<div>I am going to sort out all fuel-related issues. Be it coal, gas, nuclear or even hydroelectric,” says Veerappa Moily. The new Union power minister is a brave man. He has inherited a mess from his predecessors, and it is going to take more than good intentions to solve all the problems. <br /> <br />R. Trivedi, chief financial officer, Konaseema Gas Power, may well be the first to say “more power to Moily”. Konaseema planned a 445-MW gas-based power plant, hitching its fortunes to the huge gas discoveries in the Krishna-Godavari (KG) Basin. It sunk Rs 2,050 crore to set up the combined-cycle power plant, which was ready by 2006. For the first three years of its life, the plant idled for lack of gas — the Gas Authority of India (GAIL) could not give it any; and the Oil and Natural Gas Corporation slipped up on its production commitments.<br /><br />“We did not get fuel even for testing (the plant). In fact, there was no gas supply to IPPs (independent power producers) during this period in the state,” laments Trivedi. In 2009, Konaseema went “live” after Reliance Industries (RIL) commenced supply from its KG-D6 field. But a year and a half later, RIL’s gas production from the field, which hit a peak 60 million metric standard cubic metres per day (mmscmd) in mid-2010, has dropped to 28 mmscmd. Konaseema is again getting a fraction of the gas it needs to run the plant efficiently. It is not the only one affected by RIL’s falling production; mired in the basin’s quicksand are power projects with a total capacity of 2,529 MW. <br /> </div><table width="200" cellspacing="10" cellpadding="10" border="0" align="right"><tbody><tr><td><img width="200" vspace="8" hspace="8" height="200" align="middle" src="/image/image_gallery?uuid=dc365b2b-d532-4419-9649-10d70ae682e8&groupId=520986&t=1349507982224" alt="" /></td></tr><tr><td><strong>LAND ISSUES<br />ARUP ROY CHOUDHURY CMD, NTPC<br /><span style="color: rgb(255, 0, 0);">Projects: </span>Gajmara and Darlipali power plants (3,200 MW) in Orissa and Nabinagar plant (1,320 MW) in Bihar<br /><span style="color: rgb(255, 0, 0);">Problem:</span> Both state governments have been going slow on land acquisition<br /><span style="color: rgb(255, 0, 0);">Effect:</span> 4,520 MW of capacity addition is stuck </strong>(BW pic by Biwash Banerjee)</td></tr></tbody></table><div>Konaseema was to sell 20 per cent of the power on a merchant basis, but the Andhra Pradesh Electricity Regulatory Commission got it all for its discoms and promised to compensate it. Two years on, Trivedi says it has got nothing. It has approached the Appellate Tribunal to up the tariff by 40-50 paise from Rs 3.10 per unit. “It keeps on changing its stance, while we lose money,” says Trivedi. He adds that the firm makes just enough to pay wages and service a part of its debt.<br /><br /><strong>Grid-locked</strong><br />Konaseema is an example of the mess the Indian private sector power players find themselves in. Between 2004 and 2005, almost every big corporate house announced plans to set up power plants with thousands of megawatts capacity. Now, most of them are trying desperately to hold on to their dreams in the face of myriad problems they failed to foresee.<br /><br />In some cases, inability to get land easily has ruined many an ambitious dream. In other cases, the issue of coal linkages or environmental clearances have ensured the projects are running way behind schedule. Then there are financing problems, and those of power purchase agreements (PPA) that need revising. These apart, there are many other issues.<br /><br />The great ‘power dream’ was premised on a billion-plus people and an economy that would grow at least at 8 per cent for decades. To propel it, the Planning Commission, in the 11th Plan estimates, said it would need $164 billion in investments in power; roughly $78 billion in generation and the rest on transmission and distribution. The government rolled out the red carpet for private players by changing the Electricity Act, and it caught the fancy of big business houses. Today, it is hard for many of those who rushed in to feel optimistic.