InfralinePlus May 2012

May 2012 Volume 1 | Issue 1 | `100 This Issue is Complimentary www.InfralinePlus.com

The Complete Energy Sector Magazine for Policy and Decision Makers

Oil on boil Taxing times ahead for consumers p6

PSU Governance

Some shareholders more equal than others: Sanjeev Prasad, Kotak Securities p47

PMO gets

Proactive Pulok Chatterjee breaks policy paralysis with Presidential directives p4

Pulok Chatterjee Principal Secretary, Prime Minister Office

Powerpacked achievement for Shinde p14

Indian Power Sector on the Move, Coal Crisis Holds it. p26

RS Sharma on LIC bailing out ONGC share sale p38

Renewed Dimension of Clean Energy Industry p62

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InfralinePlus The Complete Energy Sector Magazine for Policy and Decision Makers

Editor’s Letter The launch of this magazine comes at a time when India’s energy sector is at the crossroads. Spiraling global crude oil prices are affecting India’s economy and balance of payments as it imports more than 70% of its crude oil by spending close to $150 billion of its valuable forex, fuel shortages of coal and gas is affecting growth of important industrial sectors especially coal, unearthing of the NELP blocks scam and auction of coal blocks and shrinking interest of foreign investors...

So, while the country and its policy makers juggle to wriggle out from these challenges, we at InfralineEnergy attempt to provide you an insight into all these issues that threaten to derail the pace of reforms initiated in the sector.

India’s energy security challenges have aggravated and there seems to be no silver lining on the horizon. To meet its increasing appetite for energy, India is depending on huge imports for oil and gas (coming as imported LNG) as also coal. A country that’s the third largest in the world in terms of coal reserves is now poised to emerge as the world’s biggest coal importer.

Given the geopolitical development like the Arab spring or US arm twisting India on its stance for oil imports from Iran, currency volatility inflating crude import bill and Indonesia’s plan of 25% tax plan on coal exports, are all impacting India like never before.

Renewable energy promises to play a role in reducing the import burden but will take its time.

As a result, though the sector is seen silos comprising of different elements – Power, Oil and Gas, Coal and Renewable Energy, it’s time to take an integrated view on the energy scenario in India.

To provide an integrated view of the sector from the perspective of policy and decision makers, InfralineEnergy has take this initiative of launching a monthly magazine In the first issue, we have focused on some of these issues. For instance, the policy paralysis that saw a sudden proactivism from the government’s highest office -- the Prime Minister’s Office. Indeed, it is satisfying that the highest office of the country is monitoring the development of the energy sector, though the current situation could certainly have been better managed.

We have tried to put together a judicious mix of news and views in this effort. It being our maiden attempt, there is a good scope for improvement.

Your opinion and suggestions would always stay valuable to us.

YOGESH GARG CEO and Editor InfralineEnergy Research and Information Services For Advertisement and Subscription Please contact: Ankur Seth Tel.: +91-11-46250000 (Board) | Mobile: +91-11- 9717707684 Email: ankur.seth@infraline.com Register on www.Infraline.com for FREE subscription for three months

May 2012 | Vol 1 No 1

Editorial Yogesh Garg, Editor Pallavi Chakravorty, Assistant Chief-sub editor Sangeeta Tanwar, Principal Correspondent Shruti Medha, Correspondent Desk Archana Khatri Das, Rewriter Analysts RK Tripathi Raeesa Zeb Ravi Shekhar Yashwant J Rao Debjit Das Design Team Gopal Thakur, Art Director Devdatt Kushwaha, Sr. Graphic Designer

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InfralinePlus

Contents Editor’s Letter

1

Cover Story

6 The Future of Fuel Frenzy

With major oil producing and marketing companies all set to increase prices of petroleum products in the wake of inflating global crude oil prices, it is tough times ahead for Indian consumers p6 2

Power

10

Coal

23

News Brief p10 In Conversation: JP Chalasani, Outgoing Chairman, Association of Power Producers and CEO of Reliance Power p12 In Depth: India’s power capacity crosses the 2 lakh MW mark p14 Expert Speak: Sunand Sharma, Country Manager, Alstom India p16 In Depth: Where do we stand in terms of our power reforms? p18 Statistics p20

News Brief p23 In Conversation: Former Coal India Chairman, NC Jha p24 Expert Speak: RV Shahi, Former Secretary, Ministry of Power p26

Oil and Gas

Renewable

37

News Brief p37 In Conversation: RS Sharma, former CMD ONGC p38 In Depth: Is CNG still a cheaper alternative fuel? p42 Expert Speak: VK Rao, Reliance Natural Resources Ltd p45 Expert Speak: Sanjeev Prasad, Kotak Institutional Equities p47 Expert Speak: BS Negi p50 Statistics p52

