Distribution segment to lead reforms in power sector

Private industry, which has been complaining of policy hurdles, still seems bullish on fresh investments Hanwha solar
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Indias power sector reforms in 2013 would be led by the distribution segment, armed with the newly-announced debt restructuring package for state utilities. The Centre has backed the package with measures to ensure it does not meet the same fate as the one-time-settlement scheme of 2001. Also, most states have defeated political interference on revising retail rates, which will show in healthy balance sheets of financially-ill discoms. The distribution sector reform, coupled with easing fuel supply constraints, duty measures for protection of the domestic equipment industry and the interest rate regime, will be the key factor affecting growth of the sector over the next year. The new discom package not only provides for restructuring of loans but has provisions for incentives for state governments to cut distribution losses. There is also an elaborate legislative back up, in the form of the State Electricity Distribution responsibility Bill, to ensure that errant discoms fall in line and high-level committees to monitor progress of the discoms. State discoms have accumulated losses of Rs 2.4 lakh crore, thanks to the gap between average revenue realised and the cost of supply. With rising fuel charges and stagnant rates, the gap rose to Rs 1.45 a unit (kilowatt per hour) in 2009-10 from 76 paise in 1998-99. The fresh reform initiative focuses on rate revisions, supplemented with earnings through reduced losses. Many Indian states suffer from aggregate technical and commercial (AT&C) losses as high as 30-35 per cent, compared with the world average of five-10 per cent. Anil Sardana, managing director of the countrys largest private power company, Tata Power Co Ltd, believes the need to reduce of high level of AT&C losses in distribution and enable rationalisation of tariff for customers to help improve the financial health of the discoms were part of the policy hurdles highlighted in 2012. Meanwhile, the growing focus on distributed power generation and trading of renewable energy certificate (REC) on exchanges are among the developments that can usher in positive changes in the energy scenario of the country going forward, he told Business Standard. Worst power blackout in 2012 He also listed severe fuel supply shortage and the worst power blackout (grid failure) in the countrys history, in July, as turbulences the sector faced last year. All that is set to change in the new year. The significant improvement shown by state-owned Coal India Ltd (CIL) in output would ramp up coal supply for plants. While the coal problem was compounded in 2012 by the differences between power and coal ministries over the provisions of the new supply pacts, the two sides arrived at a consensus last week. New pacts are set to be signed for over 7,000 Mw capacity within a month. Another reason for cheer in 2013 is that private industry, which has been complaining of policy hurdles, still seems bullish on fresh investments. The private sector added around 15,000 Mw of new capacity, 75 per cent of the total 20,500 Mw in the past year. Despite grappling with

challenges, the level of determination exhibited by the private sector must be appreciated, Sardana says. While the last year saw commissioning of all the three units of Tata Powers Mundra ultra mega power project (UMPP) in Gujarat, the first of the nine such large-sized power plants being planned in India, the project ran into problems owing to a change in regulation in coal exporting nations making imported coal costlier. The company is currently seeking a rate relief from the regulator. Meanwhile, the power ministry is confident of awarding a new UMPP in 2013, with revisions in the original bid document. On equipment, the coming year will witness a surge in the share of domestic industry in the power gear market. The government has already imposed a 21 per cent import duty on equipment to discourage allegedly low quality Chinese machines and benefit domestic manufacturers such as Bharat Heavy Electricals Ltd (BHEL) and Larsen and Toubro. However, the financing constraints faced by infrastructure companies may spoil the plan. BHEL is already seeing a slowdown in fresh orders. Overall, the sectors growth in 2013 would depend largely on how well the government is able to manage two key issues which had pulled down profitability of companies last year fuel supply and high interest rates. Its critical that the over 30,000 Mw of capacity, ready for commissioning and awaiting fuel supply, is supplied with fuel immediately. This applies for both coal and gas-based plants, Banmali Agrawala, president and chief executive officer (CEO) of GE Energy (India), told Business Standard. Agrawala also advocates focus on renewable power, which contributes to six per cent of the countrys power supply currently. The cost of renewable power has become competitive as wind power has achieved grid parity. This success has also set the base for a strong manufacturing sector. It is imperative that catalysts such as renewable power offtake obligation, RECs and generation-based incentive should be aggressively implemented, he said. Experts believe the biggest challenge in 2013 would be to minimise subsidies in power sales to bring the sector back on the reform path. While the discom debt restructuring will increase affordability as financial load goes off the discoms back, it will return to their balance sheets if politicians continue to distribute free power, Dipesh Dipu, partner at energy-focussed consulting firm Jenisse Management Consultant said.

