R & M: A Flicker Of Interest
The safest prediction that can be made for the power situation in the Ninth Plan is that it is likely to stay grim. Despite the governments desperate attempts to attract private sector investment in greenfield power projects, energy shortages have crossed 14.5 per cent over the past five years and peaking shortages are estimated at 28.2 per cent.
In its wisdom, the governments solution to the crippling power shortages has been to create additional generating capacity. What it ignored in the process was a ready-made low-cost and relatively short-term option to the power crisis: renovation and modernisation (R&M) of thermal and hydel power plants. At best, R&M schemes were given only secondary importance.
Power Finance Corporation chairman Uddesh Kohli, who has been advocating the cause of power sector R&M, believes that the cost and time of adding capacity through R&M is less than half that of adding new capacity through greenfield projects. This would imply that the cost of power addition through the R&M route would be less than Rs 2 crore per mw compared with Rs 4 crore per mw that greenfield projects cost.
Kohli estimates that 3,000-4,000 mw power could be easily added through the R&M route in the next five years. This, according to him, would cost Rs 5,000 to Rs 7,000 crore.
It is not that the government has not been aware of the bonanza that it can reap through the R&M schemes. In fact, it launched phase I of its R&M programme during the Seventh Plan for 34 power stations covering 164 old thermal units and involving a total capacity of 13,586 mw and a total investment of Rs 1,223 crore. The programme targeted additional generation of 7,000 million units (MU) per annum from the renovated units.
The results at the end of the programme were startling: generation exceeded 10,500 MUs!
Encouraged by the success of phase I, phase II covering 46 old thermal stations involving 209 generating units with a total capacity of 20,871 mw was taken up during the Eighth Plan. This programme was expected to bring in an additional generation of 8,750 MUs per annum. Total investment was to be Rs 1,848 crore.
Because of the cash crunch facing the Centre, phase II was to be funded totally out of the state plans. This proved a problem. Since state electricity boards (SEBs) were in poor financial health, phase II floundered for lack of funds.
The government woke up to this reality in 1995, and allowed private investment in the power R&M sector as well. The policy for private sector participation in R&M of power plants looked at three options: (i) lease, rehabilitate, operate and transfer (LROT); (ii) sale of plant; and (iii) joint ventures between SEBs and private parties.
Under the LROT option, the private promoter would take over the power station on a long-term lease, invest in it, carry out the R&M of the power station and take over its operation and maintenance. Normally, the station would revert to the SEB after the contracted period. The arrangement could also be renewable.
Alternatively, SEBs could offer power stations, which were uneconomical for them to run and difficult to maintain due to overage, for outright sale to private parties. The current worth of the plant would be the reserve price for the sale.
Under the third option, a joint company could be formed between SEBs and select private collaborators to undertake R&M and own, operate and maintain the power station.
The government had clarified that the options were only illustrative. The choice and initiative were to lie with the states. The degree of privatisation could vary with each option. These could involve temporary or permanent transfer of plant management to private agencies.
But the policy was both half-baked and ill-conceived. No preliminary work had been undertaken by the government to identify the projects that required R&M treatment. Moreover, the policy was announced even before the government had prepared the packages listing the problems of the power plants and the kind of financial and technical help that were needed to raise plant load factor (PLF) or a plants generating capacity.
Part of the problem was that the Central Electricity Authority (CEA) stopped conducting these studies altogether. The CEA cell that did these studies was disbanded.
This fact was highlighted by assistant secretary of the US department of commerce Ray E Vickery, who lamented at a press conference that in the absence of proper packages, it was well nigh impossible for any financial institution to extend support to an R&M project. Kohli concurred saying there was an acute need for central initiative on this issue.
Both Vickery and Kohli believe that finances are available aplenty for R&M activity. Vickery says that US Exim is quite willing to extend funds for viable R&M activity in India. Kohli points out that the Power Finance Corporation (PFC) has not turned down even a single R&M scheme for lack of funds.
In fact, the government has even scrapped the criteria of a minimum three per cent rate of return for SEBs to be eligible for PFC loan for their R&M schemes. PFC is learnt to have earmarked around Rs 3,000 crore for R&M schemes. State governments have been empowered to clear R&M schemes costing up to $150 million.
Despite the brave pronouncements of Vickery and Kohli, it is not as easy to arrange funds for R&M schemes as it might sound. Most of the foreign funds are linked to equipment supplies from those countries. Even the recent US interest in the Indian R&M programmes is seen by the industry as an indication of that countrys desire to grab as much of this business as possible.
Even PFC loans are not easy to come by. The corporation has, rightly, devised a detailed procedure to evaluate R&M schemes before considering them for possible financial help.
A major part of the blame for the tardy progress in the R&M sector lies with the SEBs, who have to consider renovating and modernising their plants. This is precisely what the SEBs want to avoid; they would prefer to keep flogging the old and inefficient plants till they drop dead and completely stop generation.
The government is well aware of this reluctance on the part of the SEBs to shut down the plants for R&M and, as Pradip Baijal, additional secretary in the power ministry, said at a conference recently, the government is considering a proposal to allocate a part of the 15 per cent unallocated power with the Centre, to the SEBs undertaking R&M programmes. This, according to Baijal, would help the states tide over any short-term shortages that might be caused by the R&M schemes.
This may not be the only reason SEBs are avoiding R&M for their plants. Most of them want to acquire new greenfield projects which would be much more efficient and would have longer lives. The SEBs are under the impression that the R&M schemes would weaken their case for new projects.
This could be the reason SEBs are putting as much obstruction in the way of formulating and implementing R&M schemes as possible. Who wants to have an old wife if he is getting a new one, quips Kohli.
If the reluctance of SEB managements in undertaking R&M schemes is economically unjustified, the opposition of SEB staff is strange. SEB staff, being public sector employees, are averse to accepting private sector employees as their bosses. The infusion of private sector funds in their plants, they say, would change the working atmosphere in the plants!