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Lajpat Shrivastav, Chief Executive Officer (CEO), Thermal of Moser Baer Power & Infrastructures Limited

13 Mar 2013

Need to reduce normative PLF, allow pass through of coal cost

A mechanical engineer with masters in business administration, Lajpat Shrivastav, Chief Executive Officer (CEO)-Thermal of Moser Baer Power & Infrastructures Limited,  a fast-growing integrated power player, talks about the challenges being faced by private players in the absence of adequate supply of coal and the need for a coal regulator. Excerpts from interview:

Where do you see the power sector heading and what are the challenges?

The power sector is going through a bad patch right now because of two types of problems. While there are certain things that are well within the government’s control, there are few other things that would need some time to correct even with the best intentions of the government.

Coal price forms a significant component of tariff. While regulatory framework has been set for power sector, in spite of the need being felt within the government, no regulator has been set up for coal sector. This is an urgent requirement. It will help in monitoring the progress, pricing and distribution policy for coal blocks allotted to private sector.

Liberalization of the power sector by the government attracted private sector companies to make large investments during the Eleventh Plan. One must appreciate the fact that as compared to Tenth Plan, private players added about 45,000 mw power generation capacity in the Eleventh Plan, which is a significant development. Further over 1,00,000 mw capacity projects are in various stages of development by private sector and will get commissioned over the next couple of years, including in Twelfth Plan.

What according to you is under government control and what needs to be done to infuse enthusiasm in the private sector companies?

Both public sector and private sector companies have plans to add capacity. Typically in public sector there is not enough emphasis on return of investments while setting up power projects, whereas in private sector companies this is a very crucial issue to examine while setting up large, capital-intensive projects.

There are a number of areas where small initiatives in addressing the policy mismatches can help the sector significantly. Some examples are-Coal India Limited (CIL) requires signing of power purchase  agreements (PPAs) with distribution companies (discoms) for long-term supply of power to allow signing of fuel supply agreements (FSA) with developers. Unless there are case-1 bids for purchase of
power, developers cannot tie up for sale of such power through long-term PPAs. This issue can easily be addressed by allowing short and medium term PPAs for the purpose of signing FSA, as an interim measure.

Another example is: Unless Standard Bidding Document (SBD) for case -1 bidding is revised to address the coal issue, no discom is going to invite bids, lest they get tied up with high cost of power for 25 years. Right now due to uncertainty in coal supply by CIL, no developer is certain as to how much coal will come from indigenous sources and how much from imported sources. In such a scenario it is natural that developers will build cushion while quoting tariffs over long periods, to ensure they do not suffer losses. Solution lies in either reducing the normative plant load factor (PLF) for capacity charge, or make coal cost completely pass through in the tariff.

Another example: Government of India started ultra mega projects with lot of fanfare. But now when the first set of such projects are stuck, the government is not coming forward with any kind of help. If these projects become unviable, it will send a very wrong message to the sector.

There are many such examples and they have been discussed with Power Minister Jyotiraditya Scindia in the meeting organized by the Association of Power Producers (APP). One thing is clear, unless the government sends out clear message to the sector that it will not allow the assets to become NPAs right from the beginning, the investor confidence will not be restored and further investment will suffer.

It means there are issues other than availability (or the lack of it) of coal which are creating problem? Is lack of clarity from the government also adding to the problem?

Coal availability of course is a problem. It is a recognized fact that there is coal shortage in the country. However it is surprising that the GoI or CIL is not coming forward in a clear manner to show how this issue will be dealt with in the interim till coal production is augmented. While it is heartening to see that GoI has constituted committees to study these issues and make recommendations to ease the situation, the recommendations are not implemented with same speed and focus.

Ministry of coal and power need to jointly come out with interim policy / strategy to address the shortage of coal supply. Coal price forms a significant component of tariff. While regulatory framework has been set for power sector, in spite of the need being felt strongly within the government, no regulator has been set up for coal sector. This is an urgent requirement for the country. This step will also help
in monitoring the progress, pricing, distribution policy etc for the coal blocks allotted to private sector.

