NTPC and Power Grid viability reports soon

Sri Lanka may set the stage for a new power play between the two Asian powers, China and India.

Two Indian state-run companies, NTPC and Power Grid Corporation of India (PGCIL), have planned to come out with feasibility reports on two projects in the power sector in Sri Lanka by January. The final agreement on both projects are expected to be signed soon after the detailed reports are out.

NTPC was looking to set up a 2x250 Mw coal-based project at Sampur in the Trincomalee region. PGCIL intends to come up with India’s first undersea power transmission project, connecting Sri Lanka.

Both projects are considered diplomatically important, as the China National Machinery and Equipment Import and Export Corporation (CMEC) is also setting up a coal-based power project in the Norochcholai area, with an investment of close to $900 million.

In September 2011, NTPC and the Ceylon Electricity Board (CEB) of Sri Lanka had incorporated a joint venture company, called Trincomalee Power Company, to set up the plant which would see investment of Rs 3,000 crore.

“The joint venture company will sign an agreement with the board of investment (BOI) in Sri Lanka on January 15 and the detailed feasibility report will be out by month-end,” said CEB chairman Wimaladharma Abeywickrama.

A top NTPC official confirmed the development and said related issues such as transport of coal would be decided later. PGCIL and CEB had signed a memorandum of understanding for the feasibility study for the undersea transmission line in 2010.

“The report is ready with the Sri Lankan government and a final decision will be taken by January,” Abeywickrama said.

The project is expected to start by 2014. It includes a 250-300 km power link, with a submarine stretch of about 50 km. It will require an expected investment of about Rs 3,000-4,000 crore and an exchange of close to 1,000 Mw of power. Abeywickrama says both governments have already shown green signals.

“These two projects are vital for Sri Lanka and will help us to connect with the planned Asian grid. More, we can share power both ways during peak hours,” he added. CEB is the largest electricity company in Sri Lanka, with an installed capacity of 2,684 Mw.

The finalisation of these projects are at a time when the President of the island, Mahinda Rajapaksa, had publicly said Lanka had sought the assistance of China only after India refused to get involved in some projects.

Capital blackout averted after CERC intervention

The threat of a blackout looming over the Capital due to the payment dispute between NTPC and BSES discoms has been averted, with the Central Electricity Regulatory Commission (CERC) restraining the Central generator from cutting power supply to the discoms till the dispute is resolved. 

NTPC had threatened to cut power supply to BSES discoms in the Capital from December 31 midnight over non-payment of outstanding dues. NTPC’s generating stations meet 65% of the Capital’s power requirement. 

The Capital would have plunged into darkness at the onset of the New Year, but for the CERC’s timely intervention. The matter was brought before the CERC by the discoms who disputed NTPC’s claims. NHPC and Power Grid, too, were made respondents in this case because they also have similar disputes with discoms. 

The next hearing in the case is scheduled on January 5. NTPC has raised an additional bill of R428 crore on discoms to recover arrears following the provisional revision of tariff for Central generating stations by the CERC with effect from April 2009. 

However, discoms have disputed NTPC’s claims on the ground that the CERC is yet to issue a final order on tariff revision and, pending that, the latter cannot recover any arrears. The discoms submitted that they have been regular in paying their current bills. 

The discoms have also submitted before the regulator that NTPC’s insistence that discoms open a consolidated Letter of Credit (LC) to ensure payment for electricity supplied by all its generating stations to them is not in line with the Electricity Act 2003. 

They said they have no issue about opening separate LCs for each NTPC plant supplying power to them. 

“They have a prima facie case for grant of interim relief in the form of deferment of regulation of power supply. Apart from affecting the consumers of Delhi, regulation of power supply would create impediments for the petitioners to raise finances from financial institutions, which will not be in the interest of the respondents,” discoms argued.

In solar power, India begins living up to its own ambitions

Solar power is a clean energy source. But in this arid part of northwest India it can also be a dusty one.

Every five days or so, in a marriage of low and high tech, field hands with long-handled dust mops wipe down each of the 36,000 solar panels at a 63-acre installation operated by Azure Power. The site is one of the biggest examples of India’s ambitious plan to use solar energy to help modernise its notoriously underpowered national electricity grid, and reduce its dependence on coal-fired power plants. 

Azure Power has a contract to provide solar-generated electricity to a state-government electric utility. Inderpreet Wadhwa, Azure’s chief executive, predicted that within a few years solar power would be competitive in price with India’s conventionally generated electricity.

“The efficiency of solar technology will continue to increase, and with the increasing demand in solar energy, cost will continue to decrease,” Wadhwa said.

Two years ago, policymakers said that by the year 2020 they would drastically increase the nation’s use of solar power from virtually nothing to 20,000 megawatts — enough electricity to power the equivalent of up to 15 million modern American homes during daylight hours when the panels are at their most productive. Many analysts said it could not be done. But, now the doubters are taking back their words.

Dozens of developers like Azure, because of aggressive government subsidies and a large drop in the global price of solar panels, are covering the country’s northwestern plains — including this village of 2,000 people — with gleaming solar panels. So far, India uses only about 140 megawatts, including 10 megawatts used by the Azure installation, which can provide enough power to serve a town of 50,000 people, according to the company. But analysts say that the national 20,000 megawatt goal is achievable and that India could reach those numbers even a few years before 2020.

