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Recharging
the Power Sector
November 2013
kpmg.com/in
1 | Recharging the Power Sector - How to turn around the power sector by 2018
As we look into the last decade (2003-2013), it appears that Bank exposure to the discoms in the form of short term
history is repeating itself in the power sector. The financial loans (which largely represents deficit financing) stands at
stress in the sector is very high, this time it affects both the INR 1.9 lakh Crores4
public sector discoms and the private sector gencos. There
The debt-equity ratio of private gencos has risen to 2.64 in
are stranded power assets and at the same time in many
FY13 from 0.91 in FY095
regions consumers are facing power shortages. There is no
doubt that positive developments did occur in the last decade Commissioned but stranded power capacity stands at
for example, network losses did reduce (from 35 percent in more than 33 GW6 (due to lack of coal & gas) which will
FY02 to 27 percent in FY12)1, private investment in generation result in non-performing assets with investments of over
did come in substantially (more than INR 300,000 Crores in INR 1 lakh Crores
the last 10 years)2, the XIth Plan saw the maximum installed
Cost of power deficit7 in the form of additional cost of diesel
generation capacity addition (54 GW)1 and almost all states
back-up generation is INR 43,800 crores annually.
have gone for tariff revision in recent years to reduce the gap
between cost of supply and retail tariffs (23 states and 5 union Something has gone wrong. The key questions before us
territories have gone for tariff revision in FY13 and 8 states today are:
have increased their tariffs as of August this year).
What are the immediate short term measures to revive the
Yet, the following statistics show the crisis the sector faces sector and get the investment cycle going?
today
What are the long term measures to ensure sustainability
Distribution sector financial losses stand at INR 67,000 in the sector so that we dont see history repeating itself in
Crores3 (FY12) this manner again?
1 CEA 5 As per the audited financial statements of major listed power generation
companies, aggregate debt has increased from INR 30,251 crores (48%) in
2 As per CEA, private sector has added capacities of more than 54 GW
FY09 to INR 1,57,472 crores (73%) in FY13
between FY04 to FY13.
6 Capacities which are commissioned and operating at less than 60% PLF in
3 PFC report on performance on state power utilities for the years FY10 to
FY13 as per CEA.
FY12
7 Diesel generation capacity in India is estimated to be 30 GW and the
4 In Sep 2012, Cabinet committee on economic affairs has approved
cost of generation from diesel sources is estimated to be ~INR 15 per
restructuring of INR 1.9 lakh Crores of outstanding short term debt of state
unit compared to INR 5 per unit for conventional sources, resulting in a
discoms as of Mar 2012.
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
Projects pending for fuel tie up 80 118 8 KPMG analysis of power projects planned by private sector at the end of FY12
9 http://www.eenews.net/stories/1059975362
*Some projects are affected by more than one reason 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 Forest Dwellers (Recognition of Forest Rights) Act, 2006, its
through competitive bidding (case 1 & 2). Both these forms of associated rules and amendments came quite late.
procurement had unsatisfactory outcomes - the main problem Developers were allocated blocks which were not adequately
being the significant delays in completing the procurement explored and with the uncertainties in policy and legislation13,
process itself. Around 83 percent of long term Case-1 bids mine development and production continues to stutter.
have been delayed during the period FY07 to FY1211. While
the stipulated time for signing of PPA from the date of issue The other reason for delay in bringing to production the coal
of RfP is 120 days, the actual average time taken is around mines is the continuing lack of competence and bandwidth in
440 days12. The delay is primarily due to lack of process the sector. Some of the critical gaps are the following:
discipline by the utilities and indecisiveness regarding viability Shortfall in planning capacity with poor capacity in private
of the quoted tariff. A combination of poor planning and poor sector
procurement processes led to delays and deficits. It is now Shortfall in exploration & production capacity - Imminent
also acknowledged that the model contracts had weaknesses shortfall in skilled workers for statutory positions like
related to fuel supply risk allocation. But the issue of lack of surveyor, mining sardar, overman etc.
exercise of flexibility in the procurement process is also to be Reduced pool of experienced mining engineers and
blamed. The framework provided for regulatory intervention geologists due to recruitment freeze in mining companies
to adapt the bid documents, but either these were not called and scaling down of batch sizes in mining institutes in late
upon or there was insufficient exercise of the same. 1990s and early 2000s
Poor Record of State Gencos The gas story has also been bleak and unfortunately has led to
significant stranded generation capacities (more than 15,000
While at one end state discoms could not efficiently procure
MW14). A poor policy framework on gas allocations is to blame
power, at the other end state Gencos also struggled in their
- priority was given to capacities which were ready and this
role to add capacities due to poor planning and weak financials.
led to capacity creation before gas allocation! The framework
There were regular slippages in the capacity additions from
around dispute resolution in new exploration licensing policy
state sector and even the operating plants had low utilizations
(NELP) contracts also appears to be weak since it has taken a
(average net PLF of less than 65 percent in the last five years).
lot of time to resolve the issues related to cost recovery.
