NTPC worried as SEBs’ payment security mechanism set to lapse

A tripartite agreement between the Reserve Bank of India (RBI), the Union government and the state governments, which provided comfort to power producers against payment defaults by state electricity boards (SEBs), will lapse in October 2016 and there is no certainty that a replacement would be ready in time.

Under the existing agreement, any state defaulting on dues owed to power companies risks a deduction from its annual transfers; so far this clause has not been invoked as the threat of a deduction has ensured timely payments by SEBs, which are weighed down by $3 trillion in accumulated losses.

A worried NTPC Ltd is lobbying the government to extend the agreements.

“The issue has been discussed. We are trying to get the tripartite agreements (TPAs) renewed,” said a senior NTPC executive requesting anonymity.

Another NTPC executive, who also didn’t want to be identified, confirmed the development. “We carry around 25% of the country’s base load and some sort of payment security should be provided to us,” this executive said.

“The central government has assured us that these TPAs will be renewed. Around 10-12 states have already given us the counter-guarantee. A lot of central schemes such as procuring solar power are being run through NTPC so we need these TPAs. We have been raising this issue.”

The tripartite agreements were inked based on the recommendations of a committee headed by Montek Singh Ahluwalia and covered SEB dues to central utilities such as NTPC and Power Grid Corp. of India Ltd (PGCIL), among others.

With an installed capacity of 45,048 megawatts (MW), NTPC has around a 17% share of India’s power generation capacity of 274,817.94MW, and has set itself a target of becoming a 128,000MW power producer by 2032.

“The real issue if financial improvement of the discoms (distribution companies). TPAs are desirable. However, this can be mitigated with the financial improvement of the discoms and strong regulatory mechanism,” said R.N. Nayak, chairman and managing director, PGCIL.

Cash-strapped SEBs have been unwilling to procure electricity, given the low tariffs they earn for power supply, slow progress in reducing losses and higher purchase costs. According to analyst estimates, the exposure of the banking sector alone (excluding non-banking financial companies) to the power sector may be around Rs.2 trillion today.

A senior government official who didn’t want to be identified said: “The issue has been discussed with the states. We are hopeful of getting these TPAs extended.”

The National Democratic Alliance government is preparing a blueprint for the supply of 24x7 electricity that will include customized plans for each state and lays special emphasis on green power and energy efficiency. The government, which has made boosting power generation a key policy priority, is looking to supply adequate power at affordable prices. Such plans have already been prepared for Andhra Pradesh and Rajasthan.

Queries emailed to the spokespersons of the power ministry and NTPC remained unanswered till press time.

“Until the distribution utilities get cost reflective tariffs from the state regulator and declared subsidy from the state government in time, every few years there would be a need to have financial restructuring,” said Debasish Mishra, senior director of consulting at Deloitte Touche Tohmatsu India Pvt. Ltd.

“Central PSUs (public sector undertakings), private independent power producers and lenders to the power sector are quite concerned with the state of many distribution utilities in the country today and expect that government of India would come out with another solution before it’s too late,” he added.

According to a Crisil Ltd report dated 28 July, power projects with a combined capacity of 46,000MW are facing viability issues because of a lack of long-term buyers for electricity, inadequate fuel supply, and aggressive bids they made to win projects and coal blocks to fuel them.

“Of this, 36,000MW are coal-based projects within which tariff under-recovery has impacted 20,000MW of capacities, while the rest are reeling because of inadequate feedstock and poor electricity offtake by discoms,” the report said.

India’s appetite for electricity is growing. The country’s per capita electricity consumption reached 1,010 kilowatt-hour (kWh) in 2014-15, compared with 957 kWh in 2013-14 and 914.41 kWh in 2012-13, according to the Central Electricity Authority, India’s apex power sector planning body.

NTPC’s worries primarily stem from the revised electricity tariff norms.

Last year, the Central Electricity Regulatory Commission (CERC) rejected the state-owned power producer’s representation to revisit power tariff norms applicable between 2014-15 and 2018-19.

CERC’s earlier order had said tariff incentives would be based on the plant load factor (PLF) metric and not the plant availability factor (PAF). While PLF is based on the actual power generated by a plant, PAF is a measure of the available generation capacity.

In essence, CERC linked future financial incentives to the purchase of power by distribution companies. Since these utilities are always cash-strapped, PLF is lower than PAF—putting in jeopardy NTPC’s revenues.

In 2014-15, NTPC posted a 17% decline in its second quarter profit to Rs.2,071.63 crore. Revenue increased by only 1%, to Rs.17,267.32 crore from a year ago. NTPC’s PLF for coal-fuelled projects was 81.5% in 2013-14, compared with 83.08% in the preceding year.