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Proposed reforms don't address issues of power sector, says L&T Power CEO Shailendra Roy

PB Jayakumar     May 22, 2020

The current proposed reforms are inadequate to address issues of India's power sector and fundamental policy drawbacks needs to be addressed to make the sector at par with developed nations, says Shailendra Roy, Managing Director & CEO of L&T Power and Whole-Time Director or Larsen & Toubro, India's largest engineering company, in an interview with PB Jayakumar.

Business Today: What needs to be done to make Indian power sector at par with developed nations?

Shailendra Roy: Demand enhancement, strengthening of transmission and distribution sector, funding availability and improving quality of power are required to make Indian power sector at par with developed nations.

India's per capita electricity consumption is around 1200 (kilowatt hour) kWh which is far below the world average of 2674 kWh. China and the USA together account for almost 40 per cent of the world's total electricity consumption. The plain reason for this is lower demand in India from all categories of consumers - household, commercial, agricultural and industrial. This demand has fallen sharply in wake of the extant Covid-19 crisis.

Though the government's SAUBHAGYA scheme claims to have provided connections to 100 per cent households, that is not sufficient. Under this scheme, the beneficiary households were provided only one LED light and one power plug.

To up the demand from commercial and industrial consumers, a rise in economic activities including industrialisation and infrastructure development is a must.

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Commercial and industrial consumers that account for 50 per cent of total demand, contribute more than 70 per cent of the revenue of discoms. However, the tariff levied on industrial consumers is around 40 per cent higher than that of residential consumers, a disparity owing to cross-subsidisation. Recently, CII used the examples of 20 countries including Germany, Japan, the UK, Spain, USA to bring out the fact that only India has higher prices for industrial consumers compared to residential ones. Now is a good time to review this. This could also be a boost for the 'Make in India' scheme, where there is opportunity to bring in investment from Korea and Japan, which are diversifying away from China. An enabling policy framework is essential to make this happen.

The power plants in India are run at lower Plant Load Factor (PLF) because there is dearth of matching transmission and distribution infrastructure. The same should be strengthened. The distribution sector is poorly managed and is financially stressed. Relevant reforms are required in the distribution sector to improve its lot.

The banking system in India is in bad shape due to the huge number of NPAs and liquidity crunch. The lending rates are high resulting in expensive loans for power projects, making it difficult for developers to repay. Suitable banking reforms should be in place to arrange finance for various power sector projects at affordable interest rates.

India, in comparison to other developed nations, does not have quality power. What this means is that the PLF of power plants in India is very high and there is no spare power source to cater the country's need in case of emergency. Further since the last six years no major industry has come up. It is imperative for us to set up new industries to provide the required boost to our GDP growth and also to provide employment opportunities.

Further, in case we get into industrialisation in a huge way, there could be a shortage of power. We need to understand here that we cannot depend on renewable sources to meet our base load demand and considering that a thermal power plant takes 6-7 years to come up from scratch, it is high time that we concentrate on becoming self-sufficient in power which can only be achieved if the government acts immediately. For at least ten years from now, till renewable power becomes a dominant source with installation of sustainable energy storage facilities, we need to keep on adding thermal power plants for their reliability in providing quality power to India, in order to continue its growth story.

BT: What are the fundamental policy drawbacks that are required to be addressed? Are you happy with the proposed changes?

Roy: There are mismatches in power sector policies of the government. On one hand, the government has policies like Make in India and Phased Manufacturing Programme (PMP) to promote indigenisation, on the other hand, there are some model bidding documents (like the Model Bidding Documents for DBFOO) released by Ministry of Power where it is not mandatory for developers to source domestically manufactured equipment. This kind of mismatch allows developers to source cheap equipment from China resulting in underutilisation of domestic manufacturing facilities set up by companies like us.

Further, India has been envisaging boosting domestic manufacturing for solar power plants, where currently more than 80 per cent of the equipment is imported. However, to achieve this, a policy framework that ensures long term off-takes at sustainable prices is necessary. As an example, China changed its focus from generation to manufacturing and went on to set up large solar plants that offered them economies of scale, helping in lower costs and capture the global market. Similarly, there have been instances where Indian NBFCs like PFC and REC have financed the projects using Chinese equipment.

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Though several positive changes have been proposed in the draft Electricity (Amendment) Bill, 2020, none of the changes addresses the issues faced by domestic power equipment manufacturers. Other changes such as establishment of Electricity Contract Enforcement Authority, deemed adoption of tariff discovered through bidding process, direct transfer of subsidies, reduction of cross-subsidies, provision of distribution sub-licensees and franchisees are positive changes but require more clarity regarding implementation.

Other policy drawbacks pertain to the resolution of stressed thermal projects, tariff re-negotiation issues like in the case of Andhra Pradesh renewable projects in 2019 and the longstanding issue of discoms' poor financial and operational performance.

