Stressed Assets In Power Sector

Go back Gaurav Lohani
Expert in Regulatory & its Implications

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The term stressed assets relates to those accounts which are not able to service their debt in time, where there has been a delay in payment of interest/principal by a stipulated date as against the payment schedule on account of financial difficulty faced by the borrower. The Department of Financial Services had provided a list of 34 coal based thermal power projects that had been declared stressed by the Ministry of Power in March 2017.

Factors responsible for Financial Stress of the Thermal Power Plants

As per the observations of the Standing Committee on Energy (2017-18) the following are the key factors which are responsible for financial stress in the thermal power stations:

  • Non availability of Fuel:
  • Cancellation of coal block
  • Projects set up without Linkage
  • Lack of enough PPA by states
  • Inability of the promoter to infuse the equity and working capital
  • Contractual/Tariff related disputes
  • Issues related to Banks/Financial Institutions (FIs)
  • Delay in project implementations leading to cost overrun
  • Aggressive bidding by developers in PPA

Further, the generation capacity of the power stations has outstripped the demand and therefore the plants commissioned in the last few years are underutilized resulting in low generation from these plants. Consequently, these plants are not able to generate the required funds needed to service their debt obligations thus increasing their chances of becoming NPAs. 

Recommendations of the High Level Empowered Committee

The report of the High Level Empowered Committee recommends the following measures to be undertaken in order to revive the stressed power plants:

  1. Coal Linkage for short term PPA

In recent past, few States have invited bids for procurement of power under long/medium term PPAs as they want to refrain from the fixed cost which they will have to incur in case of medium/long term PPAs. In the absence of long/medium term PPAs, these plants are not able to operate because linkage coal cannot be used against short term PPAs. Hence, Linkage coal may be allowed to be used against short term PPAs and power be sold through Discovery of Efficient Energy Price (DEEP) portal following a transparent bidding process.



  1. Coal Supply in case of termination of PPAs due to Payment default by DISCOMs

One of the major reasons for stress is the delay in payments by the DISCOMs to the generators.  This adversely affects their liquidity and ability to service the debt and to operate the plant as they are not able to make payment for the procurement of coal and meet other operating expenses. Though, there is a provision for termination of PPAs in the event of default of payment by DISCOMs, the generators are unable to exercise the option because, in absence of a valid PPA, they will lose the coal linkage and Long Term Open Access (LTOA) for transmission. Hence, the Committee recommends that a generator should be able to terminate PPA in case of default in payment from the DISCOM with the facility to use linkage coal for short term PPAs for a period of maximum of 2 years or until they find another buyer of power under long/medium term PPA, whichever is earlier.

  1. Procurement of bulk power by a nodal agency against pre-declared linkages

Substantial capacity is also stressed/ stranded because there are limited number of long/medium term PPAs available. In recent years, there have been very few bids by the DISCOMs for procurement of power in long /medium term. Under the new policy for allocation of coal linkage (SHAKTI), there is a provision for aggregation of demand by a nodal agency for more than one State.  Ministry of Power has designated Power Finance Corporation (PFC) as a nodal agency for this purpose. PFC has written to all States to indicate their requirement of power. However, there has not been much response from them. The Committee has recommended a modification to SHAKTI policy to enable the nodal agency to invite bids for procurement of bulk power for medium term for 3-5 years. These bids may be invited by nodal agency in appropriate tranches against pre-declared linkage by CIL. The advantages of this are:

(i) Coal supply to generator is assured and

(ii) Payment of the generator is secured because payment will be routed through nodal agency which will bear the risk of delay/default in payment by the DISCOMs.

  1. PSU to act as an aggregator of power

NTPC has tied up PPAs with several DISCOMs across India. These PPAs include power capacity that is yet to be commissioned. The Committee recommends that NTPC can act as an aggregator of power to procure power through transparent competitive bidding process from such stressed power plants and offer the same to DISCOMs, till such time as their own plants/units are commissioned.

  1. Linkage to be provided at notified prices without bidding

Currently the linkages are granted through the process of bidding as para B (iii) of SHAKTI policy. The generator is required to procure the PPAs within a period of 2 years from the date of grant of linkage.  Under the tariff policy notified by Ministry of Power, power can be procured only through the process of competitive bidding.  Therefore, the generator has to first bid for linkage and then bid for procurement of PPA.  This exercise exposes the generator to a lot of uncertainty and risk.  Further, the economic and market conditions at the time of bidding for linkage and that at the time of bidding for PPA may be quite different. Therefore, the Committee recommends that for incremental coal production, the generator should be required to bid only once, for the procurement of PPA and the linkage may be granted at the notified price without any further bidding. This will reduce the uncertainty and fuel supply risk of the generator and also ensure comfort to the lender to finance a project.

  1. ACQ to be determined based on efficiency

The Annual Contracted Quantity (ACQ) for supply of coal under a Fuel Supply Agreement (FSA) i.e.; the actual requirement of coal is predicated on the heat rate approved by the regulator.  Many smaller / old plants have a very high station heat rate and accordingly have higher 'specific coal consumption. Accordingly, they have been allowed higher ACQ of coal per MW of capacity as compared to the more efficient plants of higher capacity. This leads to inefficient utilization of coal and also higher carbon emissions. Therefore, in order to encourage the operation of efficient plants and to ensure more efficient utilization of scarce coal resource, the Committee recommends that the upper ceiling for the ACQ/MW may be prescribed by the CEA, based on efficiency parameters and irrespective of the capacity and actual consumption of that plant and that the coal may be supplied on that basis.

  1. Retirement of old and inefficient Plants

In the last 6 years, approximately 1, 10,000 MW capacity has been added including 100,000 MW from coal based plants. However, the demand has not increased at the same pace.  As a result, the available capacity is more than the demand and peak power shortage has reduced from 8.71 per cent in 2012-13 to 0.7 per cent in 2017-18. As a result, large capacity is lying underutilized. At the same time, there are many old plants in operation with high heat rate which are non-compliant with environmental norms. The Committee has therefore recommended that old and high heat rate plants not complying with new environment norms may be considered for retirement in a phased manner keeping in mind that there is no demand/supply mismatch.

  1. Mandatory payment of Late Payment Surcharge (LPS)

It has been observed that due to delay in payment by the DISCOMs, the viability of the generators get hurt severely. It has also been pointed out that frequently the DISCOMs insist that generators should forgo the LPS on the delayed payments, despite its mention in the signed PPA. Therefore, the Committee recommends that Ministry of Power may engage with the Regulators to ensure that LPS is mandatorily paid in the event of delay in payment by the DISCOMs.

  1. Cancellation of PPA/FSA/ LTOA post NCLT scenario

The Committee recommends that DISCOMS, CIL, PGCIL, Ministry of Environment and Forests, and appropriate Governments may be advised not to cancel PPA, FSA, transmission connectivity, EC/FC, and all other approvals including water, even if the project is referred to NCLT or is acquired by another entity subject to the provisions of the contracted PPA and /or applicable rules. It also recommends that all clearances may be linked to the plant and not to the promoter.

Posted by : Gunjan Sharma
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Posted by : Bhawana Maurya
Very informative section

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