Decades of policy, regulation mismatch to haunt insolvency in power sector

When the Allahabad High Court (HC) in its judgment observed that stress in the power sector is due to fundamental issues and not because of any circular by the Reserve Bank of India, it only depicted the sorry state of the sector, mismatched policies, and regulations of the past decade.

A high-powered committee (HPC) under Cabinet Secretary P K Sinha, set up to provide solutions for the prevailing issues in the sector, is expected to hold its first meeting on Friday. This committee has been directed by the Allahabad HC to devise a framework by September this year. 

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Of the six projects where resolution has commenced outside the National Company Law Tribunal (NCLT), one has found a buyer. Jaiprakash Associates’ operational power project (1,980 megawatt, or Mw) at Bara was bought by Resurgent Power – a joint venture (JV) promoted by Tata Power and ICICI Bank. A close look at the projects reveals this success cannot be replicated since the power plant in this case had both the power purchase agreement (PPA) and coal supply in place.

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The power ministry has identified 66 stressed power projects across coal, gas and hydro, against the finance ministry’s list of 34 coal-based stressed projects. More than 24 stressed power projects that could face insolvency proceedings will find it hard to procure buyers because they are “incomplete”. In case they do not find one, they will have to face liquidation. Most of the incomplete projects are due to cancellation of coal block allocation, delay in getting land and/or environmental clearances, and local unresolved issues.

The new buyer will have to face the same issues which landed these assets in insolvency in the first place. Coal supply to operational projects is below optimum, as claimed by the industry. There has been no fresh issuance of PPA by any state in the past six years. Hopefully, power demand has registered a healthy 6 per cent growth, but the poor financial health of the state-owned distribution companies (discoms) is a worry among investors, said a market analyst.

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Also, there are hardly any buyers for the same reason. The ones which have received any interest has been from selective buyers – JSW Energy, Adani Enterprise, Resurgent Power, and foreign banks like Bank of America. Anil Gupta, vice-president and head financial sector rating, Icra, said, “There is a handful of business groups, corporate, and private equity players who have an appetite for acquiring power sector assets. They will be selective in choosing assets in the NCLT. It is going to be a buyer’s market.”

State-owned thermal power behemoth NTPC has not accepted but not denied looking at buying some stressed assets either. “We will evaluate only those assets where the coal supply, power sale agreement, and other necessary regulations are in place,” said a senior NTPC executive. 
The executive further added they are looking at the consultancy and operations & management business opportunity in this insolvency wave. “State Bank of India (SBI) reached out to us saying they would want us as the operations partner for the stressed asset in which the bank takes the equity. We have not got any list or proposal as yet. Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) did hold discussions for setting up a JV for buying and managing stressed assets, but there has been no conclusiveness. As a company, we are ready to share our expertise, but we will not invest any equity in any stressed project,” said an executive in the know. 

An insolvency professional (IP) of a power company said consultants are being hired to analyse the viability of such incomplete projects and their cost of completion. Adding that this problem will be faced by several projects, the IP said the main problem about getting bidders was that they were uncertain about the cost of completion of the project.

Senior government officials said the HPC would make sure the prevailing problems are resolved. Nonetheless, besides coal, there are 14,000 Mw of gas-based power projects which do not have any gas supply. These could face a hard time as there was no likelihood of any assured supply either. The Centre discontinued the scheme to offer subsidised gas last year. The other 14,000-Mw project, which received gas, has enough to run at barely 30 per cent plant load factor or operating ratio.

The hydropower projects have another sad tale to tell. Embroiled in regulatory niggles, local protest and environmental hurdles, these hydro projects have been stalled for years. The hydro sector has been awaiting a conducive hydropower policy, but that has been stuck for want of budgetary support.

Leading banks, sector lenders such as PFC and REC have designed a few strategically named plans – Samadhan, Pariwartan, Sashakt - but have so far met with little success. The government officials now claim these are “resolution frameworks” and do not amount to a bailout scheme.

“These frameworks would be put to use even when a project lands in a bankruptcy court. The NCLT allows any framework to be used for resolution. We look forward to use the model of Pariwartan for several assets, as and when required or asked for,” said a senior official in the REC. Pariwartan has been drafted by the REC and aims to set up an asset resolution and management committee for stressed assets.

Samadhan is by the SBI, which has one of the highest exposure to stressed power assets, totalling Rs 270 billion. SBI claims to have identified nine projects for Samadhan. The clock, however, is ticking.


* 40,130 Mw: Total coal-based stressed assets identified by the FinMin

* 14,000 Mw: Total gas-based stranded capacity identified by the PowerMin

* 8,460 Mw: Projects with no progress on ground

* 11,100 Mw: Ongoing resolution outside the NCLT

* 7,620 Mw: Tied-up coal supply under Shakti scheme