Railways explore Options to buy distressed Power Projects to cut Energy Costs

Railways explore Options to buy distressed Power Projects to cut Energy Costs

New Delhi: Indian Railways is exploring options to buy distressed power projects as the nation’s largest consumer of electricity seeks to cut energy costs.

A panel headed by Ajay Shankar, a former secretary of the department of industrial policy and promotion, has suggested, among options, that the national transporter consider buying such assets. The panel was constituted by the Indian Railways earlier this year to review the functioning of the railway board’s public-private partnership cell.

The abundance of distressed projects in the power sector may provide Indian Railways, which needs about 12 billion units of electricity a year, an attractive opportunity to buy assets at a cheap price. Companies, which started building power projects in anticipation of faster economic growth about five years ago, had to weather a slowdown that caused growth to sink below 5%. In addition, several of these power plants are beset with fuel shortages and high borrowing costs that have hurt the ability of the companies to repay creditors.

Acquiring such assets fits in with the Indian Railways’ plan to set up a transmission system to wheel power for its network.

Indian Railways’ power consumption is growing at an average 5% a year and its power bill is estimated at Rs.12,500 crore in the year to 31 March.

“The plan is at a conceptual stage,” said a person aware of the development, requesting anonymity.

Indian Railways is considering options such as buying equity in distressed power assets and new power projects and setting up captive plants, said another person who also didn’t want to be identified.

Buying out an asset will, however, pose the problem of asset management for the Indian Railways, said Anil Razdan, a former power secretary. “Railways are already in a joint venture with NTPC for a power project and will have to develop their full fledged asset management company. The choices for railways can be to either develop their own expertise, set up a joint venture with NTPC or tie up with a power trader for their electricity needs.”

Stalled power projects are also a major concern for bankers. As of 31 March, 607 projects with investments worth more than Rs.4.85 trillion were classified as stalled, according to data collated by the Centre for Monitoring Indian Economy Pvt. Ltd. Of these, 33 projects, representing over Rs.1 trillion in investment, were in the electricity segment.

“The stressed project developer and the financial institutions would certainly feel relieved,” said Razdan.

Railway minister Suresh Prabhu, in his February budget, unveiled a plan to investRs.8.5 trillion in the railways over the next five years, with a focus on capacity augmentation and modernization. The government hopes to leverage the public-private partnerships to improve its freight business and investment in its infrastructure.

Queries emailed to a spokesperson of the Indian Railways remained unanswered till press time.

A senior Railways Board official, requesting anonymity, confirmed the development. “Buying power generation assets have been suggested by the Ajay Shankar committee. We are evaluating the options,” he said.

Cash-strapped state electricity boards (SEBs) have been unwilling to procure electricity, given the low tariffs they earn for power supply, slow progress in reducing losses and higher power purchase costs. SEBs are laden with debts ofRs.3.04 trillion and accumulated losses of Rs.2.52 trillion. This, in turn, has hit power generation projects.

Power projects with a combined capacity of 46,000MW are facing viability issues in the absence of long-term electricity buyers and because of inadequate fuel supply, their developers having bid aggressively to win the projects and coal block links, according to a 28 July report by rating company Crisil Ltd.

“Of this, 36,000MW are coal-based projects within which tariff under-recovery has impacted 20,000MW of capacities, while the rest are reeling because of inadequate feedstock and poor electricity off-take by discoms,” the report added.

The railways plans to source 10% of its electricity needs through renewable energy sources by 2020 and signed agreements with the ministries of power and renewable energy on Wednesday for cooperation in electricity transmission, energy efficiency and promotion of green energy.

The national transporter plans to reduce electricity bills by nearly one-third by seeking competitive bids from power producers, sourcing from electricity exchanges and reaching bilateral arrangements. This plan was articulated in this year’s railway budget.

As part of this strategy, it is trying to take advantage of its position as the largest consumer of power in the country to bring down its electricity costs by calling for bids from power producers to supply 1,010 MW of electricity over three years.  By calling for competitive bids, the railways expects to benefit from lower tariffs.

The transporter is seeking to reduce its electricity cost to less than Rs.5 per unit from the present average of around Rs.7 per unit.