Recharging the Power Sector How to turn around the power sector

KPMG GLOBAL ENERGY INSTITUTE
Recharging
the Power Sector
How to turn around
the power sector
by 2018
November 2013
kpmg.com/in
1 | Recharging the Power Sector - How to turn around the power sector by 2018
A look back at the last decade
As we look into the last decade (2003-2013), it appears that
history is repeating itself in the power sector. The financial
stress in the sector is very high, this time it affects both the
public sector discoms and the private sector gencos. There
are stranded power assets and at the same time in many
regions consumers are facing power shortages. There is no
doubt that positive developments did occur in the last decade
– for example, network losses did reduce (from 35 percent in
FY02 to 27 percent in FY12)1, private investment in generation
did come in substantially (more than INR 300,000 Crores in
the last 10 years)2, the XIth Plan saw the maximum installed
generation capacity addition (54 GW)1 and almost all states
have gone for tariff revision in recent years to reduce the gap
between cost of supply and retail tariffs (23 states and 5 union
territories have gone for tariff revision in FY13 and 8 states
have increased their tariffs as of August this year).
Yet, the following statistics show the crisis the sector faces
today –
• Distribution sector financial losses stand at INR 67,000
Crores3 (FY12)
1 CEA
2 As per CEA, private sector has added capacities of more than 54 GW
between FY04 to FY13.
3 PFC report on performance on state power utilities for the years FY10 to
FY12
4 In Sep 2012, Cabinet committee on economic affairs has approved
restructuring of INR 1.9 lakh Crores of outstanding short term debt of state
discoms as of Mar 2012.
• Bank exposure to the discoms in the form of short term
loans (which largely represents deficit financing) stands at
INR 1.9 lakh Crores4
• The debt-equity ratio of private gencos has risen to 2.64 in
FY13 from 0.91 in FY095
• Commissioned but stranded power capacity stands at
more than 33 GW6 (due to lack of coal & gas) which will
result in non-performing assets with investments of over
INR 1 lakh Crores
• Cost of power deficit7 in the form of additional cost of diesel
back-up generation is INR 43,800 crores annually.
Something has gone wrong. The key questions before us
today are:
• What are the immediate short term measures to revive the
sector and get the investment cycle going?
• What are the long term measures to ensure sustainability
in the sector so that we don’t see history repeating itself in
this manner again?
5 As per the audited financial statements of major listed power generation
companies, aggregate debt has increased from INR 30,251 crores (48%) in
FY09 to INR 1,57,472 crores (73%) in FY13
6 Capacities which are commissioned and operating at less than 60% PLF in
FY13 as per CEA.
7 Diesel generation capacity in India is estimated to be 30 GW and the
cost of generation from diesel sources is estimated to be ~INR 15 per
unit compared to INR 5 per unit for conventional sources, resulting in a
differential loss of INR 43,800 Crores. Source: http://www.eenews.net/
stories/1059975362
Recharging the Power Sector - How to turn around the power sector by 2018 | 2
Understanding the last decade A Push-Pull Analysis
In any industry, two types of forces are at work - a pull
force which is a demand pull for goods and services from
consumers, which in turn leads market forces to create
capacity across the value chain and provide services efficiently.
The second force is a push force, more often seen in regulated
or controlled industries, where policy makers and central
authorities decide the capacity creation needs and determine
resource allocation. Examples of push controlled industries are
nuclear power, defence and aerospace.
The power sector makes for an interesting combination of the
two forces. Until the enactment of the Electricity Act 2003,
it was highly push oriented. The Electricity Act, among other
things, intended to bring in market forces to decide investment
decisions. An example was introduction of open access where
consumers could choose suppliers directly. This was the first
step in the creation of a pull force in the industry. Consumer
choice, merchant power generation, private licensees in
transmission and provision for multiple distribution licenses in
an area are some examples where the pull force was sought to
be created.
The pull forces didn’t work as expected and consumers are still
suffering with poor quality of power and inadequate power;
though many of them are willing to pay for good quality power!
A classic case of market forces not being able to play their
part. On the other hand, investors are struggling with stranded
assets – out of a total of 179 new announced projects with
an aggregate capacity of 236 GW at the end of FY12, only
79 GW8 have got commissioned or are in advanced stages
of construction. Many of these projects are stuck in various
stages of development waiting for approvals and clearances.
