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India’s Distribution segment to lead power sector reforms in 2013

India’s power sector reforms in 2013 would be led by the distribution segment, armed with the newly-announced debt restructuring package for state utilities. The Centre has backed the package with measures to ensure it does not meet the same fate as the one-time-settlement scheme of 2001. Also, most states have defeated political interference on revising retail rates, which will show in healthy balance sheets of financially-ill discoms.

The distribution sector reform, coupled with easing fuel supply constraints, duty measures for protection of the domestic equipment industry and the interest rate regime, will be the key factor affecting growth of the sector over the next year.

The new discom package not only provides for restructuring of loans but has provisions for incentives for state governments to cut distribution losses. There is also an elaborate legislative back up, in the form of the State Electricity Distribution responsibility Bill, to ensure that errant discoms fall in line and high-level committees to monitor progress of the discoms.

State discoms have accumulated losses of Rs 2.4 lakh crore, thanks to the gap between average revenue realised and the cost of supply. With rising fuel charges and stagnant rates, the gap rose to Rs 1.45 a unit (kilowatt per hour) in 2009-10 from 76 paise in 1998-99. The fresh reform initiative focuses on rate revisions, supplemented with earnings through reduced losses. Many Indian states suffer from aggregate technical and commercial (AT&C) losses as high as 30-35 per cent, compared with the world average of five-10 per cent.

Anil Sardana, managing director of the country’s largest private power company, Tata Power Co Ltd, believes the need to reduce of high level of AT&C losses in distribution and enable rationalisation of tariff for customers to help improve the financial health of the discoms were part of the policy hurdles highlighted in 2012. “Meanwhile, the growing focus on distributed power generation and trading of renewable energy certificate (REC) on exchanges are among the developments that can usher in positive changes in the energy scenario of the country going forward,” he told Business Standard.

Worst power blackout in 2012

He also listed severe fuel supply shortage and the worst power blackout in the country’s history, in July, as “turbulences” the sector faced last year. All that is set to change in the new year. The significant improvement shown by state-owned Coal India Ltd (CIL) in output would ramp up coal supply for plants. While the coal problem was compounded in 2012 by the differences between power and coal ministries over the provisions of the new supply pacts, the two sides arrived at a consensus last week. New pacts are set to be signed for over 7,000 Mw capacity within a month.

Another reason for cheer in 2013 is that private industry, which has been complaining of policy hurdles, still seems bullish on fresh investments. The private sector added around 15,000 Mw of new capacity, 75 per cent of the total 20,500 Mw in the past year. Despite grappling with challenges, the level of determination exhibited by the private sector must be appreciated, Sardana says.

While the last year saw commissioning of all the three units of Tata Power’s Mundra ultra mega power project (UMPP) in Gujarat, the first of the nine such large-sized power plants being planned in India, the project ran into problems owing to a change in regulation in coal exporting nations making imported coal costlier.

The company is currently seeking a rate relief from the regulator. Meanwhile, the power ministry is confident of awarding a new UMPP in 2013, with revisions in the original bid document.

On equipment, the coming year will witness a surge in the share of domestic industry in the power gear market.

The government has already imposed a 21 per cent import duty on equipment to discourage allegedly low quality Chinese machines and benefit domestic manufacturers such as Bharat Heavy Electricals Ltd (BHEL) and Larsen and Toubro. However, the financing constraints faced by infrastructure companies may spoil the plan. BHEL is already seeing a slowdown in fresh orders.

Overall, the sector’s growth in 2013 would depend largely on how well the government is able to manage two key issues which had pulled down profitability of companies last year — fuel supply and high interest rates.

“It’s critical that the over 30,000 Mw of capacity, ready for commissioning and awaiting fuel supply, is supplied with fuel immediately. This applies for both coal and gas-based plants,” Banmali Agrawala, president and chief executive officer (CEO) of GE Energy (India), told Business Standard.

Agrawala also advocates focus on renewable power, which contributes to six per cent of the country’s power supply currently. The cost of renewable power has become competitive as wind power has achieved grid parity.

“This success has also set the base for a strong manufacturing sector. It is imperative that catalysts such as renewable power offtake obligation, RECs and generation-based incentive should be aggressively implemented,” he said.

Experts believe the biggest challenge in 2013 would be to minimise subsidies in power sales to bring the sector back on the reform path. “While the discom debt restructuring will increase affordability as financial load goes off the discoms’ back, it will return to their balance sheets if politicians continue to distribute free power,” Dipesh Dipu, partner at energy-focussed consulting firm Jenisse Management Consultant said.

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