Last Friday, JSW had organised a
two day Conference on Steel and Power issues at their magnificent steel complex
at Vijayanagar in Karnataka. Apart from the professionals of the two industries,
a large number of investor's representatives were present. I had the privilege
of addressing the Conference in the first Session alongwith Shri O.P. Bhatt,
Chairman of the State Bank of India and Shri Sajjan Jindal, the Managing
Director of JSW. I was expected to cover the power scenario in the country.
Since the participants consisted of, as mentioned above, the technical and other
professionals from steel sector as well as power sector besides the investors, I
briefly outlined the important aspects of the sector including demand - supply
mismatch, initiatives to create additional generation capacities, legislative
and policy reforms during the current decade, major constraints being faced in
expansion of generation and transmission capacities, long term perspectives
covering the 25 year period upto the year 2032 as brought out in the Integrated
Energy Policy (2006), financial health of the electricity sector etc. I don't
propose to elaborate these points, which were explained to the participants, in
this article. What I propose doing in this paper is to discuss the important
concerns of investors, which I dealt at length in my address. For doing so, I
had done a quick exercise with a few friends while travelling to Vijayanagar in
the aircraft. Through this brief brain storming, we identified a few current
concerns of investors in power sector. And, it is these concerns which formed
the basis of my articulation in major portion of my address.
In the wake of so many
power projects coming up, would there be excess of power supply? Would it
then not affect profitability of project developers?
Indian power sector has got
used, over last several decades, to capacity additions in the range of
20-25,000 MW in a Plan period of five years. Therefore, when with massive
preparations undertaken during the Tenth Five Year Plan for Eleventh Plan,
it was projected that a capacity addition of more than 70,000 MW could be
undertaken and implemented, during Eleventh Plan, it was a surprise to all
concerned. Now, when this has started happening, there are many who believe
that we would have excess power and, therefore, it might affect the industry
in the manner it affects other industries when there is surplus of steel,
cement etc. My answers to such concerns are as follows:
Power is not a commodity where supply
follows demand; in fact, availability of power creates demand. If Indian
economy has to grow at the rate of 9 to 10%, over next few decades,
which is what is being planned, then availability of power has to grow
at a rate of atleast 8 to 9%. In the Integrated Energy Policy,
therefore, it was targeted that the capacity of about 130 GW as in
March, 2007 should increase to over 800 GW by March 2032.
China has been able to expand its power
generation capacity, mainly in last 30 years, to more than 800 GW. Even
then during this winter, in the situation of heavy snowfalls in several
parts of China, the demand peaked so high that they had to do rationing
of electricity. Even now China continues to add capacity, though it may
not be at the same peak rate of 100,000 MW a year. Therefore, any
apprehension that India would be faced with surplus power situation and
that too in the near future would be based on a highly ill-founded and
In the wake of global recession, whose
impact was experienced even in Indian economy, though in a substantially
diluted and marginal manner, our industries such as steel, cement,
construction etc. did face the situation of excess supply which affected
product prices and also profitability. Even in such a situation we had
severe shortages of power supply in most parts of the country during
most of the seasons. It would, therefore, take several decades when we
can even think that we will have a power surplus situation and that
power generating companies would have to be confronted with a situation
of lack of demand.
More than 50% of rural India, even now, does
not have access to electricity, and those villages which have
electricity connectivity, in many parts of the country, face load
sheddings not in terms of hours but in terms of days and weeks. Rural
economy cannot grow unless electricity connectivity is extended to all
the places and electricity supply is made reliable.
Therefore, power project
developers, equity investors and lenders should all feel fully convinced
that in the electricity sector, the situation of supply outstripping demand
is unlikely, atleast in next couple of decades. Occasional surplus during
certain hours may be a different issue, but on overall basis the generating
sector in this industry will need to produce at high capacity utilisation
factor irrespective of the large capacity additions that are happening and
are being targeted.
Reforms in the power sector
have indeed led to enthusiastic response from developers. Fuel supply,
particularly domestic coal, has emerged has emerged a critical factor. Would
the shortage of fuel not affect plant performance?
It is true that policy
movements in the coal sector have not at all kept pace with the several
legislative and policy initiatives which took place during current decade,
in the power sector. It is also known that power sector is greatly dependant
upon domestic coal industry. Therefore, lack of policy reforms in the coal
sector definitely generates concerns and rightly so. However, the following
facts need to be kept in mind while critically evaluating these concerns:
Even though coal industry could not
logically conclude the exercise on Amendment to the Act, which could
have provided a more flexible approach and participation of private
sector in the coal industry, Captive Coal block Policy was liberalised
in a significant way, so that a State owned public sector power
generating companies and private sector companies could be allotted coal
blocks to meet the requirement of their power plants. This change in the
Policy has resulted in allotment of coal blocks with aggregate reserve
capacity of the order of 20 billion tonnes, equivalent to more than
80,000 MW of power generating capacity. During the initial years, there
are teething problems faced by power project developers in development
of these mines. Coming years will definitely witness significant in flow
of coal produced in these mines
Coal India subsidiaries are also organising
to step up their expansion and production programmes, which could lead
to a coal supply growth rate of the order of 6 to 7%. While definitely
there is scope for improving further the working and efficiency of these
coal companies, availability of fund for their expansion is not an
issue. They have been assuring that they should be able to meet the
requirement to the extent of atleast 70% of the power sector need.
