<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>It is not often that Anil Sardana and J.P. Chalasani find themselves agreeing with each other on any subject. Sardana is the managing director of Tata Power Company (TPC), the electricity production and distribution arm of the $87-billion Tata Group. Chalasani is the CEO of Reliance Power (R-Power), part of the $15.4-billion Reliance Group headed by Anil Ambani. Chalasani and Sardana cross swords while bidding for almost every big power project that comes up. They are fighting in the Mumbai market over a range of issues. They both bid for distribution contracts in Delhi, with TPC winning one circle, and Reliance Group's BSES bagging the other two. In fact, they are bitter professional rivals.<br><br>In one area though, both men find themselves arguing the same case. Both want to renegotiate the power purchase agreements (PPA) they signed with their customers — state governments — after they had bid aggressively and won the ultra mega power projects (UMPPs) being offered by the central government.<br><br>In 2005, the power ministry's UMPP plans moved into top gear. It wanted the private sector to set up 4,000 megawatt (MW) state-of-the-art plants across India (normal power plants are 600 MW or smaller). These UMPPs were planned to help the government achieve its ambitious plan of ‘Electricity for All by 2012'. The idea was to sanction 16 UMPPs in double quick time, which would then add 48,000 MW of the 100,000 MW planned by 2012.<br><br></p>
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<td>J.P. Chalasani, CEO, R-Power "Krishnapatnam project will not be viable unless tariffs are revised"</td>
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<p>The Power Finance Corporation (PFC) became the nodal agency. Tariff guidelines were notified in January 2005. The most attractive part of the concept was that the private developer was assured everything on a platter, through a special purpose vehicle (SPV). Land, water, coal blocks, forest and environmental clearances and tie-up for power sale — would all be taken care of. The power ministry was to coordinate with various ministries and states to fast-track clearances. The developer's role was to find funds and execute the project.<br><br>The Central Electricity Authority (CEA), in consultation with states, finally identified 12 UMPPs. PFC floated a dozen SPVs. Five coastal UMPPs at Mundra in Gujarat, Tadri in Karnataka, Krishnapatnam in Andhra Pradesh, Cheyyur in Tamil Nadu and Girye in Maharashtra were planned. Pithead projects at Sasan in Madhya Pradesh, Sundergarh in Orissa, Tilaiya in Jharkhand and Alkatara in Chhattisgarh, besides two more in Orissa and one more in Andhra, would make up the other seven.<br><br>The government also acted quickly. Invitations for expression of interest for Mundra and Sasan were issued on 1 February 2006, and the process was over in eight months. Euphoric, the government planned to award two more at Krishnapatnam and Tilaiya by April 2007. <br><br>But in 2012, the UMPP dream has soured. All four awarded UMPPs are grappling with troubles and controversy. The winners say they face unprecedented problems in fuel supply and want tariffs revised. In one case, land acquisition is the main bugbear. Meanwhile, the bidders who lost out want the projects re-tendered if the tariffs are to be revised. The customers in the PPA do not want the tariffs increased.<br><br></p>
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<td>Anil Sardana, MD, Tata Power "I Don't know how or when this crisis will be resolved" (BW pic by Umesh Goswami)<br></td>
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<p>Of the four, Tata Power won the Mundra project, while R-Power wrested the other three — Krishnapatnam, Tilaiya and Sasan, originally won by Lanco, which was later disqualified. Take TPC's UMPP. The firm is on schedule in plant execution, but finds all its fuel calculations have gone awry. On 9 March, TPC began operations of the first 800 MW phase at Mundra. It says the first phase was completed in a record 48 months. But Sardana says he loses money on every unit of energy produced, unless tariffs are revised. The Mundra PPA was signed to sell power to Gujarat, Maharashtra, Punjab and Rajasthan governments at Rs 2.26 per kilowatt hour. Sardana says that his cost of production currently is closer to Rs 2.90 per kilowatt hour.<br><br>The issue, he says, is the Mundra project was built around Indonesian coal. It was selling for $35-40 a tonne when the PPA was signed. Now, a change in rules by the Indonesian government has caused coal prices to shoot up to $120 per tonne. TPC is lobbying for a change in PPA, which envisages an immediate increase of 70 to 90 paise. It also wants a clause to protect it from sudden and steep rise in fuel costs. Incidentally, the original PPA was signed for 25 years.<br><br>The four procuring states are stoutly opposing the company's moves. Meanwhile, the central government has constituted an empowered group of ministers (EGoM) to study the problems facing the four UMPPs. Sardana says he will try to persuade the government to revise the tariff as soon as possible, otherwise TPC's subsidiary, Coastal Gujarat Power (CGPL), which is setting up Mundra, will go bankrupt. "Mundra is a national asset and we will stick to our commitment. I don't know how or when this crisis will be resolved, but we will continue production till our shareholders say enough is enough," he says.