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Sunday, August 28, 2011

UMPP coal usage rules may be revised

The government may amend the rules governing bids for ultra mega power projects (UMPPs), where the usage of excess coal from captive mines meant for these large-sized plants may have to be clearly specified upfront.

This is being done to usher in transparency and, hence, avoid any potential controversy.

The move to amend the standard bid documents (SBD) for future UMPPs comes in the backdrop of a legal challenge by Tata Power Co. Ltd. It has appealed to the Supreme Court against a decision by a so-called empowered group of ministers (eGoM) in 2008, to allow the winning bidder, Reliance Power Ltd, to use excess coal from captive mines allotted to it for the 4,000 megawatts (MW) Sasan power project for another project it has. Earlier, the Delhi high court had upheld the government’s decision.

“This issue has been raised. Whenever coal reserves are worked out, they are estimated quantities. To assume that there will be a matching quantity is wrong. If it is more, then what is to be done with the coal? It can be used for other projects that have been awarded through the competitive bidding route. There have been discussions. In such a situation some decision should be taken,” said an official associated with the UMPP award process, who did not want to be identified. “Such a condition may be incorporated in the SBD in the next set of projects, which will be awarded after the ones in Chhattisgarh and Orissa,” the same official added.

“We are looking at it,” said a senior power ministry official, who also requested anonymity due to the sensitive nature of the issue.

To be sure, the eGoM had in November 2010, after the decision allowing usage of excess coal from the captive mines at the Sasan UMPP for another project, moved to make this the rule. Accordingly, it asked the coal ministry to issue necessary instructions after getting it legally vetted; however, this is yet to happen.

The UMPP programme has had its share of problems, weighed by ecological concerns and local resistance. Developers, procurers of power—the states —and bankers met on 19 July to discuss changes that need to be made in the SBD. Such a move will also generate greater developer interest in future UMPPs and also bring tariffs down.

“Any such move which enables availability of additional coal resources would certainly help the sector. It is only important that such conditions should be transparently known to every participating developer. Therefore, making resources available will definitely be a welcome move. Once the terms and conditions are transparent and it’s a fair play, the developers would consider such availability to generate extra power and sell at market rates, which is not part of bid quantity and, hence, developers may be in a position to reduce tariff for the bid quantity of power,” said a Tata Power spokesperson.

“Based on the eGoM decision, ministry of coal has granted its approval for utilizing the incremental coal from the captive coal mines allocated for Sasan in the other project of the company, with certain stipulations,” said a Reliance Power spokesperson.

Reliance Power has been the most successful company in terms of UMPPs. Of the four UMPPs awarded till date, it has been the successful bidder for coal pithead projects at Sasan and Tilaiya in Jharkhand, and the imported coal-based project at Krishnapatnam in Andhra Pradesh. The imported coal-based project at Mundra in Gujarat was won by Tata Power.

Expert opinion over the move was mixed.

“For a competitively bid coal mine or integrated coal mine and power project, it appears prudent to allow optimal utilization of coal, particularly in light of the growing gap in demand and supply of coal, as it will allow unlocking of value of scarce resources and may lead to further aggressive tariff bids,” said Dipesh Dipu, director of consulting, energy and resources, and mining at Deloitte Touche Tohmatsu India Pvt. Ltd.

However, Anish De, chief executive at Mercados EMI Asia, an energy consulting firm, argued: “It is a fairly difficult decision to take because it could result in inadequate supplies to the power projects in the latter part of their operating life. Since the reserves are not precisely known at the time of award of project, any decision in this regard will be based on imperfect information, which could later backfire.”

The government wants to set up 16 UMPPs to meet the needs of the world’s second fastest-growing major economy after China. India has a power generation capacity of 180,000MW and expects to add 62,374MW by 2012.

Reliance Power has sued HT Media Ltd, publisher of Mint, in the Bombay high court over a 12 May front-page story in Mint that it disputed. HT Media is contesting the case.

CERC for new rules to curb grid indiscipline

To curb utilities' tendency to overdraw power by using the unscheduled interchange charge (UI) mechanism, the Central Electricity Regulatory Commission (CERC) has proposed stricter rules. Suggestions and objections have been invited by September 10.
It wants a reduction in the UI frequency band to 50.20-49.7 Hz. A deviation below 49.7 Hz would attract additional Ul charges, the previous limit for which was 49.5 Hz. Rates have been proposed for specified frequency bands.
UI rates are chargeable to a generator or a consumer when they inject less or more power than their declared schedules, computed on a day-ahead basis to ensure proper planning for power in the grid. The present charge is Rs 7.35 per unit for such drawal/injection if the grid frequency is 49.5 Hz. The Commission had tried to narrow the permissible frequency range for deviation and modified the UI charges.
CERC chairman Pramod Deo told Business Standard: "Despite repeated rulings that UI should not be used as a route for trading of electricity, the utilities had over a period postponed setting up of power projects and relied on overdrawal from the grid for meeting their consumer demands. Utilities should plan for procurement of power on a long-term, medium-term and short-term basis, instead of resorting to overdrawal through UI"
He said CERC had taken a strict view of continued grid indiscipline by some state utilities and penalties had been imposed in some cases. "The need is for all stakeholders to desist from overdrawal in the larger interests of grid security and discipline" he added.
R V Shahi, former Union power secretary, said: "Penal rates for UI is not the solution to grid indiscipline. A long-term solution is partial or full disentitlement of unallocated power to such states as habitually overdraw"
Jayant Deo, managing director of Indian Energy Exchange, said: "With the proposed regulations, it will be more economical to plan and buy in advance rather than resorting to UI. The proposal takes care of changes in the cost structure of generation and are in line with the power market development endeavour spelt in Section 66 of the Electricity Act. This will also support use of intra-day and contingency contracts available on power exchanges".

