Slowing power projects hit equipment orders

In July last year, Alstom Projects won a Euro 450-million (Rs 3,130-crore) order from GVK for their 800-Mw gas-based Jegurupadu-III power project in Andhra’s East Godavari district.

The first unit under the engineering, procurement and construction contract was supposed to be booked in the third quarter of the current financial year and the rest after relevant government clearances.

Meanwhile, fortunes of gas-based power projects took a beating, with production from the KG-D6 basin falling. Contracts for power plants also froze. “We have not yet cancelled the contract, but have kept the order alive. It will be executed whenever the project gets off ground,” said a GVK executive.

Sravanthi Energy's contract with GE Energy for gas turbines for their 450-Mw plant at Kushinagar (in east UP, 53 km west of Gorakhpur) faces a similar fate, say sources.

In response to a questionnaire, GE said the order had not been cancelled but gave no information on the status, saying they were bound by client confidentiality. Sravanthi, which had claimed it would commission its first unit by the third quarter, did not respond to queries.

Large orders in the power sector, which go upwards of Rs 2,000 crore, are generally umbrella ones.

“Generally, these orders are not cancelled right away. They change the framework, revise the dues and in case there is a turnaround, they are revived,” said a top executive from a power company.

It is not only gas-based power equipment orders in trouble. With coal-based power projects facing fuel worries, the execution of many such equipment contracts await execution.

“We are seeing order cancellations across the power sector – in coal, hydro and other renewables,” said Kameshwara Rao, head of the power practice at PricewaterhouseCoopers.

Lower-than-expected coal production and delay in the grant of coal linkages is playing spoilsport for coal-based projects. Coal linkages come with riders wherein the state producer, Coal India, will guarantee only half the coal necessary to run a power project. Imported coal-based power projects were hit by changed regulations in Indonesia which have impacted fuel costs and the viability of projects.

Rao says since there is a lack of clarity on when companies could re-start projects, companies might have frozen project development costs. “If orders are delivered, they become financial commitments, bringing along transportation and storage costs,” he said.

Industry experts say more orders, especially of bigger equipment like turbines and gensets, could go into the cold storage mode. Since power segment orders are huge, sector analysts say revenue estimates may get impacted.

Sailesh Kanane, a stock analyst at Angel Stock Broking, said a number of capital goods companies do not notify order cancellations. “A lot of such orders have not been knocked off from the order book. But they might start doing so,” he said.

Analysts say a number of orders have been slowing for a while. “Earlier, the percentage of slow-moving orders used to be four to five per cent for Larsen & Toubro. It has gone up to eight to 10 per cent,” said Kanane.