PPA-signing spree in Odisha may lead to massive oversupply and large losses for SEBs
Moneylife Digital Team 07 June 2016
Over supply of electricity is leading to high capacity charges in Odisha. This coupled with low demand growth, transmission capacity constraints and weakness in industrial consumption makes the Odisha state electricity utilities prone to risks, says a report from ICICI Securities Ltd.
The brokerage, as part of its efforts to obtain feedback from ground-zero with regard to the status of Ujjwal Discom Assurance Yojna (UDAY) implementation and its impact on power demand recovery, visited the SEBs in Odisha.
According to the report, power purchase agreement (PPA) signing spree in the state poses risk of massive oversupply while capacity charges on underutilised capacity is increasing losses for SEBs. "Against a current peak demand of about 4.1Gigawatts (GW), Odisha’s power supply is likely to reach around 9GW by FY2019, when peak demand is estimated to be 5.3GW, resulting in serious stress of fixed charges on underutilised capacity. Blessed with abundant coal reserves, anticipation of surge in power demand and willingness to participate in merchant market as a supplier, the government of Odisha had entered into 27 memorandums of understanding (MoUs) with independent power producer (IPP) (totalling 40GW capacity) for 12-25% power on the ‘cost plus’ basis."
"While many of these MOUs plant might not see the light of the day, a detailed analysis highlights at least 8 GW out of the total 40GW capacity have got or will likely get commissioned. In addition, Odisha has share of about 7GW is various state and central public sector unit (PSU) owned projects and ultra mega power projects (UMPP). Given the current financial state of the Odisha  distribution companies (DISCOMs) as Rs18.1 billion loss in FY2014 including losses of Grid Corporation of Odisha (GRIDCO), bulk power procurement and trading arm and unfavourable demand supply situation, we believe the SEB will be stressed to service the increased capacity charge on underutilised capacity," it added.
ICICI Securities feels that the under-investment in infrastructure as privatisation went wrong in Odisha. Odisha has been a pioneer in power sector reforms as the state unbundled generation, transmission and distribution activities into professionally separate entities. It also established a bulk power procurement and trading company and was the first state to bring the power sector under regulatory regime by establishing the Odisha State Electricity Regulatory Commission (OSERC). However, the state has an electrification rate of only 56-57% as there was very limited investment in transmission and distribution (T&D) infrastructure for 12 years post privatisation of discoms. It was only after 2010 that investment restarted when the government took up infra investment on its own. Currently, the license of the private discom is forfeited (issue currently under litigation). Privatisation of discoms is the reason why the state cannot sign up for UDAY as the government cannot assume liability of private companies. 
The state’s industrial power demand has seen a major drop (CESCO’s industrial volumes saw a drop from 1,618 million units (MUs) in FY14 to 1,230MUs in FY16 as the state’s mineral-based industry suffered from the mining slowdown and global commodity down cycle. This has been compounded by shift of industries to open access, where power is available at cheaper landed cost at Rs5 per kilowatt hour (kWhr) as against Rs6.3 per kWhr from discoms.
The state government is targeting revival through agriculture and domestic households. Agricultural sector accounts for barely 1% of overall power consumption in Odisha as the state is well fed by monsoons, land holdings are largely marginal, and farming is mainly ‘single crop’. Additionally, rate of electrification is fairly low, leaving about 4.5 million rural and urban households un-electrified. This however, presents an opportunity to increase power demand and the government is targeting it by incurring agri and household focused infrastructure development capex and rolling out schemes. The government aims to install 100,000 deep borewells at about 94% subsidy to boost agricultural demand. The state also aims at achieving 100% electrification by FY18, which will double the existing consumer base and aid power demand growth. The state initiated work on schemes like Biju Gram Jyoti Yojana and Biju Saharanchala Vidyutikaran Yojana to ensure supply of adequate and quality power. 
According to ICICI Securities, the state is hoping intervention from the central government for surrendering expensive power it gets from NTPC. Odisha has sought support of the Central government in untangling itself from the impending supply glut by surrendering its share of allocation in NTPC power plants located outside the state and of other power plants supplying costly power. It has also asked for coal block allocation for state-run power plants to bring down the cost of power procurement.
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