Status of power projects at the end of
FY12*
Number of
Projects
Capacity
(GW)
Projects pending for environmental
Clearances
78
103
Projects pending for water approval
45
62
Projects pending for fuel tie up
80
118
*Some projects are affected by more than one reason
The cost of coping with deficits and poor quality of power is
high - as evidenced by the extent of back up diesel power
generation of more than 30 GW9. Why didn’t the pull forces
work? One key reason is the failure of retail open access
to take off. The volume transacted is only 1-2 percent10 of
the total generation. Due to power deficit, some states like
Maharashtra, AP and Tamil Nadu eliminated cross subsidy
surcharge (CSS) and encouraged open access. But this
appears to be a short term measure to tide over immediate
deficits. What is needed is longer term stability of crosssubsidy surcharge policy so that investors can take investment
decisions.
Distribution utilities put barriers for fear of loss of cross-subsidy.
Regulators were supposed to decide how to balance the
interests of consumers, private generators and discoms, but
most often tilted the balance in favour of discoms. This points
to issues of regulatory independence and in many cases lack
of ability to discern between reality and exaggerations. The
result was a lose-lose situation - discoms had high deficits, yet
consumers were not able to easily choose alternate suppliers.
Some of the interventions were indeed noteworthy with a
strong positive intent. For example, introduction of competitive
bidding for power procurement and the Ultra Mega Power
Project (UMPP) initiative are good examples. Yet, both these
initiatives had mixed success at best – not all the instances
were successful, those that were successful consumed a
very long time and many of these will require restructuring or
contract renegotiation to make them viable.
The following paragraphs give some reasons for the situation
we see today.
The failure of intermediation
Discoms were intermediaries between generators and
consumers. They stymied open access and took upon
themselves the task of procuring power for their consumers.
8 KPMG analysis of power projects planned by private sector at the end of FY12
9 http://www.eenews.net/stories/1059975362
10 KPMG Estimate based on power exchange & bilateral sales data for 2012-13
3 | Recharging the Power Sector - How to turn around the power sector by 2018
Power came from 2 sources - the state & central gencos, and
through competitive bidding (case 1 & 2). Both these forms of
procurement had unsatisfactory outcomes - the main problem
being the significant delays in completing the procurement
process itself. Around 83 percent of long term Case-1 bids
have been delayed during the period FY07 to FY1211. While
the stipulated time for signing of PPA from the date of issue
of RfP is 120 days, the actual average time taken is around
440 days12. The delay is primarily due to lack of process
discipline by the utilities and indecisiveness regarding viability
of the quoted tariff. A combination of poor planning and poor
procurement processes led to delays and deficits. It is now
also acknowledged that the model contracts had weaknesses
related to fuel supply risk allocation. But the issue of lack of
exercise of flexibility in the procurement process is also to be
blamed. The framework provided for regulatory intervention
to adapt the bid documents, but either these were not called
upon or there was insufficient exercise of the same.
Poor Record of State Gencos
While at one end state discoms could not efficiently procure
power, at the other end state Gencos also struggled in their
role to add capacities due to poor planning and weak financials.
There were regular slippages in the capacity additions from
state sector and even the operating plants had low utilizations
(average net PLF of less than 65 percent in the last five years).
As a result some states have very high energy deficits.
The situation would have been much worse if it was not
for the private sector, which added significant capacities in
recent years and created viable alternative to state Gencos.
Going forward, governments will need to relook at the role of
state Gencos and strengthen them in terms of financials and
operations if they have to compete with the private sector.
Lack of Fuel to Power the Nation
This is only part of the story. The other big failure was the failure
of a push factor - fuel availability! The fuel sector has been a
controlled market. Allocations are done by the Government
and bulk of the coal supply was still through Coal India (CIL).
CIL provided letters of assurance to different producers - far
exceeding its capability to produce. Ostensibly one reason for
this was the past experience related to actual achievement of
generation capacity against planned and the view that not all
the Letter of Assurance (LOAs) would get called for supply. This
is now manifesting in stranded capacities. The other reasons
were internal structural difficulties to ramp up production. The
record on private coal mines reaching production has also been
very poor.
