Power Sector: At crossroads

If fuel and land acquisition issues are not sorted the sector may see a shakeout.

India’s power sector is all dressed, but has nowhere to go. At the start of the Eleventh Five Year Plan, the government had set an ambitious target of adding 78,000 Mw, later revised to 62,000 mw after a mid-term appraisal. By March 2012 (when the Eleventh Five Year Plan ends), the total capacity addition will probably settle at 51,000 Mw, well below the target. Till date, an addition of 34,462 Mw has been achieved and FY12 is expected to see substantial addition.

The good news is that despite multiple headwinds faced by the power projects over land acquisition and fuel linkages, the private sector achieved 90 per cent of its target. The state sector achieved 60 per cent, followed by the central sector at 70 per cent.

However, this is where the good news ends. The power sector is in trouble as there is no visibility on how acute fuel shortage is likely to be resolved. By now it’s legion that most independent power producers and functioning at low plant load factors, due to inadequate supply of coal in India. A report by Motilal Oswal Securities says the key challenges faced by the sector are: fuel availability, inland logistics, and back down/lower demand by SEBs, due to deterioration in financials. The Shunglu Committee Report (to suggest measures for reduction in SEB losses) is delayed and is now expected in May/June 2011.

This year isn’t likely to get any better with Coal India revising its production targets down by 60-65 million tonnes in FY12 against its original target. It’s a classic Catch-22 situation for power producers as they cannot even use imported coal to run their plants, as this would drive up the cost of power per unit making it unviable for the cash-strapped state electricity board to buy it. Analysts claim many states in the central region have resorted to blackouts rather than buying high cost power. This could mean that several projects may operate on sub-optimal PLFs in the interim period.

If this continues, the MOSL report says: “Given the headwinds, current conditions would throw up possibilities of mergers and acquisitions. Projects with poor due diligence could suffer, similar to the steel sector during the period 1997-2000.”