As per Ministry of Power,about 25000 MW of capacity from private players is expected to come up in 13th plan which is a kind of paradox as per current scenario.State DISCOMs are reluctant and skeptical to issue bids,preferring to load shedding and buying from short term power market owing to low rates(CERC’s Short term power market Report :http://www.cercind.gov.in/2013/market_monitoring/MMC_Report_1213.pdf).Moreover fuel sourcing issues related to Coal,gas(Gas Pricing issues and recommendations https://knowpowernews.wordpress.com/2013/03/24/rangrajan-committee-report-on-natural-gas-pricing-and-its-repercussions-on-sector/) have emerged as a road block to the competitive bidding route.
In April 2003,CERC has somehow tried to end the stalemate and allowed TATA & ADANI to go for “Compensatory Tariff hike” but somehow the procuring states are not ready for the same(http://articles.economictimes.indiatimes.com/2013-10-09/news/42864252_1_mundra-project-tariff-hike-tata-power).
Reports of Compensatory Tariff Hike related to ADANI & TATA can be read here :
Over 52 GW of the projects have been awarded through competitive bidding route (Case 1 and Case 2 Route) http://www.powermin.nic.in/whats_new/competitive_guidelines.htm . No new Power Purchase Agreement has been signed under the purview of Case 2 Bidding since L & T’s 1320 MW plant in Rajpura(Punjab).
Earlier the bid invitation process at Odisha as well as Chattisgarh could not be completed but as per recent notification,Fresh Rfq will be invited for Odisha UMPP http://www.cmie.com/kommon/bin/sr.php?kall=wclrdhtm&nvdt=20130906125251890&nvpc=099000000000&nvtype=TIDINGS
Refer PFC(Power Finance Corporation) for detailed RFP as well as RFQ http://www.pfcindia.com/Content/UltraMegaPower.aspx
In June 2012, bids were invited by UPPCL on behalf of 4 DISCOMs to procure power starting from 2016-17 for 25 years. Developers are not placing aggressive bids due to changed market scenario as fuel supply sourcing issues as well as pricing risks have uprooted in recent times.According to UPPCL bid results, the average tariff quoted was hovering around Rs 5-6/unit.
-In a move to promote competitive bidding for inclusive growth for the Indian power sector, CERC has adjudicated on ADANI case for requesting a tariff hike.The regulator realised that due to rise in Indonesian coal prices(due to change in regulations), it is quite viable to manage at the same tariff cost.
-Another major development that took place in the recent times was approval of mechanism to pass on the imported coal fuel price “http://www.domain-b.com/economy/general/20130621_consumers.html”. CIL need to sign FSA (Fuel Supply Agreement),according to which shortfall of the coal will be met through imported route on cost plus basis. Meanwhile after several rounds of discussion,MoP finally released SBD for case 2 Projects in September 2013 http://powermin.nic.in/whats_new/pdf/overview_of_the_draft_model.pdf Detailed RFQ as well as RFP can be referred here :
Some of the Key points being highlighted in SBD are:
-Bidding will be done on single parameter i.e “capacity charge” (comprises of RoE(Return on Equity,Interest on Loan Capital,Depreciation,Interest on Working Capital, Operation & Maintenance cost ,Cost of secondary fuel,special allowances in case of R & M of a thermal power plant).
-The basic building of SBD is adopting DBFOT Model(Design,Build,Finance,Operate and Transfer)which says the power plants will be transferred to contracting DISCOMs after the completion of the project life.
– Fuel charge will be a pass through component and it will be reflected in the distribution tariff as quoted.
-Incentive will be provided to the developers on improving the Station Heat Rate(The Station Heat Rate of a conventional fossil-fueled power plant is a measure of how efficiently it converts the chemical energy contained in the fuel into electrical energy,usually expressed in Kcal/KWh).
-Land acquisition will be procured by the utility as the concessionaire may face difficulty for getting the land at the aforesaid location.