The Policy and legislative framework impacting coal mining
is still evolving. For example, the Mines and Minerals
(Development and Regulation) bill is still in the works and
the debate around go/no-go areas is still not completely
resolved. Even the Scheduled Tribes and Other Traditional
11 KPMG analysis of Case 1 bid processes conducted between FY07 to FY12
12 Average time taken for Case I process in states Haryana, M.P, Maharashtra,
Rajasthan, Gujarat, Karnataka, Bihar, Delhi, Mumbai, U.P and A.P
13 CEA monthly reports
14 Gas capacity that is operating below 60% PLF
Forest Dwellers (Recognition of Forest Rights) Act, 2006, its
associated rules and amendments came quite late.
Developers were allocated blocks which were not adequately
explored and with the uncertainties in policy and legislation13,
mine development and production continues to stutter.
The other reason for delay in bringing to production the coal
mines is the continuing lack of competence and bandwidth in
the sector. Some of the critical gaps are the following:
• Shortfall in planning capacity with poor capacity in private
sector
• Shortfall in exploration & production capacity - Imminent
shortfall in skilled workers for statutory positions like
surveyor, mining sardar, overman etc.
• Reduced pool of experienced mining engineers and
geologists due to recruitment freeze in mining companies
and scaling down of batch sizes in mining institutes in late
1990s and early 2000s
The gas story has also been bleak and unfortunately has led to
significant stranded generation capacities (more than 15,000
MW14). A poor policy framework on gas allocations is to blame
- priority was given to capacities which were ready and this
led to capacity creation before gas allocation! The framework
around dispute resolution in new exploration licensing policy
(NELP) contracts also appears to be weak since it has taken a
lot of time to resolve the issues related to cost recovery.
The only silver lining has been the rise of renewables. Wind
was driven by a feed-in-tariff (FIT) regime and did not therefore
need a procurement process thus saving itself from its perils,
though solar power is procured through a tendering system
and is currently suffering delays due to the slow process in
various states and also at the Centre. The boost to renewables
came from the emerging grid parity (as shown in the chart
below) with conventional power15 and the short gestation
periods to set up these capacities led many states to embrace
them to meet their power shortages.
The generation based incentives to wind power also provided
impetus to new development by augmenting developers’
returns thus helping move the wind sector from a tax incentive
driven sector to a core generating sector.
Tariff (INR/kwh from various generation sources for supply to a
load centre at 33 kV15
3.42
3.90
Domestic
captive coal
mine based
power plant
Hydro
power
plant
4.72
4.76
5.44
Domestic
linkage
coal based
pithead
power plant
Wind
power
plant
Imported
coal based
power plant
6.64
Solar
power
plant
15 Based on KPMG analysis. Tariffs are for supply to Rajasthan from captive
coal based power project in Chhattisgarh, hydro power project in Sikkim,
domestic coal linkage pit head plant in Chhattisgarh, wind power plant
in Rajasthan, imported coal plant in Gujarat and solar power plant in
Rajasthan. Tariffs include inter and intra-state transmission charges at 132
kV and above, however solar plant is considered to be connected at 33kV.
Recharging the Power Sector - How to turn around the power sector by 2018 | 4
What have we learnt & what is
the way forward?
Addressing the immediate crisis to get a positive
investment cycle
The following measures should be taken up immediately
within the next one year:
1.Quick implementation of the Government decision to
allow coal pass-through for stranded projects:
Currently, capacity of ~33GW in an advanced stage of
readiness is either tied-up or under negotiations for supply
based on competitive bidding. Many of these projects
will turn into NPAs for banks because of non-availability
of fuel. For projects which have entered into Power
Purchase Agreement (PPAs) under existing competitive
bidding guidelines, the Government should allow import
of coal for the quantity equivalent to shortfall in domestic
coal supply as per the signed Fuel Supply Agreements
(FSA). The Cabinet decision in respect of select projects is
welcome. What is now needed is a quick implementation
of the same. The Central Government should formulate
a guideline on how this can be implemented quickly. This
can be through a simple formula that identifies a set of
coal indices and normative transportation cost (say, INR /
ton-km) which can be applied easily by the regulator. Coal
India Limited (CIL) can issue a certificate for the shortfall
quantity and the cost of imported coal procured against
this approved quantum can be made a pass through by the
regulator based on the guideline. A speedy implementation
of this decision will go a long way in reviving sentiment and
the investment cycle.
