Capacity utilization in the power sector shows a grim situation. The plant load factor for thermal power plants fell to 59.4% in June as generation growth remained flat. Capacity is being added even as demand is not growing. In fiscal 2015, power deficit had reduced to 3.6%, but that is just the reported number. Ratings agency Icra Ltd reckons that the actual power deficit is 15%.

Simply put, power plants are idle at such a high level of power deficit because state electricity boards are not buying. In the June quarter, merchant demand on the exchanges declined 22.3% from a year ago. Even on a sequential basis, it fell 9.3%, despite it being high summer.

The last major power purchase agreement signed by a state electricity board was Kerala in 2013.

State discoms are not buying because of a high pile-up of losses. Restructuring these losses is not going to help unless the root problem is eradicated: that of minimizing transmission losses and increasing tariffs.

As of fiscal 2014, in all but a couple of states, the revenue realized from sale of power inclusive of subsidy is lower than the total expenditure booked, calculations by Icra show. This has happened largely because tariff hikes were inadequate and distribution losses were higher than allowed by state electricity regulatory commissions. And if a state discom’s losses were high, the regulator disallowed the excess cost of power purchase.

The accumulated losses of state discoms at the end of March 2013 were close to ₹ 3 trillion. Wiping out these losses will take time. Even to recover regulatory assets—those expenses approved by state electricity regulatory commissions for recovery through future tariffs—over a period of five years, tariff hikes as high as 23% would be required in some states, such as Rajasthan, Icra estimates.

While that kind of tariff hike is not unheard of, it requires strong political will to enforce it. Even in the miraculous and unlikely event of the government stepping in and making good these losses to ensure that discoms start on a clean state, unless tariffs are hiked, this is a problem that will keep on cropping up.

Without tariff hikes and a reduction in transmission losses, necessary to see sustained demand for power, any other prescription would be a stop gap arrangement.

With fuel supply issues largely getting solved, the next trigger for power stocks would come from increased demand, which would reduce idle capacity. The BSE Power index has been a laggard and lost 5.7% in the last 12 months.

The writer does not own shares in the above-mentioned companies.

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