Coal prices may be corrected this month

Some analysts said the fact that the ministry is reviewing prices in the wake of protests is a pointer to a cut in prices or some sops for power producers

Coal prices may be “corrected this month”, a senior official in the coal ministry said on Monday, but did not specify if it could mean a downward revision as demanded by power producers.

“There could be a rationalization,” said the official, who did not want to be named. “It could be this month itself. The board of Coal India Ltd has to take a decision.”

Coal India, that supplies 80% of India’s coal, introduced a new gross calorific value-based pricing mechanism on 1 January, but consumers said the company also simultaneously raised the prices of coal by 5-20% in an opaque manner. On Friday, coal secretary Alok Perti said a meeting was held to review the prices, but he did not say if lowering them was being considered. “We are in discussions,” coal secretary Alok Perti had said after the meeting. “The gross calorific value-based system will stay. Our discussions are over pricing.”

Some analysts said the fact that the ministry is reviewing prices in the wake of protests is a pointer to a cut in prices or some sops for power producers. But there were also sceptics who said a cut in coal prices would be a surprise as prices in the global markets are on an upward trend. “There is an upward pressure coming from unavailability of coal and the fact that the deficit is imported,” said Shubhranshu Patnaik, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd. “Coal India’s prices are still 25-30% lower than international prices.”

Megawatt Show :West Bengal Attracts a Whopping 38K Crore of Investments From Power Majors

COAL India may be struggling hard to keep up its projected coal supply,but that hasn't deterred top power producers in West Bengal from collectively pumping in nearly a whopping 38K crore for setting up fresh generation capacities.The likes of CESC,NTPC,Damodar Valley Corporation,India Power Corp Ltd (IPCL) to DPSC are all on expansion mode in the state.

For instance,the RP-Sanjiv Goenka flagship CESC,which supplies electricity to Kolkata and adjoining areas,plans to emerge as a 7200 mw diversified generation-cum-distribution company over the next five years.It also has lined up elaborate plans to diversify into other modes of power generation.

So much so,CESC has roped in China's Shanghai Electric to supply boilers,turbines and generators (BTGs) for its 600 mw Haldia thermal project.The Chinese gearmaker will supply the BTG package at an estimated cost of 1,000 crore for a 600 mw thermal venture that will entail

3,250 crore of investment.Punj Lloyd,in turn,will supply the balance of plant (BoP) gear.The project,which requires 450 acres in the first phase,already has 420 acres in possession.All necessary clearances and the long-term coal linkage from Mahanadi Coalfields have come.The plant will be commissioned by mid-2014.

Apart from Haldia,CESC has taken up projects in Maharashtra,Chhattisgarh,and Bihar.Additional greenfield thermal projects are being envisioned in Rajasthan and Maharashtra.The utility is also exploring additional hydro projects in the Northeast and eastern India.

The countrys biggest power generation company,NTPC also plans to invest in two mega thermal projects in West Bengal.It is teaming up with the Railways in 74:26 JV to set up a thermal plant in Adra.It will be a 1320 mw plant that will be built on a 1300-acre plot owned by the railways.

NTPC has also decided to procure land and build a 1,600 mw thermal power project Katwa.Here,it will set up the plant over 1000 acres at an investment of about 8,000 crore.The state government acquired around 575 acres at the location while the remaining land will be acquired by NTPC.

Damodar Valley Corporation (DVC) is also about to execute 3,200 mw of fresh generation capacity at an investment of 16,000 crore.These include a 1000 mw plant in Duragpur,a 1,200 mw plant in Raghunathpur and a 1,000 mw station in Mejia.

Hemant Kanoria-controlled IPCL is also in the process of setting up 450 mw thermal power plants in Haldia.The project will entail an investment of roughly 2,475 crore.IPCL has acquired around 200 acres for setting up three 150 mw units.We have recently placed the order for boilerturbine-generator for the plant to Bhel.The order for (BoP) equipment has been awarded to Bharat Forge.It is expected to start generation by July 2013.

This apart,DPSC Ltd is in the process of setting up two 270 mw units in Raghunathpur.We had acquired about 155 acres for the Raghunathpur plant and the rest is being bought from locals.The order for boiler-turbine-generator for the plant has also been placed with Bhel.The plant is expected to start generation by 2014.

Coal supplies have also been secured for both the projects.We plan to import around 60 per cent of the coal requirement for the Haldia project, said Kanoria.

REC may raise Rs 4K cr via tax-free bonds

Rural Electrification Corporation (REC) plans to raise close to Rs 4,000 crore through tax-free bonds by the end of March. The power sector lender would be looking to use the unissued portion of Indian Railway Finance Corporation (IRFC)’s tax-free bonds.

"We are hoping to raise the residual amount after IRFC finishes raising the money it requires through these bonds. The balance amount should be around Rs 4,000 crore," said a senior REC official. IRFC’s tax-free bond issue closes on February 10.

The finance ministry has allowed IRFC to raise up to Rs 10,000 crore through tax-free bonds by March. The infrastructure finance company is raising Rs 5,000 crore through these bonds, while Rs 1,300 crore was raised from institutional investors.

"We may issue tax-free bonds by March-end if the government approves, as IRFC may not exhaust the total amount it is authorised to raise," the official said.

In Budget 2011-2012, four infrastructure finance companies were allowed to raise money through such bonds. IRFC and National Highways Authority of India were allowed to raise Rs 10,000 crore each, while Power Finance Corporation and Housing and Urban Devel-opment Corporation were allowed to raise up to Rs 5,000 crore each by March.

The government-controlled non-banking financial company is pushing its case to issue tax-free bonds before the end of this financial year. "We are in the final stages of our talks with the finance ministry to secure the approval to raise money through tax-free bonds, and are hoping we would get the permission," the company official said.

So far this year, power sector companies has raised a total of Rs 22,000 crore through domestic and foreign sources of funding. "Tax-free bonds are a great source of funds in the domestic market, and have received good response from investors," the official said.

Additional power target could be 100,000 MW for 12th Plan

The government may fix the power capacity addition target at around 100,000 MW for the 12th Five-Year Plan period (2012-2017).

The Power Ministry had proposed a capacity addition target of 100,000 MW to the Planning Commission, which is likely to accept the proposal.

"Final call would be taken by National Development Council, it may be between 90,000 MW and 100,000 MW," B K Chaturvedi, Member Planning Commission, told reporters on the sidelines of the India Energy Congress.

The government had set a target of 78,577 MW during the 11th Five-Year Plan period, which was curtailed to 62,000 MW by the Planning Commission in its mid-term review citing coal shortage and environment reasons.

According to sources, the Power Ministry may only be able to achieve up to 52,000 MW capacity addition by March, 2012.

Consensus on levying import duty on power generation equipment

The move may specifically affect Chinese firms manufacturing power equipment

India’s ministries of heavy industry and power seem to have arrived at a consensus on the contentious issue of levying an import duty on power generation equipment, a move that may specifically affect Chinese manufacturers of such machinery and Indian power companies that are looking to place orders with them.

The minister for heavy industry, Praful Patel, said a consensus had emerged between his ministry and the power ministry on the issue and that he would be discussing it with Prime Minister Manmohan Singh soon.

Indian equipment makers have been lobbying for a duty on what they say are cheap imports of Chinese equipment but the issue soon became an inter-ministerial one with several differences of opinion.

On 8 November, commerce secretary Rahul Khullar said a compromise formula had to be worked out because of these differences.