2.Procurement through a well designed centralized
competitive process at regular intervals:
More than 30 GW of 79 GW of private thermal and hydro
generation capacity planned by FY17 is waiting to get tied
up under long term power purchase agreement (PPA).
Many of these will again turn into non-performing assets
(NPAs) if they do not enter into bankable PPAs by the
commissioning date. The Government can consider setting
up a centralized procurement agency on behalf of the state
utilities which could procure on behalf of the state utilities
based on common bidding guidelines. The contracts
could be made back-to-back with state utilities to address
issues related to payments and creditworthiness. A well
designed centralized process will help in reducing delays in
procurement and also enable generators to contract untied
capacity in a planned manner.
3.Implement the loan restructuring package of the
discoms in a time bound manner:
The following seven states are the major states which
contribute to more than 60 percent of short term loans16.
Short term loans of key states16
Total in INR Crores
190,000
Rajasthan
39,710
Uttar Pradesh
25,934
Tamil Nadu
Haryana
Punjab
Andhra Pradesh
Madhya Pradesh
19,146
15,718
11,646
6,302
1,170
16 Ministry of Power and secondary research reports.
5 | Recharging the Power Sector - How to turn around the power sector by 2018
Out of these, only Rajasthan and Tamil Nadu have so far issued
bonds that are backed by state government guarantee as per
the formula suggested by the cabinet committee after the
Central Government approved the financial reform package
in September 2012. Uttar Pradesh, Haryana and Andhra
Pradesh are expected to issue bonds soon. Punjab and
Madhya Pradesh have opted out of the scheme. Central and
state governments have to agree on a time bound plan and
implement the financial reform package.
4.Address financing issues by enabling strategic and
financial investors to come in and by easing the lending
logjam: In the last two years, we have seen international
strategic investors (power utility companies) showing an
interest in the Indian power sector. Their entry is much
needed, not least because of operational capabilities, but
also to bring in the much needed equity financing into the
sector. One of the bigger concerns today is a lack of new
pipeline of projects since most of the existing set of players
are stressed (aggregate debt-equity of 2.64 and cash losses
of INR 124 Crores17) and would not be in a position to bring
much equity. The capacity addition target for 13th plan is 100
GW18 and private sector is expected to contribute at least
64 GW19. This will require equity capital of~ INR 1,27,050
Crores.
To enable strategic and other large financial investors
like pension funds, to view the sector favourably, the
Government should quickly resolve various uncertainties
such as position on coal block allocation, implementation
of imported coal pass-through, policy on M&A related to
allocated mines and have a war-room approach to resolving
issues related to some stuck up projects. A longer term
clarity on some of the above issues will also bring in more
confidence for investors looking to acquire operational
projects and running them for cash flow yields. Further,
the domestic lending community is precariously poised
towards the sector due to potential NPAs on account of
various projects that have got delayed or have been unable
to achieve COD due to fuel or PPA related issues. What
is needed is a special dispensation liberating provisioning
norms for such loans to avoid them getting classified as
NPAs. This could be done only for those projects which
are facing loan restructuring on account of uncontrollable
factors such as coal supply related issues and issues related
to environment or forest clearances. This will help unlock the
financing logjam and enable a positive investment cycle to
commence. Further, the Government should enable takeout
financing for banks by strengthening institutions such as
IIFCL to undertake the same. This will help partially address
the sectoral exposure caps that banks would otherwise be
constrained by.
5.Implementation of operations excellence initiatives
in mining companies focused on throughput
improvements: The public sector coal companies need to
immediately undertake large scale operations excellence
initiatives. Some examples of such initiatives are “Vale
17 Listed companies data - Aggregate debt-equity ratio and sum total cash
losses of listed private power generation companies
18 Planning Commission. This includes renewable capacity of 18.6 GW
Production System (VPS)” of Vale, “Improving Performance
Together” program of Rio-Tinto, “One Anglo” program
of Anglo American etc. Some ideas with regard to how
these themes can be adopted in the context of India are
enumerated below:
• Development of pit-head infrastructure: For specific
mines identified by Central Mine Planning and Design
Institute (CMPDI), immediate action needs to be taken
to bridge the gap between production capacity and first
mile transportation capacity to nearest siding by ramp up
of coal handling plant/automatic wagon loading system
infrastructure and improvement of road conditions.