With the finalisation of the revised SBD for Case 1,more states will initiate the process of issuing RFPs thereby giving the clarity on SBD.Provisions related to tariff revision and acceptance of Long Term power procurement as compared to short term would also drive states to procure more power.Changing sector dynamics of policies and regulations is a positive sign for the sector and thus making India a more competitive one.
Fossil fuels play a major role in meeting the energy demand of the nation and are expected to continue doing so in the foreseeable future. Oil & gas resources form a major part of our primary energy mix and touch our lives in more ways than one. The developing Indian economy has been constantly challenged for sourcing primary energy. India is dependent on imported crude oil to the extent that recently the US Energy Information Administration (EIA) has observed that India was the world’s fifth largest net importer of oil in 2012, importing more than 2.2 million bbl. /d , or about 70 percent of consumption.
Natural gas pricing in India is diverse and complex in nature. India is one of the few countries where different types of basic prices of gas are prevalent. Across the gas value chain and particularly for consumers, the complexity in the pricing of natural gas in India has resulted in enormous problems.
Proposed pricing formula by Rangarajan Committee implies gas price at USD8/mmbtu
Background for gas pricing in India: Committee observed that as there is no gas on-gas competition in India, which is unlikely to happen for several years, it proposed a formula based on wider global prices. Further, even as the global gas markets are not coherent like oil markets, committee proposed a formula based on average of net-backs for producers and average of exchange traded prices.
Formula proposed by the committee: Arms-length price in India = 12-month average of:
a) volume-weighted net-back pricing at well head for gas producers who export to India and
b) volume-weighted price of US’s Henry Hub, UK’s NBP and Japan’s JCC linked price. Committee has not commented on domestic gas allocation to sectors.
The suggested formula will apply to pricing decisions made in future, and can be reviewed after five years when the possibility of pricing based on direct gas-on-gas competition may be assessed.
Review of recommendations related to Natural Gas Price:
•Since the PSC-related key financial recommendations are on prospective basis, they would not impact current PSCs and hence would not impact the profitability/NAV of current producing blocks of RIL/Cairn India.
•However, the proposed gas pricing formula will have a meaningful impact on the domestic gas producers (RIL, ONGC, Oil India) as RIL’s KG-D6 gas price revision is due in March 2014 and would also influence prices for other gas producers like ONGC.
• Committee’s recommendation to determine gas price through arms-length is a very positive one. However, views/affordability of the key consuming sectors like power and fertilizer would also weigh heavily on the final gas price decision in March 2014. The higher input price for fertilizer will have implications.
Impact of Recommendations:
•Domestically produced gas price in the country would then be around $7-8/mmBtu at the current rate.
However, any increase in domestic prices would negatively impact the downstream consuming sectors, predominantly power and fertilizer sectors. While power generation cost would increase compelling an increase in power tariffs, increase in feedstock cost for fertilizer sector would lead to increase in governments’ outlay on fertilizer subsidy. Currently power and fertilizer sectors consume about 2/3rd of domestic gas. For other industries which consume domestic gas as fuel the alternative fuel choice is liquid fuels. As a result any increase in domestic gas price is not likely to affect its competitiveness vis – a vis other liquid fuels.
Moreover ,other effects which can be summarized are as follows:
-ise in inflation sharply which is around 10.16 % already in double digit.
-rise in prices in almost all sectors major sectors affected will be Transport, Auto, FMCG, Textiles.
-The rise in LPG gas will cut the common man’s pocket deeply.
-Impact on banking sectors as the hike may lead to raise in inflation which will urge RBI to raise interest rates thus affecting banks due to tightening of CRR.
-The decision will help to rein in the fiscal deficit, which is projected at 5.5 percent of the gross domestic product in 2010/11 and free up revenues for other programs.
-State oil firms currently lose about Rs 215 crores per day on selling fuel below the imported cost. Thus it will help these companies to make profits.
Thus this can be summarized with a view point that there are some of the key issues that need to be taken care before implementing the recommendations by the Rangrajan committee because ultimately it is the end user or consumer who will be facing the brunt of the increase in net price in natural gas and LPG.
There is an urgent need for Indian policymakers to draw on market oriented solutions to resolve the immense uncertainty that exists in the gas sector.