<br /><br />“We have not seen a crisis of this magnitude. There are issues over land acquisition, delays in project clearances, lack of fuel, skilled manpower, adequate transmission capacity, worsening financials of SEBs (state electricity boards) and funding problems,” says Anil Sardana, MD of Tata Power. You cannot but recall Benjamin Franklin: “A little neglect may breed great mischief. For want of nail, the shoe was lost; for want of shoe, the horse was lost; for want of horse, the rider was lost; and for want of rider, the war was lost.”<br /><br />What was the neglect? “The belief that the buyer (discoms) were ‘sovereign’, and would pay for the power was a big mistake.” That’s Premal Doshi, director-equity capital markets at Ambit Corporate Finance. “You assumed the problems would take care of themselves as one went along. It was a great business opportunity, not to be missed. Again, we say all this in hindsight.”<br /><br />Konaseema is not alone. “The declining gas supply from KG-D6 has impacted us badly. Our 220 MW barge-mounted plant at Kakinada and the 388 MW unit in Vemagiri currently operate at sub-optimal plant load factors (PLF). The situation is managed to some extent through gas rostering among IPPs. Another plant, the 768-MW Rajahmundry power station is awaiting gas for commissioning,” says a GMR statement. <br /><a href="/image/image_gallery?uuid=41023637-6b81-456e-9b08-f10dd70b6c74&groupId=520986&t=1349508266810" target="_blank"><img width="250" vspace="9" hspace="9" height="305" align="left" src="/image/image_gallery?uuid=9eeab18b-bc16-43a0-8a30-c7c46b559f6e&groupId=520986&t=1349508228132" alt="" /></a><br />Lanco Infratech hoped to install 20 GW by 2020. Of this, the 4,800 MW is expected to go on stream by 2015. Its 1,200 MW Anpara unit in Uttar Pradesh runs at a PLF of 45-50 per cent. Says K. Raja Gopal, CEO, Lanco: “The fuel supply agreement with NCL (Northern Coalfields, an arm of Coal India or CIL) got delayed. It took effect only after the presidential direction to CIL in June-August. There was also a shortage due to a breakdown at NCL’s loading points.”<br /><br />Tata Power’s second block of 800 MW at its Mundra ultra mega power project (UMPP) hums, but the company itself is in a bind. It quoted a tariff of Rs 2.26 per unit to win the bid; it wants it revised to Rs 3 per unit. Sardana will only tell you that “the PPA has been signed with five states. The matter is sub judice with the Central Electricity Regulatory Commission (CERC).” In March, Sardana told BW he would try to persuade the government to revise the tariff. He feared Tata Power’s subsidiary, Coastal Gujarat Power, would go bankrupt. “Mundra is a national asset and we will stick to our commitment. I do not know how or when this crisis will be resolved, but we will continue production till our shareholders say enough is enough,” he said. <br /><br />NTPC is ‘land-locked’ in Orissa (3,200 MW in Gajmara and Darlipali) and Bihar (1,320 MW in Nabinagar). Arup Roy Choudhury, CMD of NTPC, puts it pithily. “These (land issues) were bound to come up. Farmers are more aware and demanding.”<br /><br />Banks are worried, too. They lent Rs 3,30,000 crore by end-March 2012. Some doled out more than their equity; others kissed the caps on individual and group exposure set by RBI. Even if a bank wants to lend to a project, it may end up on the default side of group exposure. The RBI has raised a red flag in its Financial Stability Report, on SEB losses (at Rs 70,000 crore before subsidies), debt and fuel shortage. “There is evidence (anecdotal) of lenders being cautious... the high concentration of bank credit in power generation and distribution is a matter of concern”.