Power industry has been fully aware of the
likely gap between the requirement of coal and the supply from domestic
sources including from Coal India companies and from captive coal
blocks. Therefore, import of coal has been duly recognised as a source
of supply to supplement the domestic coal inputs. Over the years,
preparations have included for handling coal imports development and
augmentation of ports and further evacuation arrangements beyond ports.
These issues have been fully captured and are being concurrently
addressed. It is not to say that everything is fine and perfect. What is
being suggested is that all efforts are being mounted to address the
issue arising out of shortages of coal supply. On balance, we should
feel that situation would be under control.
As early as in 2004, in the Energy
Coordination Committee (ECC), presided by the Prime Minister, it was
decided that both public and private sector companies should be
encouraged to acquire coal mines abroad. This process has already
started yielding results - though modest now, may become significant in
When the Ultra Mega Power
Project Scheme was being conceived, consciously it was decided that a
chain of coastal power stations, based mainly on imported coal should
also be developed so that dependence of Indian power industry on
domestic coal is partly reduced, and the problems arising out of
mismatches between requirement of coal and supply from domestic sources
are appropriately mitigated.
Thus, there is multiple
strategy which has been put in place, and is being further strengthened, to
address the issue of coal demand - supply mismatch.
Large scale import of coal
may lead to escalation of prices. Would it not impact the financials of the
power generating companies?
The concern is genuine. But
the following facts need to be kept in mind while evaluating these concerns:
In the year 2011-12, if the capacities that
are being projected get commissioned, the shortfall in coal supply is
expected to be of the order of 75 million tonnes. However, since there
could be slippages in the commissioning of certain power projects, this
gap in the coal supply might be somewhat less. By that time, if the
captive coal developers gear up and expedite production of coal, the gap
could further reduce. In spite of all these, we may expect an impact on
coal price for the simple reason that the quantity of coal being
imported would be significantly higher than in the past. All such power
projects which have long term Power Purchase Agreements do have the
provisions for pass-through of additional cost of coal. Therefore, they
need not fear any financial burden on them on this score. No doubt,
there would be a marginal increase in the price of power, though it
would be much less on the weighted average basis.
For project developers on merchant plant
basis these fluctuations obviously would be determined on market
dynamics. It needs to be noted that merchant capacities have themselves
been beneficiaries of market prices of power in times of shortages.
While in certain situations they may have to absorb the higher cost of
coal, in certain other situations such additional burdens would be more
than offset by additional revenue on sale of power.
In case of Ultra Mega
Projects the price variation in coal has been duly taken into account in
terms of the Power Purchase Agreement and the project developers do get
compensated through an indexation mechanism which has been provided in
On balance, it is a conscious
strategy that a part of the coal supply requirement should be met through
imports. Even though India has huge coal reserves, the strategy suggests
that it should be used in a manner that it lasts for generations. Inevitable
implication of such an approach, in terms of price of coal from outside, has
to be duly factored in. Indian power sector and Indian consumers have
started recognising this reality.
Transmission systems, in many
cases have proved to be bottlenecks even in the past. With large scale
expansion in generating capacity, would this problem not accentuate even
Commensurate development of
transmission systems is a must not only for evacuation of power from
generation sources but also for smooth supply through sub-transmission and
distribution infrastructure. The concern is genuine. However, the following
developments, which have taken place and those which are in the pipeline,
should adequately address these problems:
In the Working Group on Power for Eleventh
Plan, it was recommended that the transmission system should have a
cushion of 30%, so that besides meeting the requirements of generating
projects, in which cases the customers are predetermined and accordingly
destinations for power supply are also known, for such projects which
are being developed outside long term PPA, the transmission should be
able to cope with the requirements. This has been accepted as an
approach in transmission systems planning and both Central Electricity
Authority and Central Transmission Utility, viz. Power Grid have already
started working on this.
Unlike in the past, the State Electricity
Boards and State Transmission Utilities, in fact, the entire power
sector, have now recognised the needs for rapid augmentation of
transmission systems - National Grid, Regional Grid and State level
transmission and sub-transmission networks. They have seen and
experienced the impact of inadequate transmission capacity resulting in
non-transmission of power, in many cases, even though power was
available. This change in the mindset has facilitated quicker conclusion
and finalisation of transmission system planning by CEA and Power Grid.
Power Grid has been performing excellently
and has come out with new approaches such as pooled transmission hubs in
select pockets where power generated at various locations could be
pooled together and transmitted through National grid across various
States. In the recent months, Power Grid has also declared that from
projects beyond specified capacity they would also be able to connect
the transmission system right upto the power station.
In the last few years of Power Trading and
Power Exchange operations, it has been seen that by and large Open
Access in transmission system, except for a few cases here and there, is
being handled effectively. Transmission constraints, though experienced,
have been reducing, and will reduce further when the transmission
systems in the pipeline get completed.