Cover: photo illustration by Uday Shankar

News Analysis p29 In Depth: How viable are imported coalbased merchant power plants? p30 Statistics p34

54

News Brief p54 Expert Speak: AK Singh, CMD, Central Mine Planning & Design Institute Ltd. p55 In Depth: Solar energy for Telecom Towers p58 Statistics p61 Expert Speak: Gokul Chaudhry, Partner, BMR Advisors p62 News Analysis p66

In Focus

4

PMO In Action The recent proactivism of PMO has infused a new hope in Coal and Power sector. Introduction to the man in the arc light - Pulok Chatterjee p4

Tail Piece

65

Point to be taken Anil Razdan, Former Secretary, Ministry of Power on India’s water security p64

Plus- Photo Essay A photo tour of Alstom’s Chamera III Hydro Electric Project

p67

Reliance’s Solar Power Plant in Dhursar in pictures

p70

Infraline Power Reports TM

Solution Driven TM

Solution

Proposed Thermal Power Projects in India: 2011

India:

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Key Highlights ►► Opportunity Assessment for EPC contractors, BTG Suppliers and other Power Sector Players ►► Investment Opportunity Assessment for Private Equity Investors, Financial Institutions and Banks ►► Developer wise Profile: Competitive Market Assessment ►► Land Acquisition Scenario - State Wise Rating ►► Developer Wise Profiling of Power Plants and Project ►► Source and Type of Fuel for All Proposed Thermal Power Projects ►► Capacity and Unit Configuration for All Proposed Thermal Power Plants in India

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Others Power Reports: Power Sector Opportunity Mapping Merchant Power Plants in IndiaAn Attractive and Sustainable Business Opportunity?

Energy Efficiency Market in India: A $16 billion opportunity Fuel for Power Generation in India: Options and Consequences Opportunity in Electricity Distribution Franchisee in India Power Sector Opportunitties in India: Perception vs Reality Power Transmission in india: Evaluating the opportunity Road Map Distribution & Power Transformers Market in India Power generation outlook in India: 2015

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InFocus

PMO Gets Proactive ►► Pulok Chatterjee’s return to PMO to undo “policy paralysis” in the Government ►► To revive India’s growth story and derailed economic reforms process

4

The post of Principal Secretary to the Prime Minister has always been a coveted one. Whether it was the former man in chair, TKA Nair during the UPA-I regime or the one before -Brijesh Mishra in the BJP government or even Pulok Chatterjee -- the most recent incumbent holding the chair, they all have played an important role in the day-to-day functioning of the government as also important policy matters.

However, the one difference between the present man in chair and his predecessors is the direct access he enjoys to both the PM, Dr Manmohan Singh and the UPA chairperson, Mrs Sonia Gandhi.

Chatterjee, a 1974 batch retired-IAS officer from the Uttar Pradesh cadre, is holding one of the most coveted charge in UPA-II. Chatterjee’s appointment was part of a major overhaul of the PMO and came at a time when the government was hurtling between one crisis and another. Given his proximity to the brass of the Congress, Chatterjee was brought in to ensure smoother coordination within the government as also between the government and the Congress party president.

But, Why are we talking about him?

How is PMO of any consequence to an energy sector magazine? The reasons are many, but to start with... He is fast emerging as the key interface between the industry and the government on all major economic issues, the recent case in point being the high-powered meeting with top 20 CEOs under Anil Ambani and Ratan Tata highlighting

issues blocking the growth of India’s power sector.

Sources say the PM is heavily depending on Chatterjee to improve the country’s power scenario, which involves addressing the controversies surrounding fuel shortages, revive investors confidence and remove hurdles faced by infrastructure projects.

His recent push for scaling up India’s coal production to ramp up power production has ruffled many feathers in the coal and power ministry. The most recent directive that came from the office of President Pratibha Patil to state-owned Coal India Ltd over signing of the fuel supply agreements (FSAs) with power producers is also an outcome of the initiative undertaken by the PMO.

“Infrastructure growth tops Pulok Chatterjee’s agenda,” a senior PMO official “Coal production going down is not a new thing…but the way it has been handled recently by the PMO under Chatterjee has got the entire industry talking,” said a senior government official.

In the oil and gas space, Chatterjee is making serious strides when it comes to exploration of oil and gas. Energy security issues or unlocking procedural delays in the sector, Chatterjee has all on his fingertips. He is regularly seen holding meetings with the bureaucrats, industrialists and chiefs of industry as also heads of state-owned public sector undertakings.

Officials in the PMO say Chatterjee is extremely diligent when it comes to work and does not take things for granted. “He has passed instructions to all secretaries in key government ministries and departments to clear backlogs and speed up decision making,” a government official said.

