Managing fuel supply & uncertainty in India, power sector specific.

1. Managing Fuel Supply & Price Uncertainty
Sushil Maroo
August 1, 2014

2. • Increasing installed capacity and improving utilization factor of power plants is critical for
meeting the rising energy needs of a fast growing nation
• Fuel Security is paramount to the stability and growth of the power sector
• Emergence of fuel shortages and escalating fuel costs has posed the most significant
challenge to Industry, Regulators, Governments and Banks since the introduction of the
Electricity Act in 2003
• Addressing fuel security is the need of the hour for the return of confidence and capital to
the Power sector
• This requires a joint effort from all constituents to offer short term, medium term and long
term solutions to the power sector fuel crisis
2
Improved fuel availability is paramount for
boosting power generation

3. Affordable power is linked to risk mitigation for
stakeholders and increased generation
• Companies, Lenders and other financial investors today look at Power as a sector fraught
with risks
– Coal “Scam” and potential cancellation of coal blocks
– Delays in environmental approvals and land acquisition affecting project implementation, costs and
adherence to PPA ‘s
– Poor financial condition of SEB’s and payment issues
– Change of goal post after project implementation has commenced based on stated Govt policy –
e.g. . – Sale of Power from plants with captive blocks
• These stakeholders price in this risk affecting consumer end power prices
– Lenders charge commercial rates of interest – ranging from 12-14% - across the world
infrastructure financing happens at rates well below normal corporate lending rates
– Equity return expectations of financial investors are comparable to stock market returns – globally ,
risk averse, yield oriented investors help finance infrastructure assets at significant discounts to
equity market returns
– Companies price in risks of project delays, cost overruns and SEB defaults while bidding for PPA’s –
Removal of uncertainties will enable bidding at moderate ROE and competitive tariffs
3

4. Coal Supply

5. India has substantial resources of coal and power
sector is the largest consumer
India has the 5th largest coal reserves globally
Proved, indicated and inferred Coal Resources in Million Tonnes
Source: CMPDI
Power is coal industry’s major customer
5
1,25,908.94,
42%
1,42,506.29,
47%
(as on 1.4.2014)
33,149.22,
11%
Proved Indicated Inferred
69%
4%
7%
Sector wise consumption/supply of coal for 2011-12
3%
17%
Power (utility & captive) Steel and Washery
Cement Sponge Iron
Others
(Total – 680.6 million tonnes)

6. Net imports
6
Demand has outstripped pace of coal production
Coal Production vs Consumption (in Mn Tonnes)
600
500
400
300
200
100
Production Consumption
Demand for coal reached 557 MT in 2012 with imports rising to 68.89 MT to meet domestic
Source: Coal Controller
shortages
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

7. Solution # 1: Boost Coal India output
Accounting for 86% of coal production, improving productivity of CIL’s operating mines is the low
Source: Annual Report of CIL FY 2012-13
hanging fruit
86%
88%
84%
80%
82%
86%
372
400
415
423
433
466
FY 07-08 FY 08-09 FY 09-10 FY 10-11 FY 11-12 FY 12-13
Million Tonnes
7

8. Solution # 2: Boost captive coal production
8
Captive Mines Production
37
44
50 50
52 52
49
59
78
98
120
100
80
60
40
20
0
2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e
mt
Source: Company Data, Morgan Stanley Research Estimates

9. Solution # 3 Linkages to Commissioned plants
9
• Fuel starved power projects have large
investments which need to be salvaged
⁻ Create Enabling framework for coal supply
under FSA
⁻ Allow PPA under Section 62
⁻ Do away with predetermined project lists
⁻ Rationalization of coal linkages
⁻ Allow Inter Plant transfer of coal among all
companies
⁻ Revisit blended coal price pooling
Capacity and Investment Stuck
39038
157730
25843
105490
10305
29895
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
Capacity (MW) Investment (Rs cr)
Under recovery of fixed/ variable cost
Projects with coal linkage related issues
Projects with captive coal block related issues

10. Solution # 4 - Open up mining
• Auction out mines without end use restrictions
• Allow entry of private sector and international players to create efficiencies, competition and
boost supply
• The world’s largest producers of mineral resources have all created efficient world scale
mining assets and companies by encouraging competition and commercial mining
– USA 
– Australia 
– Canada 
– South Africa 
– Indonesia 
10

