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The Capitalist | Powerful policy gusts could force India’s power industry to change plans, projections

The Capitalist | Powerful policy gusts could force India’s power industry to change plans, projections
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First Published: Wed, Feb 25 2009. 09 28 PM IST

Updated: Wed, Feb 25 2009. 09 28 PM IST
Fierce gales are tearing through the power sector in India, causing it to change its plans and projections almost every quarter.
Till last year, the rules required an entrepreneur to persuade the Union government to give him a licence to generate power, which was backed by a power purchase agreement (PPA) by the state or Centre for almost 20-25 years. This was extremely attractive for everyone.
Also See More Power Play (Graphic)
It promised the entrepreneur excellent long-term returns (with built-in price escalation clauses). Ministries, too, benefited from the difference between the global norm of $0.8 million (Rs4 crore) per MW and Indian costs of over $1 million per MW.
Then, last year, in an attempt to bring down capital costs, the government permitted the “case to bidding” (CTB) process. This involves the state declaring its willingness to purchase power from any party if it is technically approved and offers the lowest power tariff. The firm that quotes the lowest tariff signs a PPA with the purchasing state, backed by requisite performance and bank guarantees. No Union government licences are required.
One of the most aggressive users of the CTB route is Gautam Adani of Adani Power Ltd. After having lost the ultra mega power project at Mundra to the Tatas, he promptly focused on persuading the state governments of Gujarat, Maharashtra and Rajasthan to go in for CTBs and has won six bids and PPAs for 6,600MW. Adani is setting up generation capacities for 10,000MW and hopes to sell the surplus power through the Indian Energy Exchange (IEX), as some of these power plants will be classified as captive power plants. More such units are also believed to be in the pipeline.
The popularity of CTBs with entrepreneurs and state governments can be seen from the fact that already, almost 23,680MW, or 18%, of the total new power capacity for the 12th Plan will be through CTBs.
Now a gust threatens to change the projections by the Planning Commission. This time it is the captive power policy. This policy allows any captive plant to sell up to 75% of its power through IEX without any PPA. Given the shortfall of power supply—expected to last for at least 10 years, maybe 20—power producers hope to get better prices through IEX.
Many townships have begun thinking seriously about switching over to captive power production, where the cost of power is 30-50% cheaper than grid power. IEX is in negotiations with Hindustan Construction Co. Ltdto set up captive power units in all townships it is involved with. Most special economic zones, too, plan going down the captive power route.
That is going to put a great deal of pressure on high-cost suppliers of power—such as RelianceEnergy Ltd, whose tariffs in Mumbai are among the highest in India. Within a few years, the difference between the tariffs offered by captive units and high-cost suppliers will become too uncomfortable for any state to explain to its people. They will then be compelled to reduce power tariffs or face cancellation of their licences.
One state wakes up
Captive power units have made even state governments sit up. They do not want the power generated in their respective states to be offered to other states. But they will not be able to prevent it legally.
Gujarat appears to have become the first, and as yet the only, state to have reacted to this new reality. In the second week of January, the state amended its laws. It now requires any new captive electricity unit to unequivocally give the state the right to draw, whenever it wants, up to 10% of any power generated, on a variable cost basis.
These terms do raise questions. Will the state pay a commitment fee to the new power generating units to exercise such a right over 10% of the power produced? If the state does not draw any power, will the units be compensated for being prepared for such an offtake? What does “variable cost” mean?
But existing captive power producers in Gujarat aren’t grumbling, as the modification will apply only to the new units. Thus Adani, Tata, Mehta (Torrent), Ruia (Essar) and Ambani (Reliance) aren’t perturbed. But new entrepreneurs have already been forewarned. Quite possibly, in the way commercial hiccups are always managed in Gujarat, these new entrants will find ways to iron out such problems as and when they surface.
More negotiations ahead!
US calling Satyam
The accounts of Satyam Computer Services Ltd have not yet been restated. The US Securities and Exchange Commission’s (SEC) hearing into Satyam’s misleading financial statements has yet to begin. The punitive financial damages and prison sentences arising from the US class action suits have yet to be announced. Yet, the Indian government thinks it can find buyers for Satyam.
Beleaguered: The headquarters of Satyam Computer in Hyderabad. Krishnendu Halder / Reuters
That may happen if a suitable front for Satyam’s erstwhile management suddenly surfaces. After all, the new owner will have to be selected by the government and not by an open bidding process.
Experts wonder if this bizarre “arrangement” could be an attempt to improve Satyam’s chances before the class action suits filed by US investors commence. The other theory, more probable, is that the politicians behind Satyam land deals want to preserve their land banks and cash cows.
The pointers are all there. The Securities and Exchange Board of India had to get an order from the Supreme Court to question Satyam’s top executives; a former close associate of B. Ramalinga Raju was appointed the new CEO by the government (not the board of directors); Maytas’ assets (and those of the other 250-odd group companies) not yet being attached, though they were acquired through diverted funds. Not surprisingly, marketmen believe that the Satyam fraud will actually get exposed only when the US courts begin asking for papers and audit reports, and then seek arrest of the fraudsters.
The last time, a foreign court threatened to expose a corporate scandal in India was when Singapore issued an arrest warrant for Rajan Pillai, the maverick industrialist whose irregular financial dealings were behind the questionable attempts to ‘own’ Nabisco and Britannia.
One can only hope and pray that the Satyam saga won’t be as messy.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Wed, Feb 25 2009. 09 28 PM IST