With falling thermal Plant Load Factor levels, rising subsidy for state owned distribution utilities and the uncertainty over resolution of tariff compensations for Independent Power Producers, the country’s power sector continues to be plagued by multiple challenges, according to a recent report by credit rating agency ICRA.

The report said that energy deficit level dropped significantly in FY 2014 as a result of slowdown in energy demand as well as sizeable capacity addition.

“Against a CAGR of 7 percent between FY 2005 till FY 2013 in energy demand on all India basis, energy demand growth dropped considerably to 0.7 percent while energy availability improved by 6 percent in FY 2014. As a result, both peak and energy deficit levels came down sharply in FY 2014 to 4.5 percent and 4.2 percent respectively against 8.7 percent and 9.0 percent in FY 2013. Further, peak and energy deficit during Q1’ FY 2015 stood at 3.7 percent and 4 percent respectively. The decline in energy deficit levels is a result of subdued demand from industrial consumers (which contribute about 40 percent of overall demand in the country), constraints in off-take by state owned distribution utilities (which results into load-shedding and thus restrained demand) and improved energy availability on account of sizeable capacity addition in the thermal segment as well as factors such as higher generation from hydro/ wind sources,” it said.

The overall capacity addition in the thermal segment during last two fiscals was 36,890 MW, accounting for 22 percent of the installed thermal capacity as on March 2014.

The report pointed out the deteriorating PLF levels in the thermal segment and said that demand recovery from industrial consumers, and more importantly, improvement in the financial position of state utilities was critical for any sustainable improvement in PLF levels.

Thermal PLFs at an all India level declined to 65.6 percent during FY14 from 69.9 percent in FY13, primarily due to backing down of generation units due to low demand from distribution utilities as well as a fall in generation from gas based power plants following stoppage of natural gas availability from KG basin of RIL since March 2013. For gas based power plants, PLF level declined to 24.9 percent for FY14 from that of 40.3 percent in FY13, which itself was significantly lower than the 66.2 percent in FY11. In case of coal based stations too, PLF levels varied widely and showed a mixed trend across generating stations driven by the cost-competitiveness of power generated, extent of fuel availability and availability of Power Purchase Agreement.

The report observed delays in many states with regard to issuance of tariff orders despite satisfactory progress in filing of tariff petitions for FY 2015. Even though distribution utilities in most states filed tariff petition for FY 2014 – 15, the State Electricity Regulatory Commission in only 16 out of 29 states have issued tariff orders for the period so far. The delay in issuing tariff orders is mainly due to the election code of conduct that came into force following announcement of the general elections. Out of the 16 states where tariff orders for FY 2015 have been issued, in seven states, namely Arunachal Pradesh, Bihar, Gujarat, Jammu and Kashmir, Orissa, Uttarakhand and Madhya Pradesh, the SERC did not approve any tariff revision for distribution utilities. The SERC in Himachal Pradesh approved a marginal tariff decline as a result of tariff rationalization. In case of the other eight states, the tariff revision allowed by SERCs remained moderate in the range of 5 -10 percent, except in Meghalaya where the tariff revision was 15 percent.

The report also noted a rise in subsidy dependence. On all India basis, it estimated the subsidy dependence for state owned distribution utilities for FY 2014-15 in the range of Rs. 720 billion.

“Among all the utilities, subsidy dependence for discom in Maharashtra is estimated to increase sharply by about 55 percent on y.o.y basis in FY 2015 as a result of tariff subsidy of 20 percent announced by State Government for 11 month period (Jan – Nov 2014), while the same for utilities in other states in FY 2015 is estimated to increase by 8 to 20 percent,” it said, adding that timeliness and adequacy of subsidy support to utilities from their respective state governments remained extremely crucial.

The report said that the uncertainty prevailing over timelines for resolving the issue of compensatory tariff for IPPs having imported coal-based projects was an area of concern for the power generation sector.

In the cases of Coastal Gujarat Power Limited and Adani Power Limited, both with imported coal based projects, the Central Electricity Regulatory Commission had issued orders allowing tariff compensation but the orders were challenged before the Appellate Tribunal for Electricity by the affected state utilities. APTEL recently issued an interim order upholding the compensatory tariffs awarded by CERC and allowing the two companies to charge the revised rates from March this year.

ICRA further said that for the affected IPPs with domestic coal linkages, the progress in allowing tariff compensation by SERCs was limited.

The report said that while tariff compensation approval either by the CERC or SERCs would enable the affected IPPs to mitigate fuel price risks, majority of them remained exposed to risk of under-recovery in fixed capacity charges mainly due to escalation in project cost with steep rupee depreciation against the dollar with respect to foreign currency debt availed. Most of the bids by IPPs had not provided for pass through of foreign exchange variations. The fixed cost escalation, it added, was also due to factors related to change in law. The CERC and SERCs are yet to issue any order allowing tariff compensation with respect to under-recovery in the capacity charge.

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