PowerGrid to launch Indias first 1,200-Kv station

Come September, India’s power sector will witness a new era in the transmission segment when state-run Power Grid Corp will launch a 1,200-Kv ultra-high voltage (UHV) test station along with experimental lines in Bina, Madhya Pradesh.

The investment for the project is estimated at Rs 800 crore. The company is also setting up a 1,200-Kv transmission line for commercial purpose, which will be constructed between Wardha and Aurangabad in Maharashtra.

Till now, the power is transmitted on 765Kv /800Kv lines. The existing 400Kv line can transfer about 600 Mw power, 800Kv line can do between 1,200 Mw and 2,400 Mw and 1,200-Kv transfer 6,000-8,000 Mw, according to experts from the Indian Electrical and Electronics Manufacturers Association (IEEMA), which is associated with the project.

With the government’s plan of adding over 100,000 Mw capacity in the coming 12th Plan coupled with the challenges put up by environment hurdles, right of way and transmission losses, there is a need to develop a more sound transmission system.

About 35 manufacturers, including BHEL, Areva, Siemens and Sterlite have joined hands with PowerGrid to establish the 1,200kV test station. The test line in Bina is being constructed with two 1200kV test bays in which the leading manufacturers are providing main equipment such as transformers, surge arresters, circuit breakers, transformers among others. These test bays and test lines shall be used for various field trials initially.

“This will usher a new phase in the transmission sector as with a limited right of way (RoW), bulk power will be evacuated from the point of generation to the load centre. The transmission capacity, thus, will be fulfilled with one such line only catering to the capacity of several generators,” PowerGrid Chairman and Managing Director S K Chaturvedi told Business Standard.

According to IEEMA, the first 1,200kV system field was tested and commissioned in the former Soviet Union in 1985 after 12 years of research, which was discontinued after the disintegration of the Union. Then, Japan started developing a 1,000kV UHV system in 1978 and tests are still on. China started developmental work on a 1,100 kV UHV system in 2005 and a pilot project is presently under testing.

IEEMA’s Senior Director Operations Anil Nagrani said, “This will be an experimental line. There are many advantages of setting up a 1,200 Kv line. With unavailability of RoW, space crunch and various environmental issues, the existing power network can be upgraded to 1,200 Kv lines within the same space or little higher space.”

Indonesia's benchmark coal prices may hit only long-term contracts

The scheduled introduction of benchmark prices — called HBA Index — by Indonesia beginning September 23, may not impact bulk of the users of Indonesian coal in India. yardstick

According to international traders, catering to the vast majority of the users — including some power utilities — through spot buying, coal prices in Indonesia are either at par or higher than the indexed price and, are unlikely to be impacted.

However, the Indian users sourcing coal through long-term offtake agreements at attractive prices much below the HBA Index should be impacted. India is expected to import anything between 70 and 100 million tonnes of Indonesian coal this fiscal.

GVK Power to buy Australia's Hancock Mines for $2.2 billion

GVK Power & Infrastructure has reached a deal to buy two coal mines in Australia, taking a heavy bet which has the potential to put an enormous strain on its finances.
The Hyderabad-based company will pay $2.2 billion (about Rs 9,900 crore) for Hancock Prospecting's mines and the transport infrastructure which will be needed to move the coal at least 500 km to a port, lenders and company officials part of the negotiations told ET.

The deal will give GVK steady and secure access to the fuel for its plans in the power sector as supply in India gets crimped by environmental holdups and troubles in the Maoist-dominated coal-producing areas.
GVK will pay $1.3 billion for the Alpha Coal and Kevin's Corner mines and $900 million to develop the logistics infrastructure. The transaction will be funded by ICICI Bank, Standard Chartered Bank and Axis Bank. Ernst & Young advised GVK, whose board is expected to meet within 10 days to approve the deal.

"It looks like a leap of faith," said Kameswara Rao, the leader of the utilities practice at PricewaterhouseCoopers. "But if not GVK, someone else would have gone ahead for the mines," he added.
The Indian and Australian companies, which have been negotiating for about six months, did not reply to emailed questions. Hancock is run by Gina Rinehart, Australia's richest woman. The Hancock sale was initiated through an auction in which the bidders included GMR Infrastructure, JSW Energy and Essel Mining of the Aditya Birla Group.

"Since logistics will be vital for such a large deal, it won't be surprising that a significant part of the total payout would be for development of the infrastructure, including usage of existing rail," said a senior executive of a company that participated in the bidding.
GVK, which operates the Bangalore and Hyderabad airports, three gas-based power projects and the Jaipur-Kishangarh expressway, ended the 2010-11 financial year in March with sales of 1,900 crore and net profit of 155 crore. Its share price has fallen by more than two-thirds in the last 52 weeks, valuing the company at 2,600 crore. On Thursday, the GVK stock fell 4.6% to 16.60.

The company, which has debt of about 5,500 crore, is building a 540 MW coal-fired power station in Punjab.

The two coal mines that GVK will buy have combined reserves of 7.6 billion tonnes and are located in the Galilee Basin in Queensland province. They can produce 30 million tonnes of coal annually over a life of 30 years.
The deal, when it is signed, will be the third major acquisition by an Indian company of Australian coal mines as local firms venture overseas to overcome supply problems at home. Adani Enterprises paid about 12,000 crore to Linc Energy and Lanco Infratech agreed to buy the holdings of Griffin Coal earlier this year for nearly 3,500 crore. India is likely to import nearly 100 million tonnes of coal this year.
The power sector is one of the largest consumers of the fuel, accounting for 71% of demand, which is met through linkages with state-run Coal India and Singareni Collieries.

