“As the macro and sectoral factors improve, backed by strong legislative and policy measures - such as amendments to Electricity Act and Insolvency & Bankruptcy Code - stress in the thermal power sector will abate but it is a long road ahead!” - Sambitosh Mohapatra, Sandeep Kumar Mohanty

Overview of the Generation sector

Coal based power generation has long been the backbone to meeting India’s power needs, and the sector hasmade rapid strides in the recent past, buoyed by an active and exuberant private sector. Oflate, however, it has been facing headwinds, mostly attributed to sector specific structural and performance issues,and some bad calls made by investors during the period 2006 to 2012: the growth phase for thermal sector in India.

Private investments in the sector, during this period, were driven by sector liberalisation, assumption on unserved demand, policy and regulatory reforms, and easy availability of financing. As a result, overall share of private sector in power generation increased from around 13 GW in 2006 to 157 GW in 2018, growing at 22 per cent per annum.

Soon concern, challenges and risks replaced exuberance – many projects faced land allocation and clearance related issues leading to time and cost overruns, many failed to tie-upadequate fuel or power sale agreements, merchant market became unviable, input costs continue to grow and some contractual, legal issues made projects unviable. Lower than expected increases in power demand as well as financial health of utilities also played a part. It led to mounting debt levels, bad debts and stranded capacities, eroding investor confidence.

Over last 5 years, the Government is lending strong support to cleaner and greener sources of energy. As a result of this push and continued fall in input prices, renewable energy today is cheaper than conventional power (Rs 2.44 per unit for solar and Rs 2.43 per unit for wind) and the shareof renewables has risen from to 14 per cent to over 20 per cent in the last 3 years, limiting the growth of thermal power plants.

As the macro and sectoral factors improve, backed by strong legislative and policy measures – such as amendments to Electricity Act and Insolvency & Bankruptcy Code – stress in the thermal power sector will abate but it is a long road ahead!

Market Trends

Demand expected to increase

The accelerated pace of capacity addition in the past decade led to an overall capacity addition growth of around 9 per cent per annum (2006 to 2018).Peak demand during the same period, increased at a comparatively slower pace of only around 5 per cent per annum.

Energy deficit and peak deficit has come down to 0.7 per cent and 2 per cent, respectively, from 4 per cent and 4.5 per centaround five years back, and it also led to a slowdown in contracting of long-term capacities by state distribution companies.

The reported demand, however, is restricted, as it does not include potential to supply to un-electrified consumers and the supply itself to rural and agriculture consumers is often rostered – thus an un-catered and un-accounted electricity market exists in India.

As per EPS 19 estimates, the energy requirement in India is expectedto grow at a CAGR of 7 per cent to reach 1,566 BU till FY 22 while peak demand is also expected to grow at a similar CAGR of 8 per cent till FY 2022.

Highest growth is expected in North-Eastern states (around13 per cent), while Western, Southern and Eastern regions shall have a growth of 7-8 per cent.

High latent demand, rapid urbanisation, the government’s thrust on rural electrification via the ambitious “SAUBHAGYA” scheme and adoption of electric vehicles, would spur power demand going ahead.

PPA tenureisconfined to short/medium term

In the past year or so, DISCOMsprefer short- and medium-term procurement instead of long term. Factors for this shift includes growth in industrial open access consumption, rising share of renewable energy andlow tariffs in the merchant market.Further, DISCOMsare circumspect of signing new long term PPAs to avoid tying up for excessive capacities and paying fixed charges, until they see a sustained increase in power demand.

Coal supply to ease over time

Fuel related issues have been a perennial concern for thermal plants and key contributor to the current stress present in the sector. The major issues include – unavailability of adequate Fuel Supply Agreement (FSA), constraints on usage of linkage coal, shortage of coal (coal requirement has grown at a CAGR of 6 per cent over the last seven years, against which production has only increased at a rate of 3.5 per cent) and concerns regarding the quality of coal.

After the Supreme Court cancelled 204 coal-mines in 2014, many coal power projects were left stranded. Others were setup either without adequate coal linkages or have FSA/Letter of Assurance (LoA) but do not have medium/long term PPAs; in absence of which, these plants procure coal from e-auction at much higher rates.

