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Raghuvir Srinivasan

THIS is the question for which nobody has an answer. The Government has targeted a capacity addition of 1,00,000 MW by 2012 which means that the minimum investment needed is a staggering Rs 4,00,000 crore assuming it is all thermal! This is apart from the funds required for setting up T&D infrastructure. Given the failure of private investment and the insolvency of SEBs, the responsibility for providing the bulk of this has fallen on the central utilities, NTPC and NHPC.

Indeed, the Government has said that the central utilities would be responsible for 43 per cent of this capacity addition which is 43,000 MW. Assuming an average cost of Rs 5 crore per mega watt (average of thermal and hydel), the total outlay for the central utilities would be a staggering Rs 2,15,000 crore in the next 10 years, which means an average investment of Rs 21,500 crore every year.

There are just two ways of funding this: Either as equity from the government or from internal accruals and borrowings of the central utilities. The Plan outlay for 2002-03 for power has been pegged at Rs 14,823 crore in the last Budget. Given the state of Central Government finances, it would be naïve to expect this figure to rise substantially in future. This would mean that the central utilities have to fend for themselves for capacity creation and also for routine renovation and modernisation expenses.

One option is to leverage more on equity, apart from ploughing back internal resources generated. For instance, NTPC today is highly under-leveraged at a debt : equity ratio of just 0.34:1 when it can go up to 1:1 or even 2:1. However, borrowings are not an easy option given the outstanding dues from SEBs, which affect the cash flow. Borrowings are based on repayment capacity, which could be affected if SEBs do not pay up. Naturally then, the central utilities have been going slow on their borrowings.

Internal resource generation is certainly an option but there is a new spanner in the works in the form of the tariff orders of the Central Electricity Regulatory Commission (CERC). The availability-based tariff (ABT) order as also the new tariff norms order have severely shrunk the cash flows of NTPC (see interview with CMD Mr Jain). From an estimated cash flow of Rs 35,000 crore over the next 10 years, which is said to be enough to add 20,000 MW of capacity, NTPC's cash flows are now projected to shrink to just Rs 9,500 crore due to the CERC orders.

This is posing major problems to the capacity addition plans of NTPC; its chairman and managing director, Mr C. P. Jain says that its capex programme would be "terribly curtailed" if the CERC orders are implemented. NTPC is now contesting the order in Court.

Now, the dispute between NTPC and CERC is cause for worry because NTPC is the lead central utility and it would have to take the major share of capacity addition in future. However, CERC has prescribed the tariff norms in the eventual interest of the consumer. The orders aim to pass on the efficiency gains of NTPC in the form of lower tariff and also clip the incentives available to the organisation, again to reduce final tariff. A via media has to be found to this issue, which has strong supporting arguments from both sides. Unless that happens, the country's capacity addition programme could be heading for trouble.

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