5 states face power cuts as Financial Institutions stop lending

Several financial institutions have decided to stop disbursing short-term loans to power distributors in five states where the losses of utilities have exceeded Rs 5,000 crore each, raising fears of prolonged blackouts and weaker electricity demand. The affected states are Tamil Nadu, Haryana, Rajasthan, Uttar Pradesh and Punjab.
Losses of state electricity boards are projected to double to Rs 150,000 crore by 2014-15, creating an alarming situation for the sector as these utilities are the vital link between producers and consumers.
A power ministry official said that while there have been no defaults yet, some distribution utilities have failed to pay installments on time causing concern to lenders like Oriental Bank of Commerce, Bank of Baroda, Corporation Bank and State Bank of India.
Tamil Nadu electricity distribution company, for instance, has asked lenders for more time to repay loans.
"We have discussed the issue internally. We want to highlight the issue so that the state governments release subsidies to distribution companies and allow them to raise tariffs," said an official at Rural Electrification Corp, a state-run company that lends to utilities. Power Finance Corp chairman and managing director Satnam Singh said his company has always been cautious in lending to distribution utilities.
The tough stance by lending institutions will further queer the pitch distributors as they would not be able to meet their working capital requirements. As it is, they are borrowing short-term loans at 14-15% to meet debt obligations, the ministry official said.
Weak finances are not allowing distribution utilities to purchase power which then resort to load shedding while electricity generators are not finding takers for their produce. Power tariffs in the short-term markets have also hit record lows over the last few months.
Out of the 54 distribution utilities analysed by Power Finance Corp, only 25 had audited accounts for 2009-10, eight have not finalised accounts while some of the utilities last audited their accounts in 2006-07.

Deloitte & Touche LLP senior director Subhranshu Patnaik said: "Distribution companies have been managing to get loans by mortgaging their assets or getting sovereign guarantees. The issue has come to a boil with the growing number of sick distribution companies."
Non-approval of expenses by state regulators on account of non-achievement of efficiency targets and lack of capital investments by utilities due to poor financial health has become a vicious cycle. This needs to be broken through appropriate interventions such as advancing efficiency improvement programs, he said.
In 2001, the state governments bailed out distribution companies out of Rs 45,000 crore debt.

Innovation and investment to lead shift towards green energy

The government and the industry must work in tandem if India has to grow in a sustainable manner, panellists said at a Mint conclave on sustainable industries, held in Bangalore on Tuesday. While the industry must ensure quicker investment in greener forms of power, such as wind and solar power, the government should put in place a policy framework that ensures solar photovoltaic cells and solar thermal cells become the norm than the exception.

The panel included Raghunandan K.S., director of Integrated Technology Services, IBM India and South Asia; Girish Paranjpe, managing director of Bloom Energy; Venkatesh Valluri, chairman and president of Ingersoll Rand (India); Niranjan Khatri, general manager at WelcomEnviron Initiatives at ITC WelcomGroup, and Mukul Saxena, head, corporate research and technologies, Siemens India. Mint’s Jacob P. Koshy moderated the discussion. Edited excerpts:

The ‘Global Trends in Renewable Energy Investment’ annual report says this year that there has been a 32% increase in green energy investments, and for the first time developing countries have invested more in green energy than developed ones. You can invest in green technologies for about two years, and then recover it over a period of time. But what about companies that don’t have that kind of deep pockets. Will they be able to invest in expensive technology and still stay in the black any time soon?

Valluri: I take it back to the ’90s where shareholder value maximization at any cost was the primary aim. You had to deliver profitability quarter after quarter. There is a tipping point that’s come in the industry that shareholder value is important, but the question of whether you are a responsible company is important too. Responsibility leads to sustainability. Investments are needed. Companies that don’t make the investments will probably not survive in the future. While they deploy responsible technologies, they’ve to deliver shareholder value. Large companies that will lead some innovation will have to collaborate with smaller ones to develop that kind of technology.

Can you describe what is responsible technology? Coal is irresponsible in popular discourse. Does clean coal become responsible then? When does a technology become responsible?

Valluri: Over many decades in this century, we did not define any technology as irresponsible. It’s unfair to describe so, as we did not know anything beyond that. Now we realize that some of these technologies are not creating environmentally sustainable programmes. Now, we want to start bringing technologies like wind and nuclear. It’s a transition that has to be quicker, where investments need to come in. That’s what the industry has to grapple with, how to bring in these investments quick.

The argument goes that the Western civilization has been polluting for years, and now when the time has come to conserve, they developed CDM (clean development mechanism) markets and so on, expecting developing countries such as India to go green first. Is a similar cycle going to be played out within India too? Are the wealthier ones going to deploy expensive technology in India first, or are we all going to go green together—bottom up?

Paranjpe: The advantage of new technology in renewable energy is that it doesn’t have to be top-down. It can be bottom-up too. This has created a wave of innovations in technology and business. For example, the husk power generation in Bihar is a business innovation. For big companies, it is not so much about changing the source of power but rather about conserving the power they use. It is different for each section. If you reduce air conditioning in your office by one degree, maybe it reduces power consumption by 10-12%.

India started on solar power early. Research institutions started developing this technology in the ’80s. But it is gaining momentum only now. Is it because of the subsidies? Unless and until there are subsidies, is more green growth possible?

Saxena: It is not just a matter of subsidies. There’s always a right time for the introduction of any technology. Solar was talked about much earlier. But we had to wait for the technology to transform into a viable business proposition. We are at that stage now. This is not just for solar, there are a number of such technologies that can be developed to form a green portfolio. The only sustainable path to staying in black is, in fact, to go green.

I recently read that IBM (International Business Machines) has a smart-grid project in a tie-up with the bureau of energy efficiency. Is it that now the time is right and so we must invest in a certain kind of technology?

Raghunandan: IBM smart-grid is part of the IBM smarter planet project. For sustainable cities, it’ll encompass multiple technologies starting from water management, power optimization, to having sustainable use of technology. There are stages to adoption. The first stage is compliance to certain government norms. The second is social consciousness, a citizen phase. The third is the innovation phase, where you look at not just doing the right things but also look for financial opportunities—a business development opportunity in helping other companies and the society to become greener, while also making our own business greener.

