Citi's Views on the Indian Power Sector,
In our third edition of India Infrastructure Insights we analyze State Power Utility (SPU) losses and State Government finances against the backdrop of high merchant prices. SPU losses increased from Rs46bn in FY93 to Rs319bn in FY08 and are expected to be ~Rs500bn in FY10. At FY08 tariff levels the 13th Finance Commission believes this could be as high as Rs686bn in FY11E and move up to Rs1,161bn by FY15E. Top 12 SPUs contribute almost all of the losses and 30 out of 90 SPU entities had negative net worth at the end of FY08.
State Government annual subsidies to the SPUs have increased from Rs19bn in FY93 to Rs181bn in FY09 and could increase as losses mount. State Governments have an exposure of s2303bn to SPUs at the end of Mar08 comprising of Rs713bn of equity investments, Rs707bn of loans and Rs884bn of guarantees.
The issue lies where the wholesale price is market-determined and the retail price is regulated. The DISCOMs will go bankrupt if compelled to supply and not resort to load shedding. Fortunately in India, presently the wholesale short-term market is only ~ 5% and DISCOMs have the choice to shed load. This problem will accentuate when the share of short-term contracts in the portfolio of DISCOMS increase.
While international peak merchant prices are ~ Rs3/kWh, in India the 2009 average bilateral OTC price is > 2x this level at ~ Rs6.41/kWh. OTC prices in 2009 being higher than power exchanges prices is contrary to normal perceptions and is particularly worrisome because the size of the OTC market is 3x-4x the size of power exchange market.
According to CERC, generators might be making supernormal profits to the tune of - (1) Portfolio with average procurement cost of Rs2.76/kWh - Rs3.65/kWh, (2) states selling free hydel power - Rs5.41/kwh and (3) new imported coal based plant - Rs2.90/kWh. This is adversely impacting the financial health of DISCOMs of power deficit states.
