This is not how it was supposed to end. The script was supposed to have happy stories. How India, once a notoriously power-deficit nation, became a net exporter of power. How electricity shortage went from 4.2% (of demand) in 2014 to 0.7% in 2017. How India managed to increase its total power capacity by a third in just three years (up 31% from 243GW in March 2014 to 320 GW in March 2017) and how it achieved universal electrification, and so on.
It had nothing about profit-and-loss statements bathed in red ink or panicked bankers. Or 34 thermal power projects, representing 40 GW of capacity, going sour, jeopardising Rs 1.74 lakh crore in bank loans, becoming the principal line item in India’s terrifying bad loans problem. And yet, some of India’s top banks are staring at the spectre of taking as much as an 80% haircut in massive loans extended to power plants.
And now, with India’s new bankruptcy rules and a recent central bank directive, the parties involved are also
running out of time for negotiation and course correction, before they are forced into a firesale of sorts.
How did this come to be? The private sector was always allowed to produce power, but the enactment of the
Electricity Act, 2003, which liberalised the entry of the private players, was the watershed. The decision paid rich dividends as private companies delivered in spades. In no time, they were adding more megawatts (MW) in capacity than all the state-owned utilities that had dominated the sector all these years.
During the 12th Five-Year Plan, private firms added 54,279MW of capacity (of the total 99,209MW capacity added), achieving 116% of the target given, according to the Union ministry of power. State government-controlled utilities added 24,477 MW, whereas the central PSUs generated an additional capacity of 20,452 MW. The massive contribution by the private sector helped achieve the good news described earlier. In 2017, India became a net power exporter, selling 5,798 million units to Nepal, Bangladesh and Myanmar.
This would have been unimaginable just five years ago. It must be noted that total installed capacity does not mean all of it is produced. Production depends on demand, which is linked to consumer’s access to electricity and her ability to pay.
The viability of a thermal power plant, therefore, depends on a complex matrix of factors. Seamless availability of coal, power purchase agreements with distribution companies at a favourable rate, demand and the price of non-thermal sources of power. Many of these companies were affected by the Supreme Court’s 2014 cancellation of coal block allocations.
The challenge from renewable sources is another factor. Solar, for instance. In May 2017, the Solar Energy Corporation of India received a winning bid of Rs 2.44 per kilowatt hour (kWh) from ACME Solar Holdings Pvt Ltd for a 500 MW phase of the 10,000-hectre Bhadla Solar Park, bordering the Thar desert. Thermal power prices averages Rs 3.7 per kWh in India’s power exchanges.
Suddenly, for tariff-sensitive and debt-saddled distribution companies that are mostly owned by state-governments, which love nothing more than to be able to offer cheaper power to voters, there was a cheaper source of power. They were not about to conclude power purchase agreements in a hurry.
During 2017-18, for the first time, India added more capacity in renewables (11,788 MW) than in the thermal and hydro sectors combined (5,400 MW). Thermal power contributes around 65% to India’s energy basket. All of this meant the companies that set up coal-fired thermal power plants were either unable to start production for lack of coal, or were unable to find buyers.
So we now have 34 thermal power projects with 40,130 MW of assets and Rs 1.74 lakh crore in debt that is in risk of going bad. Seven of those stressed projects — Adani Power’s Korba (Chhattisgarh), Adhunik’s Jharkhand plant and GMR’s Kamalanga (Odisha), to name a few — have been resolved, according to finance ministry documents.
That barely chips at the problem though. For Jaypee Power Ventures, for example, three projects worth Rs 29,078 crore — two in Madhya Pradesh (Nigrie and Bina) and one in Uttar Pradesh (Bara) — turned non-productive resulting in a bad debt of Rs 19,959 crore.
In the case of Lanco, the outstanding debt in four of its stressed power assets — one each in Chhattisgarh, Uttar Pradesh, Maharashtra and Odisha — is a whopping Rs 23,591 crore.
The banks and the financial institutions that took a major hit of this power mess include State Bank of India, Power Finance Corporation, Punjab National Bank, ICICI Bank, Axis Bank and IDBI Bank, as they were the lead bankers (or financial institutions) in those 34 stressed assets.
Last week, the Supreme Court offered a reprieve to power companies when it stopped a February 12 order of the central bank from taking effect. The Reserve Bank of India had ordered that a bank should draft resolution plans within 180 days in the case of stressed assets where it has exposure of more than Rs 2,000 crore. Had the court not intervened, the banks would have by now referred most of these cases to the bankruptcy courts run by the National Company Law Tribunal (NCLT).
The Supreme Court will next hear the case on November 11. So the companies and banks have got two months to salvage the situation. “The immediate way-out is the mutual settlement between the (stressed) companies and the lenders. As the demand for electricity will only grow and with no new thermal and hydro projects coming up, all those projects under duress today will become viable in the near future,” says Deepak Amitabh, chairman and managing director of PTC India, a company that trades power.
Returning demand JM Financial ARC, an asset reconstruction company, is keen to pick up power assets and help turn them around. “We had a bearish outlook on the power sector in the past. But currently we have turned positive and are beginning to like power assets.
There has been no new addition in the power generation capacity in the last few years and the demand is going up. Hence we have changed our outlook. However, operation and maintenance will remain a challenge,” says Anil Bhatia, MD & CEO of JM Financial ARC.
Bhatia says fuel supply issues are slowly getting resolved. State Electricity Boards are being allowed to purchase power from the open market. “It may be possible to enter the sector at a good cost,” he says.
Quite apart from issues related to coal supply and power purchase agreements, the consensus among stakeholders goes, aggressive bidding by private players, the promoters’ inability to infuse equity, and contractual or tariff-related disputes have added to the sector’s woes.
Bankers are now, some might say belatedly, wary of the sector. For 16 out of 21 govt-owned banks, the exposure to the power sector lending has dropped between 2016 and 2018, the only exceptions being the SBI, Bank of Baroda, Central Bank and Union Bank of India.
“The reduction in exposure could be because of no new addition of loans to the sector or for writing off bad loans, or both,” says a banker in a public sector bank on the condition of anonymity. He adds that the trend will be clearer only next year. Kumar Saurabh Singh, a partner with Khaitan & Company that has been involved in many high-profile cases under the Insolvency and Bankruptcy Code (IBC), 2016, argues that more government interventions will be required to make the auction of power sector assets a success.
“The steel industry is on an upswing, but that’s not the case for power,” he adds, explaining why the enthusiasm witnessed in the recent bidding of stressed steel assets may not be seen in power, too. Rajiv Gupta, managing director of Arpwood Capital, which helped the Tatas buy Bhushan Steel, says the government intervention can be a catalyst in helping find new owners for distressed power assets.
He says power companies referred to IBC will be sold at an appropriate price. “Once the current equity shareholders (promoters) are taken out, IBC will not fail in finding solution to the power companies.” But there are two factors that are in favour of the distressed assets, if they can find time before the bankruptcy rules kick in. It will be a while
before renewables can reduce the dependency on thermal and demand is rising at a steady clip in the meanwhile.
With no new capacity being added in thermal and hydro, it’s only a matter of time before buyers come knocking.
The peak capacity of solar comes during the day, while peak demand is at night. Besides, solar power has its own issues to contend with. But the big question is, can these companies stay solvent for longer than it will take for demand to catch up?