References :Report of the Committee on Pricing and Taxation of Petroleum Products , 2006 (Rangrajan Committee Report),CII,MoPNG
As discussed in my previous post about the sorrow plight of Indian Coal Sector. The demand supply gap of Indian Domestic sector is increasing with each succeeding year (161MT ;2011-12). Under the umbrella of this mismatch between demand supply of Indigenous coal sector ,various recommendations have been put forward which can be summarized as:
Innovation and Technology:
- 1.Increase in Coal Production :Today, as the world has already started looking after a ‘sustainable practice’, in any domain and industrial and commercial practices, we really need to start assessing our potential and compare practices in the country vis-a-vis the other parts of the world which are more advanced in the sector. There can be 4 major advantages with the advent of new technology like Higher returns(IRR),Lower environmental degradation, lower per tonne of ore cost and higher production realization. An example of innovation in coal mining is moving from smaller capacity shovel to bucket sizes of even 25-30cu m capacities depending on factors like mine geology, size of mine etc. having digging capacities of the order of 11,000 MT/hr.
- Effective exploitation of resources: Evaluation of mineral resources required typical geological models and various geological technologies and the prospect of getting coal reserves in those particular areas is heavily dependent on the extracted data. As on April 2011
Total coal resource: Proved -114001.60,Indicated- 137471.10,Inferred- 34389.51, Total – 285862.21 .
Due to various limitations of the renewable sector, there is a need to tap our huge coal reserves. As far coal mining is concerned ,most of the mining practices are Open case mines(around 90%) as compared to Under ground mining thereby leading the drop in net coal production in some areas where the coal seam in as below as 90-100KM.Some of the prominent steps that can lead to increase in coal production are Use of proper and scientifically proven mining technology, Adopting the correct mining method (OCM/Long wall/other variants), Combining smaller mining areas to develop these into one single mine of large capacities, Promoting mining industries to have a maximum level of extraction by giving them incentives/tax rebates, Close monitoring by our government agencies in each mining project to crosscheck,the progress of each mining project in terms of percentage extraction,Meeting targets of mining projects not only in terms of production (per annum),but also on per annum level of extraction to match with the overall mineable reserves of a mining project.
3. Coal Quality Improvements : Indian Coal is characterized by high ash content, low sulphur,low moisture content. Lower washeability index, lower liberalization size. Due to these peculiar problems in Indian coal, there comes the need to go for importing of coal. CFRI(Central Fuel Research Institute,Dhanbad) has proposed some of the methods to improve wash ability index of the coal like improved froth floatation process, oil agglomeration process, oleo floatation process.(http://eprints.nmlindia.org/5887/1/Chap_9.PDF)
4. Improving Infrastructure and transport: One of the major issues being faced by the industry for the coal movement within India is transportation and infrastructure. Following are the major challenges being faced in coal transportation:
-Lack of availability of proper transportation mode for produced coal
• Mismatch between the demand and supply of railway wagons
• Lack of infrastructure to support a coal movement at full capacities
Some of the steps to improve the transport facilities and infrastructural requirements in order to compliment the coal industry rather than hamper its progress are as follows:
• Enhanced road connectivity across mineral zones and consumers
• Infrastructure developments driven by PPP
• Restructuring and/or reallocation of railway networks to connect with the coal
• Doubling of railway routes at places where coal movement is higher
• Enhancing port capacities as well as evacuation efficiency and augmenting the
existing capacities from existing ports.
Policies and Regulations: Without relevant policies measures and regulations every step will be of no use. Government has recommended various policy measures in its report of Coal Competitiveness and they can be summarized as follows:
- Auction of Coal licenses/ non coal minerals through competitive bidding and thereby leading to a boost In investor confidence.
- MMDR Bill 2011 guaranteed annuity of 26 % to the local population, thereby increasing the inclusion of host population in the mining process in particular area.
- Drafting of national sustainable energy framework for mining areas.
- Thrust on exploration on mineral resources by AMD, GSI, CMPDIL and MECL and classification of mineral resources as per the United Nations Framework Classification (UNFC) code.
