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Icra internship report

  1. 1. S UMMER INTERNSHIP REPORT A Study of Indian Power Sector-Enthralling Private investors? done at ICRA Limited by Manish Kumar Urele 0911033 Under the guidance of Namita Menon Senior Analyst, ICRA ltd.
  2. 2. Contents 1.INDIAN POWER SECTOR: AN OVERVIEW ........................................................................................................ 5 1.1.Widening Gap between Demand & Supply ......................................................................................................... 6 1.2.Change in ownership structure: .......................................................................................................................... 6 1. 3 Trends in power generation through five year plan periods ............................................................................. 7 1. 4 Capacity addition programme-target & Achievements .................................................................................. 10 1. 5 Demand Forecast ............................................................................................................................................ 11 1. 6 Coal Availabilty likely to be a bottleneck:......................................................................................................... 12 1. 7 Transmission: ................................................................................................................................................... 13 1. 8 Distribution:...................................................................................................................................................... 14 1. 9 Private Participation......................................................................................................................................... 15 1. 10 Investment opportunity:................................................................................................................................. 16 2. BOTTLENECKS IN INDIAN POWER SECTOR ...................................................................................................18 2.1 Power Sector Policy Issue ................................................................................................................................ 18 2.2. Transportation and Handling facilities for fuel ............................................................................................... 19 2.3Power equipment supplies ................................................................................................................................. 20 2.4. Regulatory & political risk .............................................................................................................................. 20 2.5. Access to fuel, land and water ....................................................................................................................... 21 2.6 GAP IN DEMAND & SUPPLY OF REQUIRED HUMAN CAPITAL ............................................................................................. 21 2.7.Law and Order................................................................................................................................................... 22 2.8 Preferential treatment with government owned/regulated companies .......................................................... 22 2.9. Non-establishment of long-term debt market ................................................................................................ 23 4.10 Meagre investment in R&D ............................................................................................................................. 23 4.12Vicious circle of various clearances .................................................................................................................. 23 3. FUELING GROWTH ......................................................................................................................................24 3.1Coal Reserves in India ........................................................................................................................................ 25 3.2Coal Production .................................................................................................................................................. 25 3.3Supply & Demand of coal for power sector........................................................................................................ 26 3.4Bridging the gap................................................................................................................................................. 27 3.4.1.Coal import........................................................................................................................................... 27 3.4.2. Diversify the portfolio of coal importing nations ................................................................................ 29 3.4.3. Overseas Mining.................................................................................................................................. 30 3.4.4. Captive Mining .................................................................................................................................... 30 3.4.5.Private Mining ...................................................................................................................................... 30 3.4.6. Increasing the thermal efficiency of power plants .............................................................................. 31 3.4.7. Law and Order ..................................................................................................................................... 31 3.5Key Challenges facing the coal industry ............................................................................................................. 31 3.6Key Reform Measures required .......................................................................................................................... 32 3.6.1. Policy and Regulatory Framework ..................................................................................................... 32 3.6.2. Deregulation of the coal sector .......................................................................................................... 33 3.6.3. Independent Regulatory body ............................................................................................................. 33 3.6.4. Improvement in operational efficiency of the coal companies .......................................................... 33 3.6.5. Strengthening of logistics in coal distribution .................................................................................... 34 2
  3. 3. 3.6.6. Investment in R & D............................................................................................................................. 34 3.6.7. Focusing on technology for future ...................................................................................................... 34 3.6.8. Information Technology for the Mining Industry ............................................................................... 34 3.7 World coal Reserve and Trends in Global production and consumption .......................................................... 36 4.TRANSMISSION ...........................................................................................................................................38 4.1Growth in Transmission Segment ...................................................................................................................... 38 4.2.Development of National Grid .......................................................................................................................... 40 4.311TH PLAN TARGETS AND ACHIEVEMENTS Funds Requirement in Transmission Segment ........................................... 40 4.4Funds Requirement in Transmission Segment .................................................................................................... 42 4.5.Sources of Funds ............................................................................................................................................... 42 4.6.Funds Available and Sources of Funds For PGCIL .............................................................................................. 43 4.7.Private Players in the League ............................................................................................................................ 43 4.7.1. Powerlink Transmission Limited .......................................................................................................... 43 4.7.2. Reliance Power Transmission Limited ................................................................................................. 43 4.7.3. Infrastructure Leasing and Financial Services (IL&FS) ......................................................................... 44 4.74. Tata Power Limited .............................................................................................................................. 44 4.7.5. Adani Power Limited ........................................................................................................................... 44 4.7.6. Torrent Power Limited......................................................................................................................... 45 4.7.7. Gammon Infrastructure Projects limited ............................................................................................. 45 4.7.8. Kalpataru Power Transmission Limited ............................................................................................... 45 th 4.8. Status of Transmission projects to be executed by Private Players in 11 plan .............................................. 45 4.9Outlook............................................................................................................................................................... 46 5. A STUDY ON ADANI POWER LIMITED ..........................................................................................................48 5.1Background ........................................................................................................................................................ 