“Both the power ministry and my ministry have agreed on the fact that there should be some import duty,” Patel said Monday, adding that he had met power minister Sushilkumar Shinde earlier in the day.

“Companies such as Bhel and L&T are at a specific disadvantage. Imports should not be disallowed but there is a case for (the Indian) power industry to have a level-playing field,” Patel said.

Bharat Heavy Electricals Ltd (Bhel) and Larsen and Toubro Ltd (L&T) have been lobbying the government to limit Chinese competition. State-owned Bhel has been facing competition from Chinese power generation equipment firms such as Shandong Electric Power Construction Corp., Shanghai Electric Group Co. Ltd, Dongfang Electric Corp. Ltd and Harbin Power Equipment Co. Ltd, both in domestic and overseas markets.

Mint had reported on 25 November that the power ministry had proposed imposing a 5% tariff on such imports. Planning Commission member Arun Maira had recommended a 10% customs duty and a 4% special additional duty on power generation equipment imported from China to strike a balance between protecting local manufacturers and the need to import equipment to boost power production. A committee of secretaries (CoS) recommended a 5% import duty on power equipment imports from China apart from a 10% countervailing duty and a 4% special additional duty.

Power generation equipment makers having a manufacturing base in India stand to benefit from such a move. They include Bhel, Doosan Heavy Industries and Construction Co. Ltd, and the joint ventures between L&T and Mitsubishi Heavy Industries Ltd; Toshiba Corp. and 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.

Power utilities have placed orders for overseas equipment largely because of the inability of local manufacturers to meet growing demand. Chinese imports are relatively cheaper because equipment makers from that country benefit from low interest rates and an undervalued currency. Undervaluing the currency makes exports cheaper and increases demand for products.

In another development, Patel said that the equipment for ultra mega power projects (UMPPs) should be sourced through international competitive bidding.

Each UMPP has a capacity of 4,000 MW each and it is for the developer to finalize the procurement of equipment. The government wants to set up 16 UMPPs to meet the needs of the world’s fastest-growing major economy after China.

India’s move to curb Chinese power equipment imports comes at a time when the two countries have been discussing ways to double bilateral trade to $100 billion by 2015 and to plug a yawning trade gap in China’s favour.

NTPC expresses concern over CIL’s pricing formula

State-run power major NTPC has joined the chorus of voices opposed to CIL’s new coal pricing mechanism, asserting that it could lead to an increase in its generation cost by about 40 per cent.

The power generation cost of NTPC could go up by about 40 per cent on account of the new pricing system, NTPC CMD, Mr Arup Roy Chaudhary, told reporters on the sidelines of the India Energy Conclave here today.

Power producers are opposed to the CIL’s new pricing mechanism implemented from January 1 based on the gross calorific value (GCV) of coal, saying that this has increased the prices of certain grades by up to 179 per cent.

Till December 31, 2011, Coal India followed a pricing mechanism based on the Useful Heat Value (UHV) of coal, which deducted ash and moisture content from the standard formula.

However, unlike the UHV pricing methodology, in which coal was categorised into seven grades, the GCV-based system has 17 grades and the new prices have been fixed accordingly.

Meanwhile, CIL’s board is likely to review the prices to rationalise them after the Coal Ministry took a decision to correct the prices at a meeting last week.

NTPC may sign pact for Bangla project by month-end

State-run NTPC expects to sign a joint venture agreement for the 1,320-MW Khulna power project in Bangladesh by the end of this month.

“The project would be a 50:50 joint venture between NTPC and the Bangladesh Government. We expect to sign the joint venture agreement for Bangladesh project by January 29,” the company CMD, Mr Arup Roy Chaudhary, told reporters on the sidelines of the India Energy Conclave today.

NTPC and Bangladesh Power Development Board (BPDB) had signed a memorandum of understanding (MoU) in August last year to establish two thermal power projects at Chittagong and Khulna for mitigating power shortages in the neighbouring nation.

The power plants are likely to come up at an investment of around Rs 13,200 crore. The coal-fired power plants are likely to be installed on a 50:50 equity basis to be run on imported coal and operated by NTPC.

About the 500-MW project in Sri Lanka, Mr Chaudhury said financial closure for the same is expected to be achieved by September this year. Construction of the project is likely to start by April next year.

A 50:50 joint venture company between NTPC and Ceylon Electricity Board, Sri Lanka, was incorporated in the name of Trincomalee Power Company Ltd on September 26 last year in Sri Lanka that would set up a 2x250-MW coal based power project in Trincomalee region.

NTPC to take up another mega project in South

NTPC Ltd, the country's largest power company with an installed generation capacity of 36,000 MW, continues to expand. It is planning to take up another mega project in South along with the 4,000-MW Kudgi project in Karnataka, during the XII Plan itself instead of the XIII Plan.

With an operating capacity of 4,450 MW in the Southern region, it is executing expansion projects at Simhadri near Visakhapatnam, Ramagundam in Andhra Pradesh, Kudgi in Karnataka, Kayamkulam in Kerala, and is planning another mega project, a 4,000 MW plant at Pudimadaka close to Visakhapatnam.

The Regional Executive Director of NTPC, Mr R. Venkateswaran, toldBusiness Line, “The Andhra Pradesh Government is keen that we take up another mega project near Visakhapatnam. While NTPC was looking at considering this project during XII Plan (2012-17), the keenness shown by the State is encouraging us to consider it ahead of planned schedule.”

Outlining NTPC progress in South, Mr Venkateswaran said supply of coal and gas continues to be worrisome. These require a long-term perspective approach. Excerpts:

How is the expansion plan of NTPC South progressing?

Overall at NTPC, we are looking at increasing the capacity to 1,28,000 MW by 2032 with projects defined for each Plan period. In South, we now have a capacity of about 4,450 MW. We plan to increase this to about 10,000 MW. The expansion projects include, 3x800 MW phase one at Kudgi in Karnataka, another 500 MW expansion, part of the phase II at Simhadri, and 3x500 MW project at Vallur and about 1050 MW at Kayamkulam. We are looking at augmenting two units of 650 MW each at Ramagundam in Andhra Pradesh. This could also be 2x800 MW. A decision on this would be taken up soon.

The Andhra Pradesh Government is encouraging us to expedite another mega project close to Visakhapatanm. There is land and sea water could be used.

The unit one of 500 MW at Vallur is ready. Once coal washery is ready, we would be able to take up generation. The fourth unit of 500 MW at Simhadri is also close to commissioning.

What is your engagement with Singareni Collieries project?

NTPC has been engaged by the Singareni to guide them through the implementation of a 1200-MW thermal power plant in Adilabad. There is no problem for land and water and the coal requirement could be addressed by pithead mines.

Kudgi mega project awaits Environment Ministry nod

NTPC Ltd's first ultra-mega power project (UMPP) of 4,000 MW, coming up at Kudgi in Bijapur district of Karnataka, is all set to award contracts for the first phase of 3 by 800 MW once it secures nod from the Ministry of Environment and Forests.

“The investment for the Rs 15,166-crore phase-1 project has been approved, the tenders for the project have been shortlisted. Within days, we are expecting nod from the MoEF,” Mr R. Venkateswaran, Regional Executive Director, said.

Speaking to Business Line, Mr Venkateswaran said this is the first thermal plant in the South to deploy supercritical technology, and the first UMPP conceived by NTPC.