<br /><br /> </div><table width="200" cellspacing="10" cellpadding="10" border="0" align="right"><tbody><tr><td><img width="200" vspace="8" hspace="8" height="200" align="middle" src="/image/image_gallery?uuid=33c6ae9b-adef-4d11-b4fb-e8e4d58a59ce&groupId=520986&t=1349508317562" alt="" /></td></tr><tr><td><span style="color: rgb(255, 0, 0);"><strong>FUEL FIASCO</strong></span><strong><br /> L. MADHUSUDHAN RAO CHAIRMAN, LANCO INFRATECH<br /><span style="color: rgb(255, 0, 0);">P</span><span style="color: rgb(255, 0, 0);">roject: </span>1,200 MW at Anpara in Uttar Pradesh<br /><span style="color: rgb(255, 0, 0);">Problem:</span> Delay in fuel supply agreement execution by Coal India<br /><span style="color: rgb(255, 0, 0);">Effect:</span> Plant load factor down to 45-50 per cent (BW pic by Tribhuwan Sharma)<br /></strong></td></tr></tbody></table><div><strong>It’s A Mirage</strong><br />India added 54,965 MW during the 11th Plan; in its terminal year, 19,469 MW was put up. It is just a tad lower than what was added in the 10th Plan (21,080 MW), but more than in the 9th Plan (19,015 MW). You can brag: the score is close to what we huffed and puffed our way to in the previous three innings combined (the 10th, 9th and 8th Plans) at 56,518 MW. “With that kind of speed, there can be no question of under-achieving. There are certain issues, but we already have 82,000 MW under implementation. Of this, fuel linkages for 60,000 MW are already in place and, for the rest, we are sorting it out with the coal ministry,” says Moily. But he is only partially right. The new capacity has not really added to electricity being generated.<br /><br />All of 8.05 per cent of the power that flows into the sockets to light up our homes, cities and factories is from newly installed plants in 2011-12. That means, even though capacity has gone up by 60.1 per cent, just over 10 per cent of that is actually flowing into the grid. You can admire the silhouette of power plants, but that’s about it; there’s not enough to fuel them at full tilt.<br /><br />The mess can get bigger. India plans to add 65 GW by 2014-15 to up its generation capacity to 239 GW. Nearly 90 per cent this is based on coal, gas or lignite; it will push up the share of thermal to over 70 per cent from 65 per cent. Says Ramraj Pai, president-ratings at Crisil: “Most promoters have experience in setting up capacities, but projects announced or under implementation are four times the operational capacity.” He gives you a sense of the complexity: the largest sub-critical boiler-turbine-generator package was 600 MW a few years ago; it can now be 800 MW. “It leads to increased challenges in terms of tying up financing.” <br /><br />India Ratings & Research (a Fitch group firm) senior director S. Nandakumar points to the irony: “They have to contend with the usual delays... debt availability would have been acute had all of the announced projects simultaneously scanned the market for bank debt.”<br /><br /> </div><table width="490" cellspacing="10" cellpadding="10" border="1" align="center"><tbody><tr><td style="text-align: center;"><span style="color: rgb(128, 0, 0);"><strong>SHOW US THE MONEY</strong></span></td></tr><tr><td><strong>Financing is a concern for the power sector with banks being of little help</strong><br /><ul><li><span style="color: rgb(128, 128, 128);"><strong>Banks had loaned Rs 3,30,000 crore by end March 2012</strong></span></li><li><span style="color: rgb(128, 128, 128);"><strong>A few banks are near the sectoral cap on power, and group exposures</strong></span></li><li><span style="color: rgb(128, 128, 128);"><strong>RBI raised a red flag in its Financial Stability Report; loan to discoms a concern</strong></span></li><li><span style="color: rgb(128, 128, 128);"><strong>Project size makes it tougher for promoters to secure funds</strong></span></li><li><span style="color: rgb(128, 128, 128);"><strong>It is hard to secure cross-border loans; cash flows are poor</strong></span></li><li><span style="color: rgb(128, 128, 128);"><strong>Private equity interest on the