NTPC's Korba super thermal power station: Located in Chhattisgarh, it is one of Asia's biggest power plants

Admittedly, distribution reforms hold the key to commercialising the Indian power sector and converting electricity into just another commodity. Only then will the sector attract investment flows to meet power demand. However, investments cannot wait for the sector to mature, since the demand for power is soaring. Therefore, leading the government's capacity addition programme are central public sector undertakings like National Thermal Power Corporation (NTPC). In the 10th Plan period (2002-2007), the private sector is expected to add a modest 5,000 mw against the central sector, which is expected to contribute around 17,000 mw, a significant part of which is being contributed by NTPC.

Fortunately, it is not a case of fools going where angels fear to tread. Not at least for the last five years, prior to which collections were of the order of 70 per cent, which means for every rupee of power sold, only 70 paise was collected. The receivables were mounting-touching as high as Rs 24,000 crore-and there was little that the Central Power Sector Undertakings (CPSUs) could do. The central government then cut a deal with the states collectively that involved part waiver of the interest component and deferred payment of the outstanding dues. In return, the CPSUs were allowed access to the states' till-that is, the states account with the country's central bank, the Reserve Bank of India-in case of default on power purchased by the utilities. And, lo and behold, the defaults vanished, and overnight collections vaulted to a stunning 99 per cent.

With this gilt-edged safeguard, CPSUs are better placed than the private sector in the business of capacity addition. For one, it significantly insulates the CPSUs from recovery losses, which are about 35 per cent. The private sector, on the other hand, has to factor in the losses while financing its projects. However, the CPSU's ability to finance projects is also limited, as lenders look to the cash flow volume to secure their debts (apparently, the fact that they can tap the state's account with RBI is not a big assurance). Hence, while NTPC is capable of adding around 22,000 mw in the 11th Plan period (2007-2012), based on its ability to service its debt liabilities, it is currently targeting only around 17,000 mw.

Courting Private Producers

With power demand rising at around 8 per cent annually over the last two years, led by industrial demand that has grown at 11 per cent a year, the power ministry is targeting around 62,000 mw capacity addition in the 11th Plan period. (Just for the record, India has an energy shortage of 7.8 per cent and a peak shortage of 11.23 per cent.) Of this, CPSUs are expected to contribute 31,000 mw, the state sector 20,000 mw and the private sector, the remaining 11,000 mw.

And this forms the basis of the central government's argument for promoting private capacity addition. Over the last two years, the vehicle for this promotion is a multi-disciplinary group, called the Inter Institutional Group (IIG), involving governmental financial institutions. Here, only those private projects with competitive tariffs were taken up and their last mile problems solved. Subtle arm-twisting became commonplace-states were often told that if they delayed signing up competitive projects, they would be denied additional power supply from the central generating stations.

This process lost its relevance when the problems of the 'pre-cooked' competitive projects were addressed one way or another-several projects were turned away when they failed to line up gas supplies. There was, however, one project that did not take off owing to the perception of the promoters' credentials. The financial institutions refused to finance a 1,000-mw project promoted by Jaiprakash Industries when they found that the equity component in the project fell below the 30 per cent mark during the course of the project. The FIIs, having burnt their fingers with the Enron-promoted Dabhol project, were not willing to take chances. At final count, the IIG process saw through around 8,000 mw of private capacity.

In what appears to be the next level of intervention, the central government is undertaking a key, yet 'soft', aspect of project development-obtaining the various clearances like land, environment, domestic captive mine, and tying power sale with several states. However, the role is limited to that of facilitation and not that of providing any financial comforts to mitigate the payment risks posed by the purchasing utilities, and that continues to be the critical issue bogging down the sector. The other salient feature of this intervention is the scaling up of projects-4,000 mw apiece-in a bid to reduce power costs. The power ministry is upbeat on the prospects, based on the initial response, which has seen more than 30 companies buy the Request for Qualification (RFG) document. Says Power Secretary R.V. Shahi: "The Sasan and Mundhra projects are very much on schedule. The projects will be awarded by the end of the year." While the Madhya Pradesh-based Sasan project will operate on domestic coal, the Gujarat-based Mundhra project is planned to operate on imported coal.