Curse of Coal for Indian Power Sector

India has a total installed capacity of 209,276 megawatt, with states contributing 41 percent, the central power utilities having a share of 30 percent and the remaining 29 percent accounted for by the private sector. In terms of fuel used, the total thermal capacity is 140,206 megawatt, of which coal accounts for 120,103 megawatt, gas for 18,903 megawatt, and oil for 1,199 megawatt. This apart, hydro power contributes 39,291 megawatt, nuclear around 4,780 megawatt and reneable energy 24,998 megawatt. The supply shortfall varies across the country, which becomes acute in states like Uttar Pradesh, while some others like Gujarat enjoy a surplus and export to other states. The government estimates the fund requirement of $256.14 billion in the power sector over the next five years to bridge the existing gap and to meet the growing demand. The Regional Load Despatch Centres (there are five of them in India which carry electricity from producers to the users on what are called grids) be given legal powers to be able to protect their infrastructure. Indias power distribution firms having accumulated losses worth a whopping $40 billion, and needing staggered hikes in tariff to ensure their sustainability. Such large losses arose mainly from what distribution companies term as aggregate technical and commercial losses, which is more of a euphemism for theft. Currently cumulative distribution losses amount to Rs.200,000 crore ($36 billion). Losses to business have been in thousands of crores, which pale into insignificance when compared to the difficulty that the people of the country have had to face. The government in September approved the proposal to restructure state electricity companies (Discoms) debt worth nearly Rs.200,000 crore ($36 billion). As part of a scheme for the financial turnaround of Discoms, state governments were to take over 50 percent of Discoms short-term liabilities by way of special securities, repayment and interest payments. The balance 50 percent short-term loans were to be restructured with a moratorium on principal at the best possible terms of interest. The basic problem for the power sector is acute fuel (read coal) shortage, affecting electricity generation in the country. It was also the year when state miner Coal India came under intense scrutiny for its production and off-take. Availability of coal and gas is a pre-requisite for spurring investments in the power sector. Reforms that would help

make coal and gas available as per the nations requirements must no longer be held back. The state-run Coal India declared it cannot meet the complete coal demand from indigenous sources till the 13th Five Year Plan beginning 2017. During the 11th Plan, there was a production gap of 140 mt. The coal sector provoked major political controversy following the national auditors report on how allocation of captive coal blocks to private companies had led to the latter making windfall profits. The Comptroller and Auditor General (CAG) estimated a notional loss of Rs.186,000 crore ($33.67 billion) to the exchequer on account of not auctioning coal blocks allocated to private allottees. Tabled in parliament, the report named 25 companies including Essar Power, Hindalco, Tata Power and Jindal Steel and Power, which got blocks in various states. In July, the government formed an interministerial group (IMG) to review progress of coal blocks allocated to firms for captive use, but which had failed to develop mines within the stipulated timeframe. The IMG, after its scrutiny, recommended deallocation of 11 mines to public sector units, 13 blocks to private firms, and deduction of bank guarantees of 14 allottees. A total of 58 mines were issued show-cause notices for their failure to develop blocks within the stipulated timeline. Coal India agreed to pay a penalty of 1.5 percent to 40 percent on failing to supply the committed quantity of coal to power utilities, following protests from major companies over its decision to go for a paltry penalty of 0.01 percent. The state miner has to meet 80 percent of contracted supply to avoid triggering off penalty. The new year awaits a pooling formula on prices by combining rates of imported and domestic coal to offset high import costs. Also awaited are reforms that can improve the supply of coal for thermal power plants, rationalise tariffs and improve the financials of state distribution utilities.