As a result some states have very high energy deficits.
The only silver lining has been the rise of renewables. Wind
The situation would have been much worse if it was not was driven by a feed-in-tariff (FIT) regime and did not therefore
for the private sector, which added significant capacities in need a procurement process thus saving itself from its perils,
recent years and created viable alternative to state Gencos. though solar power is procured through a tendering system
Going forward, governments will need to relook at the role of and is currently suffering delays due to the slow process in
state Gencos and strengthen them in terms of financials and various states and also at the Centre. The boost to renewables
operations if they have to compete with the private sector. came from the emerging grid parity (as shown in the chart
below) with conventional power15 and the short gestation
Lack of Fuel to Power the Nation periods to set up these capacities led many states to embrace
This is only part of the story. The other big failure was the failure them to meet their power shortages.
of a push factor - fuel availability! The fuel sector has been a
The generation based incentives to wind power also provided
controlled market. Allocations are done by the Government
impetus to new development by augmenting developers
and bulk of the coal supply was still through Coal India (CIL).
returns thus helping move the wind sector from a tax incentive
CIL provided letters of assurance to different producers - far
driven sector to a core generating sector.
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 Tariff (INR/kwh from various generation sources for supply to a
the Letter of Assurance (LOAs) would get called for supply. This load centre at 33 kV15
is now manifesting in stranded capacities. The other reasons 6.64
were internal structural difficulties to ramp up production. The 4.72 4.76 5.44
record on private coal mines reaching production has also been 3.42 3.90
very poor.
The Policy and legislative framework impacting coal mining
is still evolving. For example, the Mines and Minerals Domestic Hydro Domestic Wind Imported Solar
captive coal power linkage power coal based power
(Development and Regulation) bill is still in the works and mine based plant coal based plant power plant plant
the debate around go/no-go areas is still not completely power plant pithead
power plant
resolved. Even the Scheduled Tribes and Other Traditional
11 KPMG analysis of Case 1 bid processes conducted between FY07 to FY12 15 Based on KPMG analysis. Tariffs are for supply to Rajasthan from captive
12 Average time taken for Case I process in states Haryana, M.P, Maharashtra, coal based power project in Chhattisgarh, hydro power project in Sikkim,
Rajasthan, Gujarat, Karnataka, Bihar, Delhi, Mumbai, U.P and A.P domestic coal linkage pit head plant in Chhattisgarh, wind power plant
in Rajasthan, imported coal plant in Gujarat and solar power plant in
13 CEA monthly reports
Rajasthan. Tariffs include inter and intra-state transmission charges at 132
14 Gas capacity that is operating below 60% PLF 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
Out of these, only Rajasthan and Tamil Nadu have so far issued Production System (VPS) of Vale, Improving Performance
bonds that are backed by state government guarantee as per Together program of Rio-Tinto, One Anglo program
the formula suggested by the cabinet committee after the of Anglo American etc. Some ideas with regard to how
Central Government approved the financial reform package these themes can be adopted in the context of India are
in September 2012. Uttar Pradesh, Haryana and Andhra enumerated below:
Pradesh are expected to issue bonds soon. Punjab and Development of pit-head infrastructure: For specific
Madhya Pradesh have opted out of the scheme. Central and mines identified by Central Mine Planning and Design
state governments have to agree on a time bound plan and Institute (CMPDI), immediate action needs to be taken
implement the financial reform package. to bridge the gap between production capacity and first
4. Address financing issues by enabling strategic and mile transportation capacity to nearest siding by ramp up
financial investors to come in and by easing the lending of coal handling plant/automatic wagon loading system
logjam: In the last two years, we have seen international infrastructure and improvement of road conditions.
