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Imported fuel options will work only with the clear understanding from all stakeholders, J.P Chalasani, CEO, Reliance Power

23 Apr 2012

J.P Chalasani, Outgoing Chairman, Association of Power Producers and CEO of Reliance Power spoke to Infraline at length about the problems concerning the coal sector, whether imported coal is viable idea for India and his views on the performance of the power sector

Edited excerpts.

How do you look back on the power sector's performance at the end of the Eleventh Plan? And do you think it is possible to replicate this growth in the Twelfth Plan?

Since the enactment of the Electricity Act,2003--a path breaking legislation--for the first time in the 11th Five-Year Plan the private sector has made its mark by contributing over 58% of the total capacity addition in the country.

Against the 11th plan achievement of 53,922 MW, the private sector contributed 31,372 MW (until February 2012). Thus, against a plan target of 15,043 MW, the private sector has achieved almost 200%, and it is this rise of the IPP that has defined the 11th plan power sector capacity addition.

"15,000 MW of existing gas based power capacity and another 9,520 MW of upcoming capacity in various stages of development."

In the 12th Plan target, private sector is expected to add 42,000 MW (56% of new capacity), and we are confident that this target would also be comfortably achieved. With this, private sector's share in the total capacity could increase from the current 23% to 38% at the end of FY 2017. In the right enabling environment, the private sector can far surpass the current levels of capacity addition. However, fuel and distribution issues have emerged as major challenges and the sector needs to find an answer to those issues.

What according to you are the greatest challenges facing the sector right now?

The biggest challenge is obviously fuel availability and pricing. Another huge challenge is accelerating reforms in power distribution. That's a crying need. I see a silver lining in the form of the recommendations made by the Shunglu committee set up to suggest ways of reviving the SEBs/discoms. It sets out a clear game plan for rescuing the SEBs, by clearly passing the onus of repaying loans to respective state governments, instructing the states to ramp up transmission and distribution efficiency and for an allotment of distribution areas on a franchisee basis.

Do you think the optimism generated after the much-hyped meeting of industry leaders with the Prime Minister in January was justified?

Oh yes, completely justified. It was the first-ever such meeting with the Prime Minister himself interacting at length with Chairmen of nearly all leading power producing companies. Plus there were follow-up meetings with his Principal Secretary, Shri Pulok Chatterjee, which was set up at the Prime Minister's behest. As an outcome of that initiative:

  • We had the fuel supply agreement decision on Coal

  • We had a good, encouraging set of budget proposals with 7 out of 8 APP recommendations being accepted by the Government

  • Reconsideration of decision to impose import duty on power equipment

  • We had a meeting of the EGOM on gas, after which a major initiative to evaluate gas pooling for the power sector has been taken up, to augment dwindling gas supplies

  • We also had a GOM meeting on coal, to expedite forest clearances for coal blocks.

What is more, we are confident that many such decisions and solutions are on the anvil and we will hear of them soon.

Will the signing of the FSA with Coal India really be of help to utilities?

It is a very positive development for the sector. We are happy that Coal India has taken up this responsibility. It will push CIL to improve efficiencies and ramp up coal production.

How do you think domestic coal production cam be ramped up?

Coal India has a crucial role to play in that and the FSA signing is a step towards that objective. Other than that, environmental and forest clearances need to be fast-tracked.

"There is at present about 13,000 MW of capacity tied up from imported coal through the competitive bidding route. However, rise in international prices of coal has made this completely unviable."

Further, there is significant scope to improve coal production from captive/operating CIL blocks by using enhanced technologies. These should be encouraged by providing a forward looking surplus coal utilization policy, which provides adequate incentive to extract surplus coal from coal blocks.

With the controversy surrounding captive coal block allocations, do you think increased captive production from private players will ever be possible?

I am absolutely confident about that. In fact, the government is already moving forward on coal block auctioning through a competitive tariff-based model, which I think is the best way to move forward. Efficient production of coal from these coal blocks will demonstrate the benefits.

The next wave of reforms in coal sector has already begun, with the draft coal regulatory bill being introduced shortly. This would go a long way in liberalizing the sector and introducing a transparent regulatory environment, which would increase FDI and international investment in the sector.

The imported coal options seem to be fast running out with rapid changes in Indonesia as well as Australia. What solutions are possible? Will the procurers of power ever accept a pass-though for changes in prices since the tariffs have been set through a bidding process?

Imported fuel options will work only with the clear understanding from all stakeholders that risks of changes in regulations and law of any country whether Indian or Indonesia or Australian will have to be passed on. It is important to understand that the price impact of these changes is being passed on to the consumers for all Central and State Sector Power Projects that operate on cost plus basis.

"The Shunglu committee recommends the franchise model of power distribution and a slew of other reforms to ensure that the sector resumes normalcy by 2017. These recommendations should be examined and implemented at the earliest."

There is at present about 13,000 MW of capacity tied up from imported coal through the competitive bidding route. However, rise in international prices of coal has made this completely unviable. APP has requested the Government of India to constitute an Expert Group to examine the various issues related to increase in international coal prices, and provide a fair and transparent mechanism to in the PPAs to benefit all concerned parties. We understand this recommendation is under active consideration. A direction from the GoI on this crucial aspect would go a long way in providing viability to imported coal based power plants.

Do you think that the competitive bidding model has been a failure and is it best to revert to the cost-plus model?

Not at all. Tariff determination through competitive bidding has been far better than was the case with cost-plus. The competitive bidding model provides a great incentive for developers to be efficient in setting up capacities through efficient procurement, construction and financing options. Even CERC has recognized this in its study report of September 2010. Of course, fuel pricing risk must be borne by the party that can best manage it viz. Distribution companies.

While there has been so much focus on problems vis-à-vis coal, what about gas projects? What happens to the gas-based projects that are stranded?

That has been an item on the top of APP's agenda. Gas based power is a significant component of every country's power mix, as it is much cleaner, and has a much lower carbon footprint. In fact, the Rakesh Nath Committee set up by CERC to examine peaking power has also suggested that gas based power can be effectively utilized to meet India's peak power requirement.

There is 15,000 MW of existing gas based power capacity and another 9,520 MW of upcoming capacity in various stages of development. We have been pursuing with the Government of India that gas must be provided expeditiously to ensure these projects become operational expeditiously and augment India's power capacities.

Recent projections of domestic gas supply indicate a drastic fall over the next two years. In fact, official projections by the Government of India have fallen by over 75% in the last two years. To ensure that the power sector is not affected in this scenario, the best option available may be to augment the domestic gas with imported R-LNG and supply to all the existing and upcoming plants. This would eliminate the possibility of stranded assets and NPAs on account of shortfall in domestic gas supply.

The distribution companies in all states are facing huge financial challenges. As a sector association, what solutions are you suggesting to the government?

I am optimistic on this score. I think there is a growing realisation in the government that distribution reforms are critical for the entire sector. We have today robust regulations under the Electricity Act. The regulatory framework is not the problem. Implementation of those regulations is. Having said that, I view the recent decisions by the government, the central regulator and appellate tribunals as positive for the power sector. The recent tariff revisions by states should be viewed through the prism of positivity.  The Shunglu committee recommends the franchise model of power distribution and a slew of other reforms to ensure that the sector resumes normalcy by 2017. These recommendations should be examined and implemented at the earliest. Further, I may mention that while this problem is acute in some of the states, in others, the difficulties are not insurmountable.

(InfralineEnergy thanks J P Chalasani, Outgoing Chairman, Association of Power Producers and CEO of Reliance Power for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)