Power Sector: Is it heading towards another collapse? Bernstein answers
₹8.4 /kWh in April 2009 before plummeting, dragging down the entire sector including utilities, equipment providers, and financiers, it noted. The downfall of the last cycle can be attributed to various factors, primarily stemming from the initial phase of privatisation, stated Bernstein. Amidst a landscape dominated by government agencies and influenced by political agendas, the sector was buoyed by easy financing from banks and NBFCs, leading to its eventual collapse.
The sequence of events unfolded as follows: The rise: In 2003, the Indian power sector underwent deregulation, signaling a shift towards privatisation. This move paved the way for significant developments, including the establishment of the first major private power plant by JSPL in 2008, which boasted an impressive return on equity (ROE) of around 200 percent. During this period, the nation was grappling with a substantial power shortage of 17 percent.
The enthusiasm within the sector was palpable, exemplified by the overwhelming response to the Reliance Power IPO in January 2008, which was subscribed by a staggering 73 times. This fervor spurred a rush of investment as players eagerly sought to capitalise on the burgeoning opportunities. The process for entering the market was relatively straightforward: companies would sign Memoranda of Understanding (MoUs) with state governments, leveraging these agreements to secure land for their projects.
Subsequently, they would utilise the MoUs to obtain financing from banks, often inflating project values to draw additional funds. With financing secured, companies would then proceed to award Engineering, Procurement, and Construction (EPC) contracts, initiating construction activities. However, the execution of
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