- Setting up of coal regulatory authority that will act as watch dog for coal pricing mechanism in India.
- Single window clearance mechanism for taking the clearance such environment, land etc.
Above mentioned recommendations and policy regulations if implemented with proper strategy will ultimately transform India from Coal Importer country to Coal Exporter Country in the near future.
References : Report of Indian Chambers of Commerce,MoP,Newspaper Abstracts etc.
Globally, coal resources have been estimated at over 861 billion tonne.While India accounts for 286 billion tonne of coal resources (as on 31 March 2011), other countries with major chunk of resources are USA, China, Australia, Indonesia, South Africa and Mozambique.Coal meets around 30.3% of the global primary energy needs and generates 42% of the world’s electricity.India has the fifth largest coal reserves in the world. Of the total reserves, nearly 88% are non-coking coal reserves, while tertiary coals reserves account for a meager 0.5 % and the balance is coking coal. The Indian coal is characterised by its high ash content (45%) and low sulphur content.The power sector is the largest consumer of coal followed by the iron and steel and cement segments.
Some Facts about Coal Generation:
At the end of September 2012, 35 coal-based power plants had less than seven days of
coal stocks . This was due to the following:
Twenty-two of these occurrences is due to no, inadequate or delayed receipt from Coal India or one of its subsidiary firms.
Ten of these instances are due to plants running at above-planned PLFs.
Five instances are due to inadequate import of coal.
Similarly, for the first half of 2012-13, the average PLF of coal-based plants has been 68.27%, as opposed to 71.20% for the same period a year ago. Approximately 12.3 BU of generation shortfall in this period is directly attributable to the shortage of coal.
Some of the broader aspects of the Coal Sector can be listed as follows:
Operational and Sustenance Issues:
- Issues relating to fund raising for various coal projects in rural and semi urban areas, and this can be primarily cited as monopolization of the CIL in the sector which is barring the private sector investment in the sector
- Issue related to performance of mining activities in India as most of the mining that is done in India is Open Cast Mining(http://en.wikipedia.org/wiki/Open-pit_mining) instead of Underground Mining(http://en.wikipedia.org/wiki/Coal_mining)
- Private sector investment is also underdeveloped as there is not a detailed classification of various minerals according to UNFC(http://ibm.nic.in/unfc.pdf).
2. Key Administrative Issues:
- Long queue of Mining applications are lying at various levels of state and center levels thereby creating roadblocks in the path of adequate mining.
- There has been a proposal for Single Window Clearance Agency(SWCA) that will root out the so called “red tapism” in various governmental procedures.
- There have been a case of multiple registration counters/mechanisms for traders,miners,developers thereby making the final target a blurred one to be achieved in a target time.
3. Regulatory Issues: According to mine developers there are many loopholes in the policy regimes and regulatory issues regarding mining of natural resources.Prominent ones may be listed as follows:
- There is a lack of incentive mechanism in the mining sector-recommendation will be like to extend performance based incentive as has been laid down in NELP policies.
- There has been lack of policy support in transfer of mining licenses.The mine owners are not able to mine scientifically while complying to all the environmental norms and would like to dispose off these areas or develop them through forming a joint venture.States may allow this move in order to increase the production capability of the state mining companies.
The government must strictly adhere to timelines as per the MMDR act and MCR, and extension should be granted only on genuine cases as permitted under law.
4.Fiscal Issues: There have been really poor connectivity issues between the mining areas and moreover the evacuation facilities are also having a downsizing trend.
5. Infrastructural Issues: Cadastral (Khasra) maps are either not digitized or the geo referencing has not been done properly. This creates problems in lease boundary determination, thus hampering genuine miners. As a recommendation states may appoint a nodal agency to undertake these prefeasibility studies and thereby indicating the authenticity of data too.
These are some basic issues that are needed to be tackled by Indian Power Sector at the earliest and thereby making it a efficient coal production nation. Various recommendations about the problems will be taken up in the subsequent posts.
