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Fuel, finance crunch to haunt energy sector

Fuel, finance crunch to haunt energy sector
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First Published: Fri, Dec 30 2011. 12 04 AM IST

Supply struggles: A file photo of an NTPC power station at Dadri. Power projects totalling around 13,000 MW will be affected due to higher prices of imported coal, according to APP. Photo: Pankaj Nang
Supply struggles: A file photo of an NTPC power station at Dadri. Power projects totalling around 13,000 MW will be affected due to higher prices of imported coal, according to APP. Photo: Pankaj Nang
Updated: Fri, Dec 30 2011. 12 04 AM IST
Mumbai: The year 2011 saw India’s power sector beset by a shortage of coal and poor financial health of state-owned distribution companies. These challenges need to be addressed soon to boost power production during the 12th Five-Year Plan beginning April, say analysts and power producers.
Supply struggles: A file photo of an NTPC power station at Dadri. Power projects totalling around 13,000 MW will be affected due to higher prices of imported coal, according to APP. Photo: Pankaj Nangia/Bloomberg
Around 55% of India’s 1.83 trillion megawatts (MW) of installed power capacity is fuelled by coal. “The acute shortage of domestic coal in the country has become a major concern,” said Anil Sardana, managing director of Tata Power Co. Ltd, India’s largest independent power producer by capacity.
“It has led to apprehensions that the ambitious capacity addition target of 90-100 gigawatts in the upcoming 12th Five-Year Plan period may not be met and also cause avoidable stress on assets already built or committed by many private sector players,” he said.
Th Planning Commission had set a capacity addition target of 78,700MW during the 11th Plan (2007-12), subsequently revised it to 62,000MW, but only 42,000MW was added until November. The commission projects the addition of only 50,000MW by March 2012, the end of the plan period.
The commission also estimates that against an original targeted domestic coal production of 680 million tonnes (mt) during the 11th Plan, only 554 mt will be achieved.
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Mint’s Aveek Datta says that unless concerns about fuel shortages and the financial health of state-owned distribution firms are addressed, India may not achieve its target power targets outlined in the 12th Five-Year Plan.
“In the power sector, the pendulum has swung from a mood of over-optimism a year back to over-pessimism now, and none of the extremes represents a correct picture,” said Arvind Mahajan, head of the energy and natural resources practice at international audit and consulting firm KPMG. “Though many of the current concerns in the sector were there even a year back, the situation has worsened due to the lower-than-expected performance of Coal India (Ltd) and weak market conditions.”
Ashok Khurana, director general, Association of Power Producers (APP), an industry lobby, said banks had stopped lending to power projects and were insisting on certainty of coal availability “before even considering financial assistance”.
In the 12th Plan, demand for about 1,000 mt of coal for power generation is expected, and about 200 mt of this will have to be imported, according to the Plan panel. However, regulatory issues in countries such as Indonesia and Australia have led to an unprecedented rise in the price of imported coal, leading to economic viability concerns for many Indian power producers.
While Indonesia has linked the price of coal to international indices, Australia has levied a carbon tax on the export of coal. The industry estimates the overall price of imported coal to rise by around Rs 1,500 a tonne due to these two measures, since about 55% of India’s coal imports comes from these two nations.
Power projects totalling around 13,000MW will be affected due to higher prices of imported coal, according to APP. These include two 4,000MW so-called ultra-mega power projects awarded by the government to Tata Power and Reliance Power Ltd. The tariffs proposed by the firms while bidding for these projects to be run on imported coal are no longer viable considering the higher cost of fuel.
Kameswara Rao, an executive director at PricewaterhouseCoopers, said that instead of trying to outbid each other while vying for international coal assets, Indian companies should follow a coordinated approach to keep prices in check. “If the off-takers (power purchasers) refuse to absorb the additional cost, the producers will be forced to operate below capacity,” said Rajiv Mishra, managing director and chief executive officer of CLP Power India Pvt. Ltd, the only multinational power company operating in India.
“It won’t be easy for the off-takers to absorb additional cost implications over a long period of time and remain competitive,” Mishra said.
The largest purchasers of power in India are state distribution utilities that have been reeling under losses for years. The finance ministry has even advised banks to stop lending to loss-making state power distribution companies, even as the Planning Commission pegs the aggregate losses of these utilities at Rs 70,000 crore, excluding the subsidy they get from the respective state governments.
The main reasons for these losses are high levels of transmission and distribution (T&D) losses, at around 30% of total power produced, and little tariff revision over the years even though costs increased.
A report released by credit rating agency Crisil Ltd in October said the gap between the average cost of supply per unit of power and the realization per unit was as high as 86 paise. It also warned that loans to the tune of Rs 56,000 crore extended by banks to the power distribution sector were at risk if no meaningful reforms are undertaken in the next 18 months.
A committee appointed by the government under the chairmanship of former comptroller and auditor general V.K Shunglu suggested that the outstanding loans to power distribution companies be taken over by special purpose vehicles (SPVs) floated by the Reserve Bank of India and restructured while securing commitment from such utilities for regular tariff revision and reduction of T&D losses.
“We can’t have a business-as-usual approach for the sector,” said Anish De, chief executive officer for Asia at global energy consulting firm Mercados Energy Markets, concluding: “Creating an SPV for restructuring loans may work, but it needs to be followed up by setting performance parameters for the distribution companies and simultaneously ensuring external cost pass-through.”
makarand.g@livemint.com
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First Published: Fri, Dec 30 2011. 12 04 AM IST
More Topics: Fuel | Power Sector | Coal | Iron Ore | Tata Power |