• Improvement in mining process and technology:
There is a strong case for initiating a Continuous
Improvement Program (CIP) aimed at addressing
issues such as equipment break-downs, computerized
operational planning etc. all of which have an impact on
mine through-put
• Quick adoption of technology to develop
underground mines: Tenders need to be quickly
finalized for the underground (UG) mines for which
technology identification is already done by CIL and
contract terms need to be equitable in line with the
model contract agreement for mine development
operator (MDO) contract being framed by the Planning
Commission
Long-term measures to ensure sustainability
The following measures need to be undertaken in the next 1
to 3 years to ensure long term sustainability:
1.Disintermediate the discoms to activate the pull forces
of demand: Introduce the concept of retail supplier who
will contract between the consumers and the generators.
He will respond to market forces created by deficits and
high coping costs. He will contract with generators flexibly
and not be bound by standard bidding documents, coal
indexation constraints etc. In short, we can overcome the
constraints of centralized regulated procurement. This
can be done through a legislative change to introduce a
new license category - the retail supply license. Further,
provisions related to cross-subsidy surcharges and other
measures acting as barriers need to be defined in a more
definitive manner so that it is binding on regulators and
does not become a hindrance to open access as seen today.
While the Cross subsidy surcharge computed under the
National Tariff Policy (NTP) is a step in the right direction, it is
being distorted due to non-uniform methodologies adopted
by State Electricity Regulatory Commission (SERC’s) and
considering bilateral / short term (ST) sources in marginal
power purchase cost. Short term sources would tend to
have volatile prices thus preventing a stable cross-subsidy
surcharge regime. Therefore, we suggest that cross
subsidy surcharge should be computed excluding ST
sources to reflect true cross subsidy available in the system
over long term.
19 As per Planning Commission private sector contribution is estimated to be
60 GW out of 93 GW in XII plan and its share is expected to only increase
in XIII plan.
Recharging the Power Sector - How to turn around the power sector by 2018 | 6
The table below shows cross subsidy surcharge (without ST
purchases) in key states.
Cross-subsidy surcharge for Industrial Consumers at
132kV
Description
CSS for HT Industrial -132 kV (Rs/Kwh)
Cross subsidy
surcharge (As per NTP
but excluding short
term purchases)
Madhya
Pradesh
Maharashtra
Andhra
Pradesh
1.58
0.94
0.73
2.Expedite the coal allocation process through
competitive bidding to support the push factor: The
Ministry of Coal should create a roadmap for regularizing
the non-controversial coal blocks that are faced with the risk
of summary de-allocation on the back of the Public Interest
Litigation (PIL) filed in the Supreme Court. The Government
can determine the reserve price for these blocks based on
the methodology adopted for upcoming allocations as well
as apply normative project financial benchmarks based
on approved mine plans and accordingly charge a suitable
allocation fee from the allottees. The schedule of payment
should be designed in a way that it does not adversely
impact the output power prices.
As can be seen from the below graph, total landed cost for
replacement of base load requirement of a typical industrial
consumer from private sources can be competitive after
considering power generation cost, a fair level of cross
subsidy surcharge (CSS), transmission charges and losses.
Currently, the play available is in the range of INR 1.5 to 2.85
/ kWh, suggesting that a win-win situation can be created.
Total Landed cost for private player /
Avg. EHT Tariff (Rs/kWh)
Viability of Open Access with Reasonable Cross-subsidy
Surcharges
3.Invite international players who can bring modern
technology especially into underground coal mining
and increase coal production: India needs modern
technologies for de-pillaring and technologies to access
the coal in deep seams through open cast (OC) and
underground (UG) methods. With increasing challenge
of environmental clearance and land acquisition, it is
necessary to apply these methods to fully exploit the
potential of mines already in possession of the coal mining
companies.