<br><br><a href="/businessworld/system/files/images/April/cover-graphic_Page_pu.gif" target="_blank"><img src="/businessworld/system/files/images/April/cover-graphic_Page_pu.gif" style="float: right; margin: 9px;" width="250" height="141"></a>If Sardana has taken the softer approach for now, Chalasani has taken a harder line while asking for almost exactly the same things in the case of the Krishnapatnam UMPP. In June 2011, Reliance stopped work on Krishnapatnam citing changes in Indonesian regulations. It won that project under the nose of TPC and others by agreeing to sell power at Rs 2.33 per kilowatt hour, based on Indonesian coal as fuel.<br><br>Chalasani is categorical that he will not resume the project unless the selling price is revised. "If Krishnapatnam is operated at full capacity at current level of input costs (imported coal), our loss will be about $450 million a year," he says. TPC officials estimate that Mundra too will lose roughly Rs 500 crore in the first year of operations, if the selling price is not revised.<br><br>Meanwhile, the four customers of the Krishnapatnam UMPP — Andhra Pradesh, Tamil Nadu, Maharashtra and Karnataka — want R-Power to pay them Rs 400 crore as penalties for abandoning the project. R-Power has got a reprieve from the Delhi High Court, which has ruled against any "coercive action" being taken by the purchasers until the hearing is complete. The other two projects of R-Power — Sasan and Tilaiya — are not based on Indonesian coal. Both are mired in their own controversies and fuel problems. But we will come to their problems later. First, how Mundra and Krishnapatnam got into trouble.<br>break-page-break<br><strong>Indonesian Miscalculation </strong><br>In terms of bragging rights, India has the fourth largest coal reserves in the world, with about 197 billion tonne, and is one of the top producers of coal. There are two problems with Indian coal reserves, though. First, most of them have poor quality coal, with high ash content and low fuel value. This cannot be used for industries such as steel. Second, at least 40 per cent of Indian coal reserves fall in forest areas and are unlikely to get environmental clearances to be mined.<br><br>That said, Indian coal is suitable for most thermal power plants being built in the country. But due to problems with getting captive mines allocated or proper and regular supplies from Coal India, many power projects conceived in the past five years banked on Indonesian and occasionally Australian and South African coal as fuel. These countries produce superior coal, but power plants that plan to use this coal need to use vastly different equipment. A power plant designed to use Indian coal cannot start using Indonesian coal, and vice versa.<br><br>Because of Indonesia's geographical proximity, and also because of the cheap availability of the fuel, both Tata and R-Power moved to secure long-term fuel supplies from the country. In March 2007, TPC acquired 30 per cent stake in two major Indonesian thermal coal producers, Kaltim Prima Coal (KPC) and Arutmin Indonesia (Arutmin), owned by Bumi Resources, for $1.1 billion. The purchase was to secure fuel for its upcoming power projects on the west coast of India, which included the 4,000 MW plant at Mundra. The Tatas calculated they would need a total of 21 million tonne (MT) per annum of Indonesian coal for their new power plants, of which 10-12 MT per annum would be consumed by Mundra alone. The Tatas also floated a shipping subsidiary and developed coal handling facilities at Mundra port to transport coal.<br><br><strong><span style="color: rgb(0, 204, 255);">ON COLLISION COURSE:</span> The demand to revise PPAs has triggered a debate</strong><br><img src="/businessworld/system/files/images/April/collision_course-_600x238.jpg" style="vertical-align: middle;" width="600" height="238"><br><br>Meanwhile, in June 2010, R-Power acquired Indonesian coal miner Sugico to access two billion tonne of coal reserves owned by group companies, Srivijaya Bintangtiga Energi and Bryayan Bintangtiga Energi. R-Power made an upfront payment of $106 million and the balance was to be paid linked to production targets, in a deal worth $1.6 billion. The acquisition was mainly to fuel the Krishnapatnam UMPP.<br><br>But in September 2010, the Ministry of Energy and Mineral Resources in Indonesia brought in a regulation that barred any Indonesian mine from exporting coal at prices below the global prices. This law became effective on 23 September 2011 and applied to even contracts that were signed earlier.<br><br>The new rule meant Indian firms that owned coal mines in Indonesia could not use the coal for projects in India cheaply. Sardana and Chalasani had both banked on Indonesian coal at $35-$40 per tonne. Now, they are looking at paying three times more. The Indian private developers tried appealing to the Indonesian government. The Tata delegation met with the Indonesian officials several times. Anil Ambani himself met Indonesian political leaders and officials. But they got no concessions.