wane</strong></span></li></ul></td></tr></tbody></table><div><br /> </div><div>break-page-break</div><div><br /><strong>Running On Empty </strong><br />“The Centre’s efforts led to huge capacity additions. But the fuel sector was caught unawares,” says Satnam Singh, CMD of Power Finance Corporation. It is a telling statement — the power food chain is not a cohesive one. Just how will you power the power plants? Worse, nobody even thought of it. Compared to the increase in newly installed capacity in 2011-12 at 60.1 per cent, coal production stood in singular splendour — it grew by a mere per cent to 540 tonne; gas saw a 17 per cent fall in output to 120 mmscmd. It is no surprise when Singh admits: “Konaseema is a non-performing asset on our books as they have no access to gas.”<br /><br />Essar Energy’s CEO, Naresh Nayyar, is candid: “Billions of dollars have been invested and we are not able to operate our plants because of fuel and (delays in) regulatory approvals to start work on (coal) mines”. Essar had plans to set up 10,000 MW by 2014; it is stuck at 2,800 MW. Three projects of 3,600 MW are stalled. It is classic over-reach. “Our strategy was based on the fact that power plants will be linked with a mine so that we do not have any risk in terms of supply (of fuel). But unfortunately, after we started construction (of the plants), we faced issues on regulatory approvals.”<br /><br /> </div><table width="200" cellspacing="10" cellpadding="10" border="0" align="right"><tbody><tr><td><img width="200" vspace="8" hspace="8" height="200" align="middle" src="/image/image_gallery?uuid=5d174c60-5646-45ac-b7b6-dbce0f8bc725&groupId=520986&t=1349508567319" alt="" /></td></tr><tr><td><span style="color: rgb(255, 0, 0);"><strong>GREEN HURDLE: </strong></span><strong>SHASHI RUIA CHAIRMAN, ESSAR GROUP<br /><span style="color: rgb(255, 0, 0);">Project: </span>1,200 MW plant at Mahan in Madhya Pradesh<br /><span style="color: rgb(255, 0, 0);">Problem: </span>Delays in environment clearance to mine coal from the Mahan block<br /><span style="color: rgb(255, 0, 0);">Effect: </span>The project is idling </strong>(BW pic by Tribhuwan Sharma)</td></tr></tbody></table><div>Were the likes of Nayyar dealt a bad hand? Or did they play wild? Vikram Limaye, deputy managing director of IDFC, is sympathetic. He says of the 54,965 MW set up in the 11th Plan, private sector’s share was 23,013 MW (41.9 per cent), states had 16,732 MW (30.4 per cent) and the central sector had 15,220 MW (27.7 per cent). And 84 per cent of private sector projects were coal-fired, followed by gas (10 per cent) and hydro (6 per cent). If you tripped on coal, you blacked out. “These projects were in response to ‘foreseen’ power shortages, favourable push for generating capacity addition and policy initiatives such as competitive bidding,” says Limaye. None of that went as per plan.<br /><br />Few are willing to concede that promoters did not have a Plan B in place. A senior banker gives it a spin. “In the second half of UPA-1, they wagered the government on the nuclear deal with the US. Power for India Inc. was the chorus. It led everybody to believe no stone would be left unturned to get the power sector going.” It was, in hindsight, a weak cornerstone to build a power project.<br /><br />Crisil says CIL will commit to providing fuel only to the extent of 50 per cent of the annual contracted quantity for plants commissioned in the 12th Plan. It believes more than 80 per cent of the projects from 2011-12 onwards will have fuel linkages only in the form of memorandum of understanding or tapering linkage. “These projects will have to increasingly rely on higher imports. Imported fuel is nearly 2.5-3 times costlier than domestic coal,” explains Pai. You have soot all over; it keeps lawyers busy.