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Power needs access to long-tenure funds
May, 17th 2007
Currently, power sector projects are financed by a mix of long-term debt and equity. Innovations such as mezzanine finance and quasi-equity structures have helped make the bids more competitive.

MR ARVIND MAHAJAN, Executive Director, Advisory and Head (Energy, Infrastructure and Government), KPMG.

Poor collection of revenues and high transmission and distribution (T&D) losses constitute the chief source of inefficiency in the Indian power sector, according to Mr Arvind Mahajan, Executive Director, Advisory and Head (Energy, Infrastructure and Government), KPMG.

Speaking to Business Line on the challenges facing the sector, he identified cross-subsidisation and reliability of power as other major issues. "Aggregate technical and commercial losses constitute a key metric. They reflect the difference between the power procured by distribution companies and the sale of power for which they are able to realise revenues the difference is lost as unbilled power or uncollected revenues."

According to Mr Mahajan, cost coverage through tariffs indicates the extent to which power utilities are self-sufficient or dependent on subsidies. "Cross-subsidisation is another important parameter in the Indian context, where industrial and commercial consumers cross-subsidise the others through higher tariffs."

He added that cross-subsidies have implications for economic efficiency, which impacts economic growth and efficient utilisation of power.

"Reliability of power is also a key parameter; uninterrupted power of specified voltage and frequency remains a major issue for consumers."

Despite these problems, Mr Mahajan considers the power sector a good investment prospect; the sector needs $100-120 billion over the next five years. He sees the private sector complementing the public sector in achieving this target. "The prospects have opened up because of the relative improvement in the sector's financial position," he said.

Mr Mahajan attributed clarity in policy and regulatory frameworks being in place in most States as other factors behind generating investor interest. "Investments in power generation are immediate prospects; recent tenders for power procurement have attracted a lot of private sector interest."

On the transmission side, private sector participation has already commenced. Some States are contemplating PPP models for transmission. Meanwhile, the huge power deficit and consequent rise in short-term power prices are also attracting merchant power plants.

"Franchising of distribution areas seems to be an emerging trend in some States, which identify distribution zones for franchising and conduct a bid process."

According to him, the zeal of investors chasing fewer opportunities has meant cutthroat competition, "but as things stabilise, the returns to investors should also increase." Currently, power sector projects are financed by a mix of long-term debt and equity.

"Some innovations such as mezzanine finance and quasi-equity structures have helped make the bids more competitive, and players are taking recourse to these."

He added that the key issue is to gain access to long-tenure funds. "This will help the sector meet the cash flow problem it is currently facing. The Government has recognised this problem; lending institutions are being urged to provide longer tenure loans."

On Wednesday KPMG India released India Energy Outlook 2007, which is an overview of the country's energy position and opportunities in the energy sector.

The report calls for improvement in efficiencies in thermal power generation, fully exploiting hydel potential of 150,000 MW from the current level of 32,326 MW and scaling up nuclear generation by successfully developing fast breeder reactor technology.

Mr Mahajan said that in India, the T&D losses are as high as 30-40 per cent, mainly due to revenue leakages arising out of theft and unauthorised use of power as well as technical losses due to poor state of network.

"Globally, the norm for network losses is 5-10 per cent. The solution is to bring in discipline and accountability in distribution companies."

He added that the role of the political establishment is crucial in making this a reality. "States that have had strong political support for reforms have done well."

The KPMG report has also urged development of renewable energy sources such as solar power and wind energy.

On alternative sources of power, Mr Mahajan said that India has taken an important step in this direction. "The country has the fourth largest installed capacity for wind energy in the world."

Indian companies are involved in technology evolution and development in renewable energy. In the case of wind, technological evolution has established MW size machines as the norm. And in the case of solar energy, evolution in material technology has ensured rapidly increasing efficiencies in energy extraction.

He added that apart from these well-known alternatives, India must explore other areas such as biomass energy, as the country enjoys a huge resource base.

"The challenge lies in managing the supply chain for usefully converting biomass to power. Besides, nuclear energy is another area where a lot of investment is expected."

D. Murali
C. Ramesh

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