Another Major Bailout for India’s Perennially Indebted Power Utilities on the Anvil

India’s power distribution sector is always facing a challenge of high debt and heavy losses due to vested political interests that always keep the power prices below that of the actual cost incurred by the utilities most of which are state-owned. Over the last 15 years, there have been a number of reforms that have been tried and which have ultimately failed.

The debt is transferred to another government entity which temporarily solves the problem. However, the structural issue which results in losses remains, which again piles up in the next few years resulting in distress across the value chain from power suppliers to bankers and equipment vendors. Delayed payments of almost 12 months also cause issues in working capital for power generators. This problem is very bad for renewable energy developers who generally work on wafer thin margins. The NDA government has come out with the “UDAY program” during its first term which was envisioned to be a solution to the distribution sector power problem. However, things did not change and once again the distribution utilities have racked up massive debt. They also have piled on receivables of almost $10 billion which is making the power generators cry wolf.

Read about Indian Power companies here.

The problem of receivables is particularly acute now, as the general elections got over this year. During election time, government and their state-owned distribution utilities are even more reluctant to raise power tariffs leading to higher losses. Some states like Tamil Nadu have not raised the prices for consumers for the last five years in which the power cost would have gone up by around 30%. With a massive deficit between revenue and costs, the problem has become very bad. The central government is also sometimes powerless to do anything as power is a concurrent subject and state governments have the power to raise and regulate tariffs through their own state regulators. The government is now mulling that they would give special loans to distribution utilities to pay down the receivables. There is acute distress in the overall economy as well and the power sector is being seen as a major factor in the overall slowdown being faced as industries and developers face issues in getting their legitimate payments from state owned distribution utilities.