India has always been considered a conservative country, while the West has been a consumptive culture, probably because they had far more natural resources. Now, do we need to become more conservative than we inherently are? Are we just pushing conservation as a marketing package with sustainablity now?

Khatri: India has 17% of the global population, 4% of land mass, 2% of forest cover, 1% of water resources. Eighty-three per cent of our energy is imported. Indian coal has 38% ash content. And now we are threatened by climate change, which will affect the Himalayan ecosystems, our monsoon, our forest and our coastline. Unfortunately, all our wealth of iron and coal are in deep forests. Do we cut these forests to reach for these natural resources? There’s a huge balancing act to be done. We need to learn from the mistakes of the West and not commit them ourselves. We have the opportunity to leapfrog and go for cleaner technology, the way we have moved in telecommunications. We’ve moved away from cables and wires and have gone into wireless. We are a sun-drenched country. We have nine months of sunshine, whereas Germany, with six months of sunshine, is the world leader in solar technology. Big industries can use solar instead of gas for their domestic purposes at least.

Now that we have the national solar mission in place and there are active subsidies, is that all that is needed now? Are we on the right track?

Khatri: I’m wary of subsidies. To my mind, you and I don’t need subsidies. Anyway in our own homes, we have genset, water filter, etc. We are capable of buying those products. The state governments should put the onus on citizens on generating similar solutions for energy shortage; then citizens will use solar photovoltaic and solar thermal (energy), if the government provides needed subsidies and incentives. The capital burden is then shifted on to the citizen. The government does not have the money to do it on a large scale. There’s at least a 40-50% deficit. The policy framework has to be made more innovative so that these low-hanging fruits like solar, PV (photovoltaic) and thermal will be there in every house. The saved energy can be then used for industry.

Is there a lot of low-hanging fruit in renewable energy space waiting to be plucked in India, or are there several tall trees to climb?

Valluri: The execution piece in the country is a huge challenge. We ought not have subsidies for everything. This country gives a Rs. 120,000 crore subsidy to agriculture—Rs. 80,000 crore for fertilizers and the rest for seeds and other things. We also have 30% of our food being wasted. If the farmer needs to win, his crops should not be wasted. Instead of giving subsidies, the government can build infrastructure to save food. But that’s not happening because of political pressure. Anyone who wants to use a new technology will use it only if it is beneficial financially. Each company will be good in some technology or the other. We need to build a platform and integrate these. But, usually, we take up only one technology at a time and try to make it a success in isolation. We need technology convergence while we retain IP (intellectual property). Then, the question of subsidies and government policy takes a back seat. We don’t need to dig up forests and resources, there’s enough available to innovatively use today.

Khatri: If you bring about leapfrogging change, we need transformative change, for which we need architectural change. It’s time for state governments also to look at current policies and assess their impact on sustainability. For example, we probably need to make a matrix in this country to see which industry’s waste can be used for which other industry. For example, in Rajasthan, Hindustan Zinc Ltd has about 20,000 tonnes of waste, which was finally picked up by Shree Cement Ltd. That freed up 40ha of land. We can do the same for landfill sites. The government should first aim that, say, by 2017 there’ll be no landfills. Then, we can analyse what’s thrown into landfills and how they can be utilized. If we take Delhi, nearly 45% of the waste there is wet garbage, 40% is inert construction debris. It’s an individual and national waste. Opportunity to convert this into wealth: Wet garbage is a source of biogas or it can be composted. Inert debris can be converted into low-cost construction material. Waste is wealth at the wrong place.

Is it just a matter of scaling up? Do we have all the nuts and bolts in place?

Paranjpe: There are one or two such sectors, like waste to biogas. Problem here is that garbage is not segregated. It’s just a habit that people can be educated to change. The way cities organize themselves should change. They should become more autonomous, like in China, Europe and the US. City governments have to be powerful and plan for themselves in energy planning, water, waste, etc. Here we have the decisions taken at the state or the federal level, disconnected from the ground.

So, do we need more legislation?

Paranjpe: The unit of governance has to shift much more to the city, like China has demonstrated. They say that they’ll have 1,000 cities with 10 million each and that’s how they’ll take care of a billion people. We don’t have a plan like that. The most people estimate is that India will have 15 cities. Ultimately, there’ll be urbanization, and we’ll have to plan for energy and water anyway.

Do we need more government?

Saxena: We can wait for the government to lay out all the policies for us and expect us to toe the line. We can also look at a different approach: how do we approach the problems that we have at hand, where to get solutions, how to address them at the grass-roots level. Waste to wealth is a good idea. How many organizations with the financial power to do that are doing that? We should take the bull by the horn and invest in some of these basic technologies.

Mr Raghunandan, do you think we need a carbon tax? The government can use those tax funds to plan more programmes?

Raghunandan: Just as subsidy is not a good idea, tax is also not a good idea. Green initiatives have an economic rationale by themselves. We can start small, by adapting some simple initiatives with economic benefits. Starting with using mugs instead of paper cups, channelling the heat produced in data centres to house warming, like in Canada. We just have to use what’s available. Even for fossil fuels, I read that only one-third of the energy is extracted and gas is used for that. The same article says that we could use solar thermal to extract and extract more. There’s economic rationale at every step, starting small at consumer or corporate level. Then the government can make them big projects.

Mr Khatri, do you think it would be a good idea for all companies to set targets for themselves, as accepted by a regulatory body? If the company does not do it, it has to pay a fine.

Khatri: Let’s take water. In 1947, we had water at 30ft depth. In Bangalore, it’s gone down to 1,000ft now. But, if we ask people if they’ve done water harvesting, most of them have not in their Rs. 1-2 crore houses. As corporates also get water easily, they’ve not thought up innovative solutions for water usage optimization. Payback in this area is hardly 6-12 months as investment required is very low. Water and energy are like Siamese twins. If you waste water, you are wasting energy. Especially for SMEs (small and medium-scale enterprises), just by cleaning up the glass, switching off the lights and closing the leaking tap, we can save up to 60% energy. In our country, we have limited water, but archaic systems are flushing litres of water out.