Attempts like that of the Insolvency and Bankruptcy Code for stressed projects and UDAY for addressing discoms' performance have been made, however, these schemes have had limited success in meeting their objectives.

Recently, liquidity infusion into discoms has been announced. This liquidity infusion is good for resolving the issue of discoms' existing dues to gencos, but is likely to meet with the fate of UDAY and earlier discom bailout schemes if discoms are not made accountable for undertaking necessary steps to improve their operational efficiencies and financial health. It is, therefore, important to have a robust monitoring mechanism as part of the scheme and ensure that it is rigorously enforced.

BT: Why is the private sector not investing in India's power sector as anticipated especially in transmission and distribution?

Roy: Private players have burnt their fingers badly in the power generation sector. The government has declared 34 power plants totalling around 40 GW as stressed assets wherein most of the plants are owned by private firms. These plants' viability was marred by various issues like non-availability of coal, lack of PPAs, inability of financially stressed discoms to pay dues, funding issues, other issues resulting in time and cost overruns, etc. The shift in government focus to augmenting renewables capacity and the coal allocation scam have been unfortunate for the private sector. These issues degraded the financial health of promoters and most of them are under NCLT for resolution. Lending banks and financial institutions have also suffered a huge loss on account of these stressed projects and are forced to take huge haircuts during resolutions of such projects. 

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The private sector has limited its presence in transmission, which is primarily led by PGCIL. A key factor that has prevented the private players from investing in transmission is the plight of the generation projects in the private sector: projects in the generation sector got stranded due to various reasons, which caused uncertainties regarding commissioning possibility of such projects, thus threatening the feasibility of associated transmission projects. Further, securing Right of Way for transmission lines is a significant challenge owing to a combination of factors vis a vis high population density, usage of land for infra projects and locals demanding their rights.

The distribution sector is largely serviced by state owned discoms, most of whom have been facing operational inefficiencies and financial losses. Key reasons include inadequate and delayed tariff revisions, power theft, and because of their financial situation, inability to invest in upgrading the distribution network. This situation has led to low private participation in the sector, other than some cases in Delhi, Mumbai and Odisha.

BT: What is the permanent solution to solve the issues of discoms?

Roy: Discoms' financial position has worsened over the past year. Dues to power producers have gone up to around Rs 90,000 crore in March 2020 (y-o-y increase of 40 per cent), with more than 85 per cent of these 'overdue' for more than 2 months. The issue of payment delays could become more serious going ahead, since discom finances are likely to get adversely impacted due to lower industrial and commercial power demand, which contribute around 70 per cent of the revenue of the discoms.

While the recent liquidity infusion initiative should help in resolving discoms' outstanding dues, it is imperative that fundamental changes be made in discom operations to resolve their issues. Discoms have been incurring losses on every transaction. To ensure revenue boost, it is important that tariff hikes be made on a regular and adequate basis. Apart from reforms, privatisation of discoms or franchisee model seems to be promising. Cities like Mumbai and Delhi have been using these models for certain areas for long and are doing fine compared to state owned discoms. Such a provision has also been indicated in the recently published draft Electricity (Amendment) Bill, 2020 which is a positive step towards improving the condition of discoms.

Another way is through technology utilisation; a key example being the installation of smart meters. To quote recent figures, Energy Efficiency Services Limited's drive towards these installations has enabled those discoms to generate a billing efficiency of 95% during the lock down, resulting in a 15-20 per cent average increase in monthly revenue per consumer. Discoms' revenue leakage can be cut down by channelling the subsidy burden as a direct benefit transfer from the state government to the customer, provision for which has been made in the draft Electricity (Amendment) Bill.

The above steps are likely to buttress the financial health of discoms, and they would be in a better position to invest in modernizing their network to cut down on AT&C losses, which are high at around 21 per cent. The aim is to reduce the losses to around 12 per cent.

BT: What is required to attract investments into the sector?

Roy: For new investments in the sector, it is essential that potential investors see profitability in investing and also see existing investors getting fair treatment.

Government should ensure quick and seamless arrangement of land, coal and statutory clearances like Environment Clearance for faster development of power projects. Many power projects in India are currently stressed on account of these issues. There should also be processes in place so that approvals vis a vis environment clearance, forest clearance, right of way, etc, are granted with shortened cycle time without compromising on due diligence. Timely tariff hikes, steps against power theft, investments in modernizing distribution networks, etc, are the key steps for discoms to be robust.

Distribution sector is severely stressed and needs government hand-holding to come out of this financial distress. Reforms including privatisation/franchisee model for discoms should be expeditiously introduced for recovery of the distribution sector. There should be regulations in this regard and no project should be strained due to lack of firm PPA as happened in the past. Further, some states in the recent past have refused to honour the PPA conditions or have tried to cancel the PPA on tariff issues. In the draft of Electricity (Amendment) Bill, it is proposed to establish a separate regulatory body and put such issues on the fast track, which is a positive move but is required to be strictly implemented as these events negatively impact current and potential investment in the sector.

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