Will Investments in Power Bear Fruit?

Wed, 17 Feb Pre-Open

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Recently, Power Minister Mr. Goyal, stated that the domestic power sector will require Rs 20,000 billion of funds in the next five years. Further, he went on to state that out of this mammoth sum, an amount of Rs 8,000 billion will be required to fund the renewable energy projects. Additionally, a sum of Rs 3,000 billion would be required for building transmission corridors to evacuate the power generated from such renewable energy projects. Huge promises with respect to renewable energy are being made. Now the question is where will such kind of money come from? The second question which comes to our minds pertains to whether such sort of investments is necessary in an environment wherein the demand for power is subdued?

Answering the first question, public sector banks are loaded with huge amount of bad loans. A significant chunk of that pie is from the power sector. Recent directives of the Reserve Bank of India (RBI) pertaining to cleaning up of the banks books have made open the grim situation which the public sector banks are currently facing. If the data is to be believed, the bad loans plus restructured assets plus the assets written off in total made up for 17% of the books of public sector banks. This means that for every Rs 100 of loan given by public sector banks, Rs 17 worth of loans are in dodgy territory. Hence, public sector banks have been going slow on lending primarily because they already have a huge amount of bad loans piled up and they don't want to continue to lend indiscriminately and have more bad loans piling up. Thus, approaching public sector banks to fund the projects will not bear fruits.

The other way to raise funds is by issuing tax free bonds or 'green bonds'. The recently issued tax free bond by National Thermal Power Corporation was a huge success. It was oversubscribed 11.04 times. However, issuances of such kind of bonds are at their nascent stage and only time will tell whether they would be successful in garnering money from the investors.

Coming to the second question, presently generation companies are facing scarcity of demand because of poor financials of the state electricity boards (SEBs). Reportedly, SEBs have accumulated losses of approximately Rs 3,800 billion and outstanding debt of approximately Rs 4,300 billion. The SEBs do not have enough resources with them to enter into Power Purchase Agreements (PPAs) with power generation companies. This is a big drag on the demand for power.

The government has launched the 'Ujwal Discom Assurance Yojana'. This scheme; which would provide certain amount of financial relief to the SEBs. However, such schemes will not have an immediate effect on the financials of SEBs. The improvement process will be gradual. Thus, investing heavily in this sector may lead to creation of excess capacities which may in-turn dent the return ratios of the generating companies.

Building capacities is not a bad thing considering the low per capita consumption of electricity in India. However, it needs to be seen whether there will be any takers for it considering the poor state of the SEBs. The only way SEBs can revive is that they engage in annual tariff hikes. Unless this step is taken there will be no respite to the entire sector.

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