Mumbai: Tata Power Co. Ltd plans to buy minority stake in overseas coal mines to secure supply as it readies to boost generation by more than eight times in six years.
The nation’s largest private power utility has said that it also wants at least 20% of its generating capacity to come from cleaner, non-coal-based sources such as hydro, gas, wind, solar and geothermal.
Expansion goal: Tata Power’s chief financial officer S. Ramakrishna. The firm seeks to boost generation by more than eight times in six years. Prashanth Vishwanathan/Bloomberg
Tata Power plans to raise generating capacity to 25,000MW by 2017 from 2,800MW now, director and chief financial officer S. Ramakrishna said in an interview.
The shortfall in coal supply in India may triple in five-seven years, according to rating company Icra Ltd, a local unit of Moody’s Investors Service. Coal production in India was 67 million tonnes (mt) in the year ended 31 March 2010, less than the demand, according to the February report.
Tata Power and other local utilities are boosting capacity as the world’s second fastest-growing major economy faces a peak power demand deficit of 10.5% resulting in outages. They are looking at overseas acquisition to offset the coal shortage in the nation.
The biggest challenge for power producers is to source coal for their power plants and lenders insist on fuel supply to sanction loans.
“For any independent power producer (IPP) who wants to rapidly increase capacity, fuel is the most significant challenge, with shortage in domestic supply and rising prices in the global market,” said Kameswara Rao, leader of government and infrastructure practice at consultancy firm PricewaterhouseCoopers.
Tata Power plans to mitigate these risks by buying small stakes in overseas coal mines, a strategy it pioneered in 2005.
The company owns a 30% stake in Kaltim and Arutmin mines, owned by Indonesia’s PT Bumi Resources Tbk, which can produce 100 mt a year. It allows the company to use coal from these mines for its 4,000MW Mundra project and hedge risk against price volatility in the global commodities market.
Tata Power has been short-listed for the purchase of 30% stake in Indonesian conglomerate Sinar Mas’ coal mines, Dow Jones reported on Tuesday. Sinar Mas is seeking $300 million for the stake, the news agency said.
Tata Power is looking to buy smaller stakes in mines in Indonesia, South Africa and Mozambique, and Australia, Ramakrishna said.
“Power companies like Tata Power need to make their coal blocks commercially viable,” said Kuljit Singh, a partner at consulting firm Ernst and Young India Pvt. Ltd.
“In the case of projects like Mundra won through competitive bidding where fuel cost may be partial pass through—passed on to consumers—or no pass through at all,” said Ramakrishna. “If one takes a hit due to increase in coal prices, gains made through higher prices on coal by holding stake in coal mines neutralizes the price shock.”
Tata Power also plans to expand power distribution and transmission and acquire power generating firms to boost capacity, he said.
“There is need for bridging the gap between expectations of promoters and what we feel is a correct valuation of a project to allow us to do acquisitions,” Ramakrishna said.
The company’s plan of 25,000MW by 2017 is unrealistic unless they make some big-ticket acquisitions, said a research analyst with a foreign brokerage, who has been tracking the power sector for 14 years. He declined to be named.
Tata Power wants to reduce its dependence on coal-based power projects. The company has a joint venture with Norway’s SN Power to build hydropower plants in Nepal and the Himalayan region of India.
The venture plans to develop power plants that would together add 2,000MW capacity by 2015 and 4,000MW by 2020.