Powerless Before The Budget
The project will have a capacity of 1.5 million tonnes per year.
As we kick-start the Budget session in the next few days, the headlines make one feel, like most problems of the power sector have been laid to rest. Intense lobbying by industry and a genuine crisis on the ground has resulted in the PMO taking bold measures to address the key infirmity – coal shortages that have incapacitated several projects.
The Prime Minister has now directed Coal India Ltd to get its act together, sign long pending fuel supply agreements (FSAs), even import the raw material, if need be, to bridge any shortfall. Power companies, of course, have lapped up the good news and the previously soured sentiment in the sector has taken a turn for the better.
But this good news seems to mask a lot of the inherent problems in the sector that still remain largely unresolved. Most power companies are still not out of the woods and there is still a big chance that we could see bad loans mounting and unviable projects downing shutters if certain policy measures are not introduced.
On top of the agenda for the Budget, therefore, are three very important teething difficulties that the government needs to address.
First up is the issue of gas allocation. Over 9,000 MW worth of gas-based power projects are up for commissioning by March 2012. Unfortunately, there is no gas to feed their capacities, as production from the KG-D6 basin, on which companies like Lanco, GVK, GMR and R-Power are relying for their key feedstock, is dwindling. To make matters worse, the EGoM set up to look into this matter didn’t really come out with any concrete solutions in its recent meeting after 18 months, making it clear that the fertilizer sector will continue to remain a top priority for allocating gas. Importing LNG is out of question as it is financially unviable.
Resolving the tariff structure for ultra-mega power projects (UMPPs) running on imported fuel is next on the agenda. A force majeure law change in Indonesia benchmarking coal exports to international prices and the introduction of coal taxes in Australia has left the power purchase agreements (PPAs) signed by three of the current four UMPPs financially impracticable. While one could rightly blame developers for being irrational when they bid at unrealistically low rates to bag projects, expecting them to continue with the status quo and incur losses would be foolhardy. PPAs will have to be amended, as there doesn’t seem to be another option.
Beyond the UMPPs, too, large scale reforms are needed in distribution where transmission losses in certain areas run as ludicrously high as 80 per cent and state electricity boards, saddled with losses due to tariffs that have remained untouched for years, are bleeding. That may be my third point, but it is likely the most important one on the reform agenda.
Incidentally, the government does not even need the Budget to bring about these changes. This needs to be done with immediate effect, else every other budgetary sop – like tax holidays under 80-IA and excise duty exemptions – will be a pointless exercise.