“Prices came down and suddenly things were possible that didn’t seem possible,” said Tobias Engelmeier, managing director of Bridge to India, a research and consulting firm based in New Delhi. Chinese manufacturers like Suntech Power and Yingli Green Energy helped drive the drop in solar panel costs. The firms increased production of the panels and cut costs this year by about 30 per cent to 40 per cent, to less than $1 a watt.

Developers of solar farms in India, however, have shown a preference for the more advanced, so-called thin-film solar cells offered by suppliers in the United States, Taiwan and Europe. The leading American provider to India is First Solar, based in Tempe, Arizona.

India does not have a large solar manufacturing industry, but is trying to develop one and China is showing a new interest in India’s growing demand. China’s Suntech Power sold the panels used at the Azure installation, which opened in June.

Industry executives credit government policies with India’s solar boom, unusual praise because businesses usually deride Indian regulations as Kafkaesque.

Over the last decade, India has opened the state-dominated power-generating industry to private players, while leaving distribution and rate-setting largely in government hands. European countries heavily subsidise solar power by agreeing to buy it for decades at a time, but the subsidies in India are lower and solar operators are forced into to greater competition, helping push down costs.

This month, the government held its second auction to determine the price at which its state-owned power trading company — NTPC Vidyut Vyapar Nigam — would buy solar-generated electricity for the national grid. The average winning bid was Rs 8.77 (16.5 cents) per kilowatt hour.

That is about twice the price of coal-generated power, but it was about 27 per cent lower than the winning bids at the auction held a year ago. Germany, the world’s biggest solar-power user, pays about 17.94 euro cents (23 American cents) per kilowatt hour.

India still significantly lags behind European countries in the use of solar. Germany, for example, had 17,000 megawatts of solar power capacity at the end of 2010. But India, which gets more than 300 days of sunlight a year, is a more suitable place to generate solar power. And being behind is now benefiting India, as panel prices plummet, enabling it to spend far less to set up solar farms than countries that pioneered the technology.

In its solar power auctions, moreover, NTPC is not creating open-ended contracts. The last auction, for example, was for a total of only 350 megawatts, which will cap the government’s costs. The assumption is that the price of solar power will continue to decline, eventually approaching the cost of electricity generated through conventional methods.

Most Indian power plants are fuelled by coal and generate electricity at about Rs 4 (7.5 cents) per kilowatt hour — less than half of solar’s cost now. In this month’s auction, the recent winning bids were comparable to what India’s industrial and commercial users pay for electricity — from Rs 8-10. And solar’s costs are competitive with power plants and back-up generators that burn petroleum-based fuels, whose electricity costs about Rs 10 per kilowatt hour.

“At least during daytime, photovoltaic panels will compete with oil-generated electricity more than anything else” in India, said Cédric Philibert, a senior analyst at the International Energy Agency in Paris. “This comparison is becoming better and better every month.”

In addition to the federal government, several of India’s states like Gujarat, where Khadoda is located, are also buying power at subsidised rates from solar companies like Azure Power.

Analysts do not expect India’s solar rollout to be problem free. They say some developers have probably bid too aggressively in the federal auctions and may not be able to build their plants fast or cheap enough to survive. Consequently, or because their bids were speculative, some developers are trying to sell their government power agreements to third parties, analysts say, even though such flipping is against the auction rules.

Wadhwa, of Azure Power, said a solar industry shakeout in India was almost inevitable. “Initially, a lot of new players enter the sector,” he said, “and then the market settles with a few players who have a long-term” commitment to the industry.

Power Finance Corp, National Thermal Power Corp, REC line up to tap pension funds in New Year

Power Finance Corp, National Thermal Power Corp and Rural Electrification Corp are likely to launch medium- to long-term infrastructure bonds in the first week of January to raise 3,000-5,000 crore each, people familiar with the matter said. The move is aimed at tapping pension funds, which are mandatorily required to invest a major chunk of their corpus in infrastructure bonds. 

State-run NTPC, India's largest power utility, is looking to raise funds through the issuance of bonds that will mature at the end of 10 years, said market sources. State-run REC is likely to issue 3-year, 5-year and 10-year bonds. 

Infrastructure finance company PFC will issue bonds for three and five years through private placements, as they are already borrowing for long-term through public bonds issuances, debt managers said. 

The bonds are likely to offer coupon rates around 9.63-9.64%, similar to what PFC offered on its 3-year and 5-year issuances in December, said debt market analysts. 

In December, PFC raised funds through 3-year and 5-year bonds at 9.63% and 9.64%, respectively. 

"The issuers will have to offer similar rates now, since yields on government securities have risen on market expectation of higher government borrowing," said a debt market analyst. 

The yield on 10-year bonds has risen marginally by 7-10 basis points since Monday. 

On Thursday, the yield on benchmark 10-year bonds closed at 8.53%, up 6 bps from the previous close. 

Pension funds receive interest payments from their investments in special deposit schemes in the first half of January, and bond issuers prefer to tap into these inflows. According to analysts, about 50,000 crore worth of inflows are expected from these interest payments for the fund houses this year. 

PFC will also come out with its tax-free bonds for retail market on December 31, offering 8.30% on 15-year and 8.20% on 10-year bonds. 

