• A review of the report by a panel of MPs on the impact of RBI's revised framework for resolution of stressed assets on NPAs in the electricity sector suggests that it is time to panic.
  • The report states that nearly 60,000 MW to 65,000 MW of coal based thermal power capacity is under financial stress.
  • The report is a step in the right direction as far as diagnosing the problem is concerned, but it stops short of providing solutions.

It is my professional opinion that now is the time to panic!" so said a TV pundit in the 2001 Pixar hit Monsters Inc when a child was spotted walking around in Monstropolis.

This just about rings true after reviewing the 40th Report submitted by the Joint Parliamentary Committee on Energy on "the Impact of RBI's Revised Framework For Resolution of Stressed Assets on NPAs in the Electricity Sector" ("Committee Report"), that was released on August 7, 2018.

The Committee Report states that nearly 60,000 MW to 65,000 MW of coal-based thermal power capacity is under financial stress. Lenders have exposure of approximately INR 3 Lakh Crore to such assets.

This includes 54,805 MW of Coal based Power (44 Assets), 6831 MW of Gas based Power (9 Assets) and 4571 MW of Hydro Power (13 Assets). When this is read with the June 2018 data of the Central Electricity Authority (CEA), which states that there the total generation capacity of all types of power generation aggregated to 3,43,898.39 MW in India, it means that 19 percent of the entire power generation capacity in India is in financial distress and could result in being liquidated.

This also means that 29 percent of entire thermal power capacity is in financial distress (as there is a total of 222693MW of thermal generation capacity in India). The Committee Report also lists the main stressed assets and identifies that seven power generation projects aggregating to 6,110 MW have already been admitted to NCLT under the Insolvency and Bankruptcy Code ("IBC"). The report indicates that in light of there being no market or takers for such investment, either haircuts of up to 70 percent can be expected or assets would start going into liquidation.

The situation becomes more alarming when we consider the following:

  • The CEA has also reported that about 13,000 to 14,000 MW capacity of old plants have to be retired in the next two years,
  • It is projected that electricity demand in India will increase by 11,000MW annually during the next five years, and
  • As per the present data provided by the Ministry of Power, there is a 2 percent shortfall in peak electricity demand in India and currently, power plants worth 18,000 to 19,000 MW have no PPA.

Can renewables be the answer?

There is a big push for renewables, in particular, solar based capacity. However, it is not expected that renewables can constitute more than 20 percent of power generation capacity and renewable sources have issues relating to reliability, fluctuating requirements and seasonality. There is also the issue of cost and quality.

It has been clearly found that extreme competitive bidding has resulted in developers taking up the less expensive and arguably, lower quality solar panels imported from China. What is clearly needed is ramping up of domestic production of the entire solar manufacturing ecosystem (from wafers and ingots to panels) to enable quality and sustainability of supply and have domestic resilience in making solar power truly sustainable.

Who is responsible for the crisis in the power sector?

The JPC Report appears to have acknowledged the underlying reality that in the power sector, the reasons for default are often beyond the control of the promoter. It therefore asked RBI and Ministry of Finance a question on whether the definition of "default" should be sector-specific.

The response from the Ministry of Finance was however nonchalant: "while the causes for stress may be different, the nominal principles governing resolution of stress are the same, regardless of the sector"!

It also becomes clear from reading the statements made by RBI and Ministry of Finance before the JPC that RBI has not considered the macro-economic issues faced by the power sector, the regulated nature of the business and the fact that electricity features in the concurrent list of the Schedule VII to the Constitution of India, before issuing the 12th Feb'18 Circular that had magnified the stress on the Power Sector.

The February 12, 2018 RBI circular has served a death knell on revival prospects of many projects that are under construction and stressed for various reasons beyond the control of the developers, as power sale is completely regulated, unlike other sectors like Steel, Cement and Manufacturing.

The RBI Circular also treats heavily regulated sector like Electricity on par with unregulated sectors. This is arbitrary since it treats un-equals as equals. By equating solutions of stressed assets applicable for other sectors with that of the power sector, the new policy inadvertently proceeds to damage the public investment in banks.

The Committee Report notes that the RBI circular, if not rectified, will only deepen the crisis of the Electricity sector "as its leitmotif is distinct, peculiar and sector specific without any generic underpinning with other sectors of the Economy".

How to resolve the "Marshy Condition" of the power sector

The Committee Report finds that the power sector today "is in a marshy condition". In addition to under construction power plants, even the operational and functional units are on the verge of becoming NPAs. This is an alarming finding that should trigger alarm bells. Economic growth is dependent upon supply of electricity and if the electricity sector itself is considered to be in "a marshy condition", the economy cannot be expected to sprint anywhere anytime soon.

The Committee has found that the RBI position has resulted in the power sector being forced towards NPA situation and, therefore, recommends that appropriate, relevant and sector specific measures should be explored to address the issue. It has emphasized the need for efficacious remedies to energize the power sector "and not to extirpate it".

The Committee Report observes that for the power sector, factors like coal linkage related issues, delay in implementation of projects due to various reasons, non-availability of fuel, delay in land/environment clearances, inability of promoters to infuse additional funds, etc. have aggravated the problem and weak financial health of Distribution Companies (DISCOMS) have led to substantial increase in receivables of borrowing groups (i.e. receivables of Power Generating Companies), thus impacting their liquidity position.

The Committee Report also observes that the Government has accepted that the reasons responsible for stress in the power sector are at variance with the reasons responsible for stress in other sectors of the economy. But while on the one hand, it acknowledges the different reasons for sectoral sickness, on the other it ends up recommending uniform principles of resolution across the sectors, on the premise that ultimately any negotiation of debt is a restatement of financial contract

The Committee holds that forced sale under the NCLT will end up causing a big sacrifice of public money without any benefit to the economy or to the electricity sector which "would be baffling and disastrous". But what it fails to do is to provide concrete workable solutions to prevent such a disaster.

The Committee Report is a step in the right direction as far as diagnosing the problem is concerned. The crucial next step is to have clear workable solutions.

Originally published by CNBC TV18, August 2018

Piyush Joshi, Partner, Clarus Law Associates, specialises in Energy, Infrastructure Projects and Project Financing.

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