All the elements for the project have been tied up, with the Karnataka Government sanctioning 5.2 thousand million cubic ft from Almatti dam, about 18 km from the plant site. The coal for the project will be brought by rail from Mandraigarh Coal Fields of South Eastern Coalfields Ltd, about 1,700 km from the project site.

In this project, the company plans to blend imported coal procured from Goa with domestic coal. According to plans, the first unit is expected to be operational within 58 months from the date of contract and subsequent units six months thereafter

Tata Power in talks to buy stake in MEC Coal

Tata Power is in talks to pick about 15% stake in MEC Coal, the Dubai-registered company that owns more than two billion tonnes of coal reserves in Indonesia, said a person familiar with the development.

The Tata Group subsidiary, which the source said is negotiating with MEC co-promoter Ras-al-Khaimah Investment Authority, is keen on augmenting its foreign coal assets to reduce power generation costs at its plants in India, where fuel shortage often leads to outages.

"Negotiations are in early stages and may or may not result in a transaction. But Rasal-Khaimah has been keen on having an Indian partner in the coal mining project," the source said on condition of anonymity. It is, however, unclear whether Ras-al-Khaima has approached other Indian companies too.

While a spokeswoman for Tata Power declined to comment on the issue, queries sent by ET to MEC Coal executive vice-chairman Madhu Koneru, who is also head of co-promoter Trimex Group, remained unanswered.

MEC Coal is developing coal concessions in Indonesia, along with an integrated heavyhaul rail transportation system and ship-loading jetty in the East Kalimantan province. The coal railway project is estimated to cost about $1 billion.

The source said the a deal would include a provision for an offtake arrangement. If the deal goes through, it will be the second time the Tatas will be buying stake in Indonesian coalmines.

The group already owns 30% in mines promoted by the Bakrie Group, one of Indonesia's biggest business houses. Tata Power managing director Anil Sardana had recently said the company was keen on building power plants in Indonesia and Africa to grow its business, which has been capped by a shortage of coal in the country. The company currently has a capacity of 3,797 mw, and is aiming to raise it to 25,000 mw by 2015.

Shortage of coal and natural gas in the country and problems with land and environment clearances have prevented power generators from setting up new plants and operating at full capacity to meet the country's growing demand for electricity. To bridge the raw material gap, most power producers are forced to import costly coal, but cannot pass on the full cost differential to customers.

"Indian companies are ready to acquire mines in Indonesia, despite the country's move to impose a tax on coal exports, as captive mines will ensure smooth supplies and insulate against price fluctuations," said PricewaterhouseCoopers senior consultant Pukhraj Sethiya, who has handled mandates from Indian companies to scout for opportunities to build power plants overseas.

The South-east Asian nation recently brought in legislations that discourage foreign ownership in mines and is now scheduled to implement a draft legislation by 2014 which will require miners to carry out minimum processing on minerals before exporting.

Indian companies are looking at Indonesia, among other countries, to source coal, after encountering supply issues in India. The lone state-owned coal producer, Coal India , has not been able to expand capacity.

Govt mulls capping price of captive power: Report

The government is looking at capping the price of electricity produced from captive coal to ensure that power producers do not reap "super normal" profits, says a research report.

Global research firm Macquaire prepared the report after its recent meetings with various stakeholders of the power sector, including government officials.

"The government is also mooting the idea of capping power prices based on captive/regulated coal to avoid super-normal profits by generators," it said.

According to Macquaire, the Power Ministry's idea is unlikely to be enforced retroactively but would be enforced for future projects.

The power sector is grappling with multiple woes including fuel shortages, which is hurting capacity addition plans. Going by official data, about 20,000 MW of captive power capacity is connected to the national transmission grid. Companies spread across diverse sectors including Hindalco are into captive power generation.

"Regulators and industry participants are cautiously optimistic about the future prospects, driven by recent policy actions/proposals on revising tariffs," the report said.

Meanwhile, faced with spiralling coal prices, some private players are looking to renegotiate their existing power purchase agreements (PPAs) to reflect the higher fuel costs.

Regarding the same, Macquaire said the government has no intention to intervene in the PPAs signed by power producers so far.

"The ministry representative was of the view that central government is unnecessarily being dragged into arbitration as PPAs provide for renegotiation between seller and buyer. So power companies and state governments are free to enter into these negotiations," the report noted.

The country is expected to see a capacity of about 52,000 MW in the current five-year plan (2007-12), much lower than the revised target of 64,000 MW.

Sanjaya Baru: Energising growth

Electricity underpins modern civilisation, as Daniel Yergin points out in his impressive classic on the human quest for energy security. (The Quest: Energy Security and the Remaking of the Modern World, Penguin Press, New York, 2011.)

By this measure, not only do large parts of India reside outside the pale of modern civilisation, even the most upmarket neighbourhoods in urban India routinely slip into the dark ages!

The relationship between energy and development is obvious, direct and significant. Energy security is, therefore, fundamental to national development and national security. Every single aspect of national policy is shaped by the choices we make about energy — its sourcing, its pricing, its utilisation and so on.

Yet, in India, there is no national consensus on what constitute the key elements of energy security. Does subsidising power consumption contribute to national security? Is the policy on coal mining or on hydroelectricity or on nuclear energy, or on oil and gas pricing, defined by India’s national security and national interest?

Nowhere is the absence of political consensus on policy in India as damaging to the national interest as in the case of the power sector. What is even more disturbing is the fact that even within the government, there appears to be no consensus on energy policy and security. Different ministries pull in different directions.

Mindful of this problem, Prime Minister Manmohan Singh constituted an Energy Coordination Committee (ECC) in July 2005 to, among other things, “identify key areas requiring energy policy initiatives, so that the overall objectives of economic development, energy security and energy efficiency are met; monitor vulnerabilities that directly impinge on energy security aspects; outline the follow-up action needed for implementing identified policy initiatives; identify institutional mechanisms for implementing policies; periodically monitor key policy decisions”.

India has several ministries dealing with different aspects of energy, with different ministers pursuing different, even conflicting, agendas. There are different ministries for power, oil and gas, coal, water resources, renewable energy and so on. Then there is a minister for environment and forests with powers to block the functioning of all those charged with ensuring energy security.

It was to address this challenge that the press statement announcing the creation of the ECC said: “The ECC will formulate a coordinated policy response cutting across ministries so as to improve the overall energy scenario in the country while addressing energy security concerns. The ECC will enable the government to take a holistic view of India's energy needs and policy options.”

In the UPA government’s second term in office, the ECC has never met, or at least there is no public record of any meeting. So it was not surprising that when the entire power sector found itself pushed to the wall, and India began to stare an impending power crisis, it took the initiative of an industrialist, Anil Ambani, to mobilise not just power companies but the entire membership of the ECC.

A new committee, to be chaired by the principal secretary to the prime minister, will now bring different ministries into line to ensure that power sector concerns are addressed. This sounds like the old ECC at the level of secretaries rather than ministers.

Getting new power projects back on track is the first step towards addressing India’s energy security challenge. Getting existing ones to function at full capacity is a second challenge and that too is related to coal and other linkages. Equally, there is the challenge of tapping hydroelectricity and nuclear power. On both fronts, political constraints have emerged that need to be overcome.

The pricing of oil and gas is another policy challenge that the government has to grapple with sooner rather than later. Non-decision is holding up new investment. In the case of petroleum, diesel, kerosene and LPG, it is also contributing to the problem of fiscal management as well as that of energy efficiency.

