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Business News/ Money / Cogen at sugar mills could pose a challenge
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Cogen at sugar mills could pose a challenge

Cogen at sugar mills could pose a challenge

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Much as they may deny it, sugar companies know that sugar prices, which have nearly doubled in a year, will fall at some point. It may take a year or more and prices may go up further before it happens. It’s a cycle they have seen play out over decades. They are now turning to an unusual source for help: power generation. Before cogeneration of power became a standard feature among large sugar companies, they made only sugar. Integrated sugar mills also made alcohol (and now ethanol as well) using molasses and some chemicals as well.

But a combination of factors, like needing assured power for making sugar and the scope for producing power from bagasse led to a few larger players from Uttar Pradesh enter into cogen power. The high capital expenditure was a deterrent for smaller players but the payoff made it worthwhile. Bagasse generated in the sugar-making process was reused as fuel to fire the boilers to generate steam and electricity. After internal consumption, the surplus power was wheeled to the grid.

Also See | Profit Gain (Graphics)

The initial success of this model made it a viable option for many more sugar companies. Bagasse derived from cane is virtually free, except for the opportunity cost of selling it in the market. Bajaj Hindusthan Ltd earned Rs82 crore from selling cogen power and earned a segment profit of Rs48 crore in financial year 2009 (year ended September). And this in a bad year since sugar cane production was low. That brings us to the catch in cogen power: To make power you need enough bagasse, either by crushing cane or from the open market. Cogen plants work to capacity in the crushing season and also in the off-season, depending on bagasse availability.

In years when cane availability drops, power plants find it difficult to operate at full capacity. Low or lack of cogen power has another effect. Sugar companies have started importing and refining raw sugar to make up for the cane shortfall. Without power, they cannot refine sugar either. So companies are embarking on a new path; they are seeking to become power producers using coal.

Dhampur Sugar Mills Ltd has equipped two of its plants to handle coal such that they can be run even when bagasse is not available. The company said in a management call that it is seeking coal linkages and looking at the means of securing supplies. Bajaj Hindusthan is investing around Rs1,600 crore in setting up coal-fired power plants adjacent to its sugar units, and is even contemplating acquiring coal mines, to secure supplies. Balrampur Chini Mills Ltd, too, is converting one of its boilers to use coal and plans to do this at other plants, too. More clarity on these plans will emerge in the quarters ahead.

The power business will work like an annuity if the plants sell under a power purchase agreement or will offer varying returns if sold under open access (through power trading). The expectation is that power will provide a steadier revenue stream, allow raw sugar processing during the off-season and smooth out the volatility in revenue for sugar companies. This would be the goal, at least. But companies still need to worry about delayed payments and coal supplies, and investors about whether they are exposed to sugar or power. If sugar suffers from policy hiccups at the state and Central levels, so does power. The logic for increasing exposure to power seems compelling but execution will be a challenge.

Graphics by Naveen Kumar Saini/Mint

Write to us at marktomarket@livemint.com

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Published: 14 Jan 2010, 09:39 PM IST
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