Coming to Moser Baer’s thermal project at Anuppur, where are you stuck? By when do you feel the project in Madhya Pradesh would become operational?

We had a plan to become a 5000 mw company within first five to six years. We are moving forward according to our plan and have developed two projects with overall 4000 mw capacity. The first is the Anuppur Phase-I where we have completed about 60 per cent of the work and the unit is likely to be commissioned by December this year or early January next year. The problem we are facing is of case-1 bids which are not coming as state electricity boards do not want to take the risk of committing to high price power and without a bid Coal India would not commit coal supplies. We are concerned about the coal supply for the project when it gets  commissioned.

The uncertainty over coal supplies is forcing us to go slow on projects that we had
planned. We have plans to develop a 1320 mw unit in Chhattisgarh and another 1320 mw at Anuppur in phase-2. These two projects are ready for implementation with all clearances tied up, but we will start the execution of these projects only when we see comfort in the coal sector.

We do have a joint venture with Chhattisgarh Mineral Development Corporation where we are developing a small commercial coal block. Since the block does not have huge resources, we may be able to fill some part of shortfall from this block, but it is too small a block to be of much help.

This uncertainty over coal supplies is forcing us to go slow on other projects that we had earlier planned. We have plans to develop 1320 mw unit in Chhattisgarh and another 1320 mw at Anuppur in phase-2. These two projects are ready for implementation with land acquired, all clearances tied up, but we will start the execution of these projects only when we see comfort in the coal sector.

We understand that there are issues at several fronts ranging from coal supplies to signing of fuel supply agreements. Are there challenges at lending front as well?

While lenders such as State Bank and Axis Bank are lending to power companies even when Fuel Supply Agreements (FSAs) are not signed, but linkage is granted by Coal India / ministry of coal, public sector companies such as Power Finance Corp and Rural Electrification Corp insist on FSA before lending. These institutions come under the ministry of power and know the constraints being faced by developers with regard to FSA and therefore, they need to evaluate whether coal linkage is available or not, like any other bank or FII. But putting FSA signing as a pre-condition for funding is something developers are not able to solve and this creates a stalemate. Being the finance companies, which are specific to power sector, they should realistically align themselves with the sector and lend money considering the practical issues in the sector.

With all these issues plaguing the sector, would it be right to assume that the government’s approach towards the sector is casual?

No. I would not say that. I believe the government’s intentions are right otherwise it would not have brought a young and dynamic leader like Jyoritaditya Scindia into the ministry. We sincerely believe that the problems would be addressed sooner than later as the country cannot afford to miss the bus this time. I am sure that the government is fully aware that slowdown in power sector will have adverse impact on the overall economy and GDP growth.

Do you see it encouraging particularly for the private sector companies where Coal India is not participating in 17  blocks that would be auctioned now? Does that mean serious private companies would now have little more surety on coal supplies?

The policy for auction of such coal blocks may have to be such that private sector can participate. Right now as far as I know there is some confusion in this area. However I believe that even earlier coal blocks were allotted to private sector for end use of power projects, but because of the various difficulties faced by them in getting environment clearance, land acquisition etc, these blocks have not been developed so far. In parallel with concentrating on the allotment of fresh coal blocks, the government should also think of setting up a common / monitoring ministry for helping such developers in starting the production from such coal blocks.

What are your views on sharing of surplus coal within a company? Even when the Planning Commission had proposed to allow it considering the wider benefits, coal ministry seems to oppose the idea as it would throw open a bigger challenge for Coal India and the ministry ?

In view of such huge shortage of coal in the sector, it will be a welcome step to allow sharing of surplus coal within a company to develop other projects. This will reduce pressure on coal ministry as well as CIL. Not only this, it will be further helpful if MoC / CIL introduces incentives for increased production from the allotted  coal mines which will ultimately help the sector. It is now time for the government to seriously think of removing the monopoly of CIL in coal production, in line with most other developed countries. This can only happen if a regulator is set up and blocks are allotted to private players and a central ministry is set up to assist them in obtaining all the clearances in a timely manner.