7
6.98
6
5
4.72
4.73
4
1.58
3
5.47
4.05
3.96
0.31
0.94
0.47
0.73
0.22
2.83
2.63
3.01
2
1
0
Madhya Pradesh
Maharashtra
Andhra Pradesh
PP Cost (Case 1 tariff)
Transmission cost & Losses (Rs/kWh)
HT 132 kV Tariff
Total Cost (Rs./kWh)
• A scheme which enables consumers to continue availing
supply from alternate sources during periods of deficit.
Such schemes have been adopted in states like Tamil
Nadu and Andhra Pradesh during 2012-13 and work
by providing load restriction through commercial tariff
signals for exceeding a given quota of power rather
than load restriction through physical disconnection of
feeders.
CSS (Rs/kWh)
Average realization is computed at 85% LF considering that base load getting shifted to
private players - Average of express and non-express feeder for Maharashtra and Extra High
Tension (EHT) for AP.
To encourage competition under such circumstances, we
recommend the following:
• A stable cross-subsidy surcharge regime that gives
predictability for investors. This should be combined
with an equitable balancing and settlement system for
handling deviations and providing grid support.
Over the years, the contribution of underground mining
has infact reduced.20 Given that the limited shallow depth
reserves amenable to opencast mining are likely to be
exhausted in foreseeable future (may be after 25-30 years)
and the production from opencast coal mines in CIL may
reach a plateau, it becomes essential to start developing
underground mines in earnest. Further, large scale ramp up
of underground projects takes time and hence the need to
start early and introduce bulk production technologies. It
is in this area that we need to invite international players in
earnest.
• Well designed guidelines for switching over of
consumers from incumbent licensee to new retail
supply licensee.
Coal production by CIL during X and XI plan20
600
Production in MT
400
20 Article written by A K Debnath and S K Dubey
on Strategy for stepping up coal production
in CIL
Source: indiaenergyforum.org/4th-coalsummit/presentations/.../ak-debnath.doc
318
298
336
360
388
391
397
259
277
48
47
47
46
43
44
44
43
40
38
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
242
200
0
Opencast mining
Underground mining
7 | Recharging the Power Sector - How to turn around the power sector by 2018
Following are some actions that will enable participation
from international companies:
• Design the right Public Private Partnership (PPP)
framework for MDO participation treating technologically
complex projects differently from socio-environmentally
complex projects. As we have seen in many sectors in
the past, a proper risk sharing framework and transparent
processes are necessary to attract internationally
competent bidders.
• Provide the right pricing framework for Underground
Mining: The Government should provide pricing signals
for increasing underground coal mine production which
may be at a higher cost and not profitable at current
prices. Options include allowing a certain level of
merchant sale through e-auction route and providing
import-parity price for underground mines. Given the
demand for imported coal, higher prices can be absorbed
by power generation companies.
5.Carry out a process re-engineering of the environment
and forest permitting processes: Power capacity of
more than 103 GW and coal mines of more than 726
MTPA capacity are pending for environmental and forest
clearances. There was loss in production of domestic coal
from private sector to the extent of 394 MT21 of coal in the
last 5 years because of delay in development of captive coal
blocks allocated for power. This has lead to higher imports
and stranded capacities with an impact of more than INR
1,46,157 Crores22. While these processes are much needed
and value-adding, the outcomes can be achieved with much
lesser time and cost. Some of the measures in this regard
include the following:
• Bring in accountability for timely decisions on clearances
by identifying single point responsibility for different
projects. “Project officers” for all projects above a
certain threshold size should be identified. They would
be accountable for timely processing of applications after
co-ordinating with various entities.
4.Strengthen regulatory institutions: This is perhaps the
single most important institutional change that is needed.
The power regulators are supposed to be independent
and autonomous. Yet, in many states, that does not
appear to be the case. The key issues relate to a) process
of appointments b) competence of regulatory staff and
regulators, c) lack of an accountability framework and d)
indirect interference from the state government. Today
non-performance of regulators has no punitive implications.
Following are some of the measures that GOI must consider
to strengthen regulatory institutions
• Identify a charter which defines timelines for various
activities in the permitting process. This should be
monitored at the highest level. As we have shown the
loss on account delays can be astronomically high.
