India’s Power Sector ‘Held Hostage’ By Weak Electricity Providers, Vinayak Chatterjee Says

Government-run power distributors in India continue to hold the sector "hostage" as there has been little improvement in their operations despite multiple attempts over the years, Vinayak Chatterjee, chairman of Feedback Infra, told BloombergQuint in an interview. Unless the operational side of these discoms is set right, the country's power generators—whether coal or renewable energy—will continue to face stress, Chatterjee said.

The power sector is a point of stress for the economy and the Indian banking sector. Power accounts are a significant proportion of large stressed assets, which are being resolved through the Insolvency and Bankruptcy code. Analysts have noted that finding buyers and investors for stressed power assets may be difficult. Chatterjee agrees.

Stress on power generators often stems from the poor financials of distribution companies who resort to unfair practices, such as renegotiation of power purchase agreements (PPAs). In recent months, some states tried to renegotiate PPAs as merchant power rates had briefly fallen below rates agreed upon as part of long term agreements. Bankers feared that this could lead to another Rs 1.5 lakh crore in loans given to power projects turning bad, BloombergQuint reported in August.

In 2015, the central government launched the UDAY (Ujwal DISCOM Assurance Yojana) scheme for the financial turnaround and revival of electricity distribution companies. This led to a transfer in liabilities from the books of distribution companies to state governments. However, it has not managed to address the operational concerns at distribution companies, Chatterjee said.

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Elaborating on a model that he has suggested to policymakers, Chatterjee said that the private sector should be allowed to run distribution circles. He also recommends setting up a fully-funded National Power Procurement and Distribution Company.

“This institution should pick up the stranded and unutilised capacity of all power plants and distribute it to central government entities such as railway, ports, government buildings and anyone who wants to buy the power,” said Chatterjee. The National Procurement and Distribution Company could also act as a regulator of the discoms - a strict need for the sector, he added.

India's discoms have monopolies in the states they operate in, giving them a stronger hand in getting lower tariffs and renegotiating PPAs. Moreover, these discoms do not fall under the umbrella of the Competition Commission of India which means that there are few checks and balances on their decisions.

Commenting on the recent trend of falling tariffs in the wind and solar energy segments, Chatterjee cautioned on using an approach where the lowest bid is always favored. This can lead to distortions in the market, Chatterjee said.

Wind power tariffs hit a record low of Rs 2.64 per unit in an auction held earlier this month after the auction methodology moved towards competitive bidding. This resulted in a 24 percent drop in tariffs compared to the previous bid tariff of Rs. 3.46 per unit. While the lower tariffs are positive for states, they may prove to be negative for wind turbine generator producers, said brokerage house CLSA in a note on October 6. Wind power tariffs have fallen to levels comparable with solar power tariffs, which are holding at record lows.

Chatterjee suggests moving to a framework where the median bid is taken into account in bidding for infrastructure projects. This, he believes, will help keep irrational pricing at bay.

“We need to move to the median bidding, which automatically reduces the temptation of people to bid at extremes. Forget this business of lowest bid. It is killing many, many sectors. I think you will get a rational market, which optimizes the middle path between the discovery of the lowest bid and keeping sectoral economics in balance,” Chatterjee said.

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