Questions for NTPC and Coal India

Even though demand for power is growing, around 240 mn Indians still have no access to electricity

Two news items in the past one month have caused some jubilation in India’s power sector. One is about Coal India’s plan to list itself on the London Stock Exchange and the other is about NTPC’s launch of masala bonds to raise rupee-denominated loans worthRs 2,000 crore, which however would have to be settled in dollar.

Both these developments indicate the range of these companies’ ambition, driven as they are by their desire to tap the pool of global funds for sustained rapid growth. 

It is also significant because Coal India is the country’s and indeed the world’s largest producer of coal and NTPC is India’s largest producer of power, accounting for a little more than a fourth of the country’s total power generation.

It is, however, necessary to evaluate how justified is such celebration and whether Coal India and NTPC are formulating their growth plans in tune with the fundamental shifts that have taken place in the energy scenario, raising worrying questions about the future relevance of their businesses. It is, therefore, important for both the companies to at least start a debate on the changing energy scene that should force a review of their business goals and priorities. But given the nature of their ownership pattern (both are state-owned companies though they were recently listed on the stock exchanges), there are good reasons to fear that their response time may be too slow to avoid an adverse impact of the business climate on their performance.

Consider the following factors. Last financial year, the Central Electricity Authority estimated India’s peak power demand at a little over 165,000 megawatt (Mw). But India’s total installed capacity that year was nearly double that demand level or about 315,000 Mw. The huge gap between the installed capacity and the power demand is a reflection of India’s poor efficiency in running power plants that results in low capacity utilisation. Among the reasons responsible for low capacity utilisation are the inconsistent quality of coal supplies, losses incurred during transmission and distribution which are largely caused by theft and illegal connections and the poor financial health of many of the power distribution companies. 

The government has already launched a scheme allowing the stressed power distribution companies to reduce the burden of their borrowing with the help of state government bonds. Experts have found flaws in that scheme even as a large number of power distribution companies have embraced it. While bonds have been issued and the respective state governments have taken the hit in terms of incurring higher fiscal deficits, there is yet no guarantee that all these utilities would be raising tariffs by margins that would prevent their relapse into the kind of financial mess they were in earlier. Nevertheless, these power utilities would see better days at least for the next few years and this would create more demand for power and the capacity utilisation levels of most power plants could get better. 

Simultaneously, power distribution companies have also embarked on a major drive to reduce transmission and distribution losses. The overall incidence of transmission and distribution losses has already seen a southward direction, although the current levels of around 22 per cent are nowhere near the ideal. This is expected to improve the financial health of the power distribution companies and encourage them to demand more power and sell it to customers who will pay for it.

The biggest irony of India’s power sector is that even though the demand for power is growing at over 8 per cent annually on an average, an estimated 240 million Indians still have no access to electricity. Power distribution reforms can help reach electricity to many of those 240 million Indians and will thereby improve the demand for power and increase the power generating companies’ capacity utilisation. 

The power sector’s huge dependence on coal imports is another problem that is now being tackled through a combination of fresh initiatives. With Coal India increasing its production, imports have declined from the levels witnessed in the past few years. For instance, India’s coal imports in 2014-15 were estimated at 212 million tonnes (more than a third of the country’s total domestic coal production). These imports are now declining thereby also helping reduce the imbalance in India’s trade. 

Coal block auctions have also been resumed, though fresh production from the newly auctioned blocks has yet to make an impact on domestic availability of coal. But once demand for power picks up, domestic coal production should be able to rise to the occasion and obviate the need for imports.

But even as these knotty issues about power distribution reforms and increased coal availability will get resolved, the challenges before Coal India and NTPC will get tougher.  If capacity utilisation of the existing power plants in India improves even by 10 per cent as a result of these measures, more power would be available for distribution and that would be far in excess of the demand. That would be bad news for the financial viability of the existing as well as new power projects that NTPC or any other power companies are planning to build in the coming years.

Clearly, even with a marginal increase in capacity utilisation and even after ensuring that more Indians access electricity, the volume of built-up power capacity would remain far in excess of the demand, questioning the viability of new power capacities that may be on the anvil. This will also require NTPC to frame a fresh and a more considered strategy.

The problem may become more complex for Coal India. At present, almost 60 per cent of the existing power capacity in the country runs on coal. But there is now a move away from coal-based thermal plants for environmental reasons. Power tariffs for plants based on renewables such as wind and solar energy have been declining rapidly. 

The share of renewables power in India’s total capacity is 16 per cent and is set to rise even as the government scales up its plans to establish more plants based on solar and wind energy. Suddenly, the renewable options have become viable with tariffs falling.

If that is the trend, who will Coal India sell its coal to? Yes, of course, Coal India can go on selling coal to those coal-based thermal plants that would continue to account for a sizeable chunk in India’s power sector. But the future prospects of a company that is primarily producing coal do not look that rosy any more.

Hence, it is time for both NTPC and Coal India, India’s Maharatna public sector undertakings, to face up to a basic existential question about the kind of future they would like to create for themselves.