• At least one of the members of the Commission to be
from private sector to reduce government interference
6.Separate the problem of subsidized sectors such as
agriculture supply from the problems of the discoms:
While there are provisions in the Act to provide discoms
with the required subsidy, there are many problems related
to measurement and actual delivery of the subsidy. A
system of direct cash transfers, now seen in other areas,
needs to be urgently considered here. Alternatively, the
stakeholder for this category should be the Department of
Agriculture or Irrigation and not the discoms. The agriculture
department could consider disbursement to each
division based on agricultural consumption at Distribution
Transformer (DTR) level. This approach will help rejuvenate
the finances of the discoms and help them to be more
commercially sound.
• Default annual tariff increase linked to certain index (it
may be a combination of Wholesale Price Index (WPI),
fuel index etc.) should be mandated and correction, if
any, should be carried out by the respective regulators
to adjust revenue surplus/ deficit. This will safeguard the
financial interest of the utilities in case of undue political
interference.
• Performance of SERC should be measured with
designated Key Performance Indicators (KPI) either by
the Central Govt. or Appellate Tribunal for Electricity (ATE).
The KPIs should include performance related to issue
of orders within stipulated timelines and adherence to
provisions of Electricity Act (for example, enforcement of
Renewable Purchase Obligations). Based on the report
of the performance reviewer, state government or the
regulator, as the case may be, has to take appropriate
action to correct the short comings.
• Permanent staff should be appointed to strengthen the
commission. Staff on deputation should be restricted to
25 percent of the total staff.
21 Delay in production beyond 54 months, which is the maximum permitted
development timeline as per Ministry of Coal, is considered for all the
allotted blocks
• Develop a parallel processing system where information
is processed in parallel by various entities. Use of
information technology to enable speedy processing
should be done and further bottlenecks either due to
certain skills, manpower or information flows should be
resolved.
7.Railways & CMPDI should make an evacuation master
plan: Railways and CMPDI should work on coal field master
plan on the lines of Chhattisgarh model by working closely
with state governments. There is a need to expedite large
scale construction to enhance rail capacity for key coal fields,
including last mile connectivity to sidings attached to the
mines.
22 Loss on account of higher procurement cost for imported coal of more
than 200 MT procured in last 3 years and loss of generation equivalent to
194 MT of coal.
Recharging the Power Sector - How to turn around the power sector by 2018 | 8
A recommended roadmap for a
vibrant power sector by 2018
The following is a recommended near term roadmap to
recharge the sector:
1.Introduce retail supplier license in the Electricity Act by
2014. This can free up stranded operational capacity of 19
GW23 which have no bankable PPAs and the incremental
supply can partly bridge the peak power deficits of around
12 GW24. This will also ensure that the upcoming capacity
is contracted through open access (pull forces) and is not
stranded waiting for utilities to procure power.
2.Immediate implementation of fuel cost pass-through can
improve the PLF of coal based power plants to 85 percent,
resulting in efficient utilization and financial turnaround of
upcoming coal based capacity of 62 GW25 in XII plan period
and commissioned capacity of 40 GW in XI plan. A special
dispensation should be made to prevent provisioning of
bank loans in respect of such projects so that the financing
logjam can be eased and a positive investment cycle
returns.
3.Allocate new coal blocks to private sector and utilities
under the proposed competitive bidding process by FY14.
Coal blocks with reserves of ~8 BT are identified for power
sector which can produce ~195 MTPA at peak production.
At least 25 percent of this, i.e. ~50 MTPA should be made
possible by FY20.
23 Part of this capacity is currently sold under merchant route, but is subject
to coal availability.
24 CEA
25 Planning Commission estimates coal based capacity addition of 62 GW
in XII plan. This is in line with our analysis of upcoming coal based power
plants which are under construction
26 This includes CIL coal mines with a capacity of 116 MTPA which are
pending for EC and FC.
4.Resolve the litigations around existing coal allocations
immediately and carry out process reengineering for
environmental and forest clearances (EC & FC) in next 12
months. If clearances can be granted for pending projects
of 726 MTPA26 of coal mines in next 2 years and if at least
two-thirds27 of these blocks are developed by the end of
FY17, production in FY18 can be ~240 MTPA going up to
peak production of 480 MTPA by FY20.
