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Resolving power plants will require confluence of interventions, says PV Ramesh of REC

Updated : July 14, 2018 17:00:13 IST

There is plan for power sector which comes from an REC-PFC combine called Parivartan, this plan lists 16 power companies that are good plants except that they don't have a power purchase agreement (PPA) or a fuel supply agreement (FSA). REC says if they are auctioned in the market today they won’t even fetch 1 crore per megawatt. So banks should create a special purpose vehicle (SPV) and push these assets at net book value to this SPV, which can in turn sell these plants when the market improves. After all as demand improves new PPAs will be signed.

So is this plan good to save some of the companies from being dragged to NCLT? To answer this Latha Venkatesh is joined by PV Ramesh of REC.

Q: We know that your Parivartan plan has picked up some 16 power plants and you want to transfer them at net book value to an SPV but my question to you is if these plants are viable why not sell them at market value through the ARC, AMC process which the Mehta’s committee is recommending?

A: Let us understand the context and I am sure this is known to everyone, but just let me give a moment. Now we have almost about 60,000 megawatts of power plants that are stranded under construction. Of which about 20,000 are completely stranded, so there is no option there is no retrieval process there is no viable resolution for them other than to go through an Insolvency and Bankruptcy Code (IBC) process. Now about 20,000 megawatts of them have some visible commercial value these are either commissioned or very close to commissioning. These are projects which have either PPAs or FSAs, partial, full or with a sub optimal performance. We have a third set which are about 20,000 megawatts again and I talking here about the coal thermal power projects. These have no PPAs, no FSAs so there is no visible, commercial viability for these projects and these are projects which are good projects, they are functional, and they are very close to commissioning. So, there is a huge gap between their economic value and their commercial value.

Let me stretch the context a little further. Now why are they without PPA? The fundamental reason is that the demand pick up has not been commensurate with the generation. Look at the situation 10 years ago, our total installed generation capacity was 120 gigawatts. Today it is 344 gigawatts. So there has been an exponential growth over the past decade in generation. The similar investment had not been made in the transmission segment and the distribution segment in the past. If you look at the current context in the last three to four years almost a lakh of crore investment is being made in the transmission segment and under Deen Dayal Upadhyaya Gram Jyoti Yojana, the Saubhagya, the integrated power development scheme put together another lakh of crores of grant is being provided by government in terms of strengthening the distribution infrastructure, modernising the distribution grid.

So, there has been a whole dissonance between the demand and supply. Now this is a unique context, the power sector you would agree stands on a different footing for the simple reason that there are number of factors which are completely external to financial institution or to the promoters. What the RBI framework provides for is a financial resolution but not an asset resolution. Let us consider a situation as the demand picks up at a much faster pace today it is growing at 5-6 percent and it is likely to go to double digits for the next couple of years and because of the investment 40 million households being connected, all villages electrified, all grids modernised. Now this is likely to have an exponential growth in terms of demand and for the sake of future energy security of this country we need to protect this assets otherwise what would happen and as right before our eyes these assets are deteriorating they would be not viability for them, there is no market for them, who are the buyer in the market for these assets number one.

Number two is what is the commercial viability, so what is happening they are likely to go for liquidation which essentially means that when we most need the power and where the citizens need the power we won’t be able to provide that power. So, necessarily somebody has to take ownership and manage them during a period of transition as we move from a transition phase. Now we have situation of high supply, moderate demand. We are going to move to a high supply high demand paradigm. Now this transition has to be managed. So that is in that context that we are proposing this.

Q: How manages the plants and you will need money even at that time, running fuel charges working capital charges will be needed?

A: Let me put this upfront very clearly now there would be an arm’s length, the governance structure would be or at least what we have proposed is that this would be owned jointly by those principle stakeholders who have about 80-90 percent of the exposure to the power sector. Which is the two power financing companies REC and PFC and some of the major banks. Both private sector and the public sector they together form this Energy & Minerals Regulatory Commission (EMRC), this would be managed through a professional agency. We are saying that there could be an opportunity for the private sector of for national infrastructure investment fund to really take that critical, controlled management stake and then it is managed professionally.

We have proposed an investment committee which would be people buy professionals, so that the financial institutions are kept at an arm’s length. The operation and maintenance (O&M) would be done by though a bidding process. It could be NTPC, it could be any of the power managers and the working capital would be provided by the financial institution that have its stake as is where is required. We could use our leverage with the discoms to negotiate short term PPAs or sell it in the power in the power exchange. We have requested the government to support through policy drivers in terms of coal supplies. So, this requires confluence of a number of interventions which are policy interventions, operational interventions, and financial interventions given the nature of the sector.

I just also want to make it very clear we are not speaking about the REC assets here our exposure you know is primarily the state sector where there is no stress. So, this is not an REC motivated initiative. This is initiated by us taking a global picture of the power sector and the future horizon in the next five years.
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