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A few positive developments for Power Sector - Relaxations in No-Go-Area, Equipment Import and Captive Coal Block Policy, Shri R V Shahi, Former Secretary, Ministry of Power

In last few days, a few important positive developments have taken place in respect of some of the major issues of concern for power project developers. In various weekly columns, I had occasions to highlight these and other issues. In fact, in one of the recent International Conference for investors, which I addressed, these issues were highlighted as serious issues of concern for developers, equity providers and lenders. The developments of the last few days, therefore, bring considerable relief by way of addressing these concerns.

"No-Go-Area" in Forests

In fact, the idea of identifying extremely sensitive forests and declaring them as "No-Go-Area" was mooted, a few years back, by the Power Ministry, with a suggestion to Ministry of Environment and Forest that this would expedite forest clearance in respect of all other areas. The suggestion was based on the premise that such extremely sensitive forest zones would be hardly 5 to 10%. Once after a thorough mapping such areas are identified, for the balance the forest clearance could be a smoother and faster process. But, by declaring as much as 48% of the mines areas having forests as "No-Go-Area", the whole objective of the idea has been defeated.

We must recognize that coal will continue to be the major primary fuel for power generation. By 2032, in spite of serious efforts on developing hydro projects, nuclear power plants, gas based capacities and almost all other renewable sources of power generation, it is estimated that 50% of power generation will still come from coal based power plants. Implication of the stand taken by the Ministry of Environment and Forest, therefore, has to be seen with the above long term perspective in mind and the adverse impact such an approach would create in achieving the goal of double digit economic growth.

The PMO has rightly intervened. And, in the first attempt of a joint exercise it is reported that 10% out of the 48% has been found to be OK from "No-Go" prescription. This is, no doubt, a positive initiative. But, only this exclusion is obviously not sufficient. If at all such an exercise is continued, several stake holders should be associated, so that a balanced conclusion could emerge. With proper mitigatory measures, it should be possible to develop coal mines in most of the areas. If at all certain areas are highly sensitive, its proportion could, at the most, be 5 to 10%.

It has also been reported that the Finance Minister, Environment Minister and Coal Minister, have had a meeting and the view that emerged meant that such a major decision to declare 48% of the coal mine area not fit for coal mining, could not be taken by one Ministry. This decision would have far reaching consequences. This is the right approach that such a decision cannot be left to be taken by one Ministry without due consultation with other Ministries, and perhaps without deliberations at the level of the Union Cabinet. Though, the conclusion, that status quo may continue, seems to have emerged in the context of the ensuing IPO of Coal India Ltd, which would be adversely affected on the ground of this unrealistic stand of the Ministry of Environment and Forest, in absolute terms also this is a right conclusion. It requires a thorough exercise. Compensatory afforestation in lieu of forests destroyed should be brought into focus. It should be examined why Ministry of Environment and Forest, has failed in this regard.

Another issue, which is very relevant, is about the emergence of Naxal Movements. These forest areas have become the breeding ground for Naxalism. If no development is allowed to take place in these areas, the people would continue to remain deprived of the benefits of economic activities. And, attempts of the Government to control such activities are unlikely to succeed. As a matter of fact, development activities like power projects and other related economic activities would provide a scope for these people getting gainfully deployed, their living standards could change, and major issues of poverty could be addressed. Thus, there are strong and weighty reasons to allow such developments in these areas, even if it means destruction of forests, with compulsory compensatory afforestation. These need to be encouraged rather than being prevented. Development of these areas, through grant funding and subsidies could, at the most be only short lived solutions. Lasting solution can be created only out of well planned project development and economic activities.

Import of Power Plant Equipment

Another important and positive development, which has been reported in last few days, is with regard to the import of power plant equipment from China. This issue has created a lot of uncertainties amongst a number of power project developers. It was perceived that the Government was seriously contemplating a ban on the import of power plant equipment from China. This perception grew particularly on account of similar developments in the telecommunication sector on the ground of security. It has now been reported that there is no such move for the power sector. Industry expects a final certainty in this regard. A few considerations, which need to be kept in mind while dealing with the issue of equipment import from China, are as follows:

  1. Indian Power sector needs massive expansion, of the order of 100,000 MW or more of additional capacity every five year. At the same time, it is equally important that cost of power is kept as low as possible. One of the reasons that in the Mega Power Project Policy, Customs Duty and Excise Duty were exempted, with the expectation that State Governments will also waive off Sates Tax, was the need for minimizing the cost of power. Any attempt, therefore, by way of policy prescriptions or otherwise, which goes counter to this requirement, would be a self defeating initiative.