While these are domestic energy security challenges, India has external energy security challenges as well. These relate to sourcing oil and gas as well as sourcing hydroelectricity. Addressing this challenge requires taking initiatives in foreign policy and regional security, with an eye on energy security.

To be sure, till last week’s meeting of the prime minister with investors in the power sector, the only evidence of policy activism was on the external front. The visits to West Asia from India’s national security advisor had an energy security dimension.

Mr Yergin’s thesis that the quest for energy security underlies much of what has been happening in the realm of international relations through most of the 20th century is underscored by this diplomatic activism of India and China, both rising economic powers, in the pursuit of their energy security.

These domestic and external policy initiatives are all aimed at addressing the problem of energy security from the supply side. The problem also requires addressing from the demand side. Here, getting prices right is the most important policy challenge for India.

The most important part of the prime minister’s New Year Message, issued on December 31, 2011, is his statement on energy security. He identifies both the domestic and external dimension to energy security. First came the message and then the meeting, suggesting that energy security has come to the fore in the prime minister’s policy agenda. It must remain there till the challenge has been overcome.

Arijit Maitra: The one megawatt conundrum

Open access in the power sector, which the government operationalized recently, can be a game-changer for large consumers only if critical changes are made to power trading platforms and regulators put some key checks and balances in place.

When the ministry of power issued a letter on November 30, 2011 operationalising open access in the power sector, it was considered a possible game-changer in power sector reforms. Open access was a major cornerstone of the Electricity Act of 2003. It was introduced to ensure large electricity consumers choice and cheaper power via open access to their local distribution company’s wires.

Can this actually happen? The question rests on a host of practical issues that need to be considered before open access can truly create the kind of open market in power that the Electricity Act aimed at. It took eight years to actually get started when the ministry of power sent its November 30 letter titled “Opinion from M/o. Law and Justice on the operationalisation of open access in power sector”, to all electricity regulatory commissions, state governments and the state power utilities.

The stand projected in the letter is twofold: (i) that consumers with demand exceeding one megawatt (Mw) are perforce required to draw supplies from sources other than their local distribution company; and (ii) even if these consumers do continue to draw electricity from the local distribution company (discom), the rates must be negotiated between the two and, therefore, the state electricity regulatory commissions must cease to determine the retail energy tariffs by restricting themselves to determining only the wheeling charges and cross-subsidy surcharge.

The letter requests the recipients to take the necessary steps for implementing these two provisions, in effect, operationalising open access in the power sector.

All that is very well, but the first question is: where is the power? The amount of power available from traders and the two power exchanges is meagre. Moreover, the two power exchanges currently provide a platform for transactions on only a day-ahead basis where delivery of power takes place the day after the bid is placed. The weekly contracts require that the contracted amount of power be available for a week. That would leave a huge gap to be supplied through bilateral contracts with generating stations.

Assuming that executing bilateral contracts would be a cakewalk for all these consumers, there is a strong possibility that they would be left in the lurch when generating stations stop operations for any reason, as they frequently do. If, as the ministry has suggested, there is a cessation of the relationship between these consumers and their local discoms, these consumers cannot demand the supply of backup power or standby power from the discoms. The local discom, therefore, may need to be designated as the default supplier in contracts with generating companies.

Also, it will require regulators with extraordinary expertise to streamline the mostly unscientific basis on which power tariffs are fixed by the state electricity boards. If negotiating rates is the new mantra, there is reason to doubt whether these utilities have the necessary expertise to design the rates on an economic basis in the first instance so that meaningful negotiations with the one-Mw consumers can take place. Moreover, the negotiated prices arrived at should not be higher than that the regulators would have determined.

Besides, according to the Statement of Objects and Reasons of the Electricity Act, 2003, Parliament intended to restrict the provisions of Section 49, which deals with “agreements with respect to supply and purchase of electricity”, to a transaction between the consumer and a generating company or a trader. In any case, without the separation of wires and supply functions, how can consumers negotiate rates with their local discoms?

Some consumers may choose to buy cheaper power using open access during certain times of the day or night. This, however, introduces a degree of uncertainty in the long-term power procurement planning of discoms. Outbound one-Mw consumers may have to shell out additional charges to offset the liquidated damages and penalties under the stranded power purchase agreements of the discoms.

It follows from this that (i) the cost of power from sources other than the local discom would need to be aggressively low; (ii) the power exchanges would need to introduce long-term (fortnightly, monthly, yearly) contracts and hence approach the Supreme Court of India to let them introduce these long-term contracts by disposing of urgent civil appeals from the Forward Market Commission which has claimed sole jurisdiction on contracts for which payment and delivery is beyond 11 days; (iii) the discoms need to continue standby support and universal service obligations to one-Mw consumers; and (iv) regulators need to build a safety net for these consumers.

Though no one can be forced to take open access, the ministry’s letter would surely force the state electricity boards and the state power utilities to provide open access on demand. But it is only if the checks and balances discussed here are in place that open access can surely be the game-changer it was intended to be.

R Power hopeful of government clearance for Chhatrasal coal block

Anil Ambani-led Reliance Power today said it is hopeful of receiving government approval for excavation of coal from the Chhatrasal mines, even though a committee of the Ministry of Environment and Forests has denied permission on ecological grounds.

The Chhatrasal coal block in Madhya Pradesh is a part of Reliance Power's Sasan UMPP.

"We understand that the issue of forest clearance for Chhatrasal coal blocks, among other mines, is being looked into by a Group of Ministers and we are hopeful of a positive outcome on the matter," Reliance Power informed the BSE.

The company also said the 3,960-MW (6x660MW) Sasan project is progressing well and is expected to be commissioned in January, 2013.

"The Moher and Moher-Amlori extension coal mines allotted to the Sasan UMPP have received all environment and forest clearances and these mines are being developed to commence production this calender year," the company added.

The Forest Advisory Committee (FAC) of the Ministry of Environment (MOEF) and Forests has denied approval for forest land diversion for developing the Chhatrasal coal block, citing that over 965 hectares of forest land that falls in the mining area has good quality forests.

The decision was taken at the FAC meeting held last month and at that time, the panel observed that the "legal status of the forest land proposed for diversion is a reserved forest".

Reforming India's power sector

Power utilities should be reformed and enabled to emerge as a viable, credible, vibrant and professional entity.

Power utility management should change from a generation-led augmentation to a distribution/delivery-led alternative.

The December 11, 2011, edition of The Hindu carried an article “The coming Dark Age of India”, which inter alia said: “We need to cut down on transmission and distribution losses and untangle the environmental problems that coal mining has run into. Policymakers have to balance the needs of development with environmental considerations. But for some urgent steps from the government, the country may well return to the Dark Ages, literally.”

Prime Minister Manmohan Singh seems to have responded by convening a meeting of top power sector honchos on January 18, to discuss India's power crisis and the stalled ‘power sector reforms'. The list of invitees reads like the who's who of India's mega-industry/business.

As usual, corporate big-wigs and government leaders are besieged only with the supply side of power sector. They are concerned with the issue of “uncertainty” due to shortage of coal and shortfall in the allocated gas from the Krishna-Godavari Basin, which had put a question mark on the future of many power generation projects. As proof, they have pointed out that 4,000 MW of power capacity was lying idle in the absence of gas supply.

