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Clearances for coal blocks stuck, Modi can revive Manmohan Singh’s project monitoring group

Ex-IAS officer tells the Modi government to look at both demand as well as supply side issues to lift India's power sector out of crisis.

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The Narendra Modi government took charge last month for a second term – but it is confronted with the same crisis in the power sector that it did five years ago. Perhaps, the only positive sign is that coal, which is a major component in driving power generation, does not face the problems it did in 2014. Still, some unresolved issues remain.

What ails the power sector

The government will first need to address two critical issues: the massive contribution of 34 power generating companies (two of them public) to Indian banks’ stressed assets — together, they own loans worth Rs 1.74 lakh crore, which could soon turn into bad debts. The production capacity of these thermal power plants with stressed assets is around 40,000 MWs. The second issue is the shortage of coal supply and the absence of a Fuel Supply Agreement. The number of power plants in need of adequate coal stood at 30 as of October 2018, according to a report by the Central Electricity Authority.

The Parliamentary Standing Committee on Energy had in its report in March 2018 identified several reasons for the crisis ailing the power sector, one of which remains the shortage of coal.

The cancellation of allotted coal blocks in 2014 by the Supreme Court – a fallout of the coal allotment scam under Manmohan Singh government – and setting up of projects without fuel linkages are in large part responsible for this shortage in supply. The Committee had also highlighted that the states had entered into agreements (PPAs) to purchase insufficient power – there were PPAs only for 16,129 MWs against the required capacity of 24,405 MWs. There were other tariff-related disputes, issues pertaining to capital and delayed projects that the committee had highlighted.

Also read: Indian electorate cares about electricity – but the power sector remains deeply challenged

But there are a few other factors that have contributed to the current crisis. These include the uneconomic and aggressive bidding in coal block auctions in 2015 by power generating companies, which had to pay a heavy price for wanting to get hold of the coal blocks “at any cost”; mining put on hold in a number of coal for want of clearances; coal-based thermal energy sector having to bear the cost of the ambitious targets set out for renewable energy; and the variety of cess imposed on coal, which have put additional burden on the coal-based power plants.

Insufficient, selective support

Action so far has been limited to tackling issues for a select few power companies. Thus, special linkages have been provided for some entities by Coal India. There has also been a move to allow cost ‘pass-through’ to certain entities to relieve them of the burden of increased import price.

These piecemeal efforts are not likely to create substantial impact on the sector that is faced with serious crisis, although it would relieve some of the entities of the cost burden.  This too would come at someone else’s cost.

Unfortunately, hydro-electric power generation has not kept pace with the requirement. Grid balancing could have been done through hydro-electric power for the renewable energy. However, in the absence of that option, it is now being “enforced” on the coal-based power plants. They have been “asked” to back down at a substantial cost to “accommodate” solar energy transmission. Unfortunately, the thermal power plants have had to bear this cost.

Also read: Modi govt’s Uday scheme loses steam, power discom debts back to pre-2015 levels: Crisil

What Modi govt should do

The Modi government in its second term should look at both the demand as well as supply side issues that confront the power sector. Demand for power exists but the distribution companies (or DISCOMs) are unable to articulate this demand because they are in a bad shape themselves. Ujjwal DISCOM Assurance Yojana (UDAY) needs to be implemented in letter and spirit. This is imperative to get the DISCOMs out of the mess similar to how it was done in Gujarat, long before the dawn of “UDAY”. Gujarat has demonstrated that this can be done but other states will need to demonstrate the same commitment and political will. The Modi government can play the role of facilitator. DISCOMS hold the key to the power sector.

The supply side issues will have to be tackled differently and in a comprehensive manner. Supply of coal will have to be increased by Coal India through a strategy pursued during 2014-15 and 2015-16. Coal production saw an unprecedented increase in these two years. The factors that impact coal production revolve around land acquisition, environment and forest clearances, and evacuation of coal. Most of the issues that impact the first two factors relate to the actions of respective state governments. Hence, the strategy will have to entail going down to coal-bearing states to resolve such issues. It has been done in the past. There is no reason why it can’t be done now.

Also read: Power thieves drain India’s electric-car hopes

Various clearances for the coal blocks that were auctioned/allocated haven’t moved forward in the past couple of years. Revival of the Project Monitoring Group (PMG), which was launched by the Manmohan Singh government to ‘track large investment projects’, will help. A high-level empowered committee needs to be set up to examine each stressed project and work out a rehabilitation package. Only financial restructuring will not help. The package has to be a comprehensive one. This could even entail change of ownership and management and/or adequate sanction of funds that are required for the particular project. The committee should also be empowered to settle disputes, if any. Until a central mechanism along these lines is created, the issues will remain unsolved.

The power generating companies should not be saddled with the burden of cross subsidising the renewable sector. Promoting renewable energy is laudable. But it comes at a cost. This has to be borne by the society (through taxation) and not by the entities that are already in trouble.

Power sector can be revived. All it requires is some intensity and commitment on part of those in power in Delhi and in the states.

The author is a retired civil servant and former secretary in the government of India. Views are personal.

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  1. By holding auctions for coal blocks, the NDA thought it would put up a big show of being transparent and show great revenue earnings. The high auction bids made further development of the coal blocks unviable. It is only now that the global practice of auctionless coal block allocation becomes evident , along with the basic wisdom of the MMS Govt policy.
    Since the private coal sector is now hobbled, the author is forced to look up to Coal India for greater supplies by land acquisition and aggressive forest clearances , with adverse environmental impact.

  2. There is no justification for the discoms to be in a mess, after UDAY took two trillion of debt off their shoulders and flipped it to the respective state governments. There is no point having State Electricity Regulatory Commissions if the pricing of power, mainly to farmers, remains completely politically determined. India cannot afford a bailout for the power sector – or a massive farm loan waiver – once every five years, just before or just after each election. So many private power plants are idling capacity because the discoms are too broke to buy more of it from them. Power, like banking, is a foundational sector that energises the entire economy. The expansion of renewables is also getting stunted because of the poor financial condition of the discoms. If there is a body like Niti Aayog, these are the issues it should be focusing on.

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