Mending Power Sector Finances PPP as the Way Forward Energy Market Forum AF Mercados EMI 11 th February 2011
Structure of the Presentation Current Status of Power Sector Generation Transmission Distribution Magnitude of the problem in distribution Underlying causes of the problems Implications for future of the utilities, the sector and the economy Issues for Discussion 2
Generation Segment Gradual shift towards competitive procurement of supply and competitive discovery of tariffs Several rounds of Case I and Case II bidding completed by States Haryana, UP, Madhya Pradesh, Gujarat, Maharashtra, Rajasthan, Punjab, Karnataka, Bihar, Andhra Pradesh Price Discoveries through bidding extremely attractive in comparison to MoU route based tariff determination Encouraging responses from the private sector XI Plan will witness one of the largest capacity addition in comparison to any of the previous plan periods Total Capacity being commissioned: 32 GW ~ 33% is by private sector Capacity under construction: 30 GW ~ 30% by private sector Progress in the Generation segment has been reasonable and much better than the previous plan period 3
Transmission Segment Response at Central Level has been satisfactory Interregional transfer capacity to increase to 32.7 GW by 2012, to 57 GW by 2015 XII Plan Investments include ~Rs. 2000 bn in Central Sector (Inter-State) and Rs. 1000 bn in the state sector (Intra-State) 14 New projects identified for private sector participation (IPTC route) besides already existing MoU/JV route First 4-5 already awarded and few more are in process After a huge backlog of investments, state are now scaling up First PPP project awarded by HVPNL to JV between Kalpatru Power and Techno-Electric & Engg. Company First Rajasthan project awarded to GMR; Tenders for second announced UP has also completed one round of bidding Maharashtra pursuing innovative strategic alliance model Private Sector is also being involved in development of evacuation systems for UMPP projects Recent developments in the Transmission segment have been encouraging and provide a positive picture of the future 4
Issues in the Distribution Segment remain largely unaddressed leading to an alarming situation 5
Rs Crores Rs Crores State Power Sector Finances have been on a Perilous Downslide Aggregate Financial Losses of Power Distribution Utilities have been increasing at an burgeoning rate Accounting for the state level subsidy, the figures still look alarming placing severe concerns on the commercial viability of the power distribution segment 0-10000 -20000-30000 -40000-50000 -60000 0-5000 -10000-15000 -20000-25000 2005-06 2006-07 2007-08 2008-09 -21441 Aggregate Book Losses of Power Utilities Excluding Subsidy (Rs. Cr) 2005-06 2006-07 2007-08 2008-09 -8681-27920 -34241-14303 -14720-20920 Aggregate Book Losses of Power Utilities Considering Subsidy (Rs. Cr) -50602 Source: PFC Report 6
Projection for future appears to be even more alarming (at 2007-08 tariff levels) Future projection show a continuing trends unless urgent action taken At current tariff levels, the losses (excluding subsidy) are likely to reach mark ~Rs. 68000 Cr by end of 2011 and ~Rs. 80,000 Cr by end of 2012 Figures clearly highlight large uncovered gap that need to be addressed 0-20,000-40,000-60,000-80,000-100,000-120,000-140,000 Projected Aggregate Financial Loss (Rs Crore) 2010-11 2011-12 2012-13 2013-14 2014-15 -68,643-80,319-88,170-98,664-116,089 Source: Mercados EMI Analysis undertaken for the Thirteenth Finance Commission, Govt. of India 7
Magnitude of Losses in comparison to the fiscal deficit and social sector spending Impact of losses can be fully appreciated only when compared with the fiscal deficit and GDP - Accumulated Losses at the end of 2009 Approx. 15% of the India s fiscal deficit for 2009 Approx. 1% of India s GDP for 2009 Total losses 45% of XI Plan outlay on Health Care 20% of XI Plan outlay on Education 8
Tariff increases required to bridge the revenue gap are substantial Table indicates the level of tariff increase required by various states (at the current level of subsidy) to bridge the revenue gap to reach a level of No profit No Loss State Present Reported Subsidy (Rs. Cr) Avg. Tariff Increase Required (%) to neutralize the gap Haryana 2220 8.0% UP 1522 8.9% Punjab 2549 9.5% Uttarakhand - 10.8% Rajasthan 3643 4.9% MP 277 6.0% Karnataka 1802 7.8% Tamil Nadu - 8.25% Andhra Pradesh 1308 7.0% Jharkhand - 8.0% Bihar 720 11.7% Meghalaya 34 11.8% Tripura 50 16.3% Mizoram - 24.0% Source: Mercados EMI Analysis undertaken for the Thirteenth Finance Commission, Govt. of India 9
Key Reasons for the Increasing Financial Losses 10
Reduction in the AT&C losses have not been adequate Change in AT&C Losses in 2008-09 over 2007-08 Reduction in AT&C losses for the power utilities has been less than expected In stark contrast to the urgent need for loss reduction, 14 states reported an overall increase in AT&C losses in the two year period SERCs are unable to estimate the total losses due to large un-metered agriculture consumption; hence regulatory targets remain unmet Reduction by No. of States 0-2% 6 Name of the State Arunachal Pradesh, Punjab, Tamil Nadu, Puducherry, Gujarat, Maharastra 2-4% 5 Orissa, J&K, Rajasthan, Uttarakhand, AP Above 4% 5 Bihar, Assam, Delhi, HP, Karnataka INCREASE BY No. of States 0-2% 7 Name of the State 2-4% 2 Meghalaya, UP Jharkhand, West Bengal, Manipur, Tripura, Haryana, Kerala, Chattisgarh Above 4% 5 Sikkim, Mizoram, Nagaland, Goa, MP Range of AT&C Losses Less than 20% Name of the State Andhra Pradesh, Delhi 20-30% WB, Gujarat, Rajasthan, Assam, Karnataka 30-40% Orissa, Haryana, Uttarakhand, Maharashtra 40% & above MP, UP Source: PFC Report 11
