Panel suggests measures to tackle crisis in stressed thermal power projects

Earlier this month, the High-Level Empowered Committee (HLEC) set up by the Government of India in July 2018 came out with its report on stranded thermal power projects. The Committee, chaired by Cabinet Secretary P K Sinha, has assessed the landscape of these stranded assets and identified the various reasons that have contributed to the current scenario. This report focused on 34 thermal power stations, totaling to a capacity of 40 gigawatts (GW), which are entirely fuelled by coal and lignite. The report has also suggested measures to resolve the challenges. These power plants were first identified by the Ministry of Power as stressed assets in March 2017.

The Committee has assessed the landscape of these stranded assets and identified the various reasons that have contributed to the current scenario. The report has also suggested measures to resolve the challenges. These power plants were first identified by the Ministry of Power as stressed assets in March 2017.

Multiple reasons behind the crisis:

The HLEC identified several critical reasons that have contributed to the crisis, which has been festering for more than two years now.

While the Twelfth Five Year Plan had envisaged a capacity addition requirement of 88 GW, 99 GW capacity was added during the corresponding period — this led to a glut of supply, causing plants to perform below their rated capacities.

Apart from this, the debt burden of the distribution utilities and the financial stress on banks/financial institutions as well as promoters and bidders.

It is important to note that a significant chunk of the problem has been caused by the erratic coal supply and the uncertainty of coal supplies due to the scrapping of mine auctions by the Supreme Court. Clearly, institutional challenges related to the government have contributed to the problem.

In the case of the Ultra Mega Power Projects (UMPP), for which bidding took place, several players quoted very aggressively, a decision they have since come to regret. Several other promoters did not even secure coal linkages before commencing with the project. Cost and time overruns also took place with some.

Coal supply is an inter-ministerial issue, whereby the ministries for coal and railways have been requested to work out mechanisms to address short-term issues of supply, alongside the sale of coal at notified prices without entering bidding in case of short-term power purchase agreements.

Further, linking coal supply to power plant efficiency is a good way to incentivize better, newer and more efficient assets.

Closing down of old, inefficient thermal power units make for good economics and good environmental sense.

Several measures related to power markets to address the financial risks have been strongly recommended by the HLEC. These include getting NTPC or any other agency to act as an aggregator for power purchases, which can subsequently be sold to distribution utilities.

Further, suggestion on payment security mechanism—all PPAs have support for a letter of credit (LoC) for one month’s purchase equivalent to guarantee it. It would rather be prudent to increase the value of the LoC instead of seeking a separate mechanism, and ensure that it can trigger automatically against a payment default or delay.

In conclusion, the HLEC has shown that ways can be found to sort out the mess within the thermal power sector for coal-fired power plants. However, the sole focus on coal has meant that gas-based power plants will have to wait for their turn under the sun.

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