11. Solution # 5 - Logistics Infrastructure
17% of the power demand located near the pit head and the remaining 83% depends on rail
transportation. However, current rail network is highly choked.
• Dedicated Freight Corridors
• Critical rail connectivity links for evacuation from large coal fields/ clusters
• New ports and upgradation of ports including draft increase
• Infrastructure needs to be build to cater to transportation and installation of increased plant
unit
11

12. Solution # 6 - Rational land policy and faster
clearances
• Land:
– Address major issues such as lack of land records, compensation, R & R process , right of
way
• MOEF Clearance:
– Single-window clearance and cluster approval for mines
– Standard ToR for OC and UG mines should be circulated by MoEF.
– Dispensation of public hearing in case of projects having only forest land.
• Forest Clearance:
– Coal Companies insist for NOC from State Forest Authority even when no forest land is
involved for the project.
12

13. Solution # 7 - Imports to meet the shortfall
• India’s imports of coal have been rising
sharply due to failure to boost local
production
• Focus on domestic coal for all
requirements should be target
– India has adequate coal resources
– Imported coal is costly
– Drain on foreign exchange reserves
• In medium term, fiscal, tariff and other
regulatory support important to allow
imported coal to meet gap
13
120
Coal Imports(MT)
145
171
180
160
140
120
100
80
60
40
20
0
2011-12 2012-13 2013-14
Imports are rising and will continue to rise as domestic output falters and imported coal
becomes cheaper

14. Coal Cost

15. Coal price trends are mixed
15
2000
1800
1600
1400
1200
1000
800
600
400
200
120.00
110.00
100.00
90.00
80.00
70.00
60.00
CIL Linkage Price (Rs/Tonne)
Indonesia Coal (US$/MT)
117
73
May 2011 May 2012 May 2013 May 2014
• Steadily rising linkage prices rising and
higher e-auction allocations (c 10-12 %) are
increasing effective prices for several
consumers
• Imported coal prices softening but rupee
depreciation has limited gains
• Rising fuel costs have hurt producers
though aggressive PPA bidding has been a
key factor contributing to the pain
0
2007 2009 2011 2012 2014
38%

16. Fuel costs are getting factored into long term power
prices despite some stress on old fixed tariff PPA’s
16
Rs/kwh
Source: CERC and others
Coal availability and not cost is key risk to industry

17. Old PPA Terms Recent PPA terms
Tariff • Bidding capacity and variable
charge to cover capital costs and
fuel costs
• Bidding only on capacity
charge with fuel cost a pass
through
Fuel • Fuel risk primarily with power
company with option available
to de-risk partially by quoting
escalable tariff
• Fuel risk with the Buyer.
Change in laws • Change in laws in sourcing
countries for fuel or equipment
not accepted in PPAs
• Impact of change in laws in
countries exporting
equipment and fuel covered
17
Fuel cost risk will reduce going forward
Fuel cost de-risked under new pass through regime

18. Gas Supply & Pricing

19. Gas based power faces an existential crisis
• Gas based power at market price of gas is
uncompetitive with coal
• A sharp decline in domestic production
and prioritization for fertilizer industry has
further aggravated the viability issues
• With a low carbon footprint, limited social
issues and coal shortages, gas based
power is important to meet energy needs
• Focus on protecting standing gas based
capacity critical
19
8
7
6
5
4
3
2
1
0
Variable Cost of Power Generation (Rs/ Kwh)
Gas@ 8.4
USD
Gas@ 14
USD
Captive
coal
Linkage
Coal
E auction
18
16
14
12
10
8
6
4
2
0
Asia LNG Prices (US$ /mmbtu)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

20. 24,000 MW gas based capacity is at risk
• Gas supply for existing capacity of
16,624 MW is sufficient to operate at
only c 20% PLF
• Under commissioning projects of
7,525 MW, completely stranded
without any gas allocation/ supply and
have no PPA
• Investment of over Rs. 1.2 lakh Crores
and debt of Rs. 85k Crore at risk
20
5,624
Central State Private
738
0
4,447
1,075
976
6,551
528
6,549
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Grid Non-Grid Upcoming
Gas Based Capacity (MW)