TWO AILMENTS

In the perception of these decision-drivers and makers, just two things ail the power sector — first, a conundrum regarding fuel and second, the mess created by the inability of power utilities to charge consumers the right price for the electricity they consume, leading to losses. These two ailments have led to a major financial mess, and according to a CRISIL report, the total debt of state electricity boards and distribution utilities touched a huge Rs 3-lakh crore as of March 31, 2011, and is mounting. That report estimates that as much as a third of the 56,000 MW of thermal generation capacity is in trouble due to the combined impact of fuel and financial problems.

And ‘market-moghul' Montek Ahluwalia has an instant reform-solution for this. In his recent report to the Prime Minister, he has sought revision of power tariffs to reflect higher international coal prices, as a large number of power projects, including ultra mega power projects under implementation, have run into serious ‘viability problems'. The report also suggests acceleration of ‘open access' in the power sector.

Even in 2005, after a ‘reality-check' on the power sector, the Planning Commission, headed by Mr Ahluwalia, had admitted that though there have been a number of experiments in electricity reform, including the one fashioned by himself in the mid-90s, none of them had established “a viable model”. The approach document of the 11th Five Year Plan said this: “Shortage of electric power and the unreliability of power supply are universally recognised as a drag on the pace of India's development… If India is to attain 8.5 per cent growth in the 11th Five Year Plan, uninterrupted power supply is a must; so it is widely accepted that power reforms are urgently needed in the country”.

‘Power reforms', unveiled by Mr Ahluwalia, envisaged dismantling and unbundling of State Electricity Boards (SEBs) to form several companies centred on Generation, Transmission and Distribution, and progressively privatise these unbundled organisations. This model has been a disappointing failure and the reasons identified are: ‘Single–buyer' model; chain of monopolies; total absence of competition; non-separation of carriage & content; flawed regulatory framework, and cost plus year-to-year tariff setting.

TUNNEL VISION

‘Open access' has been Montek Ahluwalia's favourite panacea for all these evils, and he himself describes it: “Allowing generating companies to sell directly to distribution companies and bulk consumers, thus creating a competitive market where producers could take investment decisions based on demand, without relying on power utilities or the State Government. This would bring electricity at par with other goods and services, where competition and market forces determine efficiency levels, investments and pricing”. He had suggested that giving ‘open access' and copious supply to miniscule bulk consumers of 1 MW and above would ‘empower' the people and transform India's power sector. What a ‘tunnel vision'!

Treating electricity at par with ‘other goods and services' reflects a deficiency in understanding electricity as a commodity, and the profile of its consumers. Unlike telephones or civil aviation, where the consumers are well-heeled, electricity is a product, which even the poor use for basic comforts, as well as earning a livelihood. Furthermore, it is doubtful if the targeted beneficiaries of open access — large industries — would really benefit. Given the chaotic distribution system, acute shortage of power and poor system reliability, it is highly doubtful if the open access would remain open at all.

Given this situation, how can power utilities be reformed and enabled to emerge as a viable, credible, vibrant and professional entity making them perform the essential tasks of delivering adequate, reliable, cost-effective and good quality power to its consumers just by sorting out coal supply, augmenting generation, enhancing tariff and accelerating open access? This, indeed, is the tragedy.

UTILITIES

Even in the case of electric power, any increase in generation capacity is more than offset by inefficiencies and wastage at every stage — production, transmission, distribution and delivery. Without fixing these inefficiencies and wastage, increasing generation capacity and production is like filling a bucket full of holes! The first and foremost task should be to fill these holes, which is very much doable.

For this, the basic philosophy of power utility management should undergo a sea-change and move away from generation-led augmentation mindset to distribution/delivery-led optimisation alternative. Distribution refers to conveyance of electricity through wires, transformers, and some other devices that aren't classified as transmission tools.

This is, by and large, an engineering function. Delivery services are to facilitate retail customers to receive quality electric power from the supplier, and include metering, meter reading, billing and collection. This is more of a commercial/consumer-related function. Between these lie the major ills that afflict the power utilities in India.

Power distribution/delivery network is full of constraints and is clumsy to the core. The ills of the system are many — ill-trained workforce, poor reliability, high line losses, low voltage profiles, overloading of transformers, poor maintenance, absence of conservation measures, power theft, haphazard layouts, whimsical load connection, inadequate clearance, etc.

These ailments can be remedied by creating a comprehensive consumption profile in each utility — shift-based industries, continuous process industries and industries having independent feeders; irrigation tube wells; peak load requirement; domestic connections; essential and emergency services. The next step is to design a state-of-the-art distribution system and streamline delivery mechanism to meet the specific need of each consumer category. Legal and regulatory compliance with regard to cost-to-serve and Transmission and Distribution (T&D) losses is another imperative.

Before its formal withdrawal from India's power sector reforms in 2002 after spending billions of dollars, Mr James Wolfensohn, then President of WB, had specifically mentioned “uneconomical running of power plants” and high “line losses” as the main reasons for poor performance.

Even today, these two continue to be the ‘monumental realities' of ‘inefficiency and wastage' in India's power sector. Merely tinkering with coal supply, open access and tariff increase, instead of confronting these ‘realities' is like ‘missing the woods for the tree'

NTPC plans to foray into power distribution

State-run power producer National Thermal Power Corposration (NTPC) plans to foray into power distribution across the country in a big way.

The company has already started internal discussions on the plan, expected to be finalised in medium future.

“We are exploring the business model for entering power distribution, whether to become a licensee or go for a franchisee route. Besides, we have also started looking at the related opportunities in various states and we will soon start discussions with the state governments on this,” a senior official from NTPC told Business Standard.

However, no investment has been earmarked for the new venture. “The investment proposal will be made according to the available business opportunities. This move will help NTPC in forward integration in energy chain,” the official said.

Entering into new stream of business will be done through its wholly-owned subsidiary NTPC Electric Supply Company Ltd (NESCL).

To begin with, NESCL has already formed a joint venture last year with Kerala Industrial Infrastructure Development Corporation to take up retail distribution of power in various industrial parks developed by it, SEZs and other industrial areas in the area. The JV company — KINESCO Power and Utilities Pvt Ltd — started its operations in February last year. It is also looking to distribute power within 5-10 km across all its stations.

NESCL, set up in 2002, provides turnkey execution of sub-stations and sub-transmission systems and consultancy for project management to utilities. It also sets up networks for supply of electricity in 5 km area around central power generating stations of NTPC.

The company has been planning to enter the power distribution segment for quite some time, but did not have any success earlier. It had earlier proposed to set up distribution networks in Kanpur, Patna and Mangalore among others, but the plan could not fructify.

NTPC, currently, has a capacity of 36,000 Mw. The target is to take the total capacity addition to 66,000 Mw by the end of the 12th Plan.

Adani Group to sport a new-look soon

Gautam Adani-promoted Adani Group has decided to don a new corporate identity soon and has roped in England-based brand consultancy Wolff Olins to do the job. The Adani Group is into ports, power, coal mining, and agri business apart from an SEZ and a shipping-line, called Adani Shipping, with six vessels.

We'll soon have a new corporate identity and tagline. The Dubai office of the England-based creative agency Wolff Olins has been mandated to work on this image makeover," Adani Power Chief Executive Ravi Sharma told PTI.

However, he refused to give a time-frame for the brand makeover and the investment details. He also refused to share whether the company will have a new name after the makeover.