<br><br><img src="/businessworld/system/files/images/April/downturn_600x247.jpg" style="vertical-align: middle;" width="600" height="247"><br><br>Why didn't either Chalasani or Sardana anticipate that coal prices would rise? After all, they were signing a 25-year PPA and planning to sink in Rs 16,000 crore-plus in each UMPP. Chalasani says they did project fuel prices going up. But they had simply looked at the past decade's global data. "The Central Electricity Regulatory Commission had circulated a transparent document detailing the coal price fluctuations in international markets for the past 12 years. In that period, coal prices never rose more than 4 per cent annually. But prices have tripled or quadrupled in the past few years," says Chalasani.<br><br><strong>The Misadventures</strong><br>The Sasan project was actually awarded along with Mundra in 2006 — Tilaiya and Krishnapatnam were awarded in 2007. In December 2006, the letter of intent was issued to successful bidders — Mundra for TPC and Sasan for Lanco with Globeleq Singapore as its lead partner. Eleven bidders had qualified at request for qualification stage for Mundra and TPC's bid was for Rs 2.26 per kilowatt hour (kwh), ahead of R-Power's Rs 2.66, Adani's Rs 2.69 and Essar's Rs 2.80. Lanco-Globeleq picked up Sasan by quoting Rs 1.296 per kwh. Even when Sasan was awarded, many bidders said the quote was unrealistic — the cost of generating power even then was not that low. Many felt Lanco would not be able to complete the project and would have to go to the government for a revision.<br><br>Lanco never got a chance to prove it had calculated correctly. Seven months after awarding the letter of intent for Sasan, Lanco-Globeleq's bid was declared invalid by a group of ministers for "misrepresenting facts". An EGoM had to sit five times to decide the future of Sasan. Three other qualifiers — R-Power, NTPC and Jaiprakash Associates — were asked to bid afresh. R-Power bagged Sasan by bidding Rs 1.196 per kwh, the same as Lanco. Surprisingly, this was lower than their original bid of Rs 1.296 per kwh. Sasan was transferred to R-Power in August 2007 — 10 months behind schedule.<br><br>By November 2007, almost six months later than planned, the government managed to award the third UMPP at Krishnapatnam. <br>R-Power emerged the lowest bidder at Rs 2.33 per kwh. But it took almost two more years to award Tilaiya, the fourth UMPP. Five companies including NTPC, R-Power, Lanco, Jindal Power and Sterlite Energy were among the bidders. In January 2009, R-Power bagged the project at Rs 1.77 per kwh, again a bid many felt unrealistic.<br>break-page-break<br>For Sasan, which was almost a year behind schedule in awarding, R-Power wants to commission the first unit by January 2013 and the sixth unit by June 2014. Chalasani says it will be able to commission the project as per schedule.<br><br>But Sasan has run into problems related to mining. As per the latest assessment by the CEA, only 20.9 per cent or 1,567 acre have been acquired out of a total of 7,488 acre earmarked for mining. Of this, 5,243 acre is forest land. While the environment clearances are in place for Mohar and Amolhri mines, the forest advisory panel of the environment ministry denied permission for the Chhatrasaal block.<br><br>There is also an issue of overlapping land for Northern Coalfields. This is now before an EGoM. R-Power is going ahead with its mining plans and says it will use modern equipment to boost productivity, minimising environmental impact. "We will start mining at Mohar and Amolhri by the middle of this year," says Chalasani. But another row has cropped up in Sasan. R-Power managed to get permission to utilise coal from mines earmarked for Sasan in its other plants. This is being contested by the Tatas, who have filed a case arguing that if this was allowed, they could have matched the R-Power bid.<br><br>Meanwhile, at Tilaya, land acquisition is proving to be a headache. The SPV was transferred and PPA was executed in August 2009. So far, only 19.48 per cent or 470 acre, out of the required 2,412 acre, have been acquired. The mining plan has been approved for two blocks, but R-Power is yet to get possession of any coal blocks spread over 11,120 acre. CEA's remarks reveal the files for clearances are stuck at various central and state offices. But R-Power has time till May 2015 to commission the first unit and Chalasani thinks he can meet the target.<br><br>In the past three years, the PFC could not award any more UMPPs. More than that, the fate of rest of the imported coal-based UMPPs hangs in the balance. "In the case of Orissa and Chhattisgarh UMPPs, there were issues related to environmental clearances of linked mines, which is being addressed," says K.C. Venugopal, minister of state for power.<br><br></p>
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<td><strong>‘WE HOPE TO CRACK THE CRISIS'</strong><br><strong>K.C. Venugopal, minister of State for Power</strong></td>
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<td><strong>K.C. Venugopal </strong>(BW pic by Bivash Banerjee)</td>