In order to mitigate fuel related risks, the government came out with SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) schemeas a transparent mechanism to provide coal linkages to power plants FSAs through an auction process.Assured coal supply is expected to reduce the dependence of the plants on costlier sources of coal, leading to savings in fuel cost and improvement in operating performance. While the scheme has been positively affecting both generators and consumers, the sustainability of benefits and long-term success depend on adequate production of domestic coal by CIL, which has been unreliable. The onus is on the Government and CIL to augment production and ensure that private IPPs get their share of coal linkage as per the FSAs signed. CIL should also look atconducting auction of coal linkages to plants without PPAs that are either commissioned or to be commissioned, under the SHAKTI scheme.

Curious case of 34 stressed assets

RBI, on February 12, 2018, issued a new circular on Resolution of Stressed Assets – Revised Framework, which scrapped all previous restructuring mechanisms such as Strategic Debt Restructuring (SDR), Corporate Debt Restructuring (CDR)and issued stricter norms to deal with stressed or Non-Performing Assets. The circular provided a 180-day window for resolution of distressed assets with an aggregate exposure of above Rs. 20 billion as on March 1, 2018 or file for insolvency under the Insolvency and Bankruptcy Code (IBC) within 15 days from the expiry of the deadline.Department of Financial services (DFS) had identified a list of 34 such projects.

Lenders, following the instructions of RBI, initiated a three-fold action for resolution of distressed assets:

(i)            Allowing existing promoters to come up with resolution plans.

(ii)           Initiating a transparent auction process for “Change in management,” conducted by professional advisors, and

(iii)          Referring select cases to National Company Law Tribunal (NCLT), under the IBC, 2016.

They also had developed platforms/schemes like that of SAMADHAN (Scheme of Asset Management and Debt Change Structure) led by SBI and PARIWARTAN (Power Assets Revival Focused Warehousing and Revitalisation) proposed by REC. The idea of these schemes was to prevent sale of these plants at throwaway considerations and put forward steps in reviving the same.

Government of India also constituted a High-Level Empowered Committee (HLEC) on July 29, 2018 to address issues around the assets. HLEC submitted its recommendations in concurrence with various stakeholders/representatives from ministries and financial institutions covering solutions under improving coal supply, facilitating power sale options and recovery against DISCOM payments.

In parallel to the efforts, power companies seeking relief from the RBI circular for Power Sector filed cases in various High Courts. The Allahabad High Court, hearing one of the cases on August 27, 2018 (which was the date of 180th day deadline) rejected the plea and refused to grant any relief or special dispensation for Power Industry. However, on September 11, 2018, the Hon’ble Supreme Court provided asked RBI to maintain status quo for power sector cases providing some respite to developers and lenders. The status quo ruling meant freezing of any insolvency petition being filed to NCLT. The Supreme Court had also fixed up the next hearing date as November 14 and then subsequently revised it to November 28, 2018.

The uncertainty related to the February 12 circular is keeping both, the promoters and lenders jittery. In most cases, the lenders and promoters of assets which have so far not been referred to NCLT are actively trying to come to a consensus and close resolution proceedings before the Supreme Court verdict. The lenders, are in hope of getting better value for the assets (and lesser debt haircut) and promoters, are in hope of holding on to their assets.

Case of Tata, Adani and Essar – A new precedence

The Supreme Court’s nod to the imported coal-based plants of Mundra-Adani Power, Mundra-Tata Power and Salaya-Essar Power to approach CERC for amending their existing PPAs of around 10 GW can be perceived as a big positive not just for the developers but also for the power sector as a whole. The High-Power Committee has proposed the burden of hardships to be borne by all the stakeholders (lenders, developers, consumers). CERC has been provided a time of 8 weeks to give a decision on the proposed amendments in the PPAs. If the amendments are accepted, it will be a big relief for both, the developers as well as state DISCOMs.

DISCOM financial health

One of the key reasons for the lower power demand in India has been the poor financial health of the DISCOMs. The basic problem has been the mismatch between the revenues and expenses of the DISCOMs – accentuated by regulatory issues and operational efficiencies. The losses resulted in poor financial condition,which in turn affected its ability to pay the power generating companies resulting in lower offtake.

Government launched the UDAY program in 2015-16, targeted at one time clean-up of balance sheet of the state-owned electricity utilities coupled with a recovery plan and performance targets. The program aimed at improving the operational efficiencies of DISCOMs, reducing the cost of power, reducing interest costs of DISCOMs, and enforcing financial discipline to help DISCOMs make a turnaround. The results have been mixed, although there has been an overall improvement in the financial and operational performance of the DISCOMs.