Rs/Kwh Inadequate Tariff Increases resulting in uncovered gap 3.6 3.4 3.2 3 0.75 Increasing Revenue Gap 2.8 2.6 2.4 0.38 0.48 2.2 2006-07 2007-08 2008-09 Years Source: PFC Report Avg. Cost of Supply Rev w/o Subsidy In most states, tariff increase has been inadequate to cover the cost increases witnessed by the utilities. While the average cost of supply (all-india) level increased from Rs. 2.64 per unit to Rs. 3.42 per unit i.e. an increase of 30%, the increase in revenue has been only 18% (due to low tariffs). The revenue gap increased from 38 paise per unit in 2006-07 to 75 paise per unit in 2008-09 implying losses for the utilities. Even after accounting for the subsidy (on realized basis), the corresponding revenue gap is 16 paise per unit and 46 paise per unit respectively 12
Tariff Increase by various states in the past years Tariff Last Changed No. of States* Last 1 year 9 1-2 years 3 2-3 years 2 3-5 years 2 > 5 years 5 Source: Mercados EMI Analysis undertaken for the Thirteenth Finance Commission, Govt. of India, 2008-09 In stark contrast to the need for tariff revisions, actions in this regard from the utilities and the regulators has been slow. Inability to raise the tariffs in a timely manner in having serious implication for even the states that are performing well on the reduction of the T&D losses. * Note: Tamil Nadu and Haryana have recently increased the tariff substantially, however this still does not compensate for the uncovered gap. 13
% increase each year % increase each year While tariffs have not increased costs have been increasing consistently Power Purchase cost constitutes ~70-80% of power utilities cost. Figure shows an increase in the overall power purchase cost of power utilities Consistent increase in the operational expenses indicates limited improvement in operational efficiency in managing the distribution operations The increase is attributed to the revision in employee cost as per the recommendations of the 6 th Pay Commission 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Power Purchase Cost 17.26% 14.04% 12.22% 2006-07 2007-08 2008-09 Year O&M Expenses 32.00% 17.40% 14.93% 14 0.0% 2006-07 2007-08 2008-09 Year Source: PFC Report
What is What this is leading this leading to? to? 15
The Vicious Cycle Operational Inefficiencies Poor Finances Inadequate Tariff and Subsidy Financial Sector Contagion Lenders Default Higher cost of fund Impact on debt/equity market 16
Price (Rs/kWh) Evidence: Available supply but limited off-take leading to softening of prices Price of Short-term transactions of Electricity during Apr 09 Oct 10 Cash Strapped Utilities are increasingly resorting to lead shedding instead of buying power from the exchange 17
Evidence: Sensex Vs BSE Power Index 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 01/Jul/09 01/Nov/09 01/Mar/10 01/Jul/10 01/Nov/10 Widening Gap POWER SENSEX Movement of Sensex Vs BSE Power Index indicates a widening performance gap in the current fiscal year Lending Institutions have been reluctant to lend to projects where power has not been fully tied up 18
Other Evidences Lending Institutions have been reluctant to lend to projects where power has not been fully tied with credible counterparties Sweeteners provided in recent bids are no longer a viable proposition with dipping short term prices Long-term pricing at which most of the bids are being undertaken result in single digit IRRs if the entire capacity is sold on long-term basis Recent bids had sweeteners to allow developers to earn additional return through merchant sales Dropping market prices no longer provide attractive realizations to developers Risk of momentum in capacity creation being lost 19
Issues for Discussion 20
Issues for Discussion Why has the distribution segment not improved despite efforts? Is there an ideal reform model? What differentiates Orissa from the Delhi Reform Model? Is franchising a success story as it is believed to be? What should be the approach to reforms? Urgent actions to be taken up Imperatives and Challenges What strategies should be adopted to serve the rural segment? 21
Structural Options Option 1: Full Privatisation Option 2: Distribution Franchising Option 3: Rural Distributed Generation and Distribution Option 4: State Utility Led Performance Improvement Indian Examples Delhi, Orissa Bhiwandi, Kanpur, Nagpur Husk Power, DESI Power West Bengal Advantages Scale Economies, Control, Accountability Lesser issues with acceptability Social acceptability, addresses rural electrification issues Acceptability, Control Key issues Political and Social Acceptability, Regulatory difficulties Economies of scale, delays in award process Scale, regulation Incentive framework, sustainability, governance, accountability
Thank You 23