Despite several positive developments in the power sector during the last decade, public sector discoms and private sector gencos continue to be crippled by high financial stress.

According to a recently released report by KPMG titled ‘Recharging the Power Sector – How to turn around the power sector by 2018’, the positive developments that had taken place in the sector are reduction in network losses from 35 percent in FY 02 to 27 percent in FY 12, private investment of Rs. 300,000 crore in generation during the last 10 years, maximum installed generation capacity addition of 54 GW in the XI Five Year Plan period and tariff revision by almost all states.

However, the positive developments do not seem to have had much of an impact. On the contrary, the crisis facing the sector is most likely to worsen in the coming period unless certain measures for ensuring sustainability are initiated without further delay.

Statistics in the KPMG report provide a glimpse of the current scenario in the power sector. Distribution sector financial losses stood at Rs. 67,000 crore (FY 12), bank exposure to discoms in the form of short term loans, largely representing deficit financing, totaled Rs. 1.9 lakh crore, debt-equity ratio of private gencos rose to 2.64 in FY 13 from 0.91 in FY 09, commissioned but stranded power capacity, due to lack of coal and gas, stood at more than 33 GW and the cost of power deficit in the form of additional cost of diesel back-up generation was Rs. 43,800 crore annually.

The report points out that the commissioned but stranded power capacity would result in non-performing assets with investments of over Rs. 1 lakh crore.

In addition to analyzing what had gone wrong within the power sector during the last decade, the KPMG report suggests immediate short term measures that need to be initiated for revival of the sector and getting the investment cycle going and also long term measures that would ensure sustainability in the sector.

The KPMG report lists several factors that led to the grave situation which the power sector is in today. Among them are failure of discoms to effectively intermediate between generators and consumers due to a number of reasons, inability on the part of the state gencos to efficiently procure power and add capacities because of poor planning and weak financials, and lack of fuel.

The measures suggested in the report for addressing the immediate crisis so as to get a positive investment cycle include quick implementation of the government decision to allow coal pass-through for stranded projects, procurement of power through a well designed centralized competitive process at regular intervals, implementation of the loan restructuring package of discoms in a time bound manner, addressing the financing issues faced by the sector by enabling entry of strategic and financial investors and implementation of operations excellence initiatives in mining companies focused on throughput improvements.

For ensuring long term sustainability in the sector and to make it vibrant by 2018, the KPMG report suggests that certain measures be initiated in the next 1 to 3 years. These include introduction of retail supplier license in the Electricity Act by 2014 which would allow the retail supplier to contract between consumers and generators, creation of a roadmap by the Ministry of Coal for regularizing the non-controversial coal blocks faced with the risk of summary de-allocation on the back of Public Interest Litigation filed in the Supreme Court, invitation to international players to bring modern technology in underground coal mining so that coal production could be increased, carrying out a process re-engineering of the environmental and forest clearance processes, strengthening of regulatory institutions, separation of the problems faced by subsidized sectors such as agricultural supply from the problems of discoms and preparation of a coal field evacuation master plan by Railways and Central Mine Planning and Design Institute.

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