48 5.2.Company profile ............................................................................................................................................... 49 5.3Power Projects under construction .................................................................................................................... 50 5.4.Future projects ................................................................................................................................................. 52 5.5.Recent developmentNon-establishment of long-term debt market ................................................................ 52 5.6SWOT analysis of Adani Power Limited ............................................................................................................. 52 APPENDIX A ...................................................................................................................................................56 A.1. Raw coal production (in million tonnes) .......................................................................................................... 56 A.2. Regression analysis to determine the linear estimate of coal production ...................................................... 56 A.3. Normative requirement of coal & status of coal linkage ................................................................................. 57 A.4. Indonesian Coal Mining Industry Projections .................................................................................................. 57 A.5. World coal reserve (Country wise data)........................................................................................................... 58 A.6.Worldwide coal production and Consumption trend ........................................................................................ 59 A.7.Existing/Proposed Inter-Regional Power Transfer Capacity ............................................................................. 61 A.8. Proposed Transmission Line with Private Participation .................................................................................. 62 APPENDIX B ...................................................................................................................................................63 B.1. Existing Policy framework in coal industry: A Bird Eye view ............................................................................ 63 APPENDIX C ...................................................................................................................................................65 3
  4. 4. C.1. State wise status of IPPs .................................................................................................................................. 65 4
  5. 5. 1. Indian Power Sector: An Overview The Indian power sector has registered significant progress since the process of planned development of the economy began in 1950. Hydro-power and coal based thermal power have been the main sources of generating electricity. Nuclear power development, which was introduced in late sixties, is remained on slower track. Decades of economic planning in India following independence placed significant emphasis on the development of the power sector. Electricity generation capacity with utilities in India had grown from 1713 MW in December 1950 to about 157229.48 MW1 (as on 28 Feb 2010). Despite the fact that present generation capacity is being 100 times than that of the early 1950s, the per capita consumption of electricity is still not even comparable in any standard with per capita consumption of world average of 2,595.7 Kwh.2 Per capita electricity consumption is even lower than some of the developing Asian economies (Table 1.0) Table 1.0 S. No. Country Per Capita Electricity Consumption (kWh) 1 China 1780.5 2 Thailand 1950.1 3 Korea 7803.9 4 Kazakhstan 4071.7 5 Malaysia 3301 6 India 480.5 7 USA 13635.7 8 World 2,595.7 During 2005-06 The energy is a prime mover for growth of an economy. The reason for low per capita electricity consumption could be many such as • Non availability of electricity in rural areas • Wide gap between demand and supply • Lower level of industrialization, high cost of electricity etc. 1 http://www.powermin.nic.in/indian_electricity_scenario/introduction.htm 2 http://earthtrends.wri.org/text/energy-resources/variable-574.html International Energy Agency (IEA) Statistics Division. 2007. Energy Balances of OECD Countries (2008 edition)--Economic Indicators and Energy Balances of Non-OECD Countries (2007 edition)--Economic Indicators. Paris: IEA. Available at http://data.iea.org/ieastore/default.asp. 5
  6. 6. These reasons are evident in Indian context. The govt. has put enormous effort for rural electrification but still there is long way to go to accomplish the mission of “Electricity for all”. Total inhabited village according to 2001 census are 593732, So far 497709 (83.8% of total) villages are being electrified and 96023 more villages are to be electrified. Out of these 1344 villages are being electrified in period 01-Apr-09 to 31-Jan-103. 1.1. Widening Gap between Demand & Supply: The Indian Power industry has since independence faced the demand and supply gap4 (Table 1.1.1). The said gap is still prevalent even after government initiated the reform process in early nineties. Table 1.1.1 Year Energy Energy Energy Energy Requirement Availability Shortage Shortage % (MU) (MU) (MU) 2002-03 545983 497890 48093 8.8 2003-04 559264 519398 39866 7.1 2004-05 591373 548115 43258 7.3 2005-06 631554 578819 52735 8.4 2006-07 690587 624495 66092 9.6 2007-08 737052 664660 72392 9.8 2008-09 777039 691038 86001 11.1 It is evident from the statistics that the demand-supply gap is widening over the period of time. In the year 2008-09, the electricity generation grew by 2.71% from 704.45 Billion Units (BU) to 723.56 BU, whereas during the same period the requirement grew from 739.35 BU to 774.32 BU. The annual energy shortage increased to 11% from 9.8% in the previous year. The peak shortage however declined to 11.9% in the year 2008-09 from 16.6% in the previous year. The gross electricity requirement by the end of the Eleventh Plan as projected by the Working Group on Power is 1038 BU and peak demand estimation is 151000 MW5. 1.2. Change in ownership structure: A natural-monopoly of government was used to justify the argument that since power sector is a public-utility and hence better to be operating through government. The lack of competition, accompanied by political influence and operational inefficiency, has steered the sector towards the abyss of financial distress. Policymakers recognized this in the early 1990s and opened up the sector for private participation. Encouraged by favorable policy developments and the advent of 3 http://www.powermin.nic.in/rural_electrification/village_electrification.htm 4 Ministry of power Annual report 2008-2009; http://www.powermin.nic.in/reports/pdf/Annual_Report_2008-09_English.pdf 5 http://recindia.nic.in/download/ar2008-09.pdf 6
  7. 7. independent regulation, greater private participation is becoming visible in the sector, though not to the extent desirable. The existing ownership structure of the generating capacity is still dominated by CPSUs and state utilities (Table 1.2.1 and only 18% of the generating capacity in the country is 1.2.1) owned by the private sector6. Table 1.2.1 Ownership Structure 18% 50% State 32% Central Private The fuel wise break-up of the installed generation capacity in India ha shown in table up has 1.2.2, which is clearly depicting the dominance of thermal power plants in generation s plant portfolio with almost two-third share. third Table 1.2.2 Generation Installed Capacity (MW) of Power Utilities (Up to February 28, 2010) Ownership Mode-wise breakup Grand Thermal Nuclear Hydro RES** Total Coal Gas Diesel Total (Renewable) (MNRE) State 44002 4046.12 602.61 48650.73 0 27065 2662.41 78378.14 Private 7426.38 6307.5 597.14 14331.02 0 1233 12764.69 28328.71 Central 30915 6702.23 0 37617.23 4340 8565.4 8565 0 50522.63 Total 82343.38 17055.85 1199.75 100598.98 4340 36863.4 15427.1 157229.48 Source: Infraline 1.3. Trends in power generation through five year plan periods: The installed capacity and its ion growth rates since 1947 are given below (As on February 28, 2010 28, 2010) 6 http://www.powermin.nic.in/indian_electricity_scenario/introduction.htm 7
  8. 8. Table 1.3.1 Plan/Year Hydro Thermal Renewable Nuclear Total CAGR Energy Sources March 1985 (End of 6th Plan) 14460 27030 1095 42585 - March 1990 (End of 7th Plan) 18308 43763 1565 63636 9.89% March 1992 (End of 2 Annual 19194 48086 1785 69065 4.27% Plans) March 1997 (End of 8th Plan) 21658 61912 2225 85795 4.84% March 2002 (End of 9th Plan) 26269 74549.54 1507.46 2720 105046 4.49% March 2007 (End of 10th Plan) 34653.77 86014.84 7760.6 3900 132329.2 5.19% Mar-08 35908.76 91906.84 11125.41 4120 143061 Mar-09 36877.76 93725.24 13242.41 4120 147965.4 Feb-10 36863.4 100599 15427.1 4340 157229.5 6.27% It is evident from the table that after seventh plan period we have not seen a healthy growth in terms of capacity addition. The decline in the proportion of Hydro capacity, which started in the early seventies, has, continued. The share of Hydro-power projects in the total installed capacity which stood at 51% during 1962-63 slipped to 34% at the end of 6th plan and further to 26 percent at the end of 10th plan, against an optimal share of 40%. The Plan wise capacity addition performance shows that the Central Sector organizations have realized better capacity addition as compared to the State sector utilities. As a result, the share of Central Sector in the total installed capacity, which was 16 percent at the end of the 7th Plan, rose to around 32 percent in February, 2010. Private companies own about 18 percent of the total installed generation capacity. Their share, however, has expected to increase in the future with the opening up of the power sector for private participation. The Plant Load Factor, which is an important indicator of the performance of the thermal power generating units, has shown steady improvement at all India level and has increased from 64.4% at the end of eighth plan period to 77.03% at the end of February 2010. However, there remains considerable scope for further improvement, particularly in respect of the State Sector thermal plants. The plant load factor at various plan periods has shown in table 1.3.2 The losses on account of transmission and distribution have declined marginally but remain much higher than the technically acceptable levels. Partly, this is attributable to 8