ITER to be next option for thermal power plants

NAGPUR: International Thermonuclear Experimental Reactor (ITER) will be next option for thermal power plants, said professor of mechanical department at IIT Powai Milind Atrey. He was addressing the students of Nagpur Institute of Technology (NIT) on 'Cryogenics' recently. Atrey spoke on the importance and application of cryogenics and demonstrated the diverse uses of liquid nitrogen and prototype of magnetically levied train (Manglev). He also discussed the ITER project which is an international nuclear fusion research and engineering project, currently building the world's largest and most advanced experimental Tokamak nuclear fusion reactor at the Cadarache facility in the south of France. The project is funded and run by seven member entities the European Union (EU), India, Japan, China, Russia, South Korea and the United States. The ITER fusion reactor has been designed to produce output which is ten times the input power by 2019. The first commercial demonstration fusion power plant, named DEMO, is proposed to follow on from the ITER project to commercialize fusion energy He explained the use of simple mechanism like super conductivity in not only refrigeration but also in producing fuel for Space Shuttles and Rockets. Deliberating on the funding for research, Atrey encouraged the students to visit IIT and use the hi-tech facilities available there.

Curse of Coal for Indian Power Sector

India has a total installed capacity of 209,276 megawatt, with states contributing 41 percent, the central power utilities having a share of 30 percent and the remaining 29 percent accounted for by the private sector. In terms of fuel used, the total thermal capacity is 140,206 megawatt, of which coal accounts for 120,103 megawatt, gas for 18,903 megawatt, and oil for 1,199 megawatt. This apart, hydro power contributes 39,291 megawatt, nuclear around 4,780 megawatt and reneable energy 24,998 megawatt. The supply shortfall varies across the country, which becomes acute in states like Uttar Pradesh, while some others like Gujarat enjoy a surplus and export to other states. The government estimates the fund requirement of $256.14 billion in the power sector over the next five years to bridge the existing gap and to meet the growing demand. The Regional Load Despatch Centres (there are five of them in India which carry electricity from producers to the users on what are called grids) be given legal powers to be able to protect their infrastructure. Indias power distribution firms having accumulated losses worth a whopping $40 billion, and needing staggered hikes in tariff to ensure their sustainability. Such large losses arose mainly from what distribution companies term as aggregate technical and commercial losses, which is more of a euphemism for theft. Currently cumulative distribution losses amount to Rs.200,000 crore ($36 billion). Losses to business have been in thousands of crores, which pale into insignificance when compared to the difficulty that the people of the country have had to face. The government in September approved the proposal to restructure state electricity companies (Discoms) debt worth nearly Rs.200,000 crore ($36 billion). As part of a scheme for the financial turnaround of Discoms, state governments were to take over 50 percent of Discoms short-term liabilities by way of special securities, repayment and interest payments. The balance 50 percent short-term loans were to be restructured with a moratorium on principal at the best possible terms of interest. The basic problem for the power sector is acute fuel (read coal) shortage, affecting electricity generation in the country. It was also the year when state miner Coal India came under intense scrutiny for its production and off-take. Availability of coal and gas is a pre-requisite for spurring investments in the power sector. Reforms that would help

make coal and gas available as per the nations requirements must no longer be held back. The state-run Coal India declared it cannot meet the complete coal demand from indigenous sources till the 13th Five Year Plan beginning 2017. During the 11th Plan, there was a production gap of 140 mt. The coal sector provoked major political controversy following the national auditors report on how allocation of captive coal blocks to private companies had led to the latter making windfall profits. The Comptroller and Auditor General (CAG) estimated a notional loss of Rs.186,000 crore ($33.67 billion) to the exchequer on account of not auctioning coal blocks allocated to private allottees. Tabled in parliament, the report named 25 companies including Essar Power, Hindalco, Tata Power and Jindal Steel and Power, which got blocks in various states. In July, the government formed an interministerial group (IMG) to review progress of coal blocks allocated to firms for captive use, but which had failed to develop mines within the stipulated timeframe. The IMG, after its scrutiny, recommended deallocation of 11 mines to public sector units, 13 blocks to private firms, and deduction of bank guarantees of 14 allottees. A total of 58 mines were issued show-cause notices for their failure to develop blocks within the stipulated timeline. Coal India agreed to pay a penalty of 1.5 percent to 40 percent on failing to supply the committed quantity of coal to power utilities, following protests from major companies over its decision to go for a paltry penalty of 0.01 percent. The state miner has to meet 80 percent of contracted supply to avoid triggering off penalty. The new year awaits a pooling formula on prices by combining rates of imported and domestic coal to offset high import costs. Also awaited are reforms that can improve the supply of coal for thermal power plants, rationalise tariffs and improve the financials of state distribution utilities.

