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.
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|
|Fuel Type||% of total (Mar 2015)|
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).
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.
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.
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.
Table 2: Bank-wise Exposure to Power Sector
|As on 2015||Rs Mn||Share%||% of Outstanding loan book|
|PNB (As on 2014)||3,37,790||6.0%||9%|
|Central Bank of India||3,32,630||5.9%||16%|
|Bank of Baroda||2,70,668||4.8%||15%|
|IOB (As on 2014)||1,90,649||3.4%||2.5%|
|Corporation Bank (As on 2014)||1,19,172||2.1%||17%|
|Exposure of top 13 lenders||69.2%|
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).
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.
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)
Statutory Details: Multi-Act Equity Consultancy Private Limited
(SEBI Registered Portfolio Manager – Registration No. INP000002965)
The views expressed in this article are for educational and reading purpose only. Multi-Act Equity Consultancy Private Limited (MAECL) does not solicit any course of action based on these views and the reader is advised to exercise independent judgment and act upon the same based on its/his/her sole discretion, their own investigations and risk-reward preferences. The article is prepared on the basis of publicly available information, internally developed data and from sources believed to be reliable. Due care has been taken to ensure that the facts are accurate and the views are fair. MAECL, its associates or any of their respective directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such views and consequently are not liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way for decisions taken based on the said article.
It is stated that, as permitted by SEBI Regulations and the internal Dealing Policy, the associates, employees, affiliates of MAECL may have interests in securities referred (if any).
The contents herein – information or views – do not amount to distribution, guidelines, an offer or solicitation of any offer to buy or sell any securities or financial instruments, directly or indirectly, in the United States of America (US), in Canada, in jurisdictions where such distribution or offer is not authorized and in FATF non-compliant / non co-operative jurisdiction and are particularly not for US persons (being persons resident in the US, corporations, partnerships or other entities created or organized in or under the laws of the US or any person falling within the definition of the term “US person” under Regulation S promulgated under the US Securities Act of 1933, as amended) and persons of Canada.
Risk factors: General risk factors
a. Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved.
b. As with any investment in securities, value of the Client’s investments can go up or down depending on the factors and forces affecting the capital market. MAECL is neither responsible nor liable for any losses resulting from such factors.
c. The information on investments is subject to external risks such as war, natural calamities, and policy changes of local / international markets which affect stock markets.
d. MAECL has renewed its SEBI PMS registration effective October 14, 2014 and has commenced its portfolio management activities with effect from January 2011. However MAECL has more than 10 years of experience in managing its own funds invested in the domestic market.