Why Is Tamil Nadu's Power Corp Going Bankrupt and What Can Be Done About It?

Before he made his Budget speech this year, Tamil Nadu Finance Minister Palanivel Thiagarajan released a white paper on the state’s finances which devoted a section to one public sector undertaking – Tamil Nadu Generation and Distribution Corporation (TANGEDCO).

The PSUs finances have been in the red for several years, and the finance minister had said that the PSU had to be restructured as it had been unable to recover operational costs, pending bills with mounting interest as well as excessive capital expenditure.

TANGEDCO is among the most significant contributors to the state’s debt burden with mounting interest costs, and the construction of new coal plants is only likely to make the situation worse.

In an interview with The News Minute, Ashish Fernandes, CEO & Lead Analyst of think tank Climate Risk Horizons, stressed that TANGEDCO adding more coal plants is hardly the answer to its problems.

TANGEDCO's Finances Are Suffering Right Now

According to the New Indian Express, after the power crisis earlier this year, TANGEDCO was planning to speed up the commissioning of power projects, including coal plants at Ennore, Udangudi, and more. As per the report, it aims to complete this by 2024.

Ashish says that the financials of TANGEDCO are unchanged, but speeding up this project only translates to taking on more debt and doesn’t make economic sense either, apart from the environmental and climate issues.

Elaborating on why TANGEDCO’s finances are currently in the shape they are, Ashish said, “The demand projections that most states including Tamil Nadu have been dependent on have not come to fruition. There's excess capacity. They have taken on the debt, they have built these power plants, and then they find that they are running at 50-60% plant load factors (a plant’s capacity utilisation). When it runs at that, you're still paying off the debt, and your variable costs go up because your plant capacity factor is lower. Therefore, electricity that you are purchasing or producing is more expensive than you anticipated. You either have to pass that on to the consumers or you have to subsidise it. If you subsidise it, that means a loss and you go into the red. This is one of the main reasons that TANGEDCO is suffering right now, because of the string of power plants that they have built in the last 5-6 years and have taken on the debt for. Instead of addressing that, to propose that you will build more power plants, makes absolutely no sense economically.”

Private Sectors Can Be Allowed too

He adds that Tamil Nadu already has a surplus of capacity, and demand will continue to grow as it should. “The cheapest, most cost-effective way of meeting demand is no longer coal. It's renewables. Renewables aren’t just cheaper. Also, they don’t take as long to come online,” he says.

He cites the example of the proposed power plant expansion at Ennore and is yet to begin construction.

Even if the government were to accelerate the pace, it would take a minimum of four-five years to come online while a significant amount of debt has to be taken on.

Climate Risk Horizons had earlier explored the financial implications of the project.

He stresses that the demand growth trajectory in Tamil Nadu even pre-COVID-19 was below predictions and that there are cheaper and more flexible ways of meeting the current demand.

A report by the Comptroller and Auditor General on TANGEDCO’s finances between 2015-16 and 2019-20 faulted the state government and the PSU for not being able to turn around its financial performance and cited several shortcomings – including buying power at a higher tariff when a lower one was available, not reducing transmission losses, low plant load factor and more.

With renewables, Ashish says that if you have to recalibrate your projections for 2030, it's easier to scale back and not tender more projects, rather than committing to building a coal plant.

In the event of an uptick in demand, he said that apart from new capacity, efficiency also must be looked at.

He cites solar projects, whose time to commission is shorter than that of a coal power plant, but with lesser output than any one coal plant.

However, this gives the option of diversifying, and he says the private sector can be allowed too.

The cost of power generation in the state is high, as the state continues to depend on coal plants, and coal comes from far-off locations.

Cost of Electricity – An Economic Issue for the State

However, it’s also worth considering why coal is continuing to be stressed upon, despite a push to shift to renewables.

“Tangedco has always built coal power plants. When that’s what you have traditionally done, that can sometimes be all that you want to do, rather than looking at other options. There’s a large coal lobby and engineers lobby that's also pushing this, which is undeniable. Two, we know that a lot of these things sometimes are political economy decisions, not financial decisions. I think it will raise the question of who is going to benefit from these projects and who's going to lose? The loser quite clearly is the Tamil Nadu exchequer, the state’s finances and the state as a whole. The question is who's winning? Where's that coal coming from? Who's going to get those coal contracts? Who's gonna get the EPC contracts? Who's going to benefit from all this debt that the state is taking on? That money is going to go to someone. Who's it going to go to?” he asks.

He stresses that TANGEDCO must not succumb to the sunk cost fallacy – a situation where one is reluctant to pull back because of investment that has already been made – and needs to be told to stop expansion plans except ones that are near completion and start transitioning to a cheaper cost of electricity.

“This is a long-term economic issue for the state, and it's going to lose its economic competitiveness to other states if the price of electricity is higher,” says Ashish.

For the people of Tamil Nadu too, Ashish says the state has some of the biggest potential for renewables in both solar as well as onshore and offshore wind, which it has begun to utilise but nowhere near its full potential.

“Leaving aside environmental reasons, it will actually help to lower the cost of purchase power if it's done in the right way. Especially when everyone's concerned about inflation and rising prices, getting a reliable source of electricity, the cost of which will not escalate for the next 20-25 years, is vital. You cannot say the same about coal, as coal prices will escalate every year. Renewables, once it's built, you're looking at a flat tariff. It’s in fact, deflationary. Renewables are plentiful, the technology exists and it helps you economically, helps you save money, and helps the state save money,” he adds.

(Published in an arrangement with The News Minute.)