Two swallows...

Judging by the bids received for the two ‘ultra mega’ power projects, India’s power sector has entered into a new zone of hope. While the state-owned NTPC’s cost of production from all its plants across the country (a large number of which are fully depreciated) is Rs 1.64 per unit, Lanco has bid a tariff of Rs 1.196 per unit over the 25-year life of the Sasan project—the initial tariffs for a year or two are expected to be under a rupee. For the other project, at Mundra in Gujarat, the winning bid from Tata Power is Rs 2.264 per unit. While it’s tempting to dismiss the Lanco bid as adventurous—and the relatively young company is certainly an aggressive bidder—what is important to note is that the bid is not out of line with what the others have quoted. Reliance Energy has quoted Rs 1.29 per unit and Tata Power Rs 1.41. What is surprising, of course, is the NTPC quote of Rs 2.126 per unit—does this point to lower efficiency levels in what has been seen as a very successful public sector enterprise? The fact that the bids for the Sasan project, based on a captive coal mine, are lower than for the Mundra project, based on imported coal, puts a question mark on the general belief that imported coal is more economical than Indian coal—it is in fact railway freight that makes Indian coal expensive when transported over a long distance. Captive mines improve project viability because of another factor—they do not have to pay for Coal India’s inefficiency. There are lessons in these for India’s power bureaucracy.

It would be a mistake, though, to judge the future of India’s power sector on the basis of these two bids. For one, the government has allotted the land, given captive mines and created special conditions for these projects, including working on making payment security more stringent—the generators are to be allowed freedom to sell to third parties if the state electricity boards are unable to make payments (i.e. the ‘open access’ that everyone has been clamouring for, is being offered to these projects). Since these terms are not being offered on all projects, it is likely that the others will be priced higher, to neutralise the greater risk and higher costs. Second, since the electricity boards are meeting their payment obligations today, they should be able to provide a payment guarantee to these two projects, and financial closure may not therefore be a problem. But this ability is a direct fallout of the securitisation package for the boards—if they continue to under-recover on new electricity supplies, however, they will start defaulting sooner or later, and that will mean the bankability of projects based on sales to them will suffer. Indeed, as the installed capacity in the country rose from 69,065 MW in 1991-92 to 112,682 MW in 2003-04, commercial losses of the boards rose from Rs 4,117 crore to Rs 20,379 crore (and further to Rs 22,013 crore last year). Given this, it is by no means certain that financiers will back more than a handful of mega or other power projects. In other words, there is no getting away from the old fashioned solutions of reducing theft and subsidies in the sector, and creating transmission corridors to wheel power in and out of deficit and surplus regions.