A part of the Omnicom Group since 2001, Wolff Olins was set up in 1965 and is a brand consultancy and creative agency with offices in London, New York and Dubai and employs 150 designers, strategists and account managers.

Meanwhile, the group's flagship Mundra Port and SEZ has renamed itself as Adani Ports & Special Economic Zone after an extra-ordinary general body meeting of its shareholders accepted the proposal on December 31.

The group operates ports at Mundra, Dahej, Hazira (all in Gujarat), coal berths in Goa and Visakhapatnam, and a coal terminal in Abbot Point in Australia and is investing around Rs 20,6700 crore in these projects. But its bids for the port projects in Chennai and Vizhinjam were recently rejected.

But despite these reversals, Group Chairman Gautam Adani has drawn up an ambitious growth plan for 2020, which has the group targeting to mine as much as 200 mt coal, achieve a cargo handling capacity of 200 mt, produce 20,000-mw electricity and acquire 20 large ships, all by 2020.

"The shipping venture will see us investing about $1.4 billion in 14 ships by 2020, Mudra Port & SEZ Director Rajeev Sinha told PTI.

According to company insiders, Adani has a fetish for the number 20 and hence the 2020 businesses target.

When contacted, Sinha said, "We also read from media that the Home Ministry has denied us security clearance. We are yet to hear from the ministry."

In fact, the group's port business received two severe setbacks in as many weeks. On December 30, the Chennai Port rejected its Rs 3,700-crore bid for a mega container terminal project, citing very low revenue share offer (5%), despite being the sole bidder.

The second setback came within the next week when the Union Home Ministry denied security clearance to participate as the operator of the Rs 7,800-crore Vizhinjam Port last week, this is despite fact it had for ok from defence and foreign ministries.

Both these development have raised questionmarks about Adani's ability to raise his cargo-handling capacity to 200 mt by 2020 from 75 mt now.

The Vizhinjam denial is the third security clearance refusal to the port in the recent past. Since November, 2010, Adani Ports has been denied security clearance by the Union Home Ministry to bid for projects such as the fourth container terminal at the JNPT, a project to mechanise iron ore loading facilities at the Vizag Port and now the Vizhinjam Port.

It can be recalled that the group took the government to court after it was refused permission to bid for the fourth container terminal at JNPT in 2011. But the Bombay high court ordered the Group to withdraw the plea and directed it to move the Shipping Ministry to resolve the issue.

The only saving grace was its successful bid for the Kandla Port in December to build a cargo-handling project, as it was granted the Home Ministry clearance, given before November, 2010.

Its power vertical is also not in the pink of health, as it had to late December shelve execution of its three projects, with a combined capacity of 6,500 mw, for a want of coal supply.

"We have decided to go slow with our three power projects -- Chhindwara in MP and Dahej and Bhadreshwar in Gujarat--for want of coal linkages, which together have a capacity of 6,500 mw," Adani Power chief executive Ravi Sharma had said.

Adani Power, which is the largest coal-based private utility in the country, has an installed capacity of 3,300 mw in Mundra in Gujarat and plans to add another 6,000 mw by March, 2012 and 10,000 mw by 2013, Sharma had said. The company has set a target of having a capacity of 20,000 mw by 2020.

Last year, the Group had acquired stakes in Australia's Galilee coal mines for $2.7 billion and Abbot Point Coal Terminal for $2 billion, thus joining a growing number of domestic companies acquiring overseas mining assets. Last week, the company had commissioned a 40-mw solar power project in Gujarat and has plans to expand the solar capacity to 100 mw.

Tata Power’s Mundra UMPP begins generation

Tata Power has said that the first 800-MW unit of the Mundra Ultra Mega Power Project (UMPP) has started power generation.

“Tata Power’s Mundra UMPP has successfully synchronised India’s first 800-MW super critical unit 1 at Mundra,” the company said in a statement today.

The project at Mundra in Kutch district of Gujarat, shall have five units of 800 MW each, generating 4,000 MW of power using supercritical technology.

The first unit was slated to be ready for commissioning by September 2011.

Power Finance Corporation, the nodal agency for these UMPPs, has so far awarded four such projects. The other three projects — Sasan (Madhya Pradesh), Krishnapatnam (Andhra Pradesh) and Tilaiya (Jharkhand) — have been bagged by Reliance Power.

The Tata Group firm, which currently has a power generation capacity of 3,797 MW, has plans for 25,000-MW capacity by 2017. Of this, 4,000 MW will come from Mundra.

Ministry respite for power projects facing termination of coal supply

Power projects of 30,000 MW capacity that are staring at termination of coal supply linkage after missing key implementation milestones may get a breather.

The coal ministry has decided against using penal provisions against these developers on a unilateral basis.

The ministry has taken the view that the issue be left to the long-term fuel linkage committee to resolve. The committee, which includes representatives from all ministries concerned, is expected to meet shortly. The ministry has asked Coal India in a recent letter to ensure that its subsidiaries do not invoke their powers to cancel Letters of Assurance (LoAs) issued to these projects and wait for the outcome of the next meeting of the standing committee on long term coal linkage.

“As the review meeting of the committee on long-term fuel linkage is likely to take place shortly, I would request you to advise the local companies (CIL subsidiaries) not to take any action which could prove detrimental to the project developers and await the deliberations of the committee in this regard,” a senior coal official has written to CIL chairman NC Jha recently.

It was decided in the meeting of the standing committee on long-term coal linkage on November 15, 2008, that LoAs issued to power projects for fuel supply would be liable for cancellation if developers fail to commission their projects in 24 months' time. The clause was inserted in the model LoA following the power ministry's suggestion.

As per the key milestones incorporated in the LoA, developers are required to secure environmental clearance and achieve financial closure withing six months from the issuance of LoA. Further, they have to acquire 90% of land for the project in 12 months.

Electricity to cost 60 paise/unit more on new coal price formula

Your electricity bill could go up by 50-60 paise a unit as early as February, triggered by the recent increase in coal prices. Currently, the average cost of power is Rs 3-4 a unit. The average realisation for NTPC in the September quarter was Rs 3.3 a unit, up from Rs 2.66 last year.

Effective January 1, Coal India switched from the useful heat value (UHV) based coal grading system to gross calorific value (GCV) system for pricing coal.

This move has not gone down well with power producers, as this will push up the fuel cost. The producers have been raising the issue with the fuel suppliers. Though suppliers claim that migration from the UHV to GCV based system will be revenue neutral, those tracking the sector said that in reality there will be a big increase in pricing without any value addition.

Power generating companies typically use grade E and F coal. The basic price of grade E coal will be Rs 880-1,781 a tonne against Rs 730-1,090 under the old pricing system (data based on ‘Final offer document' of Coal India). For grade F coal, the price will be Rs 630-933 against Rs 570- 870 earlier.

Sources privy to the developments told Business Line that utilities have raised the issue with Coal India, which has assured them that if the consumer price gets affected beyond a point, say,higher than 10 per cent, then the mechanism can always be reviewed.

TARIFF IMPLICATIONS

On December 30, the Power Ministry had written to the Coal Ministry stating that the switchover would have serious technical and financial implications on tariff. This was based on deliberations with various Central and State power utilities and the Central Electricity Authority.

Though agreeing that the implementation of GCV-based coal pricing system is in sync with international practice, it also requires that some prerequisites are met before it is implemented, the Ministry said.

