is fast emerging as the primary choice of fuel in automobiles, instead of petrol and diesel. On the supply side, renewables are replacing conventional thermal-based energy sources.

The global economy is recovering at a snail’s pace. However, there are structural changes underway. Electricity is fast emerging as the primary choice of fuel in automobiles, instead of petrol and diesel. On the supply side, renewables are replacing conventional thermal-based energy sources.

As the world is adapting to this change, India continues to grapple with the issues facing electricity generation and consumption. The government is striving to provide power to every household in the country but is still not able to get the supply side equation right.

Though renewable power is attracting a lot of interest, it has become a victim of its own success. The sharp reduction in renewable power tariff resulted in state electricity boards demanding lower tariffs to align with these rates from older units. Add to that the ongoing confusion in policy and we have a sunrise industry eclipsed by unclear policies.

The bigger mess, however, is in thermal power. A report by industry body Assocham says as many as 24 power projects with 41.81 gigawatts (GW) capacity may be under severe financial stress. Credit rating firm Crisil says loans to private power companies to the tune of around Rs 1.34 lakh crore are at risk. This is over 10 percent of the total non-performing assets (NPAs) in the banking industry.

After trying out various ways of tackling the stressed assets issue in the power sector, the government is expected to set up a high-level committee headed by NITI Aayog chief executive Amitabh Kant to address the problem.

Lenders were unable to get these projects off their backs as they could not find buyers. Even as Amitabh Kant searches for a plausible solution for these stressed assets Assocham has released a paper with a simple solution.

The problem for the power sector can be resolved by having an enforceable power purchase agreement (PPA) in place.

Out of the 24 stressed projects having a capacity of 41.81 GW, 8.3 GWs are without any power purchase agreements, 9.5 GW capacity have partial PPAs (less than 40 percent of output). The balance capacity is having PPAs greater than 40 percent of output.

PPAs ensure the power that would be purchased from a unit will be bought by the state electricity boards at a particular price.

The problem with Assocham’s simple solution is that many of these stressed assets have had a time and cost overrun. Assuming that if banks are not willing to take a hit then the cost of power generated from these units will be very high. It’s a chicken and egg situation for these projects as a PPA would give them coal linkages that can bring down the cost of power.

Assocham also makes a valid point when it says that avenues need to be found out to utilize the power available in the stranded capacities, which are already commissioned or nearing completion.

There are many industries that are still working on costly captive power. Such units can be identified as customers for these power plants. Cold storage uses off-grid power so do other sectors where the quality of power is important.

The same solution of enforcing PPA should also be extended to renewable power space to solve their problem.

Demand in power sector will not be an issue as state electricity boards have started reducing their losses in compliance with the UDAY (Ujwal Discom Assurance Yojana) scheme and are consuming more electricity.

Just setting up power cables to every village would mean little if the government is not able to supply quality power. At the same time, consumers should be willing to pay for the power that they consume, for which politicians should not make power tariff an election issue.

Enforcement of signed contracts like PPAs which will make state electricity boards to toe the line by altering power tariffs to the consumer is the key to solving the problem of power stressed assets.

Selling the stressed power units either through an asset reconstruction company or in any other form is meaningless till you have a willing buyer. Such a willing customer can come only with a PPA which will be honored by both sides.

Source: moneycontrol

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Anand Gupta Editor - EQ Int'l Media Network

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