Tata Power follows Reliance - seeks higher rate for Mundra UMPP

According to government officials, provisions under the power purchase agreement (PPA) with RPower / Tata Power, do not allow rate rise that is influenced by change in policies by foreign governments

Tata Power chairman Ratan Tata on 24-08-2011 said they were seeking a higher rate for supply from its under-construction 4,000 Mw ultra mega power project(UMPP) at Mundra in Gujarat's Kutch district. It is in discussion with the Union government on this. Earlier, Reliance Power-arm, Coastal Andhra Power Ltd. (CAPL), has stopped work at its Krishnapatnam Ultra Mega Power Project citing rise in the cost of Indonesian coal that the project is to run on. This has caused big blow to the much hyped UMPP projects of central government.

The revision is being sought due to changes in Indonesian government policy on export of coal from that country, that has pushed up the fuel cost. Mundra is supposed to use Indonesian coal.

Addressing the company's annual general meeting, Tata said he did not blame the Indonesian government for benchmarking exported coal to commercial rates.

Answering queries from shareholders, he said rate revision apart, they were examining options. One was to set up a power plant in Indonesia itself, if the Mundra revision didn't happen.

Tata Power managing director Anil Sardana said alternatives, if the Mundra revision didn't happen, included experimenting with low-grade coal from various sources, to keep the plant running. "We are already doing this at our Trombay power plant," he said.

As for setting up power plants in Indonesia, "If there is lesser meaning in bringing the coal back here, we might use it there," Sardana said. Tata Power owns 30 per cent stake in three coal mines of Bumi Resources in Indonesia.

According to government officials, provisions under the power purchase agreement (PPA) with RPower / Tata Power, do not allow rate rise that is influenced by change in policies by foreign governments.On the likely impact of this issue on the stock price, Tata said, "We are taking up the issues with the government and the share prices will stabilise once there will be a solution." The stock fell 4.5 per cent on Wednesday to Rs 1,036 a share on the Bombay Stock Exchange.

Tata also answered queries on the company's Mumbai distribution business, where shareholders asked about continuing to use Reliance Infrastructure's network for supplying power. "We have regulatory advice to use the existing wires for wheeling power. We are not doing anything that the law does not enable us to do," Tata said.

The standard Power Purchase Agreement (PPA) for projects such as the UMPPs excludes fuel from the force majeure provisions. Fuel, instead, is mentioned under Clause (a) of Article 12.4 of the PPA that lists out the ‘Force Majeure Exclusions'. Besides, the ‘Non-natural Force Majeure events' specified in the PPA does not include actions by a foreign government.

Article 14 of the PPA, which deals with the termination of contract on account of default by the power seller (in this case CAPL), lists out the "abandonment by the seller or the seller's construction contractors... for a continuous period of two months" as a condition for triggering the clause, provided if "such a default is not rectified within 30 days from the receipt of first notice from any of the procurer or procurers".

Power sector needs top priority, says Ratan Tata

The Government needs to look at the power sector with a tremendous sense of priority, more so if it wants to meet its plans and growth targets, Mr Ratan Tata, Chairman, Tata Power, said.

Addressing shareholders at the 92nd AGM, Mr Tata outlined the potential of the sector while pointing to the impediments that hindered growth.The challenges were land acquisition, environment clearances, non-availability of domestic coal and the cost of imported coal.

If the issues remain unaddressed, the industry may have to look at captive plants to meet their requirements, which would entail huge investments.

There was also a need to review the tariff structure, especially, those being built on imported coal, he pointed out.

Tata Power was looking for overseas opportunities to expand its portfolio, given the challenges faced on the domestic front, he said, without detailing the geographies the company intends to work in.
Speaking to reporters after the meeting, Mr Anil Sardana, Managing Director, said the Chief Executive Officer of the imported coal-based Mundra power plant, had written to the Government on the policy changes in Indonesia and the impact of the fuel cost on the project.

In the absence of a resolution to the issue, the company would look to use its expertise at Trombay in blending coal to fuel the plant, he said.

cost of coal

Mr Sardana said it should be understood that cost and availability of coal were an industry issue as domestic coal was in shortage and importing was expensive.Referring to Tata Power's arrangements for coal in Indonesia, he said if circumstances called for the coal to be used in that country, Tata Power would not hesitate to do so, instead of shipping it to Mundra.

Coal India's Wage Costs may Rise 19% This Fiscal

Coal India, which is under pressure from labour unions for a salary hike, could see its wage costs rise by as much as 19% this fiscal, according to investment banking major JP Morgan. The wage cost increase from July 1 would impact the non-executive segment, which is 85% of the wage bill. We are building in a total wage cost increase of 19% in FY12E,which includes the inflation impact and the wage agreement hike, JP Morgan said in a research note. Four of the five trade unions of Coal India have put up their wage demands to the management, demanding salary hikes ranging from 100% to 500%,which is likely to put severe financial pressure on the company.
1,500 firms queue up for coal linkages
CIL unable to meet demand surge

What's common to NTPC, GMR Energy, Shree Cement Ltd and the Railways? These are among hundreds of companies seeking coal supplies from the Government for their power, steel and cement projects.

In the past year alone, the Coal Ministry has seen a 20 per cent rise in applications to over 1,500 from those seeking long-term coal supplies for their projects. The demand is led by captive power producers, independent power producers, State electricity boards, sponge iron and cement makers.

Securing a linkage would enable the end-users to procure coal at a lower price than the prevailing market rates.

Through CIL

Supply for such linkages is done through Coal India Ltd (CIL) and comes at a notified price which is at a discount to the global prices.

