NEW DELHI: At a time when almost a third of India’s 1.3 billion citizens have no access to electricity, power plants worth about $19bn are struggling to find customers.

High interest rates and weak industrial demand have coupled with India’s unusually cool summer and unseasonal rains to curtail electricity usage. That’s left some 20 gigawatts of capacity — enough to power New Delhi thrice over — without long-term supply contracts, according to Ashok Khurana, director general at the Association of Power Producers.

“New plant initiations have come to a grinding halt,” said Debasish Mishra, a senior director at Deloitte Touche Tohmatsu India in Mumbai.

“The situation is very discouraging for anyone planning to set up a power plant in India. If not addressed in time, we will swing from the current surplus situation to a major shortage in a few years.”

For JSW Energy, one of the affected power generators, almost half its capacity lacks long-term buyers, said Chief Executive Officer Sanjay Sagar. While Sagar blames tepid power demand on “a downturn in economic activity,” the situation also reveals structural problems afflicting the next link in the chain of India’s power market.

Power plants sell to electricity retailers, preferably on long dated contracts. And the financial health of those retailers, controlled by state governments and forced to supply power to farmers and the poor at subsidised prices, is worsening. India’s electricity retailers have accumulated losses of 2.5 trillion rupees ($39bn) and lose 700bn rupees every year, according to the first-year report card of PM Narendra Modi’s government. Reviving the distribution companies will be crucial to Modi’s election pledge of providing round-the-clock electricity to every household in the country by 2019.

“That’s the reason why good demand from industrial customers is so critical for distribution companies — because they are the paying customers,” said Khurana. “That demand is missing now.”

India’s installed capacity is 272.5 gigawatts, according to the power ministry. It costs roughly 60 million rupees to set up a megawatt, said Sambitosh Mohapatra, a partner at PwC India, so 20 gigawatts translates to about $19bn.

India’s electricity supply has improved in the three years since a major power failure darkened vast swathes of the country’s north. And the government has approved investment of 1.1tr rupees to upgrade distribution and transmission infrastructure across the nation.

Major Singh, chairman at the power ministry’s Central Electricity Auth­ority, couldn’t be reached on his office phone for a comment.

Still, the electricity retailers lose about 1 rupee on every kilowatt hour sold, according to the power producers association. And state governments aren’t always assiduous in making their subsidy payments on time, forcing distributors to cut purchases and forcing outages, said Mohapatra of PwC India.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, June 30th, 2015

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