The issue comes close on the heels of National Highway Authority of India's (NHAI) tax-free retail bond issuance that made a successful debut on Wednesday. The bonds have so far received subscriptions worth about 25,000 crore. 

The issue is scheduled to close on January 11, 2012. 

Dealers said, going ahead, bond yields will rise despite the Reserve Bank of India indicating easing of policy rates as markets expect a further fiscal slippage of about 30,000-40,000 crore. 

"Further issuances of government securities could put some strain on the market, resulting in upward pressure on yields. As per the polls being conducted, expected slippage could be anywhere in the range of 30,000-40,000 crore," said an official from a large bond house. 

Issuers such as NTPC are expected to get finer rates, which could be about 15 basis points less than other issuers, since they are not very frequent issuers in the bond markets.

Delhi's Tata discom wants state aid

Tata Power Delhi Distribution (TPDD, earlier called North Delhi Power Ltd) has sought financial assistance from the city government to offset its operational losses. This comes on the heels of Reliance Infrastructure’s BSES getting fresh equity infusion of Rs 500 crore from the government.

In a letter to the city government, TPDD says it needs equity infusion of Rs 400-500 crore. Tata Power holds 51 per cent stake in the company, which distributes electricity to about 30 per cent of Delhi. The Delhi government holds the other 49 per cent. Two BSES companies distribute power to the other 70 per cent of the city. TPDD’s revenue gap was Rs 3,100 crore as on September, of which bank loans were Rs 2,400 crore, a company official said. The initial investment by Tata Power and the Delhi government in the company, in 2002, was Rs 368 crore.

On Tuesday, the government had informed the Delhi Electricity Regulatory Com-mission of its plan to infuse fresh equity of Rs 500 crore to BSES. The latter’s parent company, Reliance Infra-structure (R-Infra), would also infuse Rs 520 crore in BSES, to enable the latter to avail a loan of Rs 5,000 crore to pay dues towards generation companies, including NTPC. The Delhi government and R-Infra had infused a total of Rs 576 crore in 2002, when BSES’ two city distribution companies were formed.

R-Infra holds 51 per cent equity in the BSES discoms. BSES had said it was unable to pay its dues and NTPC had served a notice to it, threatening suspension of power supply. NTPC supplies a little over 2,000 Mw to BSES. It has since extended the deadline for payment to January 7. DERC had also, last month, sent notices to BSES, asking why its licence should not be suspended for failing to clear dues.

Delhi saw a revision of power rates, of 21 per cent, effective September 1; BSES and Tata had wanted a 50 per cent rise. It was earlier revised in 2009. Next month, DERC is to begin the process of revising rates for 2012-13.

Fuel, state electricity board dues continue to haunt power sector

SEBs are lifting much lower output, which, in turn, creates problems of cash flow and debt servicing

    

In the past couple of months, the overarching theme in the power sector has been state electricity board (SEB) reforms. The recent report of the Shunglu panel recommended a somewhat radical solution to create a special purpose vehicle to take over the shaky loans of state electricity boards. State governments are making the right noises on structurally reforming the distribution sector and cleaning up state electricity boards by computerizing accounts and allowing annual tariff revisions etc. And a record 14 states increased electricity charges this year. But these touch the surface of the problem and implementation is a long and arduous journey.

State electricity board dues are just one part of the equation. They have estimated accumulated losses of Rs. 75,000 crore mainly because of pilferages, having to buy expensive short-term power and inadequate tariff revisions. That will take some time to clean up.

In the meantime, the power sector will continue to suffer as usual—at least for the next six months or so. One reason for the low plant load factors, or capacity utilization, among power generators is because state electricity boards are lifting much lower output, which, in turn, creates problems of cash flow and debt servicing.

Increasing exposure to the power sector has made financiers wary of lending to this sector.

There is a shortage of coal to fire thermal power plants. Hydro projects are being held up in execution by land and environmental problems. As a result, companies are putting off expansion in the sector, the latest being Adani Power Ltd which is deferring plans to build a 6,500megawatts power plant. Capacity addition, so far, this financial year has been three-fourth of the targeted 14,000MW.

Sure, there are some silver linings. Plant load factors have improved over the last couple of months. Capacity utilization in November was 74.45%, well over the 61.14% achieved in September for thermal power plants. As a result, generation has increased 9% from a year ago, but these plant load factors are still lower than a year ago, indicating a slowdown in the sector.

While coal minister Sriprakash Jaiswal has guaranteed that no power plant will be shut down because of a lack of fuel, Central Electricity Authority figures indicated that 48 power plants had less than seven days of coal supply at the end of November. This was well over the 31 power plants reporting a critically low fuel-supply position at the end of September. Thus, the outlook will remain dark for some more time.

Fuel, finance crunch to haunt energy sector

The year 2011 saw India’s power sector beset by a shortage of coal and poor financial health of state-owned distribution companies. These challenges need to be addressed soon to boost power production during the 12th Five-Year Plan beginning April, say analysts and power producers.

Around 55% of India’s 1.83 trillion megawatts (MW) of installed power capacity is fuelled by coal. “The acute shortage of domestic coal in the country has become a major concern,” said Anil Sardana, managing director of Tata Power Co. Ltd, India’s largest independent power producer by capacity.