The differential between the CIL-notified rates and the global prices range from as low as 15-20 per cent for the higher grades to as high as 50 per cent for the lower grades of coal.

Also, the notified prices in the past six months were lower by as much as 68 per cent when compared with the coal sold in the domestic market through e-auctions.

This demand surge comes at a time when CIL's output has remained stagnant in the past couple of years. Environmental considerations and land acquisition issues are hurting CIL's expansion plans.

As a result, the Ministry has not been able to allocate linkages to these players though some linkages were provided on selective basis over a year ago, sources said. Coal imports to bridge the demand-gap supply are expected to double to 142 million tonnes (mt) in the current fiscal against 70 mt last year.

The Ministry had stopped issuing coal linkages from early 2009. Instead, Letters of Assurance (LoAs) are issued based on the recommendation of Standing Linkage Committee, after scrutinising the applications.“We have been applying for linkages over the past five years.“The required SLC meetings are not happening and the standard answer from the Government is we don't have coal,” said Mr H. M. Bangur, Managing Director, Shree Cement Ltd.However, that has not deterred Shree Cement, which has gone ahead with its expansion plans both in cement and power sectors. “We have gone ahead with our plans by procuring coal from the open market and imports,” Mr Bangur said.

Demand outlook

Till March 2012, the coal requirement for the power sector is pegged at 396 mt. Of the 347-mt now offered by CIL, 306 mt already stands committed for supply to generating stations commissioned till March 2009.
“Over 100 applications have been submitted during January-July this year, mostly from captive power plants, followed by SEBs and independent power producers,” said an official from the Independent Power Producers Association.

Coal India Mines Face 40,000 T/day Loss

At least 22 mines owned by Coal India (CIL),the world's biggest coal miner, face closure over environmental concerns in Jharkhand, potentially suffering an output loss of up to 40,000 tonnes a day, officials said on Wednesday. The state pollution control authority has accused CIL of running the mines without proper forest clearance permission. We have issued an order to them to shut down, said Sanjay Kumar, member of Jharkhand State Pollution Control Board. But a senior official at Bharat Coking Coal (BCCL),a unit of CIL which operates these mines, said they had not yet received the closure order. We have not stopped production yet, D C Jha, BCCL director, said. We will have to close down once we get the order.

Mega Power Stays a Dream as Input Costs Turn into Nightmare

It has all come down to a rupee. But the one rupee increase in the cost of generation could set Tata Power back by.1,800 crore when it switches on the first 800 mw unit of its 4,000 mw ultra-mega power project in Mundra next month. Tata Power is contracted to sell power from this project to five states at an average price of.2.26 per unit. But imported coal prices have risen in the aftermath of Indonesia’s decision to link prices to international benchmarks. The setback would make a mockery of the 14% return on equity norms provided by the Central Electricity Regulatory Commission for such projects.So, the Tatas are renegotiating. But ADAGs Reliance Power has halted work on its 4,000 mw Krishnapatnam ultra-mega power project (UMPP) in Andhra Pradesh on similar concerns. The issue is that we don’t have sufficient coal today and we won’t have it tomorrow, says Reliance Powers CEO JP Chalasani.So we will have to supplement it with imported coal.Krishnapatnam is not the only project that has been impacted, it is a sector issue. Both Tata Power and Reliance Power had bought coal mines in Indonesia to fuel their power plants. But the local government changed its policy, making cheap export of coal impossible. Under new norms, coal exported out of Indonesia would be up to 150% more expensive, thus making the project economics go awry. But can private power producers ask for contracted rates to be renegotiated due to fuel price rise the power ministry doesn’t think so.

Problems Galore for Ultra Mega Power Projects

That’s just one issue that has stymied UMPPs, but it is not the only one. A third such project is yet to tie up funds even as interest rates continue to rise. Another has concluded initial bids but only after a delay of 18 months due to issues relating to environment clearance. Bids have been invited for yet another but it is yet to get the nod from the environment ministry.About.100,000 crore of investments are riding on just these five projects put together. But more than that, Indias power security hinges on these UMPPs a total of 16 such are planned in the 12th Five-Year Plan.Together, they were to add 64,000 mw, an increase of 40% from the nation’s power generation capacity. They are desperately needed to achieve the target of 100,000 mw capacity addition in the 12th Five-Year Plan (which starts next year).Together, they could light up around 53 million households. They could have helped overcome a peak power deficit of almost 9%.They could also have shown how the private sector could catalyse infrastructure development. But none of this seems likely now.


Private UMPP developers would want that, but the union power ministry won’t oblige. The state electricity boards can’t oblige given their poor finances. And making consumers pay higher tariffs is never easy. The power purchase agreement is between the buyer and the seller, Power Secretary P Uma Shankar told ET.They need to discuss it to understand the issue and what can be done to resolve it. The buyers, in this case, happen to be 10 state electricity boards, most of which are starved for cash. In the case of Tata Power, the contract provides for cost escalation for 45% of fuel cost, but the Reliance Power agreement is structured without any escalation clauses. Fuel accounts for almost 70% of the generation cost for a company. At the time of bidding, developers may quote lower charges for escalation in fuel prices to make their bids more competitive. But they have to bear the risk. The government cannot intervene in a contract between these companies and the procurers, a senior power ministry official said on condition of anonymity. The competitive bids were based on companies own assessment of risks and the burden of price risk has to be borne by the developer.Changes,if any, must be done in consultation with the buyers. But that would be a long drawn out process, because there are many contracts to be renegotiated with many electricity boards. Tata Power is in pact with the electricity boards of Gujarat, Maharashtra, Punjab, Haryana and Rajasthan. Reliance Power is contracted to sell electricity at.2.33 a unit to Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra.Ultimately, the country would lose if there are such delays. The industry lobby may be using that as leverage to make the best out of a bad situation. It (renegotiation) may violate the pure logic of a bid but the government needs to have a sympathetic approach as it is inconceivable for the private sector to make predictions for the next 25 years, says Vinayak Chatterjee, chairman of infrastructure consultancy firm Feedback Ventures. These are assets where private and public money and interest is at stake. States should consider the reasonable solution looking at the larger picture. It is more than four years since the UMPP policy was framed. It is necessary to take stock and allow extensive feedback, says former power secretary RV Shahi,who spearheaded the policy when he was the power secretary from 2002-2007.He is now the chairman of consulting firm Energy Infratech.If certain provisions (in the upcoming UMPPs) need to be changed, elaborated or added, it should be considered, he adds. Under the UMPP policy, the government identifies a project and sets up a shell company that secures land and other clearances. The shell company is then transferred to the developer who is willing to develop the project for the lowest tariff. Expect long-winding renegotiations in the old projects. But there is a rethink on UMPPs that will come up for bidding soon.


