Chennai/Mumbai: As if a slowing economy, sluggish consumer demand and volatile markets aren’t painful enough, industries in Tamil Nadu are reeling under a power crisis that is causing unscheduled, peak hour outages, bumping up costs and hurting output.
The southern state is home to the country’s largest textile export hub in Tirupur, and hosts factories of overseas companies such as Korean auto maker Hyundai Motor Co., French glass-maker Compagnie de Saint Gobain SA and Finnish mobile-phone manufacturer Nokia Oyj.
So bad is the power scarcity that the 6,000 textile units in Tirupur may have to lay off a combined 20,000 workers, according to the Tirupur Exporters’ Association. The industry, which employs about 350,000 workers, earned Rs9,950 crore from exports in 2007-08.
Foreign companies, drawn to Tamil Nadu by its promise of being a power-surplus state, have shielded themselves from power shortages by entering into pacts with the state government for assured, uninterrupted electricity supply. But they haven’t escaped unscathed because the manufacturing units that supply them raw materials and components have had to scale back output.
Some companies have no choice, but to depend on captive power, although the cost of electricity from captive generation facilities is three times the Rs5 per unit charged by the Tamil Nadu Electricity Board, or TNEB.
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Rapid industrialization in the past three years led to a surge in electricity demand, triggering the current crisis. Tamil Nadu’s investment pipeline increased to Rs3.49 trillion as of March from about Rs1.73 trillion in June 2006, according to data from the Centre for Monitoring Indian Economy, a private institution.
Demand for power in the state expanded from 7,228MW in 2004-05 to 9,500MW as of August 2008, but supply increased only to about 6,681.5MW from 5,234.5MW in this period, TNEB data shows.
“Demand can increase rapidly but power projects have long gestation periods, so there is a time lag,” a senior TNEB official said, adding that Tamil Nadu had not seen any significant additions to its power generation capacity in the past 10 years.
Typically, power generation and distribution plants take between two and two-and-a-half-years to start commercial operations, depending on capacity.
All major power projects under construction in Tamil Nadu are expected to be commissioned in the next two-three years, adding 1,245MW of capacity in 2009-10, 867MW in 2010-11 and 2,250MW in 2011-12, according to TNEB data.
This capacity addition may not necessarily ensure additional supply. Tamil Nadu’s total power generation capacity as of 31 March was 10,122MW, but not all of this is utilized.
The central power generating stations in the state, for instance, are supplying 1,000MW less than the 2,825MW they are expected to, the TNEB official said, asking not be named because she’s not authorized to speak with the media.
The Tamil Nadu government is now planning to step up third-party power purchases. Reliance Energy Ltd, a unit of the Reliance-Anil Dhirubhai Ambani Group (R-Adag), and state-owned NTPC Ltd participated in a TNEB tender to supply 500MW to Tamil Nadu, the official said.
MRF Ltd, the country’s largest tyre manufacturer by sales, which has two of its six factories in Tiruvottiyur and Arakonam and a third one coming up in Trichy, has internal power generation plants but has still been hit by the electricity shortage.
“As we are running full capacity, we have been losing production on account of power failures across both our factories in the state,” said Koshy K. Varghese, executive vice-president of MRF.
The two units in the state faced production losses of at least 15% to 20%, in addition to rising costs from using the captive power units. “In a situation when (the) market is difficult and companies are trying hard to keep costs under control, these are unwanted, unplanned expenses,” Varghese said.
All the auto parts suppliers Mint spoke to, as well as textile companies, are facing a significant spike in their production costs because of the power crunch.
J. Ravichandran, general manager, manufacturing, TIDC India (part of the Murugappa Group), said the company’s reliance on its diesel-run captive power unit has increased costs “from Rs3.90 per unit to Rs12 per unit and may lead to a cost overrun by at least Rs50-60 lakh per month.”
TIDC makes power transmission chains for the industrial, automotive and agricultural segments.
Subhasis Dey, a general manager at automotive electrical systems maker Lucas-TVS Ltd, a joint venture between UK’s Lucas Industries Plc. and T.V. Sundram Iyengar and Sons Ltd, said using captive units has nearly doubled the company’s power costs. “We have no choice but to absorb this additional cost till the situation improves. We can’t pass it on to our customers,” Dey said.
Textile exporter JVS Exports, in fact, has had to cut one-third of its production in the past six months, and has stopped using diesel generators from 1 November as it found them “totally unviable.”
“Our production cost has increased by Rs30 per kg of yarn. With the global meltdown, customers want less expensive goods, but we are forced to increase our prices,” said M. Britto Joseph, chief executive of JVS Exports.
The Madurai-based company, which employs 700 workers, is considering trimming its staff size by 15% by the end of this year.
The chief executive of a two-wheeler company, who requested anonymity, said the current power situation in the state would increase the company’s production costs by Rs50 lakh per year.
“We are getting 660MW of power against (a requirement of) 1,200MW. We, hence, don’t have any option but to get more gensets.”
Hyundai Motor India Ltd’s Tamil Nadu unit, which turns out 2,200 cars per day from its plant in Sriperembudur near Chennai, has a pact with the government for uninterrupted power, but its parts suppliers, especially those without captive generation facilities, have been hit by the disruptions, said Ashok Jha, the company’s president.
“We have asked them to install captive power units as we don’t see the situation improving in the short term,” Jha said.
Still, Tamil Nadu can draw some consolation. The power cuts aren’t likely to hurt future investment in Tamil Nadu because other states are also facing a power deficit, said Srivats Ram, chairman of the Automotive Component Manufacturers Association’s southern chapter, which represents 125 companies.
“(But) companies will have to factor in the cost of having captive power plants while budgeting for new projects in the state,” he said.