strategic investors (power utility companies) showing an Improvement in mining process and technology:
interest in the Indian power sector. Their entry is much There is a strong case for initiating a Continuous
needed, not least because of operational capabilities, but Improvement Program (CIP) aimed at addressing
also to bring in the much needed equity financing into the issues such as equipment break-downs, computerized
sector. One of the bigger concerns today is a lack of new operational planning etc. all of which have an impact on
pipeline of projects since most of the existing set of players mine through-put
are stressed (aggregate debt-equity of 2.64 and cash losses Quick adoption of technology to develop
of INR 124 Crores17) and would not be in a position to bring underground mines: Tenders need to be quickly
much equity. The capacity addition target for 13th plan is 100 finalized for the underground (UG) mines for which
GW18 and private sector is expected to contribute at least technology identification is already done by CIL and
64 GW19. This will require equity capital of~ INR 1,27,050 contract terms need to be equitable in line with the
Crores. model contract agreement for mine development
To enable strategic and other large financial investors operator (MDO) contract being framed by the Planning
like pension funds, to view the sector favourably, the Commission
Government should quickly resolve various uncertainties
such as position on coal block allocation, implementation Long-term measures to ensure sustainability
of imported coal pass-through, policy on M&A related to The following measures need to be undertaken in the next 1
allocated mines and have a war-room approach to resolving to 3 years to ensure long term sustainability:
issues related to some stuck up projects. A longer term
1. Disintermediate the discoms to activate the pull forces
clarity on some of the above issues will also bring in more
of demand: Introduce the concept of retail supplier who
confidence for investors looking to acquire operational
will contract between the consumers and the generators.
projects and running them for cash flow yields. Further,
He will respond to market forces created by deficits and
the domestic lending community is precariously poised
high coping costs. He will contract with generators flexibly
towards the sector due to potential NPAs on account of
and not be bound by standard bidding documents, coal
various projects that have got delayed or have been unable
indexation constraints etc. In short, we can overcome the
to achieve COD due to fuel or PPA related issues. What
constraints of centralized regulated procurement. This
is needed is a special dispensation liberating provisioning
can be done through a legislative change to introduce a
norms for such loans to avoid them getting classified as
new license category - the retail supply license. Further,
NPAs. This could be done only for those projects which
provisions related to cross-subsidy surcharges and other
are facing loan restructuring on account of uncontrollable
measures acting as barriers need to be defined in a more
factors such as coal supply related issues and issues related
definitive manner so that it is binding on regulators and
to environment or forest clearances. This will help unlock the
does not become a hindrance to open access as seen today.
financing logjam and enable a positive investment cycle to
commence. Further, the Government should enable takeout While the Cross subsidy surcharge computed under the
financing for banks by strengthening institutions such as National Tariff Policy (NTP) is a step in the right direction, it is
IIFCL to undertake the same. This will help partially address being distorted due to non-uniform methodologies adopted
the sectoral exposure caps that banks would otherwise be by State Electricity Regulatory Commission (SERCs) and
constrained by. considering bilateral / short term (ST) sources in marginal
power purchase cost. Short term sources would tend to
5. Implementation of operations excellence initiatives have volatile prices thus preventing a stable cross-subsidy
in mining companies focused on throughput surcharge regime. Therefore, we suggest that cross
improvements: The public sector coal companies need to subsidy surcharge should be computed excluding ST
immediately undertake large scale operations excellence sources to reflect true cross subsidy available in the system
initiatives. Some examples of such initiatives are Vale over long term.
17 Listed companies data - Aggregate debt-equity ratio and sum total cash 19 As per Planning Commission private sector contribution is estimated to be
losses of listed private power generation companies 60 GW out of 93 GW in XII plan and its share is expected to only increase
18 Planning Commission. This includes renewable capacity of 18.6 GW 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 A scheme which enables consumers to continue availing
purchases) in key states. supply from alternate sources during periods of deficit.
Such schemes have been adopted in states like Tamil
Cross-subsidy surcharge for Industrial Consumers at Nadu and Andhra Pradesh during 2012-13 and work
132kV by providing load restriction through commercial tariff
Description CSS for HT Industrial -132 kV (Rs/Kwh) signals for exceeding a given quota of power rather
than load restriction through physical disconnection of
Madhya Maharashtra Andhra
Pradesh Pradesh feeders.