  9. 9. Table 1.3.2 Plant load Factor five year plans Target Actual Sector-wise (Actual) (%) (%) Central State Private at the end of 8th plan 63.6 64.4 71 60.3 71.2 at the end of 9th plan 69.9 69,9 74.3 67 74.7 at the end of 10th plan 76.3 76.8 84.8 70.6 86.3 2009-10 (Up to Feb 2010) 77.02 77.03 85.05 70.45 82.02 Source: Infraline inadequate investment in the T & D system. Though we have seen a significant growth in electricity generation over the years, the shortage of power continues to exist primarily because of growth in demand for power, outpacing the growth in generation and generating capacity addition. The power supply position at the end of various plan periods has shown in table 1.3.3 Table 1.3.2 Energy Plans Requirement Availability Shortage MU % Growth MU % Growth MU % At the end of 7th plan 2,88,974 2,66,432 22,542 7.8 At the end of 8th plan 4,13,490 6 3,65,900 3.3 47,590 11.5 At the end of 9th plan 5,22,537 3 4,83,350 3.4 39,187 7.5 At the end of 10th plan 6,90,587 9.3 6,24,495 7.9 66,092 9.6 2009-10* 6,88,213 - 620,074 - - - * April 2009 to January 2010 The peak demand shortage was also remained a challenge for the Indian power sector. However, we were able to maintain the steady growth in supplying peak load vis-à-vis increase in demand, but we had not outwent the growth so that to meet a steady deficit of peak load. The trends in peak deficits is shown in table 1.3.4 The main reasons for shortage of power are- • Growth in demand for power outstripping the growth in generation and capacity addition, • Shortage of peaking power in the grid. • Low Plant Load Factor of some of the thermal generating units, mostly in the State Sector 9
  10. 10. Table 1.3.3(Peak Deficit trends) Demand Met Shortage (MW) % Growth (MW) % Growth (MW) % At the end of 7th plan 48,055 39027 9,028 18.79% At the end of 8th plan 63,853 32.87% 52,376 34.20% 11,477 17.97% At the end of 9th plan 78,441 22.85% 69,189 32.10% 9252 11.79% At the end of 10th plan 100,715 28.40% 86,818 25.48% 13,897 13.80% 2009-10* 116,281 15.46% 101,609 17.04% 14,672 12.62% * April 2009 to January 2010; CAGR = Compounded Annual Growth Rate • High Transmission & Distribution losses • Inadequate sub-transmission and distribution network in some States. • Inadequate inter regional transmission capacity, for supplying power from surplus regions to deficit regions. • Poor financial position of State Utilities rendering it difficult for them to raise the resources necessary for making required investments to create adequate generation, transmission and distribution system. 1.4 Capacity addition programme-target & Achievements: The planning commission and Ministry of Power had set the target of 41,110 MW to be added in the system to meet the growing power requirement. Out of this, the share of Central Sector was 22832 MW and that of the Private Sector was 7121 MW. The State Sector had a share of 11157 MW. However, once again the actual capacity addition in the power sector has been far below the target set by the Ministry of Power. Capacity addition during this plan period was only 21180.2 MW an achievement of trifling 51.6% of the target. The summary of actual achievement has shown in table 1.4.1 Table 1.4.1 (Capacity Addition-10th Plan achievement) Sector Hydro Thermal Nuclear Total % achievement Central 4495 7330 1180 13005 56.9 State 2691 3553.6 0 6244.6 55.9 Private 700 1230.6 0 1930.6 27.1 Total 7886 12114.2 1180 21180.2 51.6 % Achievement 54.8 47.6 90.8 51.6 • However, shortfalls in all the three segments i.e. Central, State and Private Sector has reported, the shortfalls in achieving the Private sector targets of capacity addition are notable with only 27% achievement. 10
  11. 11. • In terms of fuel mix comparison, nuclear sector was able to achieve 90.8% of the modest target set for it. • In Hydro segment 54.8% of the target was achieved and X Plan is notable in the context of clearing the backlog. There were number of hydro projects which were originally due for commissioning in the Eight Plan or even before. But these projects due to associated problems were brought into the Tenth Plan with a long history of time and cost over run. These projects included Naptha Jhakhri HEP (1500 MW), Tehri HEP (1000 MW), Dulhasti HEP (390 MW) and Sardar Sarovar (1450 MW). In the Tenth Plan we have the satisfaction of bringing these projects on track and all of them have been commissioned in the X Plan. • The dismal performance of Thermal segment at 47.6% of the target is mainly due to most of the coal based backup projects could not set due to supply constraint on part of BTG equipment manufacturers especially BHEL. The planned capacity addition in 11th plan was 78577 MW, which has further revised to 62,374MW in the 11th plan Mid-Term Appraisal. The year wise capacity addition target and the actual achievement has shown in table 1.4.2 Table 1.4.2 (Target & Achievement of capacity Addition in 11th Plan) Year Central State Private Total Hydro Thermal Nuclear Hydro Thermal Nuclear Hydro Thermal Nuclear Target 690 3490 660 1682 4767 0 0 750 0 12039 2007-08 Achievement 1030 1990 220 1393 3880 0 0 750 0 9263 Target 0 1750 660 1097 1262.2 0 0 2761 0 7530.2 2008-09 Achievement 0 750 0 969 852.2 0 0 882.5 0 3453.7 Target 252 2490 660 301 4679 0 292 5833 0 14507 2009-10 Achievement 0 1740 440 39 3079 0 0 4287 0 9585 Target 529 5890 1220 597.5 6012 0 219.5 5891 0 20359 2010-11 Achievement - - - - - - - - - - 1.5 Demand Forecast: According to the 17th Electrical Power Survey report the demand projections on all India basis for the year 2011-12, 2016-17 and 2021-22 has given below in table 1.5.1 11
  12. 12. Table 1.4.1 Year Electrical Energy Requirement at Power Annual Peak Electric Load at Power Station Bus Station Bus Bars (MU) Bars (MW) 2011-12 968659 1,52,746 2016-17 1392066 2,18,209 2021-22 1914508 2,98,253 1.6 Coal availability likely to be a bottleneck: There are mainly three sources of energy for power generation on which India is relying, namely, Thermal, Hydro and Nuclear. Power generation through nuclear energy is although at nascent stage but nuclear deal with US and other technological advance countries will, in long run, certainly supercharge the power generation through this untapped source. The availability of fuel is the major concern for the policy maker especially for Thermal segment. Coal and gas supply is likely to become bottleneck in achieving the planned capacity addition target of current and forthcoming five-year plans. Renewable energy is so far remained untapped, but it seems to be the promising source of energy in near future provided we could develop the required infrastructure and technology to reap the vast unexploited renewable energy resource. The break-up of total generating capacity in India according to the fuel used is given in table 1.6.1. As per table 1.3.1, it is evident that our energy requirement is largely dependent on coal. 53.3% of our energy requirement is fulfilled through coal and hence it can be easily inferred that in the long-run, availability of coal is going to play a substantial role in meeting the energy requirement of the nation. The coal reserves of India up to the depth of 1200 meters have been estimated by the Geological Survey of India at 257.38 billion tonnes as on 01.04.2007. Coal deposits are mainly located in Jharkhand, Orissa, Chhattisgarh, West Bengal, Madhya Pradesh, Andhra Pradesh and Maharashtra. Table 1.6.1 Fuel MW %age Total Thermal 100598.98 64.6 Coal 82,343.38 53.3 Gas 17,055.85 10.5 Oil 1,199.75 0.9 Hydro (Renewable) 36,863.40 24.7 Nuclear 4,340.00 2.9 Renewable Sources 15,427.10 7.7 Total 1,57,229.48 As on 28 Feb 2010 12
  13. 13. Hydropower is currently accounting for about 25% of nation’s energy requirement. The hydro potential is by and large untapped because of the several issue associated with it such as very long gestation period, relocation and rehabilitation of the affected mass population, submergence of forest and its adverse effects on flora and fauna etc. 1.7 Transmission: Transmission of electricity is defined as bulk transfer of power over a long distance at high voltage, generally of 132 kV. In India bulk transmission has increased from 3708 ckm (Circuits Kilometers) in1950 to more than 265,000 ckm today. The nation is divided into five regions for transmission system, namely, Northern region, North-Eastern region, Southern region, Eastern region and western region. The Government of India has an ambitious mission of ‘POWER FOR ALL BY 2012’. This mission would require that country’s installed generation capacity should be at least 2, 00,000 MW by 2012 from the present level of 1,57,229.48 MW. To be able to transmit this power to the entire country an expansion of the regional transmission network and inter regional capacity to transmit power would be essential. The power needs to be carried great distances to areas where load centers exist. Table 1.7.1 shows the existing transmission capacity in India. As part of its ambitious mission to provide electricity to the entire nation by 2012, the Indian government is looking to strengthen the national power grid by adding more than 60,000 circuit kilometers (37,200 miles) of new transmission at a cost of about 7.5 billion rupees (R) ($146 million). That integrated grid is expected to carry as much as 60% of the power generated in the country. The government is also carrying out a Rs 6.5 billion ($126 million) expansion of the five regional systems as well as the interregional grid to boost transmission capacity from 17,000 MW to 37,000 MW7. This project will primarily connect load centers to generation resources that are unevenly distributed around the country. While the predominant technology for electricity transmission and distribution has been Alternating Current (AC) technology, High Voltage Direct Current (HVDC) technology has also been used for interconnection of all regional grids across the country and for bulk transmission of power over long distances. A lot of emphasis is being given to increase the inter-regional power transmission capacity. The proposed target is to achieve cumulative capacity (all five regional grids) of 38,650 MW8 by the end of 11th planning year period. 7 http://www.powermag.com/nuclear/Powering-the-People-Indias-Capacity-Expansion-Plans_1858.html 8 Ministry of power annual report 2008-09 13