21. Solution # 1 - Improved domestic output and
LNG facilities key to supply boost
• Restoration / improvement of KG6 supply
• Increase allocation of gas to power sector. Currently, Fertilizer sector is using approx. 30%
gas while power is using 31% gas.
• Continued availability of domestic gas at reasonable price – US$5-6/MMBTU
• Improvement from other domestic sources like conventional fields, CBM etc
• World class LNG terminals to boost imported gas facilities …
21

22. Solution # 2 - Blended costing of fuel
• Pool pricing of power by SEB / utility to provide steady ROE for all
• Blending domestic gas with costly LNG
22

23. Global Scenario

24. US Shale production is set to rise exponentially
24
12000
10000
8000
6000
4000
2000
0
U.S. Shale Production (BCF)
2007 2008 2009 2010 2011 2012
• Shale gas production to grow by more than
10 Tcf, from 9.7 Tcf in 2012 to 19.8 Tcf in 2040
• US to transition from being a net importer of
1.5 Tcf of natural gas in 2012 to a net
exporter of 5.8 Tcf in 2040
Source : US Energy Information Administration

25. 25
Shale is chancing US and global energy landscape
Source: BP Statistical Review June 2014
100
80
60
40
20
0
US Energy Production (%age)
1990 1995 2000 2005 2010 2012 2013
Liquids Natural Gas Coal
Nuclear Energy Hydroelectricity Renewables
• Contribution of Natural Gas has increased
drastically from 28% in 1990 to 33% in
2013 while dependency on Coal reduced
from 34% to 27%
• US energy production as a share of
consumption declined substantially to
~69% in 2005 before rising back to ~83%
in 2013.
100
80
60
40
20
0
US Energy Consumption (%age)
1990 1995 2000 2005 2010 2013

26. Europe’s and Eurasia thrust on renewables
putting pressure on fossil fuels
26
100.0
80.0
60.0
40.0
20.0
0.0
Consumption Pattern (%age)
1990 1995 2000 2005 2010 2013
Liquids Natural Gas Coal
• Demand for fossil fuels decline by
16% with losses in oil (-22%) and coal
(-36%) overwhelming gains in natural
gas (+9%).
• Fossil fuels now account for 80% of
EU energy consumption in 2013,
down from 88% in 1990
100.0
80.0
60.0
40.0
20.0
0.0
Production Pattern (%age)
1990 1995 2000 2005 2010 2013
Liquids Natural Gas Coal
Nuclear Energy Hydroelectricity Renewables
• Production of Energy increased by merely
1% in 2013 over 1990
• Production of coal declined by 37%

27. China and India will be focal point of Energy
27
120%
100%
80%
60%
40%
20%
0%
Production as Share of Consumption (%age)
1990 2000 2010 2013 2015 2020 2025 2030 2035
India China
• India’s and China’s dependence on
import of Liquid and Natural Gas
continues to grow
₋ India’s consumption to touch
~1307 mt by 2035 against ~595 mt
in 2013
₋ China’s consumption to touch
~4671 mt by 2035 against ~2880
mt in 2013
• Production not enough to fuel growth
₋ India’s Production to increase by
108% over 2013 by 2035 against
120% increase in consumption
₋ China’s Production to increase by
56% over 2013 by 2035 against
62% increase in consumption

28. In Conclusion
Make Power sector a low risk, moderate returns sector
• Risk mitigation to create a truly infrastructure utility model is key to delivering adequate,
low cost power to India
Measures to address short to medium term fuel issues
• Stable policy regime
• Easing regulatory and other constraints to boost coal and gas output
• Prioritizing supplies to power industry and ready projects
• Rational pricing policy for ensuring industry viability without subsidizing the inefficient
The answer to LONG TERM fuel security is a Comprehensive Energy Policy which addresses the
following
• Do we want to make the best use of India’s vast fuel reserves to become self sufficient?
• Do we want to provide fuel at lowest possible cost to generate low cost power for the
country ?
• Can we balance the interests of fuel producers, power producers and power consumers to
have a fair pricing regime for the electricity chain?
28