References: Indian Chambers of Commerce, MoP, CEA etc
India being fifth largest energy consumer in the world is rising high in terms of installed capacity (207 GW,Source : CEA as on 11.Nov.2012). Much progress is evident in Infrastructure,Telecom but things in power sector is not going as per the planning done by our GoI and MoP and thus India’s economic growth is at risk. Inspite of having so many reforms and policies,Indian power sector is grappling with “Cancer” and it requires some sheer reforms that will ultimately lift it to more sustainable position. Some of recent reforms/policies that have jolted Indian power sector in recent times can be summarised as below:
- Competitive Bidding of Captive Coal Blocks: Competitive Bidding Mines Rules,2012(http://www.coal.nic.in/100212.pdf) has been notified in Feb,2012 and according to which Captive coal blocks will be allotted on the basis of competitive bidding to the power plant developers.After the recent COAL SCAM(http://en.wikipedia.org/wiki/Indian_coal_allocation_scam) there was a lot of hue and cry about the allotment of coal mines to non serious players in the Indian power market.Almost each and every bidder has earned a windfall gain through the Coal Scam. According to the recent Competitive Bidding guidelines, Coal will now be allocated to companies in specific end use sectors(excluding power companies) through an auction under which two part bids would be invited over a floor price.For power companies, the respective state will select a developer on the basis of competitive tariff bids and recommend coal block allocation. Moreover power companies are required to pay the reserve price fixed by state government for such coal blocks.
- Approval of draft of MMDR(Mines and Minerals(Development and Regulations) Bill,2011: Another much awaited bill is the MMDR Bill(http://pib.nic.in/archieve/others/2011/sep/d2011093002.pdf) which has been approved by the cabinet in Sep,2011.It will be enacted after getting approval from President as well as Parliament.The bill provides a strong legislative environment for socio- economic conditions of the mining areas and the people which are effected by the same.The core of bill is a provision that mandates coal mining lease holders to contribute 20% of their Post tax profits( PAT -It is the net profit earned by the company after deducting all expenses like interest, depreciation and tax.PAT can be fully retained by a company to be used in the business. However dividend is paid to the share holders from this residue.) to a distinct mineral fund,which will be used to meet social compensation obligations.With the advent of this policy,it might make a dent to the profits of CIL,SCCL and they can take a harsh step of increasing the coal prices which will affect the developers and consumers at last.
- Revision of Royalty Rates: Another significant aspect that occurred in recent times is the revision of Royalty rates in which there is an increase of 14% ad valorem and 6% advalorem on coal,lignite respectively.(http://pib.nic.in/newsite/erelease.aspx?relid=82191)
- Exemption of Import Duty on thermal Coal: The finance Bill that has been passed by Parliament enforces the exemption of 5% basic customs duty and 1% Countervailing duty on thermal coal imports for indefinite time.This is major step in favour of major coal importers as well as power plant developers.Moreover,ECB has been allowed in case of Indian power sector which will be used to part finance the rupees based debt of power plant projects.
- Presidential Decree to CIL: A presidential decree has been issued to CIL for supplying coal to power generating companies under the terms and conditions of FSA.
- Revision of Standard Bidding Documents: In the generation side, There has been a major revision in case of Case 1 and Case 2 Bidding Documents in lieu of competitive bidding.MoP has also issued drafts related to UMPP Power projects and these aimed at more stringent bidding process with higher performance guarantees and other eligibility norms.Only core sectors companies can participate in bidding process and company can’t have more than 3 UMPPs in the pre commissioning stage.CERC has been made a regulatory body to intervene in the cases related to PPAs.
- Issue of Guidelines for Short Term Market: MoP released a notice of guidelines related to comptetive bidding in short term power market(accounts for 10% of the total electricity generated in the market).
- Imposition of Import Duty on Power Equipment: Union cabinet approved the request of imposing 21 % import duty on the power plant equipment. The move has been taken to restrict the cheaper equipment that are being used in the Indian power scenario thereby hampering the growth of Indian manufacturing industries which are still struggling to develop the power plant.