  14. 14. Table 1.7.1 (All figures in ckm)9 At the end of 10th plan 11th plan Upto March 2009 +500 kV HVDC Central 4368 5668 State 1504 1504 Total 5872 7172 765 kV Central 1775 2709 State 409 409 Total 2184 3118 400 kV Central 50992 61800 State 24730 27696 Total 75722 89496 220 kV Central 9444 10066 State 105185 112894 Total 114629 122960 1.8 Distribution: Distribution is the vital component of the entire electricity supply chain, despite being of its crucial importance it remained as neglected element and thus, resulting in huge Aggregate Technical and Commercial (AT&C) losses. Most of the ills of the Indian power sector find their origin in the distribution segment. The distribution segment has lagged both in terms of operational efficiency as well as financial performance. The slow pace of investment generation as well as distribution segment can be attributed to the severe cash flow problem associated with the under-recovery of costs and poor collection efficiency. Poor operational efficiency further aggravates the situation. Table 1.8.1 shows the All India AT&C loss10 which reveals that almost 1/3rd of the generated power is drained away as losses. This is a great matter of concern for a developing nation like ours. With a vision to achieve overall growth of GDP at the rate of 8-9% our planning committee estimated the installed capacity necessary to achieve the said target. With the losses in the system of such a mammoth magnitude will land us to nowhere near the target. Proper investment and planning is required to minimize these losses to acceptable limits. 9 http://www.indiainbusiness.nic.in/industry-infrastructure/infrastructure/power.htm 10 http://www.cea.nic.in/power_sec_reports/Executive_Summary/2010_01/1-2.pdf 14
  15. 15. Table 1.8.1 (All figures in percentage) Year AT & C losses* 2002-03 32.54 2003-04 34.78 2004-05 34.33 2005-06 34.54 2006-07 32.07 *PFC figures PFC: Power Finance Corporation Ltd. Recognizing the urgent need of reforms in the distribution sector the Government of India introduces, the Accelerated Power Development Programme (APDP) in 2001, for the strengthening of Sub Transmission and Distribution network and reduction in AT&C losses. The main objectives of the programme include improving the financial viability of state utilities, reducing of aggregate technical and commercial (AT & C) losses, improving customer satisfaction, and increasing the reliability and quality of the power supply. 1.9 Private Participation: Long after the independence, Indian government realized need of private players to ramp up the growth of power sector. To enable the private companies to enter in the sector, Indian government has introduced many policies/ regulation (eg. Electricity Act 2003, National Electricity Policy) so that private players will ready to channel their money in power sector. At present, private players share 18% of total installed capacity in power portfolio. The government realized that unless comprehensive reforms are undertaken it would be difficult to attract private sector to invest in the power sector. By enactment of Electricity act 2003, formation of central electricity regulatory commission are the steps in this regard. The government also implemented various policies to encourage participation of private sector. Some of these policies were liquid fuel policy, Hydro power policy, Mega Power Policy etc. However, the outcome of these policies was not as expected. The contribution of private sector in capacity addition during 10th plan was only 1970.6 MW which was about 16% of the total achievement in the period. The various issues involved in the low level of private participation are discussed below: Most of the project are financed through Project Financing route. The main difference between corporate financing an project financing is that primary source of loan repayment is sponsoring company backed by entire balance sheet not the 15
  16. 16. project alone. If project fails, the investor can expect significant losses even if it is sponsored by AAA- rated company. This risk is the major concern for the potential investor and hence deterring them to invest in private power projects. Large scale capital intensive projects usually requires huge investment up front and only start to generate revenues after a significantly long construction period. Therefore, matching debt repayment obligation with project revenue cash flow implies that, on average, project finance is characterized by much longer maturities compared to other form of financing. With the change in macroeconomic condition the lender will prone to suffer significant losses by investing in these projects. There are numerous operational agreement to be executed before a development of power project which includes EPC contract, fuel supply agreement, power purchase agreement, Govt. clearances etc. Even if the project is being prosed by private players there are too many hurdles which private players have to cross to commence financially viable project. Many projects are delayed due to these agreement and later suspended by the private players with bitter experience in the power sector. The source of financing for independent power project are scarce, because the risk of development are high. Until the project reaches financial closing for construction, ther are a multitude of risk that could reduce the value of the project to zero. This risk include: Political opposition of project Permitting risk Regulatory disapproval and change in law Inability to obtain PPA, either because the power price is too low or the term are not acceptable Inability to secure fuel and fuel transportation under long term contract Dealing with SEBs risk: The weak financial health of the SEBs is the major concern for private players because the ability to repay the loan by private players is directly link with the revenue generated from SEBs. In case SEBs are not in position to pay to the private players, this will be poses a great risk on private players in terms of economical operation of plant and the credit worthiness associated with the name of the private company. However, govt is timely identifying the issues and preparing the ground so that private players can afford to enter in the power sector. It is estimated that about 23100 MW of thermal project for which main plans order have been placed, 21040 MW of UMPP, 8380 16
  17. 17. MW for which linkages/ part linkages are identified and is likely to be commissioned by private sector in 12th plan. For 11th plan most of the project announced are either not able to have the financial closure or having in one or other phase of clearances seeking. The state wise detail of the projects are shown in Appendix C.1 1.10 Investment opportunity11: The Sixteenth Electric Power Survey projects a capacity requirement of about 100,000 MW for the period 2002–12. Apart from generation capacity addition and associated network strengthening, additional investment is required to extend the transmission and distribution network to meet the requirement of the un-served population. Government of India estimates for investments in the Power Sector, in order to meet the required targets for Eleventh Plan, stand at Rs.10316 Billion which comprises of funds required for adding power generation capacity, R&M of existing power plants, expansion and up-gradation of transmission and distribution infrastructure, decentralized distributed generation etc. The three key components which drive the Power Sector are Generation, Transmission and Distribution. The total requirement of funds for generation projects, during the Eleventh Plan period is estimated at Rs.4,108,960 million, with Rs.2,020,670 million for the central sector, Rs.1,237,920 million for the state sector and Rs.850,370 million for the private sector. Investments for transmission system development and related schemes during the Eleventh Plan period is estimated at Rs.1,400,000 million, with Rs.750,000 million for the central sector and Rs.650,000 million for the state sector. The total fund requirement for sub-transmission and distribution systems development for urban as well as rural areas during the Eleventh Plan period is estimated at Rs.2,870,000 million inclusive of APDRP and RGGVY schemes. 11 http://recindia.nic.in/download/ar2008-09.pdf 17
  18. 18. 2. Bottlenecks in Indian Power Sector There is an immense opportunity for growth in Indian Power sector, but it could be hindered or more appropriate to say, it is being outpacing because of the below mentioned factors: 2.1 Power Sector Policy Issue: The Indian power sector has largely dominated by political influences. Though policy formulation may happen at the central level, its implementation lies with states. Unlike the telecom sector, in power, the success or failure of implementation depends largely on the will of the ruling government at the state level. To bring about reforms, like implementation of unbundling of SEBs, privatization of transmission and distribution are some of the responsibilities which lies with state government and the benefits from these reforms and policies are bearing the direct relationship with efficiency with which state govt. are implementing them. Power is a highly politicized subject and often guided by the possible outcome of near elections. More often than not, reforms take a backseat, given the political nature of the sector. Most importantly, in most cases state utilities control distribution assets along with access to end customers. Tariff for different consumer categories, is determined by the respective state electricity regulator based on fixed RoE norms. Since the hike in tariff has not kept pace with the cost of supplying power, losses have been rising for distribution utilities. The table 2.1.1 below shows the skewed nature of tariff and its consequences in terms of huge losses to the SEB’s and table 2.1.2 shows the cumulative losses in Rs. Crore to SEBs Table 2.1.1 Year Cost of supply Realisation Only Agri Loss (Paise/kwh) (Paise/kwh) (Paise/kwh) (Paise/kwh) FY02 246 181 59 65 FY03 238 195 77 43 FY04 239 203 72 36 FY05 254 209 76 45 FY06 258 221 79 37 FY07 276 227 71 49 FY08 290 232 71 58 Source: CEA, Edelweiss research One of the main reasons why state governments have been hesitant in hiking the agriculture/domestic tariff is that this segment forms the largest part of their vote banks. Consequently, tariffs are far higher for industrial users, forcing them to set-up captive power plants. If this trend continues, it could damage state financials further as industrial customers, who bear the burden of high tariff, are going away (captive), 18
  19. 19. Table 2.1.2 State wise Commercial Loss (w/o Subsidy) of Power Utilities (Rs. Crore) Region 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Eastern -3,128 -3,316 -1,114 -1,460 -2,461 -5,173 Region N-E Region -1,136 -1,238 -1,081 -1,543 -806 -946 Northern -8,586 -8,223 -8,031 -14,361 -10,391 -13,722 Region Southern -11,289 -5,833 -5,132 -4,578 -4,894 -5,996 Region Western -5,192 -2,583 -3,748 -2,053 -1,577 -1,609 Region Grand Total -29,331 -21,193 -19,106 -23,995 -20,129 -27,446 Source: Infraline leading to higher subsidy funding by state governments. Further, this type of skewed tariff structure will work as repellent for private players to invest in this sector. Since this tariff structure will lead to the bad financial health of SEBs, which may, in turn default in payment to these private players. Moreover, Indian transmission and distribution system is not efficient; we have almost 33% of AT & C losses. The theft of electricity is also a major concern. SEB’s are carrying this burden for years and resulted into unhealthy financial condition. Whatever power is transmitted, only two-third of its get metered and billed. This resulted in huge losses. Unlike SEBs, private player will not be interested in power production until they ensured that every single unit that is produced and transferred is billed. 2.2 Transportation and Handling facilities for fuel Manifold increase in the demand for coal in coming years, particularly to meet the energy requirement of the country, has put an onerous responsibility on the coal sector. Although extra efforts are being made to meet this demand, the related infrastructure appears to be stagnating, which is creating new problems for transport of coal to various power plants across the country. This situation will worsen if infrastructure like rail, road and port for the import of coal has not developed apace with the capacity addition programme. Rail infrastructure will have to be strengthened to handle this demand. Given that the coal import figures are also likely to go up to 500 Million TPA, the ports must also gear up and invest in infrastructure development. At present, the ports on an average cannot handle more than 30,000-35,000 tonnes of coal. Furthermore, a well thought-out rail-cum-sea route to the southern and western ports should be given consideration in the 11th and 12th Plans. The government must also consider coal 19
  20. 20. slurry pipelines. This mode of transport has discussed several times, but unavailability of water and high implementation costs have rendered the proposition unviable. However, no study has made to update the earlier studies after 1992. The earlier studies must be reviewed in light of international experience 2.3 Power Equipment Supplies The equipment used in power plant, if not supplied on time, could cause the delay in the execution of project. In recent times, quite a few projects have got delayed due to delayed equipment delivery across BTG (Boiler, turbine & Generator) and BoP (Balance of Plant) segments. Selected equipment suppliers like transformers manufacturers have increased capacity, but most of the other equipment suppliers (BTG and BoP) are yet to increase their manufacturing capacity. BHEL and Thermax have been key boiler manufacturers in India; BHEL, along with Siemens, has been a key player in turbine generators. BHEL, the largest equipment vendor in the country, has 10 GW annual BTG capacity. However, according to the Eleventh Plan capacity addition targets, the BTG industry is required to have an annual capacity of ~15 GW. BHEL, the major power plant equipment manufacturer, is having its books overbooked and to accommodate the growth in power sector we need a strong backup of these suppliers. While in the interim, developers are resorting to imports, equipment supply has expected to be a cause for concern for developers across the vertical. Most of the private players are inclined to import Chinese BTG equipment because of shorter lead-time. Given the poor performance and quality record of accomplishment of Chinese power plant equipment in the country, the efficient and smooth operation of the power plant could be a cause for concern. In addition, power plants with Chinese equipment work better with imported coal compared to domestic coal. However, the TPP is based on domestic coal. Hence, its operating and maintenance could turn out to be a cause for worry. 2.4 Regulatory & political risk CERC is the regulatory body that sets benchmark norms, which various states could adopt with minor changes post approval. Since most of the existing power projects are regulated and we expect T&D utilities to continue to be regulated over the near future, any change in norms that would affect returns could influence earnings if the same is not offset through scope for efficiency gains. Moreover, political risk is also played as anti-catalyst in power sector growth. 20
  21. 21. 2.5 Access to fuel, land and water: Most projects, going forward, are likely to be on competitive basis. Access to fuel, land and water are critical to complete projects on time, remaining competitive at the same time. The requirement is likely to be significantly increase in the Twelfth Plan period. Sourcing them at reasonable prices could be a key hurdle. Any delay in execution may not only result in higher project costs, but could also risk penalty payments; since tariffs are predetermined, returns could be significantly hit. Table 2.5.1 indicates the requirement of these three essential elements per MW of electricity produced based on coal/gas as fuel input. Table 2.5.1 Land Water Fuel Coal 0.8-1.4 acres 29 mn ltrs p.a. 3000-5000 tonnes p.a. Gas ~0.1 acres 10 mn ltrs p.a. 0.05 mmscmd p.a. Source: CEA, Edelweiss research The supplies from Coal India Limited is likely to increase from ~350 MT (End of 10th Plan period) to ~ 500 MT by FY12E (End of 11th plan period), resulting in a shortfall of ~62 MT for coal-fired power plants; the deficit is expected to be met through imports. Looking at the potential shortfall of coal in the coming years, many companies have started looking for coal in countries like Indonesia to meet their requirements. Even companies like NTPC have started importing coal (imports in FY09 – 2.5 mn tonnes; FY10E – 12.5 mn tonnes) to meet coal requirement at their existing plants. GoI, taking cognizance of the gravity of the situation, has started allotting coal mines to the private sector so that mining of the crucial mineral can happen at a faster pace. The other fuel like gas, nuclear fuel etc. is also going to be act as roadblock in the growth path of Indian power sector, because of large demand and supply gap of these resources. 2.6 Gap in Demand & Supply of required Human Capital: The total work force in the power sector at the end of 10th plan was approximately 9.5 lakhs as per the Planning Commission’s Working Group on Power for 11th Plan. The following are the requirements for additional work force for the 11th plan assuming addition of 68,869 MW of generation capacity, 100,000 ckt. Kms of HV, EHV and UHV transmission lines and 16 crore-distribution consumers. 21
  22. 22. Table 2.6.1 (Figure in thousands) Area Technical (Work Non Tech (Work Total (Work Force Force required) Force required) required) Thermal 31.4 12.3 43.7 Hydro 25.3 7.1 32.5 Nuclear 3.9 1.6 5.5 T&D 202.1 60.6 262.7 Total 262.7 81.7 344.4 Source: Planning Commission Working Group on Power for 11th Plan It is evident from the table 2.6.1., that to achieve the target for 11th plan an additional 2.5 lakhs technical and 1 lakh non-technical staff is required. While large-scale investments have been planned and numerous projects are underway, the lack of competent work force to execute these projects, subsequently operate, and maintain them is already being felt. The scarcity is increasing by the day and unless the Government, industry and all other stakeholders invest in attracting and training the available talent on an urgent basis, it has the potential to become a major bottleneck and derail the rapid growth in the sector that has just begun. 2.7 Law and Order: India’s major coal reserves lie in the ‘red’ belt or the Naxal-affected regions of the country. Power plants fuelled by coal blocks in these regions face issues like irregular supply. Coal India Ltd (CIL), officials had earlier admitted to transportation problems from coalmines in the Naxal-affected regions of Jharkhand, Orissa, Maharashtra, Madhya Pradesh and Chhattisgarh. Although, at superficial level, Law and order problem is not seems to bear any relation with the coal supply but on the ground of reality, it is. The supply from these regions could boost if government pays proper attention to maintaining law and order in these areas and the sense of safety to the person associated with the coal mining. 2.8 Preferential treatment with government owned/regulated companies: Building a power utility is a capital-intensive task. To raise the money for the power project, private as well as public company are chasing to market. As an investor, one is always interested to invest in public bodies and prefer public company over private company since one feel investment in public (Govt. backed) company is safer. In this regard, although the government has opened its door for private players, but where the question of fund raising comes, they are still competitor. Regulation and reform will be effective only when one can have fund to enter into that domain. The first thing is money so policies must be designed to enable private players to raise easy-funds. Further, in India, BTG packages (major power equipments) are being manufactured by few public companies like BHEL, private companies have to depend on them to fulfill 22