“It has led to apprehensions that the ambitious capacity addition target of 90-100 gigawatts in the upcoming 12th Five-Year Plan period may not be met and also cause avoidable stress on assets already built or committed by many private sector players,” he said.

Th Planning Commission had set a capacity addition target of 78,700MW during the 11th Plan (2007-12), subsequently revised it to 62,000MW, but only 42,000MW was added until November. The commission projects the addition of only 50,000MW by March 2012, the end of the plan period.

The commission also estimates that against an original targeted domestic coal production of 680 million tonnes (mt) during the 11th Plan, only 554 mt will be achieved.

“In the power sector, the pendulum has swung from a mood of over-optimism a year back to over-pessimism now, and none of the extremes represents a correct picture,” said Arvind Mahajan, head of the energy and natural resources practice at international audit and consulting firm KPMG. “Though many of the current concerns in the sector were there even a year back, the situation has worsened due to the lower-than-expected performance of Coal India (Ltd) and weak market conditions.”

Ashok Khurana, director general, Association of Power Producers (APP), an industry lobby, said banks had stopped lending to power projects and were insisting on certainty of coal availability “before even considering financial assistance”.

In the 12th Plan, demand for about 1,000 mt of coal for power generation is expected, and about 200 mt of this will have to be imported, according to the Plan panel. However, regulatory issues in countries such as Indonesia and Australia have led to an unprecedented rise in the price of imported coal, leading to economic viability concerns for many Indian power producers.

While Indonesia has linked the price of coal to international indices, Australia has levied a carbon tax on the export of coal. The industry estimates the overall price of imported coal to rise by around Rs.1,500 a tonne due to these two measures, since about 55% of India’s coal imports comes from these two nations.

Power projects totalling around 13,000MW will be affected due to higher prices of imported coal, according to APP. These include two 4,000MW so-called ultra-mega power projects awarded by the government to Tata Power and Reliance Power Ltd. The tariffs proposed by the firms while bidding for these projects to be run on imported coal are no longer viable considering the higher cost of fuel.

Kameswara Rao, an executive director at PricewaterhouseCoopers, said that instead of trying to outbid each other while vying for international coal assets, Indian companies should follow a coordinated approach to keep prices in check. “If the off-takers (power purchasers) refuse to absorb the additional cost, the producers will be forced to operate below capacity,” said Rajiv Mishra, managing director and chief executive officer of CLP Power India Pvt. Ltd, the only multinational power company operating in India.

“It won’t be easy for the off-takers to absorb additional cost implications over a long period of time and remain competitive,” Mishra said.

The largest purchasers of power in India are state distribution utilities that have been reeling under losses for years. The finance ministry has even advised banks to stop lending to loss-making state power distribution companies, even as the Planning Commission pegs the aggregate losses of these utilities at Rs.70,000 crore, excluding the subsidy they get from the respective state governments.

The main reasons for these losses are high levels of transmission and distribution (T&D) losses, at around 30% of total power produced, and little tariff revision over the years even though costs increased.

A report released by credit rating agency Crisil Ltd in October said the gap between the average cost of supply per unit of power and the realization per unit was as high as 86 paise. It also warned that loans to the tune of Rs.56,000 crore extended by banks to the power distribution sector were at risk if no meaningful reforms are undertaken in the next 18 months.

A committee appointed by the government under the chairmanship of former comptroller and auditor general V.K Shunglu suggested that the outstanding loans to power distribution companies be taken over by special purpose vehicles (SPVs) floated by the Reserve Bank of India and restructured while securing commitment from such utilities for regular tariff revision and reduction of T&D losses.

“We can’t have a business-as-usual approach for the sector,” said Anish De, chief executive officer for Asia at global energy consulting firm Mercados Energy Markets, concluding: “Creating an SPV for restructuring loans may work, but it needs to be followed up by setting performance parameters for the distribution companies and simultaneously ensuring external cost pass-through.”

NTPC signs purchase pact with M.P. for 50 MW solar power

NTPC Ltd has signed a power purchase agreement (PPA) with MP Tradeco in Bhopal for supply of power from 50 MW solar PV (photovoltaic) power plant to be set up at Rajgarh in Madhya Pradesh.

Expected to be commissioned by the year 2013, the 50-MW solar power from Rajgarh Solar PV shall be bundled with unallocated power from upcoming coal-based stations of NTPC by Government of India, according to a statement from NTPC.

The PPA was signed by Mr. M.K.V. Rama Rao, Executive Director (Commercial), NTPC, and Mr P.K. Vaish, Managing Director, MP Tradeco, in presence of Mr I.J. Kapoor, Director (Commercial), Mr S.N. Ganguli (RED-West-II) and Mr Mohammad Suleman, Secretary (Energy), Government of Madhya Pradesh, and other senior officials.

MORE PROJECTS

NTPC, the country's largest power generating company, is in the process of building a large portfolio of non-conventional energy projects, including solar PV projects in Karnataka, Rajasthan, Gujarat, Madhya Pradesh, Andhra Pradesh and other States.

The company has also finalised plans to set up a 25-MW solar PV project close to the Ramagundam super thermal power plant with an outlay of about Rs 140 crore for the phase one of 10-MW project. The company plans to install all of the 25 MW at the site in AP by 2013, according to sources in the company.

