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September 11, 2017

Sector Report: Power

This report is available to users in India for ₹40,000 + applicable taxes


Government initiated certain steps to address key issues; timely and effective implementation crucial


Government has initiated several measures to alleviate stress in the generation segment. Most recent being SHAKTI policy, which aims at removingfuel supply bottleneck by providing coal linkages to plants having Letter of Assurance (LoA). This would keep their generation cost low and ensureincreased plant availability with assured fuel supply. However, availability of fresh PPAs and discounting on existing PPA tariffs are key monitorables.The flexible coal utilization policy for state and central generation plants notified earlier in May 2016 has also resulted in bringing down fuel cost, whichis evident from reduced average generation cost of NTPC plants at Rs.1.94/kwh in FY17 as compared to Rs.2.01/kwh in FY16 owing to improved coalquality and supply.


The government is also considering to set up a holding company (termed as National Asset Management Company (NAMC)) for identified stressedassets, with the help of NTPC, PFC and REC besides banks, that will auction stressed plants or lease them on contract basis after the lenders takemanagement control. However, the lenders and promoters will have to take significant haircut through debt-equity swap. Government has also givenmore powers to RBI for dealing with stressed assets and schemes like SDR, S4A and flexible structuring of outstanding loans (5:25 scheme) introduced by RBI are aimed at relieving the stress to an extent.


Issue of oversupply in power sector to persist; complete resolution not expected by 2022


Although several measures have been initiated by government, robust pick up in power demand is crucial for revival of stressed generation segment.As of 2017, major discoms have already tied up for excessive power. Overall power procurement structure is also expected to undergo a shift anddiscoms are likely to prefer short/ medium term procurement instead of long term PPAs on account of increasing share of intermittent renewableenergy and rise in industrial open access consumption. As discoms are avoiding tying up for excessive capacities under such uncertain sales growthprojections, negligible fresh PPAs for conventional power are expected till 2022 leading to continued financial stress on generators with untiedcapacities.


Sale of power through the Merchant route is also an unsustainable option owing to continued decline of short term power prices, which declined toRs.3.0/kwh in FY17 (weighted avg. of power transacted on exchanges and bilateral through traders) and is expected to remain low at about Rs.3.3-Rs.3.5 even in 2022.


Low tariffs of Rs.2.4/kwh in exchanges can cover only fuel cost; thus limiting any possibility of revenue generation for untied capacities. Consequently,consolidation in the sector is expected to be slow and takeover of stressed assets to be limited to the extent of tied-up capacities as witnessed in recentpast.