Power ministry sources say they are considering some changes in the bid conditions based on the problems faced by projects in the past. But these are only for upcoming UMPPs.They rule out any changes in existing contracts. We are looking at making some changes in the concession agreements for new projects, but it is too early to say what would be changed, Power Secretary Uma Shankar says. Only four of the 16 such projects have been awarded so far. The rest have run into delays relating to environment clearances, land acquisition and fuel linkages. The delays may now actually go in favor of UMPPs.Despite setbacks to the first six, the fresh UMPPs that will come up for bidding will attract the private sectors interest, industry sources say.UMPPs would continue to generate more interest than any other project, says Raaj Kumar, chief executive officer,GMR Energy. It offers scale, and also other pre-requirements such as land, fuel linkage (in case of pit-head based projects) and clearances. To that extent fund-raising is easier. Developers are keen that the remaining UMPPs are rolled out without further delays. But financing will pose a challenge.Clearly, we all are interested, says Lance Infratechs Chief Financial Officer J Suresh Kumar. But it will not be possible for every developer to finance these projects easily in an environment where interest rates are hardening. Banks have hiked key rates by 200-250 basis points in the past one year following Reserve Bank of India’s monetary tightening measures. Banks have become more circumspect and cautious, and are being selective, said S Vishvanathan, managing director & CEO of SBI Capital Markets. Good projects are still being closed financially. But availability of cash with banks is not as plenty as before, he adds. The company managed fund-raising for two of the four UMPPs Tata Powers Mundra project and Reliance Powers Sasan UMPP.Vishvanathan recalls that banks were earlier aggressive about financing infrastructure projects under the PPP route. Not anymore. Private investment in infrastructure from debt and equity sources has slowed and, consequently, power sector investment may now fall short of targets, Fitch Ratings said in a recent report. But experts say these hurdles may be a blessing in disguise and can bring in a more realistic approach towards UMPPs.They believe the bids for the next round of these projects may not be as aggressive as developers learn to assess and manage the risk-return trade-offs better. The last UMPP that was put up for bidding the pit-head project at Tilaiya met with a tepid response when financial bids were invited in January 2009.But now, there is renewed interest for the upcoming UMPPs at Orissa and Chhattisgarh, particularly among utilities which missed out on the opportunity for large-scale capacity addition earlier. But the aggression we saw (in the bids) earlier may not be there anymore, says ICP Keshari, joint secretary in the ministry of power. Bankers will advise realistic bids. They will be the balancing factor, says Debashish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India. Most bids are likely to come clustered around the same level. He does not rule out a freak high bid by a company which may have lost out earlier.

Wednesday, August 24, 2011

Lack of proper support slows FDI into power sector: NTPC

State-run NTPC has said that lack of "politico-administrative" support to tackle commercial losses and poor health of government utilities are among the main reasons for low FDI inflows into the Indian power sector. 
Cumulatively, the sector has witnessed FDI inflow of just USD 5.9 billion between April, 2000 and March, 2011. "The reason for low FDI inflow in power sector is that there is a lack of politico-administrative support on containment of commercial losses, coupled with poor financial health of state utilities in addition to capped regulatory returns on equity," NTPC said in its 2010-11 annual report. NTPC is the country's largest power producer and has an installed capacity of 34,854 MW. Out of the total, over 28,000 MW are from coal-based projects. Looking at capacity addition of about 17,600 MW in 2011-12, the power sector is grappling with environmental hurdles, project delays and fuel supply issues. "Delays in land, forest and environmental clearances, resulting in cost escalation and availability of fuel are not only reasons for low inflow of FDI into power sector but also for delay in setting up power plants," the report noted. The sector attracted FDI of USD 1.25 billion in the last financial year as compared to USD 1.44 billion in 2009-10. Many power distribution companies are incurring huge losses, especially due to a mismatch between power tariffs and the cost of generating electricity. Estimates show that electricity distribution losses touched about Rs 70,000 crore in 2010-11. Other major concerns for the sector include constraints on power equipment manufacturing capacity and shortage of skilled manpower. The country's energy requirement at the end of 12th plan (2012-17) is projected to be 1,392 billion units. And to achieve this target, power generation has to rise at a Compound Annual Growth Rate (CAGR) of over 9 per cent. Power generation has seen a CAGR of 5.17 per cent from 2001-02 to 2010-11. The total installed capacity stood at 1,73,626.40 MW at the end of March 31, 2011, with state sector accounting for over 47 per cent share.

