Power Play!

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The Indian power sector, which plays a key role in the current government’s ‘development plan’, is undergoing a major upheaval. We hereby present a write-up covering the sector’s issues and share our views on some of the recent happenings.

Current State

As on 31st of March 2015, nearly 70% of India’s power capacities were thermal capacities. Moreover, majority of the thermal capacities are coal based. Also, participation of private sector in power generation has increased significantly from 11% of total installed capacity in FY06 to 38% currently (as seen in Table 1 below).

Table(s) 1: Ownership and Category Wise Power Capacities

Sector MW (March 2015) % of total
State Sector 95,079 35%
Central Sector 72,521 27%
Private Sector 104,122 38%
Total 271,722 100%
Fuel Type % of total (Mar 2015)
Thermal 70%
Nuclear 2%
Hydro (Renewable) 15%
Other (Renewable) 13%

Renewable energy (ex-hydro) segment is largely owned by private sector. Also, proportion of renewable energy has increased significantly in the 11th and 12th plans due to factors like favorable government policies in terms of tax benefits and higher tariffs, declining costs due to scale benefits, fuel supply and environmental issues in case of thermal power.

Low Plant Load Factor (PLF)

Various issues plaguing the non-renewable power plants like lower production of domestic gas and lower off-take by SEBs due to their poor financial condition have resulted into lower utilization of power sector capacities in form of lower PLFs (as seen in chart 1 and chart 2 below).

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Declining Power Deficits

India’s power deficit seems to have come down significantly over the years with new capacities coming into operation (see chart 3 below). Inter region transmission capacities are also expected to increase significantly in coming years, which is expected to increase the asset utilization of the industry.

But then, merchant power tariffs have come down significantly from their peak with new capacities added in recent years.  Merchant tariffs had  gone  up  from  INR 3.0/unit  in FY06  to INR 9.0/unit  in FY09  due  to  increased  power deficit. Higher merchant power tariff was one of the key incentives for higher private sector participation in power sector.

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SEB Concerns

Loss in transmission, power theft and delays in tariffs revision have led to significant transmission and distribution (T&D) losses, which has resulted in SEBs (State Electricity Boards) accumulating significant losses over the years. Eight states account for more than two-third of the total accumulated losses, mainly: UP, Tamil Nadu, Rajasthan, Haryana, Bihar, Jharkhand, AP and Telangana.

T&D losses have been gradually declining over the years (from 34% in 2002 to 20% in 2015) as seen below in chart; but they are still one of the highest amongst emerging economies.

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Overall tariffs have increased in recent years with some SEBs increasing power tariffs post financial restructuring in 2012/2013. Off late various SEBs have resorted to load shedding to reduce the losses. Certain SEBs are contemplating to sell their power generation assets to reduce the debt.

SEB losses have been funded by bank borrowings guaranteed by state governments. As on May 2015 total exposure of the banking sector to SEBs stood at INR 2,00,000 crore and to power sector as a whole was INR 5,67,400 crore (which is ~8% of total outstanding bank advances ).

 

Power Sector – Debt

Overall industry level debt/total assets ratio has more than doubled over last 10 years (as can be seen in chart 4 below). A closer analysis reveals that power companies having Debt/Total assets ratio of more than 50% contribute to almost two-third of the industry debt. As Banks are currently facing stress on their already elevated exposure to the Power Sector, they are turning cautious with respect to incremental lending to new Thermal Power projects. Refer Table 2 below for Bank-wise Power sector exposure as a % of total loan book.

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Table 2: Bank-wise Exposure to Power Sector

As on 2015 Rs Mn Share% % of Outstanding loan book
SBI 10,00,850 17.6% 10%
Canara Bank 4,56,200 8.0% 29%
PNB (As on 2014) 3,37,790 6.0% 9%
Central Bank of India 3,32,630 5.9% 16%
BOI 3,07,910 5.4% 7.5%
IDFC 2,80,160 4.9% 37%
Bank of Baroda 2,70,668 4.8% 15%
IDBI 2,65,020 4.7% 6%
IOB (As on 2014) 1,90,649 3.4% 2.5%
Andhra Bank 1,40,623 2.5% 5%
ICICI Bank 1,36,460 2.4% 18%
Corporation Bank (As on 2014) 1,19,172 2.1% 17%
HDFC Bank 89,620 1.6% 5%
Exposure of top 13 lenders 69.2%

Capex trend

Between 2008 and 2011, power industry in India experienced very high capex with large capacities being added. With the industry facing operational issues like fuel supply, SEB issues, high leverage; average capex to sales ratio in the last three years has declined significantly when compared to the long-term trend (see chart 6 and 7 below).

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SEB Reforms

The Cabinet has recently given its approval for the Ujwal DISCOM Assurance Yojana (UDAY), which will enable states to earn additional/priority funding by power ministry and will also ensure additional coal at notified prices. The scheme requires quarterly fuel cost adjustment, annual tariff increase, reduction in T&D losses to 15% levels.

Overall, the scheme appears to be better structured than previous ones.  It uses incentive and punishment structure for SEBs reforms.  SEBs are expected to be able to purchase more power due to lower interest cost resulting in better PLF for generating companies.  However, no specific funding provision has been announced for investment in distribution infrastructure. SEBs have low bandwidth to invest, based on current financials.

Conclusion

The declining capex trend shows that high-growth phase in power capacities as seen in past might not be a possibility in near future.  One can expect low capacity expansion in thermal power for the next three to four years till the time sector’s existing issues are sorted out and utilizations of existing capacities increase. Significant capacity additions are expected mainly in the ‘renewable’ segment.

Financial restructuring reforms related to SEBs appear to be only temporary solutions. Long term solutions should aim at reducing T&D losses, increase investment in distribution infrastructure and regular increase in tariffs.

 

(Sources: CEA Data, Company Annual Reports, RBI Data, Other Broker Reports and News Articles)

 


 

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(SEBI Registered Portfolio ManagerRegistration No. INP000002965)

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Portfolio Management Services (SEBI Registration No. INP000002965) are offered through Multi-Act Equity Consultancy Private Limited (CIN: U67120PN1993PTC074692), which is a wholly-owned subsidiary of Multi-Act Trade and Investments Private Limited; Investment Advisory Services (SEBI Registration No. INA000008589) are offered through Multi-Act Trade and Investments Private Limited (CIN: U65920MH1997PTC109513).