  2. At present more than 100,000 MW projects are at different stages of construction. About 50% are from the equipment manufacturers outside the country. And, within the imported group about 80% is from China. All these procurement decisions by various companies have been taken on the basis of cost effectiveness. It has been observed that these equipments do cost atleast 20% less, and, therefore, they have the ability to reduce the cost of power produced.

  3. Even in the past, if we analyse previous few decades, supplies of main plant from BHEL used to be in the range of about 60%. BHEL at present is fully loaded. Even if we consider their expansion plans, the orders that they have and the orders that they would secure would keep their manufacturing capacity fully loaded. Therefore, it is not a matter of great concern that BHEL's manufacturing capacities would remain under- utilized. In fact, heavy order book position affects their timely supply.

  4. It is true that when the Power Ministry raised a lot of noise, at the highest level, on inadequacies and unpreparedness of the power plant manufacturing sector, not only BHEL has responded, but also there are three more agencies which are seriously pursuing setting up of power plant equipment manufacturing factories. Even they need not feel insecure and threatened. As a matter of fact, Indian power sector, for a long time, did need such options. The expansion of power generating capacities is going to be so huge that there will be enough scope for everyone to participate. In order that the domestic manufacturing is competitive and quality and schedule conscious, it would be essential that a reasonable amount of import is facilitated. If the power generators can access less expensive equipment and thereby reduce the cost of power, it would in fact be in the larger interest of consumers. We must not forget that electricity tariff, particularly for industry, in India, is one of the highest in the world. Manufacturing sector has been lamenting about the price of power which does impact on their being competitive in the global market. Obviously it cannot be the case of industry in general that in order to create a scope for domestic power plant manufacturers, the price of power gets increased leading, in turn, to a situation under which manufacturing sector in general becomes less competitive.

  5. While it is a good development that the issue regarding banning of import of Chinese equipment for power plant is likely to be resolved favourably, because the issues of security in power sector are not on similar lines as in the case of telecommunication sector, it is equally important that no deliberate attempt is made to impose Duty on such equipment. We need to recall that after due deliberations, for Mega Power Projects, Import Duty as well as Excise have been waived in order to keep the cost of power low. The proposal to impose Duty, which has been reported to be recommended by the Planning Commission is, therefore, contrary to the above objective. There is no reason to be unduly alarmed at import of plant and machinery.

Captive Coal Block Policy

In the weekly columns, I have been highlighting that the coal sector reform has not at all kept pace with the several reform initiatives which have been taken in last seven years, starting from Electricity Act 2003, in the power sector. As a result, the pace of progress, even in power sector, gets constrained because power sector is dependant on the domestic coal sector to the extent of more than 60%. Liberalisation of Captive Coal Block Policy in 2005, at the initiative of the Energy Co-ordination Committee, presided over by the Prime Minister, was indeed a step in the right direction. The proposal that captive coal developers would also be allowed to sell coal beyond their own needs, is again a very important step. A specified proportion of the coal produced, say about 15 to 20%, when allowed to come in the market, could be instrumental in gradual development of coal market. In the power sector, merchant plants have already started making positive impact towards developing electricity market. Though at this stage, since the quantum of power being traded, outside the Power Purchase Agreements is less, the impact on price discovery is not so visible. In coming couple of years, when such traded power may constitute a significant proportion, market development could receive the right momentum. Similarly, if the coal mine developers are also allowed to sell part of the coal produced in the market, the size of such market will increase and price discovery, in a gradual manner, would be in the overall interest of market development.

In one of my other columns, several constraints, which stand in the way of speedy development of captive coal blocks, had been highlighted. While some of the issues are gradually getting addressed, for example the problem relating to Geological Report, the development of common infrastructure in large coal mines areas remain to be resolved. There is a need to facilitate development of rail and road connectivity in these areas, so that individual coal block developers are able to proceed on their mines development programmes in a smooth manner.

Another important initiative in the coal sector, which has been under consideration for last few months, needs to be brought into action. Ultra Mega Power Project Scheme has vindicated the strength and positive results of the Scheme. Similar Scheme in the coal sector can go a long way in making major contribution to the expansion of the coal production on the one hand, and in bringing about competitiveness in the cost of coal production on the other. The concept of Shell Company undertaking the initial project development activities such as land acquisition, environment and forest clearance etc. and then bidding the project on the basis of price of coal, it is felt, will be as successful as the Ultra Mega Power Project. The size of such projects should be in the range of 15 to 20 million tonnes per year. This initiative would lead to a market of coal, in addition to coal India, and captive coal developers and can provide a powerful alternative and, therefore, competition in the coal sector.