NTPC to stop bulk tendering for equipment

In an attempt to create a level playing field for all power generation equipment manufacturers in the country, state-run NTPC Ltd plans to opt out of the current practice of bulk tendering that includes conditions, which assures orders go to another state-owned firm Bharat Heavy Electricals Ltd (Bhel).
This assumes significance given the plans of India’s largest power generation utility.
NTPC currently has a power generation capacity of 34,854 megawatts (MW) and has projects totalling 14,088MW under construction. Equipment for 16,192MW is under the tendering process, with the firm targeting an installed capacity of 75,000MW by 2017 and 128,000MW by 2032. NTPC plans to award orders for equipment meant to generate 40,000MW during the 12th Plan (2013-17) for value of about R
 2 trillion.
“Going forward, we may place equipment orders for our projects even individually for specific projects,” said NTPC chairman and managing director Arup Roy Choudhury. “Bulk was a condition to attract foreign power generation equipment makers. There were also conditions to protect Bhel’s interests. Foreign players have come in. Going forward, we’re in the free market.”
Since the goal of encouraging local manufacturing has led to foreign firms setting up domestic joint ventures (JVs), there is no need for the earlier dispensation, according to NTPC. The move has also not kept the Chinese from competing with India’s biggest power equipment maker.
Bhel has been facing competition from Chinese power generation equipment manufacturers such as Shandong Electric Power Construction Corp., Shanghai Electric Group Co. Ltd, Dongfang Electric Corp. Ltd and Harbin Power Equipment Co. Ltd, both in the domestic and overseas markets. It posted a net profit of R
 6,011 crore on revenue of R
 43,337 crore in the fiscal ended 31 March. Bhel has an order book position of at least R
 1.64 trillion and an annual capacity of 15,000MW. It aims to become a $10 billion-plus firm by 2012.
“The purpose of bulk orders has been solved. Why should we wait for the orders to be clubbed and then place them,” asked another NTPC executive, who didn’t want to be named. “In the case of bulk tendering, we have to go to the cabinet every time. It is time-consuming. However, it does not mean that the Chinese will be allowed to participate in the bids as Central Electricity Authority has made it mandatoryfor a supplier to have a manufacturing base in India.”
Part of the Union government’s agenda for its first 100 days, the bulk order initiative included preconditions for the supplier to set up manufacturing facilities in India and partially safeguarded Bhel’s interests.
“The only benefit of bulk tendering was to encourage domestic manufacturing,” said Shubhranshu Patnaik, senior director (energy and resources) at Deloitte India. “In the long run, open tendering is good and has to happen at some point of time.”
NTPC has already floated two tenders for 20 supercritical units valued at R
38,000 crore, making it the largest such individual order in India. Boilers and turbines using supercritical, or very efficient, technology achieve high power plant efficiencies and economies of scale. The first order is for the supply of 11 boilers and 11 turbines of 660MW each. The second one is for supplying boilers and turbine generators for nine units of 800MW each.
These orders saw widespread interest from the private sector, with JVs being formed between Larsen and Toubro Ltd and Mitsubishi Heavy Industries Ltd; Toshiba Corp. of Japan and the JSW Group; Ansaldo Caldaie SpA of Italy and Gammon India Ltd; Alstom SA of France and Bharat Forge Ltd; BGR Energy Systems Ltd and Hitachi Power Europe GmbH, and Thermax Ltd and Babcock and Wilcox Co.
“This was a special dispensation only for these two tenders. After this we will have to compete for orders like everybody else,” said B.P. Rao, chairman and managing director of Bhel.

NTPC preparing back-up plan to avoid slippages in capacity addition targets

India's largest power generator, NTPC, is preparing a back-up plan to avoid slippages in capacity addition targets as some of its proposed new projects face obstacles such as gas shortage and legal tussles over tenders.
"Our first priority is our commitment to capacity addition. We will comply to both, the capacity addition target and the capex, which has been planned for the 12th Plan," Chairman Arup Roy Choudhury told ET.
NTPC's capacity addition would be crucial for India's target of adding 100,000 megawatts in the 12th plan because the state-run utility aims to add 25,000-30,000 mw of capacity in the five year period, accounting for 30% of India's target.
NTPC is exploring the option of expanding its power plants in case the plans to set up new projects fail. "If the 3,000 mw of gas project and the 6,000 mw of thermal don't happen, I have a parallel back-up. We will go ahead with brownfield expansions to make sure whatever we have committed is achieved," Roy Choudhury said.
NTPC had floated tenders for 20 supercritical units worth around Rs 40,000 crore. It first invited bids for 11 boilers and turbines, and later for supply of nine boilers and turbine generators sets.

Panel wants higher tariff for areas prone to power theft

In an attempt to accelerate reduction of transmission and distribution (T&D) losses in the power sector, a high-level government panel has recommended levy of a variable surcharge on power tariff with the impost to be higher in areas that report large-scale power theft.
The surcharge would vary from one sub-division to another within a distribution area, depending on the actual level of T&D losses.
Once implemented, the proposed system would ensure that consumers in high-theft areas pay a higher tariff than those living in areas where the incidence of theft is low. It is felt that this structure would also help in building public pressure to curb theft as often the activity also gets political patronage.
In its preliminary report, the Shunglu committee on the financial health of state power distribution bodies has recommended levy of a non-uniform loss surcharge by power regulators. Its quantum will vary from one area to other depending on the level of losses and the extent of theft. The idea behind the suggestion is that the issue of power theft cannot be just addressed by raising tariff in a distribution area but targeting the issue through strict monitoring mechanism and invoking a system that penalises such activities.
The panel, which made a presentation on the draft report to the Planning Commission on July 25, has also suggested a system of periodic evaluation of state regulators’ performance by independent experts to maintain a level of discipline in regulations and to ensure they are not colluding with state governments for providing a better projection of the health of distribution utilities.
The Shunglu committee is expected to submit its final report to the government by September. Its report will then form the basis of distribution sector reforms.
“The idea of a loss surcharge is great. But it will need a lot of consensus building by the government. The issue can also be discussed at the forum of regulators (a body of central and state level power regulators),” said an official of the Central Electricity Regulatory Commission (CERC).
Interestingly, Maharashtra adopted a similar tariff policy in 2005-06 but had to abandon it in the face of a strong consumer resistance. Since November 2008, the state is using loadshedding as a weapon to punish consumers in high power theft areas.