- Steps in Renewable Sector: A major step taken in Renewable sector is the withdrawal of Accelerated Depreciation and GBI i.e Generation Based Incentives (http://www.eai.in/debate/scrapping-of-the-accelerated-depreciation-incentive-for-wind-projects). This move will led to low capacity additions in the coming years & it has been speculated that MNRE will reintroduce incentives in the 12th plan.
- Regulatory Initiatives: CERC has played major role in the past year in formulating various key policies especially related to transmission and distribution sector i.e tightening of frequency band from 49.5 – 50.2 to 49.7 – 50.2 Hz. This has been primarily done to increase grid security in more stricter manner (under Electricity Grid Code 2010)
- Ensuring Timely tariff revision: In Nov 2011,APTEL (Aplleete Tribunal) passed a landmark judgement regarding timely revision of tariffs by state DISCOMs.SERCs(StateElectricity Regulatory Comissions) has been directed to issue suo moto proceedings for tariff determination within a month of scehduled tariff petition.In June 2010,GERC became the first commission to implement APTEL’s order.
- Implementation of Open Access: In Nov 2011,MoP announced all consumers to be eligible for Open Access who have their load more than 1 MW.Moreover state regulators have jurisdiction over fixing of energy charges for these consumers. Inspite of these efforts, there is a need to take strict steps to implement it as in some cases like Odisha they are trying to suppress it by Sec 11 of EA 2003.
- Renewable Energy Regulations: Renewable Energy Regulations has been made effective from 1st,April 2012 for five years.It lays down the guidelines for tariff determination and moreover the floor prices, forbearance prices have been revised. Forbearance Price of Non Solar RECs Rs 3300/MWh & Floor Price as Rs 1500/MWh(Solar RECs).
So, a bunch of steps have been taken to revive the Indian Power Sector but the Sector requires strong implementation strategy which will ultimately make India from Power deficit nation to power surplus nation.
References: PowerLine Magazine,Govt. sites like MoC,MoP etc
The average cost of coal production in India is steadily increasing, despite increase in
productivity. The coal pricing mechanism is not consistent with the international practice.
Prior to nationalization in 1973, coal prices were set administratively low in comparison
to the production cost leading to losses for many coal mining companies. To allay some
of these losses government set up the Bureau of Industrial Cost & Prices in 1970 to
recommend the appropriate price of coal, based on the average of production cost of all
mines which led to problem for the coal companies with high production cost. In 2000 a new
Colliery order was passed for deregulating the prices of all the grades of coal and Ministry of
Coal will no longer involved in setting the price of coal. According to the order each coal
company is allowed to set its own sale price based on the prevailing market prices.
The recent move of Coal India to resort to fix sale price of coal on Gross Calorific Value (GCV)
rather than on useful heat value of the fuel will have a direct impact on the sale price. This
clearly indicates that Colliery order which is still in place, but only on the paper as the prices
are still being guided by the Government. Though the GCV practice is very much consistent
with the International practice, we need to address one main question as far as India is
concerned: Do we have the proper infrastructure in the place which can accommodate this
practice? As per CIL, the move will have negligible effect where as NTPC claimed that their
coal bill will be rise by 40% from ` 20, 000 Cr to ` 28, 000 Cr. Also there is no clarity on the
method which is to be adopt by CIL for classification, sampling and analysis to finalize the
grade of coal or GCV band of mine. Another important question which raises concern that
why Coal India has gone for GCV analysis on its own where as the Office of The Coal
Controller is the authorized body for declaring the grades and ascertaining the coal
availability. NTPC the largest consumer of coal has requested the Power Ministry to take up
Tthe issue with Coal Ministry. But, all goes in vain as Coal India moved to the new system from
January 1, 2012.
Many of the public utilities have complained that this new system had resulted for wrong
classification of coal because the quality of the same coal which they were getting before 31
December, 2011 as 4200 GCV now they are procuring as 5300 GCV. This points the accusing
finger on the classification procedure and implementation of GCV by CIL. Companies have to
pay much higher prices for the same quality coal than what is required. It is good to keep
pace with international practices but to implement it blindly without proper planning is
surely not a justifiable move by CIL.