Cross subsidy
2. Expedite the coal allocation process through
surcharge (As per NTP 1.58 0.94 0.73 competitive bidding to support the push factor: The
but excluding short
term purchases) Ministry of Coal should create a roadmap for regularizing
the non-controversial coal blocks that are faced with the risk
As can be seen from the below graph, total landed cost for of summary de-allocation on the back of the Public Interest
replacement of base load requirement of a typical industrial Litigation (PIL) filed in the Supreme Court. The Government
consumer from private sources can be competitive after can determine the reserve price for these blocks based on
considering power generation cost, a fair level of cross the methodology adopted for upcoming allocations as well
subsidy surcharge (CSS), transmission charges and losses. as apply normative project financial benchmarks based
Currently, the play available is in the range of INR 1.5 to 2.85 on approved mine plans and accordingly charge a suitable
/ kWh, suggesting that a win-win situation can be created. allocation fee from the allottees. The schedule of payment
should be designed in a way that it does not adversely
Viability of Open Access with Reasonable Cross-subsidy impact the output power prices.
Surcharges
3. Invite international players who can bring modern
Total Landed cost for private player /
7
6.98
technology especially into underground coal mining
6
and increase coal production: India needs modern
Avg. EHT Tariff (Rs/kWh)
5.47
4.72
5 4.73
4.05 3.96
technologies for de-pillaring and technologies to access
4 1.58
0.94 0.73 the coal in deep seams through open cast (OC) and
3 0.31 0.47 0.22 underground (UG) methods. With increasing challenge
2 of environmental clearance and land acquisition, it is
2.83 3.01
1
2.63
necessary to apply these methods to fully exploit the
0 potential of mines already in possession of the coal mining
Madhya Pradesh Maharashtra Andhra Pradesh
companies.
PP Cost (Case 1 tariff) Transmission cost & Losses (Rs/kWh) CSS (Rs/kWh)
Over the years, the contribution of underground mining
HT 132 kV Tariff Total Cost (Rs./kWh)
has infact reduced.20 Given that the limited shallow depth
Average realization is computed at 85% LF considering that base load getting shifted to reserves amenable to opencast mining are likely to be
private players - Average of express and non-express feeder for Maharashtra and Extra High
Tension (EHT) for AP. exhausted in foreseeable future (may be after 25-30 years)
and the production from opencast coal mines in CIL may
To encourage competition under such circumstances, we reach a plateau, it becomes essential to start developing
recommend the following: underground mines in earnest. Further, large scale ramp up
A stable cross-subsidy surcharge regime that gives of underground projects takes time and hence the need to
predictability for investors. This should be combined start early and introduce bulk production technologies. It
with an equitable balancing and settlement system for is in this area that we need to invite international players in
handling deviations and providing grid support. earnest.
259 277
242
200
Following are some actions that will enable participation 5. Carry out a process re-engineering of the environment
from international companies: and forest permitting processes: Power capacity of
more than 103 GW and coal mines of more than 726
Design the right Public Private Partnership (PPP)
MTPA capacity are pending for environmental and forest
framework for MDO participation treating technologically
clearances. There was loss in production of domestic coal
complex projects differently from socio-environmentally
from private sector to the extent of 394 MT21 of coal in the
complex projects. As we have seen in many sectors in
last 5 years because of delay in development of captive coal
the past, a proper risk sharing framework and transparent
blocks allocated for power. This has lead to higher imports
processes are necessary to attract internationally
and stranded capacities with an impact of more than INR
competent bidders.
1,46,157 Crores22. While these processes are much needed
Provide the right pricing framework for Underground and value-adding, the outcomes can be achieved with much
Mining: The Government should provide pricing signals lesser time and cost. Some of the measures in this regard
for increasing underground coal mine production which include the following:
may be at a higher cost and not profitable at current
Bring in accountability for timely decisions on clearances
prices. Options include allowing a certain level of
by identifying single point responsibility for different
merchant sale through e-auction route and providing
projects. Project officers for all projects above a
import-parity price for underground mines. Given the
certain threshold size should be identified. They would
demand for imported coal, higher prices can be absorbed
be accountable for timely processing of applications after
by power generation companies.
co-ordinating with various entities.
4. Strengthen regulatory institutions: This is perhaps the Identify a charter which defines timelines for various
single most important institutional change that is needed. activities in the permitting process. This should be
The power regulators are supposed to be independent monitored at the highest level. As we have shown the
and autonomous. Yet, in many states, that does not loss on account delays can be astronomically high.
appear to be the case. The key issues relate to a) process
of appointments b) competence of regulatory staff and Develop a parallel processing system where information
regulators, c) lack of an accountability framework and d) is processed in parallel by various entities. Use of
indirect interference from the state government. Today information technology to enable speedy processing
non-performance of regulators has no punitive implications. should be done and further bottlenecks either due to
Following are some of the measures that GOI must consider certain skills, manpower or information flows should be
to strengthen regulatory institutions resolved.