5.Develop a framework for capacity enhancement in mining
by CIL in next 1-3 years. This should help CIL ramp up
the production and meet the optimistic scenario target
of 615 MTPA28 at the end XII plan against business as
usual scenario of 556 MTPA. Also with FDI in mining and
adoption of modern technology, CIL should be able to ramp
up the underground mine production from the estimated
54 MT to 64 MT29 by FY18.
To unshackle coal supply, whether from CIL/ SCCL
(Singareni Collieries Company Ltd.) or captive blocks,
there is a need to step back and relook fundamentally
at our legislations like the Coal Mines Nationalization
Act, Contract Labour Regulations and Abolition Act etc.
Otherwise initiatives like revenue-sharing model for
difficult-geology mines and large scale private sector
participation in capacity enhancement of the sector will not
take off as expected.
27 There can be multiple issues other than environmental and forest
clearances, like land acquisition, which are resulting in delays in production.
It is not realistic to assume all the blocks will achieve production in 2-4
years time.
28 Supply to power projects is around 80% of the total coal production by CIL
29 20% of proved reserves are below a depth of 300 meters and account to
28 billion tons. This translates to more than 600 MTPA even if we consider
mineable reserves to be only 60% of the proved reserves.
9 | Recharging the Power Sector - How to turn around the power sector by 2018
If we can achieve the above, we will have incremental coal
production of 394 MT in XII plan from CIL mines, captive coal
mines, Singareni coal mines and increased underground
mine production30. This can support ~80 GW of coal based
capacity additions. Considering capacity additions from
other sources as per Planning Commission’s target31, we will
have an aggregate energy supply of 1638 BU32. This will be
sufficient to meet 100 percent of energy demand projection
of 1462 BU in FY18 as per Electric Power Survey33. Further,
these measures will revive the investment cycle, bring in new
investors including strategic players and help bring the much
needed equity for new projects. Timebound implementation
of Financial Restructuring Plan (FRP) for discoms will also help
improve viability of the distribution sector.
It is important that all stakeholders participate in this
resurrection of the power sector. This includes the Central
Government and its various ministries such as those of coal,
30
31
32
33
power, environment, railways; the State Governments, the
lending community through a change in mindset towards
lending, the power utilities (discoms) through efficiency in
procurement and allowing a level-playing field for competition
through open access, the Electricity Regulators through
efficiency and adherence to the spirit of the Electricity Act
and importantly the private sector through being reasonable
in their expectations and having to make suitable sacrifices
to come out of the current situation. In the ultimate analysis
it is the power consumer, whether it is the urban or rural,
industrial or agricultural, who bears the brunt of the situation.
We owe the consumer a much better power situation - a
vibrant, competitive and reliable power sector, one that
allows industry to compete in the rest of the world and gives
all other consumers a quality of life they deserve. For this, we
need to recharge the power sector and do so urgently.
Incremental production by SCCL is 6MTPA by FY17 and 80% of this quantity is expected to be supplied to power plants
Planning Commission targets estimate capacity addition of 2.8 GW, 9 GW and 18.5 GW from nuclear, hydro and renewable sources
PLFs for coal, nuclear, hydro and renewable sources are taken as 85%, 70%, 40% and 20% respectively
Electric Power Survey projection for energy demand in FY17 is 1354 BU and is expected to grow at a CAGR of 7.93% between FY17 to FY22.
Key Infrastructure,
Government & Energy (IG&E)
sector contacts
Other contact
Arvind Mahajan
Pradeep Udhas
Partner and Head
Infrastructure, Government & Energy sector
T: +91 22 3090 1740
E: arvindmahajan@kpmg.com
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T: +91 22 3090 2040
E: pudhas@kpmg.com
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Partner
Management Consulting
T: +91 22 3090 2527
E: skamath@kpmg.com
Bhavik Damodar
Partner
Transaction and Restructuring
T: +91 22 3090 2126
E: bdamodar@kpmg.com
Manish Aggarwal
Partner
Corporate Finance
T: +91 22 3989 2625
E: manishaggarwal@kpmg.com
Nabin Ballodia
Partner
International Tax
T: +91 124 3074 321
E: nabinb@kpmg.com
Raajeev B Batra
Partner and Head
Governance Risk & Compliance Services
Risk Consulting
T: +91 22 3090 1710
E: rbbatra@kpmg.com
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