<br /><br />R-Power’s 4,000 MW Krishnapatnam UMPP is caught in a tariff wrangle. It has to stop discoms from encashing a bank guarantee of Rs 400 crore; it has filed a suit against 11 discoms in four states at the Indian Council of Arbitration seeking “open” PPAs. The cause is the change in mining regulations in Indonesia. R-Power puts it down to force majeure. But P. Shiva Rao, legal advisor to discoms, differs: “This is irrelevant as Section 17 and 58 of the Electricity Act (2003) does not allow for private arbitration. Only CERC can decide on this.”<br /><br />India Ratings & Research’s Nandakumar and his colleague Venkatraman Rajaraman point to the lack of “wiggle room” in PPAs. Before ‘Factor Indonesia’ cropped up, financial closure of the new projects assumed coal at $40-55 per tonne with an annual (nominal) escalation of about 5-10 per cent. The merchant tariff was seen between Rs 3.25 and Rs 3.75/kWh. But coal prices have more than doubled. As fuel supply contracts were neither hedged nor did the tariff have a cost pass-through provision, the analysts point out that the current cost of generation has rendered projects uncompetitive. <br /><br /><img width="610" height="284" align="middle" src="/image/image_gallery?uuid=60992136-fcfd-4832-b796-5f0f2fa2909d&groupId=520986&t=1349508719282" alt="" /><br /><br />It is no consolation that attorney general Goolam Vahanvati has said the CERC can revise tariffs even if parties are bound by a PPA. Given the standoff between producers and discoms, it will be a long wait. “We will only know how to proceed once decisions that have been agreed upon are implemented. Till then, there is a big question mark on the private sector’s participation (in power)”, says Ashok Khurana, director general, Association of Power Producers.<br /> </div><table width="200" cellspacing="10" cellpadding="10" border="0" align="left"><tbody><tr><td><img width="200" vspace="8" hspace="8" height="200" align="middle" src="/image/image_gallery?uuid=537aaa32-a733-4920-8fa1-c6f8d5a2f504&groupId=520986&t=1349508803697" alt="" /></td></tr><tr><td>OUT OF GAS: M.V.V.S. MURTHI PROMOTER, KONASEEMA GAS POWER<br />Project: 445 MW plant in Konaseema, Andhra Pradesh<br />Problem: Short supply from KG-D6 gas field<br />Effect: Company forced to operate the plant on a staggered basis (3 days a week) at a plant load factor of 30 per cent<br /> </td></tr></tbody></table><div><strong>Can’t Pay, Won’t Pay And Some More</strong><br />If there is an apparent sliver of hope, it’s over discoms — the Cabinet Committee on Economic Affairs’ nod to recast their debt of Rs 1,20,000 crore. Matters had come to head. In the absence of cost-reflective tariffs (a political hot potato), discoms financed the interest on loans through more of the same. The RBI asked banks to apply the brakes on loans to discoms. “We have decided to stop generation, but we cannot afford to take a deferred payment as 80 per cent of our cost (of power) is for buying coal. We pay CIL through a letter of credit and cannot afford this. We can’t compromise,” says NTPC’s Choudhury.<br /><br />It is again a band-aid. “It (restructuring) will definitely help in the short run, but unless there are some long-term measures, I don’t think it will be sustainable. And, we could find ourselves in a similar situation again in 7-8 years,” says Seshan Balakrishnan, director-infrastructure at Ernst & Young. <br /><br />According to Crisil, nine states — Tamil Nadu, Andhra Pradesh, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh, Madhya Pradesh and Jharkhand — account for 85 per cent of discoms’ losses; their combined debt accounts for 80 per cent of all such debt. And these nine states can swing fortunes at the hustings; they send 292 MPs to Parliament, 53.77 per cent of the total.<br /><br />Just how bad conditions are can be gauged from what GVK Power has done. It will use imported re-gassified liquefied natural gas (RLNG). “GAIL has offered to supply RLNG at spot market prices. We can supply this power with the fuel costs transferred to discoms. We will recover only the capacity charges from discoms in this arrangement,” says GVK Power.