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KVB Reddy, Executive Director , Essar Power

03 Mar 2014

Essar Power is one of India’s leading private power producers, with a track record of more than 15 years. It has seven operational power plants in India and one operational power plant in Algoma, Canada, with a total installed generation capacity of 3,910 mw. Its Executive Director KVB Reddy talks to Shakeb Ayaz about the company’s growth strategy, its problems on fuel front and why the company is planning to convert two of its gas-based plants into coal-fired ones. Excerpts.

What kind of capacity addition has Essar Power planned in the coming fiscal?

This year we are going to commission about 1,000 mw of capacity across three of our units, taking our overall capacity to 4,900 mw. The ones to be commissioned this year are the 600 mw unit II of Mahan I project in Madhya Pradesh, 270 mw of Hazira II in Gujarat and 120 mw in Paradip, Orissa. For the six-month period ended September 2013, Essar Power reported a 45 per cent increase in power generation to 5,672 million units (MU) from the year ago capacity, while generation capacity rose 18 percent to 3,910 mw. Power business’ operational EBITDA during the period stood at $147 million compared to $93 million in the first half of 2013. While operationally the company continues to perform well, the business faces challenges in terms of non-availability of feedstock (gas, coal) and delays in receiving approvals.

Is your company present in the hydro power segment?

We are not present in the hydroelectric segment, save for one small project in Nepal, which is still on the drawing board stage. Our portfolio primarily consists of gas-fired and coalfired plants. Our operational projects are Essar Power Hazira (515 mw), Vadinar Power (120 mw), Bhander Power (500 mw), Vadinar P1 (380 mw), Salava 1 (1,200 mw) and Vadinar P2 (510 mw). All the projects are located in Gujarat. We also have one power plant in Canada – Algoma Power Plant -- with a capacity of 85 mw.

With fuel supply agreements (FSAs) tied up with Coal India Limited (CIL) and the Cabinet Committee on Investment (CCI) also expediting clearance process, do you think there will be an improvement in the power scenario soon?

We look forward to a situation of easing of raw material supplies. The sector as a whole continues to suffer because of feedstock issues and we hope that recent policy movements will improve the supply situation.

How satisfied are you with the coal auction process? Do you want the government to be more transparent? What is the status of Mahan coal block and how much initial production do you see from these mines?

Mahan coal block, which is jointly owned by us and Hindalco, received stage I clearance – forest clearance – from the Ministry of Environment and Forests (MoEF) in October 2012 and is awaiting stage II clearance. Upon receiving that clearance, we can begin the mining process and expect to reach peak production of 8.5 mmtpa in about three years.

What is the status of fuel supply for your plants?

We operate our power plants in two buckets - captive or return on equity and non-captive. In former, we have six operational plants. These projects deliver secure revenues and operational EBITDA as the majority of payments are based on availability, rather than on power generated. Fuel price and delivery risks lie in power purchase. In non-captive, we have domestic or imported coalfired plants. Our 1,200 mw Salaya power plant runs on imported coal and faces no major feedstock issues. Amongst the domestic coal-fired plants, unit I of 1200 mw, Mahan I has been commissioned. The plant awaits coal from its captive mine for which environment clearance is underway. Till then, the plant is running on coal procured through CIL’s e-auction route. Here, due to shortage of coal, the plant is operating at sub-optimal level and commissioning of unit II will be synchronised with captive mine approval. Considering the short supply of domestic natural gas and high cost of imported LNG, Essar Power is converting two of its gas-fired plants, the 515 mw Hazira power plant and the 500 mw Bhander plant, to imported coal-fired plants with a combined capacity of 430 mw. As per our estimate, it will cost about $200 million to undertake the conversion of both the plants. The objective of the conversion is to ensure that the commercial life of these assets, which is currently uncertain due to gas issues, is extended.

What are your company’s expansion plans? Is green-field expansion on cards?

At present we are focussed on finishing projects on hand and are not undertaking any fresh projects. But there are various plants which are in a project stage. Mahan 1 (unit II) in Madhya Pradesh with a capacity of 600 mw, Hazira II in Gujarat with a capacity of 270 mw, Paradip in Odisha with a capacity of 120 mw,Tori I in Jharkhand with a capacity of 1,200 mw and Tori II in the same state with a capacity of 600 mw are in project stage.

What will be the capital expenditure for the next couple of years and how do you plan to fund it? How much do you plan to borrow for the next fiscal and what are the current borrowing levels?

All our projects have achieved financial closure. Our investment is very much in line with industry average of US$1 million / mw for thermal projects. Our gross debt is about $3 billion.

How aggressively are you looking to acquire coal mines in the overseas market? Which geographical areas are you looking for coal assets?

While we look at all available opportunities in the market, there is nothing concrete at this point in time to reveal.

How are the captive mines of your company performing?

We have a captive mine in Indonesia, called Aeries, for our Salaya project; Mahan coal block in Madhya Pradesh for the Mahan project and Chakla and Ashok Karkata coal blocks for the Tori project. In Aeries, work is going on to construct the road and port infrastructure required to export the coal. All statutory clearances have been received and work on the coal jetty is continuing. We expect to obtain first coal from this mine in the second half of fiscal 2015. For Mahan, we are awaiting stage II forest clearance, which will allow us to begin mining process. We will take about three years to reach peak production. Chakla and Ashok Karkata are awaiting stage I forest clearance.

Delays and denials of forest clearance may prove to be a roadblock in power evacuation and some of your projects in eastern India are also affected by this. How does your company plan to move ahead on this?

Delays in receiving regulatory approvals have pushed several projects to the brink and hence a quicker approval process is the need of the hour. For our Mahan plant, where the first unit is operational, we are procuring coal through the e-auction route and are evaluating imports. We have also applied for tapering linkage. For Tori, the project will proceed in sync with approvals received.