At least one of the members of the Commission to be 6. Separate the problem of subsidized sectors such as
from private sector to reduce government interference agriculture supply from the problems of the discoms:
While there are provisions in the Act to provide discoms
Default annual tariff increase linked to certain index (it with the required subsidy, there are many problems related
may be a combination of Wholesale Price Index (WPI), to measurement and actual delivery of the subsidy. A
fuel index etc.) should be mandated and correction, if system of direct cash transfers, now seen in other areas,
any, should be carried out by the respective regulators needs to be urgently considered here. Alternatively, the
to adjust revenue surplus/ deficit. This will safeguard the stakeholder for this category should be the Department of
financial interest of the utilities in case of undue political Agriculture or Irrigation and not the discoms. The agriculture
interference. department could consider disbursement to each
Performance of SERC should be measured with division based on agricultural consumption at Distribution
designated Key Performance Indicators (KPI) either by Transformer (DTR) level. This approach will help rejuvenate
the Central Govt. or Appellate Tribunal for Electricity (ATE). the finances of the discoms and help them to be more
The KPIs should include performance related to issue commercially sound.
of orders within stipulated timelines and adherence to
7. Railways & CMPDI should make an evacuation master
provisions of Electricity Act (for example, enforcement of
plan: Railways and CMPDI should work on coal field master
Renewable Purchase Obligations). Based on the report
plan on the lines of Chhattisgarh model by working closely
of the performance reviewer, state government or the
with state governments. There is a need to expedite large
regulator, as the case may be, has to take appropriate
scale construction to enhance rail capacity for key coal fields,
action to correct the short comings.
including last mile connectivity to sidings attached to the
Permanent staff should be appointed to strengthen the mines.
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 22 Loss on account of higher procurement cost for imported coal of more
development timeline as per Ministry of Coal, is considered for all the than 200 MT procured in last 3 years and loss of generation equivalent to
allotted blocks 194 MT of coal.
Recharging the Power Sector - How to turn around the power sector by 2018 | 8
23 Part of this capacity is currently sold under merchant route, but is subject 27 There can be multiple issues other than environmental and forest
to coal availability. 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
24 CEA
years time.
25 Planning Commission estimates coal based capacity addition of 62 GW
28 Supply to power projects is around 80% of the total coal production by CIL
in XII plan. This is in line with our analysis of upcoming coal based power
plants which are under construction 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
26 This includes CIL coal mines with a capacity of 116 MTPA which are
mineable reserves to be only 60% of the proved reserves.
pending for EC and FC.
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 power, environment, railways; the State Governments, the
production of 394 MT in XII plan from CIL mines, captive coal lending community through a change in mindset towards
mines, Singareni coal mines and increased underground lending, the power utilities (discoms) through efficiency in
mine production30. This can support ~80 GW of coal based procurement and allowing a level-playing field for competition
capacity additions. Considering capacity additions from through open access, the Electricity Regulators through
other sources as per Planning Commissions target31, we will efficiency and adherence to the spirit of the Electricity Act
have an aggregate energy supply of 1638 BU32. This will be and importantly the private sector through being reasonable
sufficient to meet 100 percent of energy demand projection in their expectations and having to make suitable sacrifices
of 1462 BU in FY18 as per Electric Power Survey33. Further, to come out of the current situation. In the ultimate analysis
these measures will revive the investment cycle, bring in new it is the power consumer, whether it is the urban or rural,
investors including strategic players and help bring the much industrial or agricultural, who bears the brunt of the situation.
needed equity for new projects. Timebound implementation We owe the consumer a much better power situation - a
of Financial Restructuring Plan (FRP) for discoms will also help vibrant, competitive and reliable power sector, one that
improve viability of the distribution sector. allows industry to compete in the rest of the world and gives
all other consumers a quality of life they deserve. For this, we
It is important that all stakeholders participate in this
need to recharge the power sector and do so urgently.
resurrection of the power sector. This includes the Central
Government and its various ministries such as those of coal,
30 Incremental production by SCCL is 6MTPA by FY17 and 80% of this quantity is expected to be supplied to power plants
31 Planning Commission targets estimate capacity addition of 2.8 GW, 9 GW and 18.5 GW from nuclear, hydro and renewable sources
32 PLFs for coal, nuclear, hydro and renewable sources are taken as 85%, 70%, 40% and 20% respectively
33 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.
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Partner
Corporate Finance
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Partner
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