<br /><br />It frustrates Nayyar. “We do not want to commit capital unless we have more clarity on regulatory approvals.” A senior banker admits to a “moderation in investment plans”. State Bank of India has turned selective — major sanctions in 2011-12 were to Neyveli Lignite Corporation (Rs 2,500 crore) for 1,000 MW and to Meja Urja Nigam (Rs 2,000 crore) for 1,320 MW.<br /><br /><a target="_blank" href="/image/image_gallery?uuid=47eeb513-c119-4008-8b27-c7dc056ae22d&groupId=520986&t=1349509022035"><img width="600" height="245" align="middle" alt="" src="/image/image_gallery?uuid=e8275796-ed35-4b19-8ba8-1616ef50e11d&groupId=520986&t=1349508982768" /></a><br /><br />Limaye skips the posers — given the RBI ceiling on individual and group lending, how much more debt can banks supply to power projects? “Once the uncertainties relating to fuel and reforms at discoms are sorted out, there will be renewed interest in thermal power.” What are the alternatives — is it non-banks like IDFC and private equity (PE)? Balakrishnan says there was good interest from PEs for two years (2009-11). “They have invested around $2-3 billion with another commitment going up to $5 billion. But PE funds have also gone shy (of the sector).”<br /><br />Kameswara Rao, executive director, PricewaterhouseCoopers, paints a grim picture. “The balance sheets of all the big cap companies are in deep distress, a significant capacity is lying idle for lack of viable tariffs.” Is the power sector still worth a punt?<br /><br /><br /><img width="472" vspace="8" hspace="8" height="297" align="middle" alt="" src="/image/image_gallery?uuid=00610236-56e2-4925-a17f-5c0f794e35d4&groupId=520986&t=1349511496425" /><br /> </div><table width="584" cellspacing="8" cellpadding="8" border="1" align="center"><tbody><tr><td><span style="font-size: large;"><span style="color: rgb(128, 0, 0);"><strong><img width="200" vspace="9" hspace="9" height="200" align="left" alt="" src="/image/image_gallery?uuid=ae353d3f-b980-4386-9ac0-9801ab34214d&groupId=520986&t=1349511535218" />MOILYSPEAK</strong></span></span><strong> Union power minister Veerappa Moily spoke to BW recently on issues dogging the power sector. Excerpts:<br /><span style="color: rgb(51, 102, 255);">CAG FEAR:</span> Even if blocks are de-allocated, it will not impact their current production targets. We might see its effect in the 13th Five-Year Plan<br /><span style="color: rgb(0, 0, 255);">FUEL LINKAGES FOR 12TH PLAN: </span>Linkages for 60,000 MW out of 82,000 MW are in place. For the rest, we are in discussions with the coal ministry<br /><span style="color: rgb(0, 0, 255);">RAIL INFRASTRUCTURE:</span> Rail linkages have been a challenge. The Prime Minister’s Office has constituted a committee under the Railway Board to ensure that the power sector gets adequate railway connectivity. I have to put pressure on the committee as it has not met even once since its formation.<br /><span style="color: rgb(0, 0, 255);">COAL INDIA: </span>Why are they sitting on such large reserves? Coal was nationalised as we wanted to protect the natural resource. But if they are unable to meet the demands, we will have to revisit the entire thing.<br /><span style="color: rgb(0, 0, 255);">EXPECTATIONS FROM PRIVATE SECTOR:</span> In the 11th Plan, the private sector contributed 50 per cent to the capacity addition. This is expected to go up to 60-65 per cent in the current Plan.<br /><span style="color: rgb(0, 0, 255);">DISTRIBUTION LOSSES: </span>The idea is to reduce these losses to 7.5 per cent from the current average of 27 per cent, and this is possible.<br /><span style="color: rgb(0, 0, 255);">DISCOMS DEBT RESTRUCTURING: </span>It is not a mere bailout plan. It is a performance-based programme and will ensure that utilities will not come back to a similar situation 10 years down the line.</strong></td></tr></tbody></table><div><br /><br />bweditor(at)abp(dot)in<br /><br />(This story was published in Businessworld Issue Dated 15-10-2012)<br /> </div>