Power sector marred by coal, gas shortages

Reuters

NEW DELHI: As 2012 draws to an end and the New Year set to roll, the power producers in the country look for speedy resolution of existing troubles. The domestic power sector has witnessed a few success stories in the last 4-5 years; but the road that lies ahead of is dotted with innumerable challenges that result from the gaps that exist between whats planned versus what the power sector has been able to deliver. Apart from the inadequate fuel supply, the delay in land acquisition and environmental clearances as also tariff revisions and distribution reforms are the issues, which NTPC wants to be addressed, Arup Roy Choudhury, Chairman and Managing Director NTPC, told Business Line.

Tackling these concerns should get top priority as the solution to these will contribute immensely to the growth of the power generation sector in the country, Choudhury added. NTPC has total installed capacity of 39,674 MW, including joint ventures. Positive legislations, competitive bidding policies, opening up for private investments and surging growth in electricity demand have all contributed to the growth of the sector. Revised competitive bid documents for procurement of power should come out early next year, said Debasish Mishra, Senior Director, Deloitte in India. However, there are a number of persisting bottlenecks. The challenge as one sees compared to previous years are deteriorating coal supply on one end of the value chain and poor financial outlook of Discoms where the losses have been increasing to levels far higher than previous years, Anil Sardana, Managing Director of Tata Power, said. Despite huge coal reserves in India, the domestic power sector is facing coal shortages and has resorted to imports. This shortage may result in increasing stress on assets that are already built by private players, in addition to the targets of capacity additions not being reached, Sardana added. Tata Power is the largest private player in the sector with installed capacity of 6,899 MW. The Coal Ministry notified Auction by Competitive Bidding of Coal Mines Rules, 2012 on February 2. We view that the coal block auction in the initial phases may benefit the non-power consumers in securing their energy needs for expansion. However, even if the Government comes out with an auction scheme, the auctions would face the risk of fewer takers unless the economy recovers by the first quarter of 2013-14, said Guru Malladi, Advisory Partner-Infrastructure Practice, Ernst & Young. Not only shortage of domestic coal, private producers such as Tata Power and Adani suffered from the sudden spike in price of imported coal from Indonesia and Australia, due to change of tax regime. Affordable pricing of our natural resources, both gas and coal, is key to the growth of the power sector, Choudhury said.

The spike in price has made imported coal-based power projects unviable. Another major challenge to the sector is the shortage of natural gas in India. This shortage has stranded gas-based power projects with a combined capacity of around 18,903.5 MW, accounting for only 9.13 per cent of the total generation capacity. The Government should evolve a robust energy security policy for the country as also issue advisory to all State Regulatory Commissions to plan bulk supply procurement in line with basket of fuels that meet Indias energy security needs, Sardana said. Malladi said that looking from the supply deficit point of view; coal imports are likely to grow at a rapid pace over the next five years. Such imports will have immediate effect on cost of electricity that may lead to an increasingly skewed cost of generation across various players. To address this disparity, it is imperative to come up with a price pooling mechanism that will balance interests of consumers, power producers and distribution companies, Malladi explained. Setting up a coal regulator is the best option, according to the NTPC Chairman. This is because it would act as a single point of contact for anybody who wants to invest in the coal sector. There would also be transparency on account of quality, production and pricing of coal, Choudhury said. Mishra of Deloitte said hopefully all the disputed power purchase agreements (PPAs) such as Tata Power Mundra, Adani and Lanco, among others will find some compromise solution in 2013. The average Aggregated Technical and Commercial (AT&C) losses in the country hover around 35 per cent and are higher in both technical and commercial fields. Electricity theft, metering regulations, financial distress, agricultural and rural consumption, operational inefficiencies and low private sector participation are some of the key challenges faced by the distribution segment. With Discoms improved financial health, the regulators would impose Renewable Purchase Obligation (RPO) more strictly and that should give boost to the Renewable Energy Certificate (REC) market and improve the investment in the renewable sector, said Mishra.

We are also expecting the Government to come out with a clear policy on Generation based Incentive (GBI) for wind sector, Mishra added.