  23. 23. their requirement. Here also private companies are subject to less preference than govt owned bodies in case of fulfilling order backlog. This will hamper the project execution and made companies to bear monetary losses associated with that. 2.9 Non-establishment of long-term debt market: In India, we do not have long-term debt market. We can see its effect in the skewed preferences of power project development. The private companies are inclined to build the thermal power project instead of hydro, because of longer gestation period of hydro projects. Leaving aside the fact that, more number of clearances required for hydro than compared with thermal, the non- availability of long-term debt is the other explanation for the said skewed tendency. The use of insurance and pension fund for infrastructure development will boost the private share in power sector. The corporate bond market (If allowed) could also make private player to enter in the power business. 2.10 Meagre Investment in R & D: We have put much less attention toward R&D, due to which, our power system is not efficient. Whether it be, generation, transmission or distribution, we are inefficient. We know that we are going to have a huge deficit of coal supply in near future, through R & D we could come up with new technology which can produce more energy from per unit of coal (Fuel) consumed. Presently, we are mixing the imported coal with domestic coal to improve the overall efficiency of power plant, pulverized coal based firing, coal firing in-tandem with oil firing are similar technologies which we are implemented to improve the performance of power plant. There is significant scope through R & D to come out with technologies, which enable us to improve the efficiency of power plant. Similar story is for transmission and distribution, we are having so much loss in t&d (though major is accounted by theft) but we are not emphasizing the need of R & D in this field to make the system efficient. 2.11 Vicious Circle of various clearances: There are numerous clearance required to set up a power plant. With the project financing, for most of the power projects it become very crucial to complete the project on-time otherwise it will poses penalties as well as monetary loss to the developer. There is long list of clearances which must have to sought before commencing the project like forest, environment, aviation clearance, techno-economic clearance, fuel linkage clearance, there are hundred procedures to make to acquire land etc. this vicious circle of clearance make it very unlikely to the project to complete on time. Government must have to redesign the list of mandatory clearances or assure to provide clearance at faster pace. 23
  24. 24. Now we will discuss the various issues concerning growth of Indian power sector in detail: 3. Fueling Growth: Coal dominates India’s 1,57,229.48 MW power generation portfolio with mammoth share of about 53%. According to Planning Commission scenarios, by 2030, coal-fired capacity will likely be in the range of 200 GW to 400 GW, up from the 82 GW today12. The Indian coal industry was nationalized in the early 1970s. The production of coal increased from 70 MT (million tonnes) at the time of nationalization to 492.95 million tonnes in 2008-09. Coal India limited and its subsidiaries are the major producers of coal. 403.73 Million Tonnes of coal was produced by Coal India Ltd. and its subsidiaries during 2008-09 as against the production of 379.459 million tonnes in the year 2007- 08 showing a growth of 6.4%. Singareni Collieries Company Limited (SCCL) is the main source for supply of coal to the southern region. The company produced 44.54 million tonnes of coal during 2008-09 as against 40.604 million tonnes during the last year. Small quantities of coal are also been produced by TISCO, IISCO, DVC and others. 3.1 Coal Reserves in India: India is having a huge reserve of coal (coking & non-coking), India has endowed with 267.2 Billion Tonnes of coal reserves (table 3.1.1). The proven reserve stands at about 105.8 Billion Tonnes corresponding to approximately 8 % of world’s total proven reserves. Coal production is being comes from open cast mines as well as from underground mines; about 84% of the country’s coal production is from Open Cast Mines. Power sector is the major consumer of the domestic coal production with nearly 75% share, other being steel and cement industry. Table 3.1.1 (Figures in billion tonnes) Total Proven Indicated Inferred Reserve Reserve Reserve Reserve Coking 33.4 17.5 13.8 2.1 Non-Coking 233.8 88.3 109.7 35.8 Total 267.2 105.8 123.5 37.9 As on 01.04.2009 Source: Coal India limited 12 Source: Central Electricity Authority, “Power at a Glance”; Ministry of New and Renewable Energy 24
  25. 25. However, we have huge reserve of coal but it is misnomer to state them as “Huge”, because of its poor quality. Our coal is having high ash content of the magnitude of as high as 30-40 %, compared with ash in coal in other countries of about 15-20%. Moreover, the calorific value is also not very high. 3.2 Coal Production: The Coal India Limited (CIL) and its subsidiaries is the major producer of coal 431.27 million tonnes of coal was been produced by Coal India Ltd. and its subsidiaries during 2009-10 as against the production of 403.73 million tonnes in the year 2008-09 showing a growth of 6.82%. The raw coal production and its growth have shown in appendix A.1. If we do the regression analysis on the growth of the total coal production from year 1998-99 to 2009-10, we find that on an average there is an increment of about 18 Million tonnes of coal production during the time span (Appendix A.2). Figure 3.2.1 Figure 3.2.2 10th plan period 11th plan period 400 440 430 Production 300 420 Production 410 200 y = 17.74x + 271.78 400 R² = 0.9985 390 y = 25.9x + 353.03 100 R² = 0.9986 380 0 370 0 2 4 6 0 1 2 3 4 Time span Time span Source of input data: Coal India Limited Figure 3.2.1: Regression analysis of total increment in the coal production during 10th plan period Figure 3.2.2: Regression analysis of total increment in the coal production during 11th plan (First 3 years only of the plan period) The installed capacity addition of thermal power plants, proposed in the 11th planning commission report, is based on the “Report of the Working Group on Coal & Lignite”. Let us compare and contrast projection of the report and its ground reality. The report says that • The coal production is envisaged to reach 680 mt in the terminal year 2011-12 of the XI Plan from the anticipated production of 432.50 mt in 2006-07 implying a CAGR of 9.47%. The incremental production in the XI Plan is envisaged to be 247.50 mt as against 104.71 mt likely to be in the X Plan. 25
  26. 26. • The incremental production envisaged in the XI Plan from CIL is 156.70 mt, SCCL 3.30 mt, and captive blocks 86.53 mt. To supply the fuel (coal), to the capacity added, it was projected that cumulative increment of 247.50 Mt of coal production must be done. Figure 3.2.1 and 3.2.2 are the regression analysis of the increment in the coal production during 10th and 11th (first three years of the plan period only) plan respectively. It is evident from the regression that during 10th plan period there was an average annual increment of about 18 Million tonnes of coal. During the 11th plan period the pace is although high, of about 26 million tonnes per year, but is far way behind the required one. With this rate we can add at most 130 Million tonnes which is only 80% of the production required from the CIL in the working paper. The story is similar for other coal producing agency. It is having clear implication that even though if we could able to achieve the target of capacity addition there must be shortage of fuel because of non-availability of coal. 3.3 Supply and demand of coal for Power Sector: The overall requirement of coal for all sectors is projected to be 916.818 Million tonnes by Coal India Limited (cumulative for all sectors) at the end of 2016-17. The gap between the projected demand of 916.818 Million Tonnes and the projected domestic availability of 647.5 Million Tonnes works out to 269.32 Million Tonnes in 2016-17. This requirement would need to be met from imports. Further increasing production from captive blocks to bridge the gap also remains as a distinct possibility. In 11th plan upto 2011-12 the projected demand of coal is estimated to be 731.10 Million Tonnes, the demand of power sector utilities is 483 Million Tonnes, which is about 66%. Including the demand for captive power plant of 57.06 Million Tonnes, the share of power sector in the projected demand, works out to about 74%. The demand of steel sector at 68.5 Million Tonnes forms 9.4% of the projected demand. The share of cement sector is 4.4% and that of sponge iron sector is about 4%. The balance 8.2% is for bricks and others sectors. As per the projection by Central Electricity Authority (CEA), capacity addition in 11th Plan in Coal-based projects and normative requirement of coal & status of coal linkage has given in appendix A.3. The Detailed coal requirement vis-à-vis capacity addition during coming years, as projected by CEA/CIL, and Demand-Supply Gap Analysis, has shown in Table 3.3.1. 26
  27. 27. Table 3.3.1 (Gap between Demand & Supply of Coal ) CIL Projection (In Million Tonnes) Particular 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Production 460.002 486.65 514.75 542.75 575.25 609 647.5 Supply Through E- 46 48.665 51.475 54.275 57.525 60.9 64.75 auction Committed Demand 457.544 457.544 457.544 457.544 457.544 457.544 457.544 on CIL sources excluding E-Auction and requirement a/c TPP coming up beyond 1.4.2009 Availability from CIL -43.542 -19.559 5.731 30.931 60.181 90.556 125.206 sources for TPPs coming up after 1.4.2009 Commitment a/c 81.788 298.483 394.524 394.524 394.524 394.524 394.524 TPP coming after 1.4.2009 Net coal -125.33 -318.042 -388.793 -363.593 -334.34 303.968 -269.32 balance/availability for further issuance of LoA Source: Coal India limited Published on 06 April 2010 3.4 Bridging the gap: Coal based thermal power plant, accounts for more than 50% of the total installed power generation capacity, while coal based power plants account for about 80% of domestic consumption of coal. Thus, it remains a dominant fuel for the Indian power sector and is expected to remain so in the near future. Growth of an economy is a function of power consumed. To meet our power requirement we are very much dependent on the availability of coal. It is evident from the projections that domestic coal production is not sufficient to meet our requirement. Therefore, we have to look at the options through which we can bridge this wide gap; some of the options and issues involved have discussed below: 3.4.1 Coal import: We could meet our requirement through import; we are mainly importing the coal from Indonesia, Australia and South Africa. However, this option is not as simple as it seems, there are many issues associated with it, which have discussed below in detail: We are importing coal largely from Indonesia, and any local regulation or coal policy is going to affect us. Indonesian government is planning to put a cap on the 27
