The implementation of reforms at the state power utility (SPU) level as well as of those initiated to mitigate fuel shortages remains key to power sector turnaround, says KVB Reddy, Executive Director, Essar Power, in an interview with Sumantra Das.
Given the situation of India's shortage of domestic coal, how do you see the growth prospects of thermal power sector in the country?
Thermal power comprising coal, natural gas and diesel accounts for 80 per cent of the country's generation. Coal usage alone accounts for two-thirds. India expects that its projected rapid growth in electricity generation over the next two decades is expected to
be largely met by thermal power plants. In view of this, the thermal power sector is expected to grow rapidly in the country.
In our view, for rapid development of our country, we need cheap power and currently, only thermal power, and that too pit head (for domestic coal), and coastal plants (for imported coal) are ideal for that objective. Coal is still the cheapest form of power. India has vast coal resources and hence it needs to exploit its resources to provide affordable power for all.
Tackling concerns like delayed approvals should get top priority, as the solution to these will contribute immensely to the growth of the power generation sector in the country.According to the Centre for Monitoring Indian Economy (CMIE), thermal power generation, which moved up by 6.6 per cent, is estimated to grow 14.4 per cent in 2012-13. This will largely be on account of the jump in power generated by coal-based plants. As per CMIE estimates, coal-based power generation would increase by around 19,200 MW. Since thermal power accounts for 80-85 per cent of the power generated in the country, it is the biggest factor in any increase in power generation. Thermal power generation increased 7.2 per cent on the back of a healthy growth in power generation capacity.
Many power companies subsequently have to look for coal mines overseas and source more expensive imports which may hamper the business rationale in long run. What is your take on this and what are the other options on which power producers can opt for?
In spite of being home to world's fourth largest coal reserves, India is facing a severe shortage of coal. Environmental regulations, land acquisition troubles and frail infrastructure have been blamed for the country's inability to provide enough coal to meet demand. Imported coal comes with its own advantages like lower ash content and higher calorific value, and hence in many cases, they might be more cost-effective than domestic coal.
In order to insulate themselves from volatile prices, we look at owning the complete value chain and hence have captive mines to fire our power plants.
The government has geared up reform process for the sector. When do you see a turnaround?
Power sector reforms is a continuous process and is undertaken with a view to increase domestic production and efficiency. The implementations of reforms at the state power utility (SPU) level as well as of those initiated to mitigate fuel shortages remain key to power sector turnaround.
We are encouraged to see developments in the direction of increase in coal output with the major thrust from Coal India, tariff rationalisation by state electricity boards (SEBs), prospects for re-negotiations with power producers on power purchase agreements (PPAs), and high level discussions to initiate price pooling are steps in the right direction.
What are the major bottlenecks for industry growth that has been still remained unaddressed?
Currently, the concern is both on the supply and the demand side. On the supply side, poor availability of fuel (both gas and coal), transmission capacity bottlenecks, and slow pace of obtaining statutory approvals for land acquisition and environmental clearance are key factors affecting capacity creation. Several projects at the development stage are being deferred/kept on hold due to the above mentioned reasons.
Fuel availability has emerged as the biggest risk faced by thermal power projects in India. Coal production has not kept pace with power capacity addition. Significant rise in the interest rates over the last few years has affected fund raising. Availability of plentiful debt capital at reasonable cost is critical for any business, particularly infrastructure, as debt typically finances 75 per cent of the project cost. The current state of capital markets is also not conducive to raising equity, which has made funding challenging.
On the demand side, absences of tariff reforms have led to high losses and financial stress for distribution companies, which are the main bulk procurers of power. Poor cash flows of state-owned distribution companies are affecting their ability to off-take power, which is creating additional uncertainty for capacity creation.
However, we remain optimistic that the government is cognizant of these factors and is taking active steps to address them.
How do you prioritise the reform initiative? What kinds of reforms you may suggest to be implemented in first go?
We would look at speedier approvals as the first step for reforms. We have a situation where our power plant is ready but we don't have the coal to fire it because of delays in getting the required approvals to develop the linked mine. We are encouraged to see the government getting serious about the sector and are hopeful of seeing speedy measures to address the situation.
India would be able to add 88,000 MW of generation capacity in five years (2012-2017). In the current scenario, do you think this target is achievable?
If issues of approval delays, shortage of fuels, various problems in terms of fuel supply linkages, land acquisitions and environmental clearances are addressed by the government, India has the potential to meet its target capacity addition.
Do you think there are constraints pertaining to availability of power equipment as also the availability of quality EPC players to cater to the requirements of increasing number of thermal power generation?
There are no constraints from the government side pertaining to the availability of equipment. We have world class EPC players here, including our own sister company Essar Projects, who have rich experience in setting up world class power plants.
There has been increasing dependence on Chinese equipment and manpower by private players. How do you see this kind of practice as a developer?
We have placed equipment orders with Chinese firm Harbin Power, one the largest power plant equipment manufacturers in China, for Boiler Turbo Generator (BTG) packages and other project materials. We have a good working experience with them and have found them to be satisfactory.
Financial year 2012-13 has been one of the most challenging years for most of the companies. Was it due to slow execution of power projects in the country or were there other reasons?
For Essar Power, 2012 has been the year of delivery. In 12 months, we have tripled our capacity to close to 4,000 MW. Several of our projects like Salaya, Mahan, and Vadinar have come on stream during this period. There were challenges in terms of delays of getting the required approvals, but things have started moving again. We received stage I forest clearance for Mahan Coal Block and the mine development activity at our Indonesia site (Aeries Coal Mine) is in full swing.
Going ahead, what target do you have set for power generation segment?
As you are aware, Essar Power is one of India's largest private power producers with a 15-year operating track record. We currently have seven operational power plants in India and one in Algoma, Canada, with a total installed generation capacity of 3,910 MW. This capacity is increasing to 6,700 MW by March 2014.
Below are the projects which are under implementation now: