The GENCO muddle in India's power sector

Business Standard reports of a Memorandum of Understanding (MoU) between BHEL and the Telangana Power Generation Corporation for three power plants with 5880 MW capacity at a cost of Rs 26,640 Cr. Since the three projects were approved before the current guidelines on mandatory tariff based bids were issued in early 2011, their tariffs would be determined under Section 62 of the Electricity Act, 2003, on a cost-plus basis. 

This draws attention to the reforms on the generation side, particularly at the level of  state generating companies or GENCOS. It is well known that most of these entities are poorly managed, corruption-ridden (on coal and other procurements), operationally inefficient (high station heat rates), over-staffed, debt-laden, and have very high construction cost which translate into high tariffs. On their revenue-side, having the last charge on discom revenues (after independent power producers,IPPs, and central power generators), they are forced into accumulating payment dues from discoms on the power sales. It is estimated that these receivables are well above Rs 1 lakh Cr and mounting. 

Consider the example of the three new Telengana Genco plants. At a time when the discoms are deep in the red, and with no signs of any improvement, and have stopped purchases across the country, such large capacity addition is unlikely to find buyers. It is most likely that their construction costs are on the higher side and will therefore generate high-cost power. This would make discoms even less interested in purchasing this power since it is unlikely that they will be able to pass on the cost of purchase in the form of higher tariffs. Further, the coal linkage (almost 30 mt would be required) and transmission capacity for the project are uncertain. It would entail more recruitment and further unionization. 

In this context, the Government of India and states should consider a few of the following options

1. All the MoUs signed by State GENCOs under Section 62 where construction has not started should be immediately annulled. These projects can be recast as Section 63 contracts, where discoms would purchase power based on competitive bids. 

2. Public finance, through PFC or REC or Public Sector Banks, should be curtailed so that GENCOs (and also discoms) do not have access to easy funding of the like that the Telangana and other GENCOs routinely access. Rigorous commercial due-diligence, in the same manner as is done to IPPs, should underpin any lending to GENCOs. 

3. The cozy arrangement whereby GENCOs fill the order books of public sector entities like BHEL, with liberal payment terms, should be broken up immediately. All Boiler-Turbine-Generator (BTG) and other procurements should be done only through competitive bidding. Such cozy arrangements between GENCOs and state entities like BHEL and PFC are inflicting enormous damage to the sector by crowding out more competitive projects and increasing the burden on consumers. 

4. Finally, GENCOs should form part of any restructuring of discom losses. Apart from their chronic distribution and commercial losses, discoms are saddled with high cost power purchase from GENCOs. States should be encouraged to sell some of their high cost generating stations. Such sales should be made conditional on buyers investing in retrofitting the stations or augmenting capacity so as to lower the cost of service.

Over the years, GENCOs have doubtless played an important role in capacity addition, especially when IPPs could not have shouldered the burden. Further, state generating stations today play an important role in keeping IPPs honest. But now, when IPPs form more than 60% of the capacity addition in recent years, the time may have come to pull the plug on state support and preferential terms, and let GENCOs compete in the market on level-playing terms with IPPs.