If one were to go by recent news reports, power sector in India seems to be on the track to recovery. With coal auctions completed, a pragmatic approach to environment clearances, a new land acquisition bill, new regulations to deal with financial woes enhanced Mergers & Acquisitions activity things seem to be on the right track.

The installed capacity has shown a healthy growth year-on-year, as is evident below :

Table 1 :Installed Capacity



March 2014

March 2015

Percentage Growth









Large Hydro












Source : CEA

However, reading the fine print may throw up some doubts. The following is the position of PLF of Thermal plants in the last year :

Table 2: Annual PLF


March 2014

March 2015




Source : CEA

The above statistics are not good sight for either investors or financiers. A typical thermal power project is financed assuming a PLF of 80%-85%. Assuming a DSCR of 1.3 for power projects on an average, 65% PLF would yield a DSCR in the range of 1 – 1.05 which is certainly not bankable. Thus attracting new investments in the sector could become difficult.

Lack of coal to blame?

The fall in PLF can be attributed to lack of fuel i.e. coal. The sector was dealt a big blow by the Supreme Court order cancelling all coal mines in September 2014. This problem seems to have been solved by recent coal auctions. However, again reading the fine print, throws up a few questions.

As per the methodology followed for coal auction for the power sector, a reverse auction with the bid variable being transfer price the coal (Variable price) was held. The reverse auction meant the lowest offer would win. This was done to keep the power costs low. An innovative idea with a good intention! However, the bid price went to zero and eventually became negative meaning thereby that the miners would let go of the mining cost and instead pay money for selling coal. Now, the mining cost and reasonable profits have to be recovered by miners, thus the idea was to load the mining costs on the capacity charge while bidding for PPAs.

The loading of the mining cost in the capacity charge would not help in keeping power tariff down, thus defeating the very purpose of the having the reverse auction. However, a potential bigger threat is that the capacity charges are paid only for showing plant availability and not for power supply i.e. if the Power purchaser (in this case various Discoms, which are majorly government owned) would have to pay the capacity charge if they choose not to off-take power despite plant-availability. Thus, a higher capacity charge can be misused!

The government being cognizant of the threat talked of capping the capacity charges. In case of capping of capacity charges, the coal auction winners would have no way of recovering the mining costs and would thus not invest in developing the mines. Thus, the very idea of auctioning coal mines which was to increase coal production beyond what is done by Coal India Limited would be lost.There were a few newspaper reports recently suggesting bankers were reluctant to fund development of these coal mines pending clarification on issue of capacity charge.

Secondly, there is an issue of compensation being paid to owners of operational mines. There wasn’t a transparent fool-proof method of deciding the compensation to be paid to owners who had developed mines to some extent. At least one of the owners has gone to court against compensation decided for him by the government. In another case, an owner of such a mine who ‘re-won’ the mine was accused of colluding with other bidders and the ‘re-allocation’ of the mine was cancelled. This owner too has approached the courts. Thus, litigation could play a spoil-sport in mines which are closest to production.

Thus, we may be some time away from judging the success of coal auctions which would only be possible when coal production from these mines starts.

The problem may not have easy solutions, but interfering in market dynamics (by going for a reverse bidding) was probably not the right solution. A simpler solution may have been to open the coal sector completely and have a private coal market. The market forces may have discovered the coal price through normal auctions and the power sector could have chosen the most efficient coal producer. Alternatively, capping of capacity charges may have been announced in advance if the reverse bidding had to be implemented. I guess we are all wiser in hindsight!

Discoms – A helping hand needed!

Another reason for falling PLF of the plants could be lower demand for power! As incredulous as it may sound, data points to this, as is evident in the table below :

Table 4 : Power demand and supply for March 2014 & March 2015



Energy (MU)

Deficit %



March 2014

March 2015

March 2014

March 2015

March 2014

March 2015





























North East














Source: CEA

The above table shows decline in power demand for the month of March in 2015 over 2014. The same is true for most of the months in the year. It may be noted that the above is the demand that is made by Discoms to Generators and not by ultimate consumers to Discoms. Some decline in demand can be attributed to slow down in the industry (though marginal). However, a major reason for demand is lowering of demand by Discoms. This coupled with load-shedding points to consumers’ demand not being passed on by Discoms. This could be attributed to inefficiencies of the largely government owned Distribution Sector where T&D losses are around 25% (ranging from 11% to 45% for various states). Various other factors like political interference in market like free power, non-payment of subsidies etc contribute to the losses. Thus,Discoms instead of bleeding to death with losses choose to cut demand leading to a situation where paying customers face load shedding while generation capacity sits idle.

The Financial restructuring package introduced by the previous government was opted for by only a handful of states. Even in these states the implementation has not been as planned thus creating a need for a new financial package.

Financial package aside, distribution reforms may have to be the way forward. There may not be an easy solution to political interference but a few technical solutions like separate feeders for agriculture and/or urban poor need to be explored and made mandatory. Tariff review and revision may be made mandatory through a panel constituting commercial experts and consumer groups. The success of the few states that have experimented with privatisation in a few select circles by way of outright privatisation of discoms and/or franchisees may be made into case studies and popularised.

I understand the solutions mentioned above may sound simplistic but idle capacity coupled with declining demand could send investors away from the sector and cause harm which may take decades to correct. Thus the hard decisions may be taken right now or else the power sector woes may not be ending soon!


Rohit Kumar

Assistant Vice President with the Asset & Structured Finance team at IL&FS Financial Service (IFIN), based at Mumbai


Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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