The Tariff Challenge

NTPC Chairman T. Shankaralingam: The corporation's plants account for around 25 per cent of the country's supply

To be sure, some big announcements have come recently from the private sector. Tata Power, for instance, has bid for four mega projects, and has already received the RFG for the Sasan and Mundhra projects. Anil Ambani's Reliance Energy, on the other hand, has plans that span nuclear to hydel and envisage Rs 60,000 crore in investment. However, the litmus test for the mega projects will be the response to the next stage of the bid process, where tariffs will be solicited. It is here that the risk perception of the sector will be truly discovered. "We have decided against bidding for the ultra mega projects since the fundamental issue of payment security from the purchasing utilities has not been addressed. And, it is not as if our appetite in the power generation business has been whetted," says Praveer Sinha, Chief Operating Officer, Nagarjuna Power Corporation, which has already inked a deal to sell power to the Karnataka state distribution utility power from its proposed 1,015 mw imported coal-based plant in Mangalore.

The response from one of the bidders is no less cautious. Says Srinivasa Rao, Country Head, AES (India) Ltd, a subsidiary of the global power major AES Corporation: "We have serious concerns about the payment security mechanism as reforms have not progressed adequately. Furthermore, the government could have considered several units of 1,000 mw each, as it would be easier to secure finances for them rather than a single 4,000-mw project in view of the payment risks involved."

Ironically, it is one of the Centre's reform measures that will put pressure on the utilities' payment abilities-to recall, the utilities' deal with the PSUs five years ago, wherein they secured future power bill payments in lieu of partial waivers. While the move became a reform driver since payment became a zero-sum game (either the utilities paid up in full to the central sector power utilities like NTPC or its owner, the state, would cough up the payments), matching distribution reforms have not taken place. Hence, the payment security mechanism for PSUs (which supply over 25 per cent of the country's power) will put pressure on the utilities' payment ability for future capacity addition. Furthermore, the states' finances will now be further strained, since the time is ripe for redemption of bonds issued to NTPC five years ago in lieu of their outstanding dues. Every six months, the states will have to pay around Rs 1,000 crore to NTPC.

AES' Rao: Has serious concerns about the payment security mechanism for the ultra mega projects

In fact, the regulator for multi-state power transfers, Central Electricity Regulatory Commission (CERC), has already 'advised' the government that it must identify escrow capacity, or revenue streams from the utilities' distribution business, that remain unencumbered. The idea: in case of payment defaults, the sponsors of the ultra mega power projects will have direct access to this cash flow. "We are here to facilitate capacity creation at every level. However, we have voiced our concern to the government on the need to ensure a robust payment security mechanism so that the projects are viable," says A.K. Basu, Chairman, CERC. "We have also told the government that such large capacities should be entirely contracted by the utilities on a long-term basis," he added. This typically mirrors the lenders' views, who finance as much 70 per cent of the project cost. Says Jitendra Balakrishnan, Deputy MD, IDBI: "The ultra mega projects are at a preliminary stage and there are issues relating to payment security and imported fuel that we are attempting to address."

It is not as if the private sector is sitting pretty on the ringside. Realising the criticality of fuel in the final power cost, private sponsors are flocking to the coal-bearing states, as domestic coal continues to be the best bet, never mind hurdles like law and order issues. "We have proposals for as much as 18,000 mw of capacity addition in our state. And a good part of this capacity will be exported to other states," says Chhattisgarh State Electricity Board chairman Rajib Ranjan.

With state power utilities allocating as much as 80 per cent of their costs on purchase of power, the key issue facing the sector is the ability to add reasonably priced power capacity. For the market, higher risk will demand higher returns. So don't expect the private sector to be swept off its feet by the suitor at the Centre.