Some of the requirements include an automatic sampling facility. Further, in the international coal market, where GCV-based pricing is adopted, coal is sold through legally enforceable fuel supply agreements, with stringent provisions on quality parameters and penalties for deviation from the stipulated parameters. The existing fuel supply agreements would need to be suitably modified to adopt these practices.

PRICING FORMULA

UHV-based pricing is based on empirical formula (which deducts ash and moisture content from the standard formula). Under UHV pricing, the coal is categorised into seven grades. The worry was that these bands were very wide and did not offer significantly higher price for washed coal.

GCV-based pricing, on the other hand, is linked to the actual calorific value or quality of the coal. Coal India is classifying the seven grades of coal into 17 bands under gross calorific value. Coal with similar calorific values may have similar price across the mines. There will be a discount on coal with high ash content.

Raise energy price for 9% growth, says Montek

Concerned over rising energy import bills amid a weaker rupee, Montek Singh Ahluwalia, the deputy chairman of Planning Commission on Friday said there is a need to raise energy prices to achieve nine per cent growth.

“Domestic coal prices are one third of international rates at present. There is need for better alignment of energy prices,” he said while speaking at the foundation day ceremony of National Aluminum Company (Nalco) here and in the process backed the Coal India Ltd (CIL) move to implement a new coal price structure effective from this year.

The recent CIL move to sell coal according to gross calorific value, instead of useful heat value method used earlier, has been opposed by government as well as private thermal power stations.

Even UPA’s key ally and West Bengal Chief Minister Mamta Banerjee has expressed her displeasure over the issue on concerns that the price rise would necessitate electricity tariff hike. But the plan panel deputy chairman said, the price rise in energy sector is necessary for higher growth.

“To achieve 9 per cent growth, we would be requiring about 6.5 per cent growth in overall energy sector. The loss making electricity distributing companies (discoms) should raise tariffs to support the growth,” he added saying that state governments often do not want the discoms to raise power charges.

Ahluwalia also supported raising the prices of petroleum products saying the nation cannot afford to subsidise costlier oil imports.

“Petrol prices in India are more or less in alignment with the international market. But diesel is 20 per cent cheaper and kerosene is 75 per cent lower than global markets. So, when we are importing high cost energy, we are subsiding it and we can not afford that,” he said.

Crude oil contributes the most to Indian energy consumption, next to coal.

India imports over 80 per cent of its oil requirement. Speaking about the 12th Five Year Plan, the plan panel official said, the Central government needs to give attention on transport and infrastructure development, along with energy sector. He said cooperation of state governments is required to roll out Goods and Services Tax, (GST), which could be a game changer in the way India would grow in next five years.

“Many people believe that GST alone could contribute about one per cent to GDP growth. The states that are complaining about revenue loss should understand that the total rise in income would compensate most of their losses,” Ahluwalia said.

Commenting on the current slowdown in Indian economy, he said, it is a temporary phase and in next three to four months time situation should improve. “I can assure you that in next three or four months time, people will feel that the fear of economic slowdown has disappeared. They will also feel that inflation has been controlled,” Ahluwalia said.

JSPL’s third power unit at Raigarh begins production

Jindal Steel and Power Ltd. said on Friday that a 135MW unit at its Raigarh power plant in Chhattisgarh has started commercial production from 1 January.

The steel and power producer is setting up 10 units of 135 MW each, four in Raigarh and six units at Angul in Orissa. Of these, three have been commissioned at Raigarh and one at Angul.

It is currently implementing thermal power capacity expansion of 2,400MW in Chhattisgarh and 1,980MW in Jharkhand. It is also implementing 6,100MW of hydro power in Arunachal Pradesh.

The company also plans to add 2,640MW in Jharkhand and 1,320MW in Orissa. Currently, it has a generation capacity of about 1,000MW but plans to expand this to 11,480 MW by March 2020.

Energy credits trading likely to touch Rs 100 cr by year-end

With increasing focus on renewable sector, the market for trading energy credits in the country is expected to be worth Rs 100 crore by the end of this year.

The market for trading of renewable energy certificates (RECs), which is less than a year-old, is currently worth Rs 30 crore.

“The market for RECs is growing and is anticipated to see trades worth Rs 100 crore on a monthly basis by the end of this year,” a top official at the Ministry of New and Renewable Energy said.

An REC is a market-based instrument and represents I MW hour of electricity produced from a clean energy source. In general terms, a renewable generator would get one REC for every MW hour of power produced.

Last month, the Ministry of Heavy Industries and Public Enterprises directed all central public sector enterprises to set up renewable energy projects or voluntarily purchase RECs as part of sustainable development initiatives.

This move would deepen the market for REC, with more and more entities expected to purchase these certificates in the coming months, the MNRE official said.

Currently, RECs are traded on the last Thursday of every month on the country’s two power bourses — Indian Energy Exchange (IEX) and Power Exchange India Ltd (PXIL).

The volumes in REC trading have picked up in the last three months. Currently, non-solar type certificates are driving the volumes, rating agency Fitch’s Director of Asia-Pacific Utilities team, Mr Salil Garg, said.

“The market for REC is growing... The demand depends much on the need for renewable energy,” he noted.

According to PXIL, RECs were cleared at a price of Rs 2,950 per certificate during the trading on December 28.

Power distribution licensees, captive power plants, traders and open access users are among the participants in the REC market.

Costlier power needed to rescue discoms

Regular rate increases, coupled with resumed lending by banks and other financial institutions, might save power distribution companies (discoms) from a situation such as the one that happened 10 years ago, when the government had to organise a rescue package.

According to experts, a 15-20 per cent rise in rates for a couple of years or more may save the situation. Some states have been regularly revising prices and others have begun to do so to save their discoms — Rajasthan recently allowed a 24 per cent rise and Delhi one of 22 per cent. Tamil Nadu, Uttar Pradesh, Punjab and Himachal are expected to do so this year, says Central Electricity Regulatory Commission Chairman Pramod Deo.

Even a 15-20 per cent revision would, he said, leave some backlog. With elections due in some states, the revisions might get delayed.

The discoms in Rajasthan, Tamil Nadu, Orissa, Punjab, UP and Andhra Pradesh are in a bad financial situation. In the country, apart from the cost of operations, the rising price of imported coal has started impacting the sector, he added.

A senior executive from a discom said the distribution segment was the worst affected in the sector. State governments should be willing to allow major rate increases to ensure sustainability of the discoms, he added.

Discoms have invariably not been able to recover their cost of operations because of the mismatch with rates and non-release of subsidy by some governments. Their accumulated losses were Rs 1,06,347 crore in 2009-10, from Rs 75,000 crore in 2008-09, according to the ministry of power. Apart from losses, the loan dues for the utilities were Rs 1,77,602 crore as on March 31, 2010. The average

cost of supply was Rs 3.41/kwh in 2008-09 from Rs 2.93/kwh in 2007-8 and Rs 2.75/kwh in 2006-07. Average revenue realised was Rs 2.91/kwh in 2008-09 from Rs 2.65/kwh in 2007-08 and Rs 2.49/kwh in 2006-07, according to the ministry. Subsidies from state governments were 18.94 per cent (Rs 29,665 crore) of the total revenue of state utilities in 2008-09, up from 11.17 per cent (Rs 13,590 crore in 2006-07) and 14.12 per cent (Rs 19,518 crore) in 2007-08.

In 2001-02, on the recommendation of a committee under Montek Singh Ahluwalia, now deputy chairman of the Planning Commission, long-term bonds were issued on behalf of the utilities, to be discharged by the state governments.