Other positive initiatives taken by the Government

  • Introduction of third-party sampling of coal at both loading and unloading end of coal supply from CIL to Generators – As per the August Standing Committee Report, this has led to considerable improvement in the quality of coal supplied by CIL. This coupled with improvement in the efficiency of plants has led to reduction of 6.5 per cent in specific coal consumption by coal based thermal power plants.
  • Coal linkage rationalisation – Coal linkages have been rationalised to optimise cost of transportation of coal. This has helped in reducing generation cost, with NTPC itself realising savings of around INR 862 crore in 2017-18.
  • Policy of flexibility in utilisation of domestic coal for reducing the cost of power generation – Objective is to allow flexibility in optimal use of domestic coal in efficient generating stations, resulting in reduction in the cost of electricity generation and reduce the power purchase cost of State DISCOMs. Gujarat and Maharashtra have already operationalised PPAs of 500 MW and 400 MW respectively through this mechanism by use of linkage coal of state GENCOs in more efficient IPPs to get cheaper power generated from such coal.
  • Pass-through of cost incurred by power plants for meeting environment norms – This removes the uncertainty of developers with respect to additional cost implication and will result in timely implementation of the environment norms.
  • Pass-through of any change in domestic duties, levies, cess, and taxes imposed by the government –While the provision for the same was already provided in Tariff Policy 2016, the Ministry of Power directed CERC to determine the per unit impact of any such change in law within 30 days of filing of petition.


Distressed assets sale

The IBC process and the February 12 RBI circular has provided a transparent platform for acquisition of distressed assets. A number of strategic firms and financial investors have already shown interest or taken part in the EoI or auction processes that have taken place so far. Out of the 34 identified stressed assets (40.1 GW), only 8 assets (8.8 GW) have so far been resolved. The valuation discovered, for most power plants fell within the range of around Rs. 1.6 crore/ MW to Rs. 4 crore/ MW.

Opportunity also lies with state owned distribution utilities and generating companies who plan to add new capacities. Acquiring an asset, either through the NCLT mandated process or through the bid process conducted by lenders outside the NCLT would be a better proposition in terms of cost (considering debt haircuts), risk and time prospective compared to setting up a green field power plant. The benefits so accrued would lower the cost of power for the utilities and can be passed on to the consumers.

Phase out and Replacement of Old and Inefficient Plants

There are a number of thermal plants which are over 25 years old. These old plants are inefficient with high heat rate and high specific coal consumption, apart from being non-compliant with environmental norms. Retiring such plants will reduce stress on natural resources like land and water, improve utilisation of scarce resources like coal and also contribute towards curbing pollution. The public sector utilities should consider phasing out such plants and replacing them with new efficient power plants, many of which are currently stranded and available for sale.

FGD Installation Opportunity for OEMs

Central Pollution Control Board has revised the implementation timeline for thermal plants to comply with new emission norms to 2022, providing sufficient time for installation. Considering the timelines, ordering and installation of FGDs by coal-based plants to comply with the emission norms is likely to pick up from end of FY 2019. Central utilities such as NTPC and NLC, few state utilities and IPPs have already floated numerous bids of installation of FGDs.In the current market conditions, where negligible new coal-based power plants are planned, orders for FGDs would support power generation OEMs. It is expected that significant ordering for FGDs would continue for next few years. De-NOx solutions too would present opportunities for power sector OEMs.


While the financial distress in power sector can be attributed to a number of factors, number of projects were impacted due to financial conditions of DISCOMs and power demand – given that its constrained. Successful resolution of the stressed power assets, whether within or outside NCLT, would largely depend on addressing the key structural issues aided by improvement in power demand and financial health of the distribution companies. Interested buyers to stressed assets are likely to bid for only those plants, which have adequate FSA and long term PPA fit into their evaluation criteria.

Initiatives being taken by the government to provide coal linkages under the SHAKTI scheme or provide medium-term power arrangements under aggregated pilot schemes are steps in the right direction to resolve the intermediate issues for the stressed power plants.Production of coal has to be ramped up and logistic constraints – such as availability of rails and rakes – has to be removed, which requires sustained effort from state owned enterprises.

From a long-term perspective, the government’s thrust on providing uninterrupted electricity access to every household and on improving financial health of the DISCOMs with the implementation of UDAY is likely to result in a sustained increase in the demand for electricity, improving financial health of DISCOMs and relieving the stress.

Revival of the thermal power space, which is the backbone of Indian power sector, can happen with concerted efforts from all stakeholders and public sector enterprises, including distribution companies. Even with the changing energy mix, this revival is essential to save crores of public and private money invested in setting up these capacities over the last decade and to meet the growing energy needs of India.