  28. 28. total export; they are planning to have a maximum export up-to 150 Million tonnes. In a speech on “Coal supply outlook in Indonesia”, Dr. Ir. Sukma Saleh Hasibuan (Director, Ministry of Energy and Mineral Resources (MEMR), Indonesia) expressed this concern. The coal production and supply projection shown by him in the speech has shown in Appendix A.4. This will create shortage in global coal market and put pressure on international coal prices. This is having severe consequences in Indian context, Independent Power Producers (IPPs) who are planning to rely on imported coal in long term, will look it as highly volatile business which confront them with high price volatility and political risk. On December 16, 2008, the Indonesian Parliament adopted a law on mineral and coal mining (“New Mining Law”). The New Mining Law provides that existing contracts will continue to be valid until their expiry, but that the terms of the existing contracts must be modified within one year to make them comply with the New Mining Law. However, the New Mining Law is unclear as to which of its provisions will require amendments to the terms of existing contracts to bring those contracts into compliance with the New Mining Law. The existing holders of contracts may be given five years to comply with such obligation. However, the New Mining Law does not provide any details on when these government regulations will be issued or what specific obligations will be imposed. The legal uncertainty raised by the adoption and implementation of the New Mining Law has increased the risks, and may increase the costs, involved in our sourcing Indonesian coal. We cannot rely on importing of coal because of such unseen able events and unpredictable global political environment. Global Pressure on acquiring coal resource: Asian countries like China, Japan, Kazakhstan, etc are also boosting their power generation capacity and the problem of fuel is same for them. This will create a competition in acquiring the major portion of world coal export or they might try to acquire the coalmines in coal exporting country by going into long-term contracts. China recently signed a MOU of $60 billion, with an Australian Coal major Resource House for a 30 million tonne coal supply deal. Thus, China is finalizing a 20-year contract to receive high quality Australian Coal from a newly developed mining base called First China, which is located in Western Australia State of Queensland. China is now searching coal resources in the entire world. While Asia Pacific countries such as Indonesia, Australia, Vietnam and Mongolia are its traditional coal import sources, footprints of Chinese coal hunters are now left in almost all the continentals. Russia, Canada, the US and South Africa have become China's important coal trade partners. China is now consuming near 45 percent of the global coal, and has accounted for over 20 percent of the world coal trade. The said trend will further aggravate the pressure on coal prices. 28
  29. 29. Infrastructure: Although theoretically, coal could have imported in large quantities to meet any domestic shortfall, problems with coal imports arise primarily because of the inadequacy of handling facilities at ports and the lack of inland transportation infrastructure (particularly railways) in India. To handle the large quantity of the imported coal we have to think about the development of our other related infrastructure like ports, transportation etc. 3.4.2 Diversify the portfolio of coal importing nations: We are importing coal from very few nations and mainly from Indonesia. This will lead to the risk of high price volatility and political risk. The risk could be reduced if we could diversify our portfolio of coal exporting countries. For example, we are almost neglecting the Australia as a source of importing coal. Figure shown below depict the decline in Australia’s share in coal import. China’s coal import is growing and export is decreasing. Similarly, Indonesian govt. is planning to put cap of 150 Million Tonnes on the net export. Source: Barlow Jonker In these circumstances, we have to develop our relations with some other countries. Australia can be the option. An Australian trade commission delegation, which recently came to India, presented a paper to the coal ministry saying reducing the import duty of thermal coal and keeping the zero import duty on coking coal intact would not only strengthen bilateral ties but would also enhance the availability of affordable inputs for two Indian infrastructure industry-power and steel. The trade commission pointed out that coking coal import, which was 12 million tonne in 2006-07 from Australia, would touch 18-20 mt in 2010-2011 and 25 mt by 2012, taking into account India’s steel capacity addition. While Australia has its share only in India’s coking coal space, Indonesia commands the thermal coal space. Australia wants to make an entry into the thermal coal space, since imports of thermal coal are likely to go up13. However, political (policy wise) uncertainty will always be there for example recently Australian govt has put Henry Tax on the exported coal, making the coal prices sourer for the importing nations. The similar uncertainty/risk is associated with every coal-exporting nation because of their internal policies. Hence, it will be wise to have tie-up with as many as 13 http://www.coalspot.com/news-detail.php?nid=908 29
  30. 30. coal exporting countries as possible to diversify the risk. The main point to be made is that, we should not concentrate on any one or two nation for our coal requirement but to include more countries in our portfolio from where we could tie up long-term linkages. 3.4.3 Overseas mining: Coal supply to meet our energy requirement can be fulfilled by acquiring mines other countries. CIL has formed a subsidiary, Coal Videsh Limited (CVL), to acquire coal blocks in a number of countries including Indonesia, South Africa and Australia. Coal produced by CVL will be channelled into India to meet domestic demand in future. Private companies like Tata, Adani Power limited and GVK have acquired the coalmines mainly in Indonesia and some in Australia. IPPs are reluctant to acquire overseas mining right because of the volatility of business and risk associated with country specific policies, which are keep changes with time, such as imposition of Henry Tax by Australian govt. and introduction of New Mining law, by Indonesian govt. 3.4.4 Captive Mining: The issue of demand supply gap could be resolve through encouraging captive mining. A major constraint in ramping up production is the failure of companies to develop captive coal blocks allotted to them by the coal ministry. Power sector has, so far been allotted over 100 captive coalmines. Except 5-6 of them, none has come up so far14. For Indian coal companies, project planning, approval and commissioning make for a protracted process, involving a multiplicity of clearances at various levels: the Boards of the companies concerned, various Ministries, the Planning Commission, and other Government bodies. Estimates suggest that there are over 30 separate clearances, including environmental clearances, required before Government approves a coal-mining project. This leads to enormous delays, at times years, at the approval stage itself. If captive mining will supercharge its pace, the net production of the coal in the country will certainly increase and this will reduce the burden of CIL to meet the coal requirement. We have abundant coal reserve, according to an estimate our coal reserve will last for more 150 years, but the problem is in mining. For this government have to encourage the captive mining and have to look for collaboration with technologically advanced countries for technology transfer in mining. 3.4.5 Private mining: As the captive mining projects of private sector players have not yielded the desired results, CIL has recently proposed that these players be allowed to produce coal even before their main projects are commissioned. Further, CIL has offered to buy coal from private players at prices to be decided by a committee formed by CIL and the MoC. To overcome the problem of finance or availability of requisite skills outside the domain of the existing Indian coal companies, the GoI has allowed an associate 14 Business Standard 30