Steps underway

Banks and institutions like Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) had stopped lending to discoms. With new criteria set out by the power ministry, PFC and REC have resumed lending. These include regular rate revisions and maintenance of audited accounts, for a discom to be eligible for access funding. This may also deter state governments for forbidding rate rises, beside helping ensure sound financial health of the utilities.

A committee has been set up under the Planning Commission member B K Chaturvedi to formulate a turnaround plan for ailing discoms. It would consider the recommendations of the Shunglu committee, made last month, on the financial health of discoms. The Shunglu panel had suggested an SPV as a corporate entity to buy out distressed debts of banks to ailing discoms.

Adani Power approach SC to scrap electricity sales contract; case may break Rs 1.6 lakh cr projects

Adani Power has approached the Supreme Court to scrap an electricity sales contract because of fuel supply uncertainty and unexpected rise in cost of imported coal, in a case that can make or break mega projects worth Rs 1.6 lakh crore and their lenders.

The company had signed a power purchase agreement in 2007 for supply of 1,000 mw to a state utility at a fixed tariff of 2.35 per unit for 25 years. But project economics changed drastically with the fall in domestic coal supply and abrupt rise in cost of imports, prompting Adani Power to issue a notice to terminate the contract.

The utility, happy with the low tariff that Adani had bid, rejected the notice and won its case in the state's regulatory body and the appellate tribunal.

A Gujarat government official said Adani Power has filed a civil appeal challenging the regulators. Adani Power declined comment.

The court's verdict would have huge implications for ultra mega power projects by Tata Power at Mundra and Reliance Power at Krishnapatnam, which have become unviable because of the abrupt rise in price of Indonesian coal but are locked in contracts to sell cheap electricity. It will also impact projects of Essar, JSW, Lanco, India Bulls and Shapoorji-Pallonji.

"Current contractual framework does not protect power companies from short supplies of coal 'assured' by CIL or from unexpected level of changes triggered by any 'change in law' event in coal exporting country.

As these developments are beyond the control of the developer, these contracts should be modified through appropriate policy/regulatory interventions to translate the impact of these uncontrollable factors on tariff," said Ashok Khurana, director general, Association of Power Producers.

Deja vu in the power sector

From a sector that was deemed one of the most promising as late as a year ago, the electricity sector‘s financials have worsened rapidly. For generators, the immediate reasons have been a quagmire of disrupted fuel linkages, coal and natural gas, land issues, equipment shortages, and lately increased borrowing costs. Capex data from CMIE indicate a sharp increase in abandoned projects. These problems have been progressively aggravated by the worsening financial condition of state electricity distribution utilities (discoms). 

Although the situation is not as bad as in the early 2000s, which had necessitated the one-time settlement (OTS) scheme, there are enough parallels to have caused the establishment of two high level committees (Shunglu and Chaturvedi) to look into the causes and suggest structural reform measures to prevent a recurrence. There have been no outright defaults this time, but enough irregularities in payments from the discoms. However, the magnitude of the problem is approaching that of the earlier crisis, and has been building up since 2005-06, after having improved since the implementation of the OTS scheme. 

First, a description of the losses, since the figures in the media vary widely. The bottom line of the discoms’ financials are the operating losses. As of FY10, the last year a compilation of discoms finances are available, these losses had increased to R63,548 crore, up almost 2.5 times from R27,000 crore in 2006-07. While energy sold had increased at a compound annual growth rate (CAGR) of 9% over this period, losses (without the subsidy component) had risen at a 33% CAGR and with subsidies realised, a staggering 89%. Subsidies actually received rose just 3%. 

The subsidies story is important, however. Discoms are mandated to supply power to consumers (agriculture and domestic households) at rates which are lower than the cost of supply. To the extent that this is a social objective embedded in the supply of electricity, this should be compensated through subsidies. Net of subsidies actually received, rather being just booked by the utilities, these losses rose to R44,000 crore, up from R14,000 crore in 2007. The sharp increase in the gap between these two reported loss categories are the subsidies paid, which as pointed out above, rose just 3%. 

In addition to these accumulated losses (which increased by R88,000 crore over March 2005 to March 2010), the Shunglu Committee points to an even more disturbing statistic—an increase in current assets of R94,000 crore. Quoting verbatim, “this last figure is highly opaque and not clear as to what are the contents which aggregate to this … inevitably, these represent nothing but losses not shown in the annual accounts”. 

Two large components of this increase are “sundry debtors” and “other current assets”, which together account for an increase of R81,000 crore. Some part of this, of course, subsidies not paid, which would reflect an overlap with the total accumulated losses, but an additional component is the “receivables”, which rose from R31,000 crore to R56,000 crore. The collection period (for individual states) was 36 to 645 days. The longer the period of arrears, the worse the financial health of the utility. This, in addition, shows in very poor light the collection efficiency figures of 94% (in 2007) that are reported by utilities (according to the Central Electricity Authority). 

To bridge these losses and continue system operations, utilities have resorted to borrowing from banks and financial institutions. Matching the sharp deterioration of losses in FY10, discoms’ debt had increased 27% in FY10 to R3.1 lakh crore, up from R2.5 lakh crore the previous year. The result of this is that the net wealth of utilities has been virtually eroded. For the system as a whole, net worth at end-March 2010 had fallen to less than R12,000 crore, down from close to R90,000 crore at end-March 2008. 

The bright spot in this is that the deterioration is caused by a handful of states. As much as 85% of the deterioration in system losses (and 74% of losses pre-subsidy) was due to just six states. Other than the bills receivable, the losses can be attributed largely to two characteristics. One, the inability or unwillingness of discoms to raise consumer tariffs, to match the increase in power generation or procurement costs. Two, an inability to reduce system losses {which are now called aggregate technical and commercial (AT&C) losses}, a combination of transmission losses and theft. 

The cost discrepancy first. While the average cost of supply rose from R2.76 per unit in 2006-07 to R3.54 (i.e. 78 paise), the average revenue realised increased just 35 paise, to R2.68 per unit (529 million units were sold in 2009-10). Again, this discrepancy varies widely across states. Part of the discrepancy is due to the cross-subsidisation to agriculture and domestic consumers, part of which is supposed to be covered by the government subsidies. 

But even this could have been manageable, had discoms not had persisting high AT&C losses, 27.2% in FY10. Even this, according to the Shunglu Committee report (which pegs this at 30%), does not include other operational losses (for example, over statement of agricultural consumption). After having dropped sharply from 36% in FY05 to around 31% of total power procured by FY07, losses have bottomed at 27% in FY10 and reportedly persists there. 

So what needs to be done to remedy the situation? The Shunglu Committee has suggested a framework that aims to impart some commercial discipline to discom operations. This is not the place to explain this. Suffice it to say that it sounds very similar to the OTS scheme of 2001, with an SPV to take over the bad loans of discoms as the innovation. 

Will this avert an aggravation of losses in the future? There are some encouraging signs. At least two of the largest loss-making states have filed (or are in the process of filing) tariff increase proposals before their respective regulators. In addition, state discoms are increasingly looking at franchising (through auctions) concentrated, high load consumer pockets to private power companies. The experience of the Bhiwandi (Maharashtra) franchise has been very encouraging; more franchises have been awarded in Kanpur and Agra. However, it is amply clear that barring a more commercial orientation of these utilities, there is unlikely to be a sustained improvement in their operations and finances.