Just like Competitive
Bidding for power generation projects to select developers, the exercise
has already started in the area of transmission. Private companies have
responded well to these tenders. Coming years will see transmission
lines constructed by private developers in addition to those by Power
Grid and State transmission companies. Another development in the last
three years in this field is also relevant to be mentioned. Some of the
developers such as Jindal Power and Adani Power have started developing
large transmission systems linked to their power plants and extending
upto National Grid and to the transmission systems of their customers.
Thus, there are a number of
initiatives which have already been launched and are being implemented both
in private and public sectors to substantially augment and expand the
transmission network. These, it is felt, should be able to take care of the
additionalities in generation capacities which have been planned.
Price of power from merchant
plant has been showing a declining trend. Will it not adversely affect the
profitability of merchant power plant developers?
In the year 2006, Ministry of
Power organised a Conference of developers with the objective of brain
storming the prospects and possibilities of developing capacities on
merchant basis. It was suggested that power market cannot develop unless a
substantial amount of power is sold and purchased through dispensation
beyond long term contracts. To address the concern arising out of declining
prices of merchant power the following facts need to be analysed:
Power Trading has remained confined to less
than 3% of the total power supplied in the system. Obviously, the prices
at which the Trading is done, either through Trading Licensees or
through Power Exchanges, cannot be termed as price discovery. With such
a low volume of power transacted, the rates are obviously outcomes of a
distress situation. When the trading volume increases prices are bound
to come down.
The objective is that gradually around 15%
of power in the system should be outside the long term PPA. When slowly
the market reaches that situation the prices determined can be a termed
as valid price discovery.
In the past we have seen
power being sold during certain seasons and during peak hours at rates
varying between Rs. 8 to Rs. 10 per Kwhr. These are not price signals of
any reliability for a long term investment decision.
Merchant power price will
always be significantly higher than the price through long term contract.
The difference, however, will not be of the types which we have seen
sometimes in the past. In my view, if the PPA price is in the range of Rs.
2.5 to Rs. 3.0 per Kwhr, as at present, the merchant price might stabilise
between Rs. 4 and Rs. 5 on an average. Any major deviation from this may be
unlikely. Even with this, development of merchant plants, with risks which
are obviously higher than those for PPA projects, is attractive enough and
should be pursued.
A number of project
developers in the country are sourcing plant and equipment from China. There
is a general apprehension about quality. How far these apprehensions are
The following points are
relevant to be mentioned:
China has an installed a capacity of more
than 800 GW, mainly based on the domestic plant and equipment.
There could be manufacturers of Balance of
Plants in China who could be producing high quality products and there
could be others whose products may not be of that quality. In respect of
Balance of Plant, therefore, one needs to identify the manufacturers of
better quality and rating.
In respect of boiler, turbine and generator,
the major manufacturers have licensed technologies. In my considered
view, there is no quality problem as such. Recently in a matter of three
to four months, one of the Units commissioned by Adani Power, has been
able to consistently perform at 95-98% Plant Load Factor.
A word of caution,
however, is necessary for long term contractual arrangement for
maintenance and spares. Large project developers could perhaps insist on
Chinese suppliers to set up repair facilities and also to stock critical
spares, so that in times of needs urgent action could be taken.
If the price differential is
favourable, there could not be any in principle reservation on Chinese
equipment on the ground of quality as such. Appropriate arrangement for
spares and local repair facilities could be a step in the right direction.
If India wants to develop at
the rate of 100,000 MW or more each Five Year Plan, would the domestic
manufacturing capacity be adequate to meet this challenge?
Domestic manufacturing has
indeed been a right concern. Many of the projects got delayed and continue
to get delayed on account of serious delays in deliveries of plant and
machinery. Till the end of Tenth Plan (2007), in spite of persuasions and
pressures, the manufacturing capacity of BHEL remained at around 5,000 MW
per year. The good point is that several positive developments on this front
have happened. Following facts are relevant:
Now the capacity of BHEL is more than 8,000
MW. In the next three years, we could expect more than 10,000 MW, in the
next five years to more than 15,000 MW and subsequently to around 20,000
MW per year.
Besides BHEL, three more large manufacturers
are coming up. In the next five years each one of them should have a
capacity between 3,000 to 5,000 MW.
Therefore, after about
five years, we may definitely expect an annual domestic capacity of
about 25,000 MW. Similar expansions are also happening in respect of
Balance of Plants.
These positive developments
on the domestic manufacturing front supplemented by also import of power
plant equipment should be able to adequately address the issue concerning
supply of plant and machinery to take care of the massive expansion
programmes of Indian power sector in coming years.
There were a few other concerns
also expressed such as possibility of environmental regulation affecting the
profitability of project developers, and possibility of a Carbon Tax. It was
clarified that in the power sector where the need for investment will continue
and it would be important to attract investors, it is unlikely that any policy
decisions would be taken which will be adverse to the interest of investors. It
is better to assume that Government will continue to provide policy initiatives
which will attract investors rather than taking decisions which will be
restrictive in nature and would discourage investments.