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Are soaring coal prices hitting India's coal power dreams? BW's <strong>P.B. Jayakumar</strong> spoke to minister of state for power<strong> K.C. Venugopal</strong> to find out the government's plans.<br><br><strong>Your plans to address various issues dogging UMPPs...</strong><br>These were conceptually great initiatives. The initial plan was to launch some 16 UMPPs and build major power hubs catering to each region. But we still face the perennial issue of major clearances. While conceiving UMPPs, the government took the burden of all clearances to hasten approvals. We have already awarded four projects during 2006-09. All these are at various stages execution. In Orissa and Chhattisgarh, there are issues related to environmental clearances of linked mines. We are hopeful of cracking such issues.<br><br><strong>But how will you ensure coal for all these projects? </strong><br>The 12th Plan projections of capacity addition are yet to be finalised. As far as imported coal-based power plants in coastal India are concerned, these are not fresh proposals. These were conceived in the 11th Plan and to be commissioned in the 12th Plan. On the availability of imported coal at cheap rates, certain developments over which we do not have control are driving prices. So we are reviewing our strategy. The issue needs inter-ministerial consultation and a committee is chalking out a solution. <br><br>On issues regarding private developers of UMPPs, the very structure of UMPP is built on an agreement between developers and procurers. Procurers mean the respective state distribution firms in the respective regions. Among those procurers, there are identified lead procurers with whom we had discussions and asked them to review the progress within the provisions of the agreement.<br><br><strong>But is there any clause in the agreement for penalising bid winners for delay of UMPP?</strong><br>Yes, there are exclusive clauses to address such issues.<br><br><strong>What are your options to resolve the coal crisis, as our domestic output is inadequate. We are looking at a shortfall of 292 million tonnes in the next five years.</strong><br>The capacity addition in the 11th Plan is impressive, as it has gone up twofold or more compared to the last plan. But there was no commensurate growth in coal production. By the terminal year of 12th Plan, our imported coal need is about seven times of what we draw now. We are seriously into sorting out this roadblock. In the long term, we have a two-pronged strategy — speed up clearances for mine development and catalyse production from captive coal blocks. We are also developing effective demand-side management. We need to enhance our fleet of renewable energy developers as well. The coal ministry is committed to the development of coal resources. But one has to see the mounting social compulsions. There is no point in blaming stakeholders in coal mining, as it is deeply about conflicts of interests and positions. We just can't afford to have more coal production at the cost of heavy ecological losses.<br></td>
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<p><strong>Cheap Power At Stake</strong><br>The concept of UMPP is the most viable idea to leapfrog capacity-addition quickly with the help of the private sector, all experts agree. The problem is whether it makes sense for the government to allow companies to revise tariffs after the project has been awarded.<br><br>In the case of Indonesian coal, the Tatas and R-Power say the change in rules was unprecedented. They have their sympathisers in the central government, who are seriously looking at whether the Indonesian situation should be taken into account for allowing a change in the PPAs. On the other hand, many of the companies that lost out in the bidding process say that Tata and R-Power bid extra low to win the bids and were not realistic in their cost estimates. They also say that if tariffs are to be revised now, the projects should also be offered to those who had bid in the original round of the bidding. <br><br>There are others who feel that tariffs sought by many state governments are artificially low. Also, there are some who point out that the government has not lived up to its own promises of giving land, water and captive coal mines that could be utilised quickly.<br><br>These are things the government is trying to correct. In January, Prime Minister Manmohan Singh constituted a committee of secretaries under his principal secretary, Pulok Chatterjee, to work out an action plan to sort out coal issues and power tariffs. The committee asked Coal India to sign supply agreements within a month with plants commissioned up to 31 December and with plants that are going to be commissioned by March 2015. If Coal India could not deliver, it would have to meet commitments with imported coal, warned the committee.<br><br>The power ministry has also come up with drafts of fresh standard bid documents (SBD) and power purchase norms for awarding new UMPPs. "I believe the current coal issue may be resolved since such changes are cyclical, but we have to look at the big picture of energy security for the country", says Sardana. Tired, Tata Power is looking at setting up power plants outside India to meet its internal growth targets, he says. Meanwhile, the country's power crisis has started becoming acute again.<br><br>p(dot)jayakumar(at)abp(dot)in<br><br>(This story was published in Businessworld Issue Dated 02-04-2012)</p>