In Karnataka too, the company has entered into power purchase agreements with the Karnataka Government Corporation for setting up solar PV farms. Due to low gestation period, some of the NTPC plants are expected to be operational by next year.

The company's medium term plan is to have an installed capacity of about 1,000 MW of from non-conventional energy sources including solar PV, solar thermal and wind energy farms.

Tiroda plant to help Adani Power cushion ‘losses' in Gujarat

Merchant power sales from upcoming Tiroda thermal power station in Maharashtra is expected to help Adani Power Ltd to survive the anticipated negative impact of its supply contracts with Gujarat State utility for first three quarters of 2012-13, according to sources.

Considering that the company has substantial foreign currency borrowings, there should be pressure on net margin due to a higher interest payout than envisaged.

The company is slated to supply 1,000 MW a day from Mundra power station to Gujarat Urja Vikash Nigam Ltd (GUVNL) at a reportedly “loss-making” tariff of Rs 2.35 MW a unit for 25-years from February 2012.

To coincide with the development, the first 660 MW unit at Tiroda will be on stream “before March 2012”. Since supplies against firm commitments (power purchase agreements) should start from Tiroda by end-2012, it offers APL a window to boost profits through merchant sales in the first three quarters of next fiscal.

The entire domestic coal-based power station combing five China-made units of 660 MW each is slated to be commissioned before March 2013. The project is developed in collaboration with Millennium Developers.

HURDLES AHEAD

Originally proposed to be of 1,980 MW, the Tiroda project size was later expanded to 3,300 MW banking on proposed captive supplies from the allotted coal mining blocks at Lohara (West) and Lohara extension coalfields next to the Tadoba Andhari Tiger Reserve in Maharashtra.

In the following days, protests from environmental activists, alleging that the mine would infiltrate into the buffer zone of the Tiger Reserve areas, led to cancellation of the captive mining lease.

While the Adanis are now pinning hopes on its “request to Centre” to revive the Lohara mining lease in a truncated format, without disturbing or infiltrating into the forest area, the immediate reprieve has come in the form of a ‘tapering linkage', granted by Coal India towards the first 660 MW unit at Tiroda.

The scheme offers captive blocks owners 3-4 year window to develop the mines and enjoy requisite supply of coal for linked end-use plants at notified price.

While the linkage may save the day for the first unit, APL will surely feel the pinch ones other 660 MW units should be commissioned – one each every quarter.

INTEREST PAY-OUT

With the Rs 19,000-crore Mundra project scheduled to be fully commissioned by this fiscal, APL may feel the pinch of rupee devaluation in the immediate term in terms of higher interest pay out against foreign currency borrowings.

Sources, however, argue that unless rupee undergoes any further sharp devaluation from the current level, the average interest cost of the project is still lower at 9.5 per cent (discounting the devaluation impact) when compared to domestic borrowing cost of over 11 per cent.

NTPC board okays over Rs 18,000 cr for 2 thermal projects

NTPC Ltd has informed BSE that the board of directors of the company on Wednesday accorded the investment approval of Rs 15166.19 crore for the Kudgi super thermal power project (3 X 800 MW) in Karnataka. This is subject to environmental clearance of Ministry of Environment and Forests.

The board also approved the move to implement Vindhyachal super thermal power project, stage-V (1 X 500 MW) in Madhya Pradesh at an appraised current estimated cost of Rs 3180.40 crore subject to environmental clearance.

Stage-I (6 X 210 MW), Stage-II (2 X 500 MW) and Stage-III (2 X 500 MW) of the project are under commercial operation. Stage-IV (2 X 500 MW) of the project is currently under construction.

Rationalise energy prices

“It is the economy stupid” said Bill Clinton. How true. If there is one message that the political elite should distill from the economic and financial crisis that is currently roiling liberal democracies around the world, it is that short-sighted and self-interested politics cannot ride roughshod over the remorseless logic of the market. The eurozone crisis has already put paid to four governments in Greece, Ireland, Italy and Spain. The reason Barack Obama may still survive into a second term is because the Republicans appear more intent on undermining their most credible candidate Mitt Romney rather than coalescing to exploit the huge cracks that have appeared in the US economy. The UK finance minister has just announced a budget that heralds a ‘lost decade’ of economic growth and the conservative Lib Dem coalition is writhing with tension. This message needs to be internalised by our own leadership. With economic growth slipping below 7%, with inflation in double digits, with high interest rates and a depreciating currency, they should be casting their gaze beyond their political navel to economic management. Else, they too will find their fortunes upended at the next elections.

What then might one ask should be their economic priorities? Clearly there is no one answer. Politicians, especially when advised by economists, have a penchant for ploughing their own constituency-based furrow. There will, therefore, be as many answers as there are respondents. But it would be a surprise if a majority did not list energy (along with water and food) on their agenda. This is because everyone knows that the spin and direction of the current spiral of energy scarcity and inefficiency will have to be slowed and reversed if the Indian economy is to stay on the growth turnpike.

The underlying reason why energy security for India is a fast-fading aspiration is because the price of energy is misaligned from the market. It is a distortionary price mechanism driven by politics and institutional, vested interests rather than economic logic. It is why the gap between energy demand and supply has widened, why the balance sheets of our energy PSUs have eroded while adulteration, blackmarketing and waste have run rampant.