  31. 31. company of an end-user company to undertake captive coal mining if the end user company holds at least 26% equity in the associate company. The GoI has also allowed private mining in cases where a holding company has an equity stake of at least 26% in both the end-user company and the coal mining company. Additionally, the GoI has permitted consortium mining for captive purposes, where a number of end-users can come together for mining coal. 3.4.6 Increasing the thermal efficiency of power plants: The possible option to curb the widening gap between demand & supply is, to increase the thermal efficiency of the thermal power plants. Currently, we are in practice of mixing our low quality coal with high quality imported coal to increase the overall thermal efficiency. There is scope to invest in R & D to come with the technology to produce more unit of electricity from per unit of the coal consumed. The government must have to seek collaboration with developed nations for technology transfer in thermal power generation. This will help us to meet our energy requirement from the domestically available coal in long run. 3.4.7 Law and order: India’s major coal reserves lie in the ‘red’ belt or the Naxal-affected regions of the country. Power plants fuelled by coal blocks in these regions face issues like irregular supply. Coal India Ltd (CIL), officials had earlier admitted to transportation problems from coal mines in the Naxal-affected regions of Jharkhand, Orissa, Maharashtra, Madhya Pradesh and Chhattisgarh. Although, at the first sight, Law and order problem is not at all seems to be linked with the coal supply but really it is. The supply from these regions could boost if government pays proper attention to maintaining law and order in these area and the sense of safety to the person associated with the coal mining. 3.5 Key Challenges facing the coal industry: The critical issues facing the coal industry are highlighted below: Lack of Investments in Mining: In spite of the economic liberalization of 1991 the mining sector has not seen major investments. This is possibly due to the problems such as government policy, land acquisition, development of infrastructure, transportation system, social engineering and community development involved in major green field site projects. There is a need to re-look at the total management solution for attracting investment in new mines. The solution has to lead to the creation of joint venture institutions with central government, state government and private sector as partners. The facilitation for the project through provision of land, infrastructural development, community development etc, can be done by the government agencies whereas the investment in the mine and the associated technological inputs can come from the private sector. In addition, the private sector must have the freedom to run the mine 31
  32. 32. in a cost effective manner. This may be a long term solution for future mines in India and it will have unique opportunities for both the government and private sector to work together for India's development. Historically, opencast mining has been favored over underground mining. This has led to land degradation, environmental pollution and reduced quality of coal as it tends to get mixed with other matter. Further, coal mining in India is associated with poor employee productivity. The output per miner per annum in India varies from 150 to 2,650 tonnes compared to an average of around 12,000 tonnes in the USA and Australia. India has still not been able to develop a comprehensive solution to deal with the fly ash generated at coal power stations through use of Indian coal. Clean coal technologies, such as Integrated Gasification Combined Cycle, where the coal is converted to gas, are available, but these are expensive and need modification to suit Indian coal specifications. Challenges in Jharia: Jharia Coal field in Jharkhand is the richest coal bearing area in India, which contains large quantities of high-grade coking coal. However, this area also contains a large number of mine fires, which have been burning for several decades. A major challenge to the mining community is that of tackling fires that have engulfed large and densely populated coal bearing areas. A technological, cost effective, safe and minimum disturbance solution to this problem has to be found. 3.6 Key Reforms Measures Required15: The vision for coal mining industry should be to come out with an innovative and comprehensive action plan for providing effective solutions and their progressive implementation. This will involve innovation and research in satellite based remote sensing, robotics, mining equipment, mining operation, extraction, beneficiation, processing and transportation. The task of transformation of the coal sector is formidable given the size of investment requirement and the level of political interference that is expected during such process. The following efforts can become the cornerstones of reform in the sector: 3.6.1 Policy and Regulatory Framework: The coal industry in India has traditionally been characterized by state monopoly, lack of independent regulation and lack of transparency in tariff determination. The Government has now realized that a high growth rate in domestic production of coal could not been sustained without carrying 15 http://www.indiacore.com/coal.html 32
  33. 33. out structural reform and introduction of competition through participation of the private sector. In this regard, the Government has taken the following measures: • Distancing of the Government from price determination of all grades of coal • Opening of captive coal mining for power, iron and steel, and cement to private investment • Foreign investment in Indian companies taking up coal mining for captive use has been permitted. • The allocation of coal blocks are to be done on the basis of competitive bidding (Proposal stage) • Allowing State Government companies or undertakings to carry out mining of coal (or lignite) reserves (either by opencast or underground method) anywhere in the country • Reduction in customs duty on coal imports to 5 percent (currently planning to remove the custom duty at all) •Downsizing of the budgetary support to the national coal industry 3.6.2 Deregulation of the coal sector: Deregulation and opening of the sector to private participation will spur state owned Coal India Limited (CIL) to improve performance, and help attract investments to upgrade existing mines and open new ones in the next five to seven years. Recognizing this, Government has now decided to offer access to state- owned mining blocks to investors. Simultaneously, Coal India is being encouraged to further identify coal blocks wherefrom coal extraction will be commercially viable. 3.6.3 Independent Regulatory body: An independent Regulatory body to govern investment and operation in the sector is required. Such a body will help create a level playing field and will allow the Government to distance itself from activities like allocation of blocks, approval for mines, etc. The body can also be expected to introduce competitive price regulation. 3.6.4 Improvement in operational efficiency of the coal companies: Coal India is in need of an organizational transformation to gradually align its operating costs to international standards. Mining costs of CIL are at least 35 percent higher than that of the leading coal exporting countries such as, Australia, Indonesia, and South Africa. The productivity should increase from 0.5 tonnes per man-year to 5 tonnes per man-year in underground coal mines using long wall mining and from 15 tonnes per man-year to 30 tonnes per man-year in open cast mines. To improve productivity, Coal India will need to invest in new technologies, improve processes in planning and execution of projects, and 33
  34. 34. institutionalize a comprehensive risk management framework. State of the art equipment for open cast mines and long wall mining system are required. More thrust should be given to safety for evolving accident free mining. 3.6.5 Strengthening of logistics in coal distribution: In India, the logistics infrastructure such as ports and railways are overburdened and costly and act as bottlenecks in development of free market. Privatization of ports may bring the needed efficiencies and capacities. In addition, capacity addition by the Indian Railways is necessary to increase freight capacity from the coal producing regions to demand centers in the northern and central parts of the country. On the Indian rail network, freight trains get a lower priority than passenger trains, a problem that promotes delays and inefficiency. Special freight corridors would raise speeds, cut costs, and increase the system’s reliability. 3.6.6 Investment in R & D: Work is required on clean coal technology to prevent the global warming and environmental pollution effects. For a long time there has been a talk about integrated gasification and combined cycle technology. Organizations like NTPC, BHEL and CSIR laboratories should work on this project. Coal India and other producers should help in this project by contributing in beneficiation and washing of the coal input. There should be a time bound programme for getting the results from this project. These results will have far reaching implications on the choice of technology for all future mining applications. 3.6.7 Focusing on technology for future: India’s numerous technology research institutions, are working on energy related R&D. However, there is a possibility that they are operating in a fragmented fashion. The Government may get improved recoveries on its investment by concentrating on few important technology areas. To start with, focus may be applied for tighter emission standards and development of technologies for extraction of methane from coal deposits. All mining operations today involve continuous use of explosives, thereby generating high noise level, vibrations and shocks and very high level of dust pollution. This also takes away very large area as explosive safety zone and environment safety zone. Alternative technologies for using high power laser system for safe, pollution free and precision mining need to be evolved. 3.6.8 Information Technology for the Mining Industry: India has a unique blend of small and large- scale mining operations. There is a need for assimilating the advances in Information & Communication technologies into mining operations for technological up gradation. Experiences from the oil & gas exploration where most advanced ICT have been successfully used will be useful in the mining industry as well. Many times the oil & gas industry has given the thrust to ICT out of necessity– 3D imaging & visualization and 34
  35. 35. networking of large scale super computers. Indian mining industry could further modernize by using software for an integrated data management, analysis & 3D geological modeling, 3D plant design and advanced real time control & monitoring systems. Application of Information Technology should lead to robotic mining for improving the precision, safety and overall yield from mining. In addition to the above, the following measures, which have accepted in principle, are awaiting implementation: • Freeing the sector from controls on distribution • Establishment of a regulatory authority to resolve price disputes between producer and consumers of coal • Granting of infrastructure status to coal sector • Allowing public sector enterprises for joint venture projects with private sector. 35

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