Three decades back, for instance, India imported 25% of its crude oil requirements. Today it imports 80% and the Planning Commission has estimated that, due to slack production and increased consumption, this import dependency will increase to 87% by 2016-2017. We have huge reserves of coal but still the Planning Commission is projecting that by the end of the 12th plan we will import approximately 250 million tonnes of coal. This, of course, only if the commensurate import and distribution infrastructure have been put in place. T he energy companies are in dire financial straits. IOC, BPCL and HPCL—the three oil marketing companies—will, for example, “underrecover” (a euphemism for loss) around R130,000 crores in FY 2011-12 because of the political diktat that they sell diesel, kerosene and LPG at prices below cost. These companies were once almost debt free but today they have bank borrowings in excess of R100,000 crores. The interest burden wipes out the bulk of their operating margin. Many more facts could be cited to illustrate the deepening energy crisis. Our political elite is, of course, aware of the problem but their hope must be that it will not explode on their watch. This must have been the hope of the Greek politicians as they fudged their accounts and accumulated debts before the economy hit the skids and they were turfed from power, averaging approximately $250,000 for every working Greek.

So what is to be done? It would be naive to suggest that prices should be wholly market-determined. The din and furore surrounding the current debate on retail FDI would be a pipsqueak compared to the outcry that would ensue.

But the needle of change does not have to be pushed full circle. Incremental shifts in the right direction can also generate billions in value and pull the energy sector back from the brink. For instance, as everyone knows, kerosene subsidies do not reach the poor but get sequestered by the middlemen who then trade them on the black market. There is a proposal to discontinue these subsidies and to transfer the released funds for disbursement directly by the state governments. This could be expedited. There is a suggestion that subsidised LPG cylinders should be rationed, especially to those in higher income brackets. This could also be fast-forwarded. There is an idea that of the two grades of diesel currently sold in the country (BSiii & BSiv), the higher grade (BSiv), which accounts for around 15% of total diesel consumption and which is used inter alia by those who drive SUVs, should be partially deregulated. Similar incremental proposals have been put forward for rationalising coal and gas prices—all with the objective of mitigating the costs of the disconnect between a market determined and an administered pricing structure.

None of these proposals are without flaws or easy to implement. The kerosene dealers and distributors would fight change tooth and nail; the state governments might find it practically infeasible to make direct disbursements and dual pricing of commodities will inevitably encourage diversion and adulteration. But the ideal must not be allowed to trump the positive. Doing something can often be better than doing nothing. The essential point is that in our connected world the market will ultimately assert itself, and that if energy pricing continues to run counter to this force the economy will sooner rather than later slip into reverse gear. And at that point the Clintonian comment may well define our politicians’ epitaph.

Power Ministry dissent derails PSU buyback plan

The finance ministry's plan to meet the disinvestment target through share buyback by state-run companies has run into a problem with power ministry saying that all six companies under its administration will not be able to participate in the process.

In a dissent note to the North Block, the power ministry has argued that all the state-run companies have big expansion plans to tackle the massive power shortage in the country, and therefore, won't be able to spare cash for the share buyback.

"They (power ministry) have argued that they are targeting a capacity addition of almost 100,000 MW during the 12th Five Year Plan (2012-17)," said a finance ministry official, requesting anonymity. "This would need huge investments, and PSUs under them have already committed funds for various projects," the official said.

The public sector enterprises under the administrative control of the power ministry are NTPC, Power Grid, NHPC, REC, PFC and NEEPCO.

According to estimates, the combined cash surplus with all these state-run firms is around Rs 50,000 crore, more than current year's fiscal disinvestment target of Rs 40,000 crore that the government is struggling to meet, having raised just Rs 1,145 crore so far.

The chairman of a state-run firm backed the power ministry's response, saying his company's cash surplus position paled in comparison to its massive investment requirements.

So far, only mines ministry and the department of public enterprises (DPE), a nodal agency for 246 state-run firms, have supported the cabinet note proposed by the finance ministry on share buyback.

But the DPE has also cautioned that companies should not be forced to buy back shares, suggesting that the option should be left to the respective boards.

"We have given our nod to the proposal but said that the buyback should be proportionate, and all guidelines of the market regulator Sebi should be followed," said an official with DPE.

The finance ministry has moved a cabinet proposal to give executive sanction to listed companies having surplus cash for buying back their shares.

The government is looking at various options, including cross-holding, share buyback, auction and special dividend to raise disinvestment proceeds. Finance minister Pranab Mukherjee has, however, said the government will stick to its disinvestment target of Rs 40,000 crore in this fiscal.

Power Grid Corp: Powering ahead with low-risk business model; assured returns

At a time when the stock market is volatile and the macro environment remains uncertain, it's advisable to invest in defensive stock trading at low valuation. Power Grid's low-risk business model and strong earnings visibility offer a defensive investment opportunity. Investors can consider buying the stock at its current market price.

About the Company

Power Grid is a Navratna company with 50% market share in the transmission business and has a monopoly in inter-state transmission. Nearly 95% of its revenue is generated from the transmission business, with the balance coming from the consulting services provided to power companies in India and abroad and from leasing its optic fibre bandwidth to telecom operators.

It is controlled by the Central Electricity Regulatory Committee (CERC) and operates under a regulated business model with a fixed return on equity. The company is assured a return of 15.5% plus some incentives on equity investments, from its clients.

Financials

Power Grid's net sales have grown at a compounded annual growth rate (CAGR) of 21% over the last three years to Rs 8,389 crore in FY11 and the profit after tax has grown at a CAGR of 30% to Rs 2,697 crore. The company's major cost is capital expenditure on setting up transmission lines, while there is hardly any operational cost.

As a result it has an operating margin as high as 90%. The company's earnings growth will depend on how much capital expenditure it can afford and how fast it can capitalise its capital expenditure. In simpler terms, how fast it can commission its transmission lines so that the return on capex is faster.

For the XIth fiveyear plan, the company's capex target is Rs 55,000 crore, of which it has already incurred 70% in the first four years and roughly 60% of it has already been commissioned.

And for the XIIth five-year plan, the company, which has a strong execution record, has already set an additional capex target of Rs 95,000 crore. Power Grid's dividend pay out ratio is 32% and it has a very strong balance sheet

Valuation

Given the company's huge capex plans and strong execution record, the company's 30% growth in earnings is likely to continue for another few years. At the current market price of Rs 95, Power Grid's stock is trading at price to earning multiple of 9.7 which appears to be attractive.

Investment Rationale

India's GDP growth rate has outpaced the growth in installed power capacity in last 10 years, increasing the demand-supply gap. Given the monopoly that Power Grid enjoys in the central transmission system, it will benefit from this increasing demand. The company has an extremely low-risk business model.

FDI in power sector swells even as domestic fund flows trickle

At a time when domestic investors are applying the brakes on power sector funding, foreign direct investment (FDI) inflows into the sector could actually be headed for a new record this fiscal.

In a signal of bullish sentiment among global investors, FDI inflows into the power sector — at a robust $1.3 billion during the first six months of the current fiscal — were just marginally short of what came in during the entire 12 months of each of the previous two financial years.

The FDI inflows, apart from investments routed through Mauritius, include fund flows from France, Singapore, the UK , the UAE and the US. Recent FIPB (Foreign Investment Promotion Board) approvals include proposals by Hinduja Energy for induction of foreign equity into a domestic firm and fund raising plans for coal washery operator ACB Ltd and Chennai-based Gita Power and Infrastructure. FDI up to 100 per cent is permitted under the automatic route for projects involved in electricity generation (except atomic energy), transmission, distribution and power trading.

The news on robust foreign inflows comes in at a time when domestic investor interest in the power sector is petering out and is clearly visible in the form of the tepid response by domestic banks and financial institutions to the funding of new private generation projects. The main concern is about adequate coal supplies for new projects, amidst signs that developers of projects close to commissioning could default on their loan repayments due to fuel shortages.

Subdued merchant power rates and reluctance among cash-strapped State Electricity Boards to buy power from the spot market are adding to investors' woes. The worsening financial position of the SEBs — their losses are pegged at Rs 55,000 crore — has already begun to affect existing power generators. While NTPC's bottomline was dented last fiscal due to lower offtake by SEBs, private developers also face the same risk.

An official with state-owned lender Power Finance Corporation admitted that fuel risk had made them cautious while evaluating projects. Edelweiss, in a recent wrap-up on the power sector, too attributed “serious business risks” for power developers, cascading down to their lenders, due to coal shortfall. These fuel risks, it said, were bigger than the risk arising out of lower or less remunerative merchant sales.

The overall funding requirement in the Eleventh Plan (2007-12) was estimated at Rs 10,31,600 crore (about $230 billion at an exchange rate of Rs 45) by the Working Group on Power at the beginning of the current Plan period.

UMPPs not getting delayed due to coal blocks allocation: Govt

The 4,000-MW capacity ultra mega power projects in the country are not getting delayed due to allocation of coal blocks, the Minister of State for Power, Mr K.C. Venugopal, informed Parliament today.

“There is no delay in commissioning of ultra mega power projects (UMPPs) due to reasons attributable to problems in the allocation of coal blocks,” he said in the Lok Sabha.

For pit-head UMPPs or where the coal mines are attached to the projects, one of the pre-requisite for calling Request for Qualification (RFQ) is allocation of coal block by the Ministry of Coal.

And since the coal blocks are allocated even before the initiation of bidding process, the delay could not occur for want of allocation of coal blocks, he added.

However, he said that the last date of submission of RFQs for Chhattisgarh UMPP has been extended nine times as the coal blocks of these UMPPs were categorised as no-go area by the Ministry of Environment and Forests.

The last date of submission of RFQ for Chhattisgarh is December 5.

However, in view of the decision of Group of Ministers (GoM) on environmental and development issues, relating to coal mining and other development projects, to do away with the go/no-go concept, the MoEF has been requested to clarify the matter for proceeding ahead with the bidding process of Chhattisgarh UMPP.

At present, the preliminary bids for the Bedabahal UMPP in Orissa have been invited and as many as 20 bidders have evinced interest in setting up the project.

Solar power prices inching towards common man's reach

The aggressive tariffs quoted by solar power developers in the second round of bidding under the National Solar Mission shows that solar power is slowly inching towards the reach of the common man.

The industry has been speaking of “achieving grid-parity” in about four years, meaning that solar power would cost no more than what the distribution companies sell at in less than half a decade. The bids that opened today suggest that grid-parity may well happen even earlier.

Implications

The French company, Solairedirect won a mandate to put up a 5-MW project by quoting a tariff of Rs 7.49. The highest quote was of Green Infra, of Rs 9.39.

What this implies is that some fifteen project developers believe that they can put up solar photo voltaic power plants, sell the electricity they produce at prices under Rs 9.40, and still make money.

Compare this with the quotes of the previous round (Batch-I) and the point becomes clear. Last time around, the lowest tariff was Rs 10.90 and that tariff kicked up a huge debate on whether the developers were foolhardy and if they actually hoped to get funding from banks.

What is worthy of note is that the prices quoted in this round are lower than the prices at which electricity is sometimes traded on the energy exchanges. And, solar has beaten diesel power squarely, though purely in terms of cost.

What happened in the meantime that the tariffs should fall so steeply? Presumably, it is the precipitous fall in the prices of solar modules — panels containing silicon cells that generate electricity when sunlight falls on them.

A year back, when the Batch I bidding was happening, solar modules were sold for $1.70 a watt. Now, there are companies that are offering the same at 90 cents. Due to advancements in technology, material use is coming down and efficiency levels – a measure of how much of sun's energy falling on the panel is converted into electricity – are on the rise.

A further fall in module prices is anticipated and solar power is very likely to get still cheaper.

Lowest rates at power generation bid

A bidding for power generation kindled hopes of generating solar energy worth at least Rs 4,000 crore. What’s more, it has triggered a fall in rates, according to an official associated with the development.

Aggression was the key word at the bidding process on Friday for the 350-Mw photovoltaics-based solar projects under the second batch of the first phase of the National Solar Mission. The result was encouraging: the lowest bid submitted (by Solar Director) was for Rs 7.94 per unit, while the highest (Green Infra) was Rs 9.39. This, when Rs 15 per unit is the Central Electricity Regulatory Commission’s approved price.

The bids were made before NTPC Vidyut Vyapar Nigam (NVVN), the power trading arm of National Thermal Power Corporation (which was nominated to handle the first phase too).

The developers would sell power to NVVN at this rate for the next 25 years. The government has targeted the selection of grid-connected solar PV projects up to 350 Mw under Batch-2 in 2011-12.

An NVVN official said nearly 400 bidders had submitted request for qualification. Of them, about 160 were shortlisted. They were the one’s who submitted their request for on Friday’s proposal (financial) bid, he told Business Standard.

The official said the fall of rates were largely due to the availability of highly efficient and cheaper technology.

Power analyst D Radhakrishna said NVVN must be saving around Rs 1 crore per hour over last year’s offer and around half of the tariff proposed. “States will now need to revisit the already approved tariff.”

Spot power rates zoom as coal stations face dwindling stocks

Rates go up Rs 5/unit in South, Rs 4 in the rest of the country

Coal shortage is beginning to reflect in the spot electricity rates, which have risen steadily to an average of around Rs 5 per unit in the Southern region and close to Rs 4 per unit in the rest of the country.

Tuesday's peak electricity rates on the IEX — the country's largest power exchange — were recorded at Rs 9 in the South and close to Rs 6 in the other parts of the country, as coal supplies to the sector, manifested in terms of the fuel stocks at key coal-fired stations, are slipping again after a mild recovery in the middle of last month.

Government estimates suggest a cumulative generation loss of over 5 billion units during the first seven months of the current fiscal. This was mainly on account of the inadequate availability of coal, which is beginning to show up in the steadily climbing spot power rates. Latest estimates released suggest that nine stations are left with a day's stock or less.Incidentally, the data for November 20 – the latest date for which the coal stock position has been made available – show that the coal stock position is the worst since the beginning of last month. While excessive rains in Coal India Ltd's coal fields and workers' strike at Singareni Collieries were largely responsible for triggering the recent coal shortage situation, law and order problems in the Central Coalfields Ltd and Mahanadi Coalfields Ltd, inadequate crushing capacity at mines and less transportation of coal from mines to railway sidings have aggravated the problem.

The worsening fuel position comes after a brief blip in the middle of last month, when coal stocks showed signs of recovering at power stations. This was at a time when the Coal Ministry had claimed that coal companies had been asked to step up despatches to major thermal stations.

According to the latest data, stations with less than a week's coal stock have risen to a record 52, up from 36 in the beginning of last month. Also, a total of 32 key thermal power stations in the country were operating with coal stocks of less than four days, out of the 86 major thermal stations monitored for their coal stock position.

The 52 stations that have less than a week's stock add up to a cumulative capacity of well over two-thirds of the country's total installed coal-fired capacity of 99,503 MW.

Thermal stations are normally expected to hold coal stocks of between 15 and 30 days, depending on the location of the project. While pithead stations are expected to hold stocks of 15 days or more, stations located away from the mine are expected to hold coal stocks for 21 to 30 days.

NTPC Ltd said it is ensuring that stocks are “comfortable” at its stations by juggling around fuel from various sources, including imported coal and fuel from several domestic coal fields. Estimates suggest that NTPC's Singrauli and Kahalgaon stations had stocks of about 7,000 tonnes each as on November 20, against a requirement of 31,600 tonnes and 52,300 tonnes respectively.

The 3,260-MW Vindhyachal station had extremely low stocks, with higher generation being cited as the key reason.