The aforesaid reasons are enough to

make us take notice of the actions of the most key bureaucrat of the country today. Chatterjee is clearly seen leading all major policy discussions, be it in the area of infrastructure, important economic sectors, home affairs, defence or even tourism.

Chatterjee is not a new face in the PMO, this in fact is his second stint.

His first tenure was in 2007-08, when TKA Nair was the man in his chair.

A Gandhi family loyalist, Chatterjee held the position as the District Magistrate in Rae Bareli — the constituency of Indira Gandhi in the 80s. Later he also served as deputy secretary in Rajiv Gandhi’s office in 1985. He has also worked as Sonia Gandhi’s private secretary when she was the leader of the opposition in Lok Sabha.

Buzzword is that Chatterjee has been given the task of changing the Congress’ bleak prospects in the 2014 general elections. Therefore, Chatterjee’s return to this office is with a dual purpose -- one to give a policy impetus to India’s derailing economy and the other to re-build the party’s diminishing image.

Like any another power-packed man, Chatterjee has had his share of controversies. Just before assuming charge, media was slammed with reports highlighting Chatterjee’s failure in advising the PM regarding grant to A. Raja -- the then telecom minister and main accused in the 2G spectrum scam. Reports also cited Chatterjee’s involvement as the joint secretary in the PMO -- favouring the appointment of Suresh Kalmadi to head the Commonwealth Games Committee.

However, the Congress, it seems has remained undeterred by these allegations and has continued to show faith in Chatterjee.

Chatterjee does have a strong support from the government.

However, only time will tell whether he proves to be the blue-eyed boy for India’s energy sector and the industry

Key Highlights Daily Newsletter and Database Updates on: • Power • Coal • Oil & Gas • India Upstream • Renewable For more details email at: general.support@infraline.com

May 2012 www.InfralinePlus.com

CoverStory

Oil on boil: Taxing times ahead for consumers ►► Oil prices just 15% short from all-time high; even US and European economies aren’t out of wood ►► Central and state government should consider bringing down tax component for relief to consumer

6

With over-growing losses and Already hit by costlier products and increased borrowings, the two major services, household budgets are seen oil refining and marketing companies shooting up. Get ready to once again – Indian Oil Corporation (IOC) and loosen your purse strings as the three Hindustan Petroleum (HP) -- are also state-owned oil companies -- Indian heading for losses, which if happens Oil, Hindustan Petroleum, Bharat will be for the first time in their history.

Corp -- are ready to announce a hefty The only way this can be averted is to increase in prices of petrol, diesel, increase the consumer prices of auto cooking gas or LPG and kerosene for and cooking fuels. public distribution system.

International oil prices have been Citing massive losses in the wake of creating havoc for quiet sometime high global crude oil prices -- currently now. And thanks to high global crude hovering close to $120 a barrel -- the oil prices currently at $120 a barrel, oil companies say their under-recovIndia’s crude oil import bill for the first eries (or losses on sale of petroleum time is expected products below the cost price) have to cross $150 mounted to over `8 a litre on petrol, billion for more than `15 on diesel and nearly 2011-12 `500 on a 14.2 kg LPG cylinder.

“Prices of all as against Though the amount hike remains petroleum $100 unclear as of now, the intention prices need to be looked billion of the oil companies seems at again.” quiet clear.

Union petroleum minister, last year.

The Jaipal Reddy international crude oil price for the Indian Basket as by the Petroleum Planning and Analysis Cell (PPAC) under the Ministry of Petroleum and Natural Gas continue to be at scary levels -- close to $118 a barrel.

Not being able to pass on the hike in petrol prices, the state-owned oil companies have also warned of disruptions in fuel supplies as losses on fuel sales in the domestic market have mounted to “untenable limits.”

“The situation is very critical. We are losing `7.67 per litre on petrol and after adding 20 per cent sales tax, the desired increase in rates in Delhi is `9.20 per litre,” (IOC) Chairman R.S. Butola recently said.

“Our 93 per cent of cost of production is on account of crude oil, which we have to import. If we don’t earn revenues from fuel sales, we would not be able to buy crude oil and in that situation, there will be fuel supply disruptions,” he added.

Interestingly, as oil companies talk about their growing losses, the Centre too has upped the ante and is all set to curb the outflow of its funds going in as huge subsidies on fuel every year. As against last year’s fuel subsidy outgo of over `60,000 crore, the government’s plans to limit the subsidy on fuel to around `40,000 crore. This was announced by finance minister Pranab Mukherjee in his budget proposals for 2012-13 and is also part of the government’s fiscal consolidation plan.

Mukherjee had hinted is his Budget speech that the government did not have the fiscal elbow room to give more subsidy to oil companies to prevent a rise in retail prices of fuel.

“If we don’t have the capacity, how can we pay a subsidy? Theoretically speaking, if petroleum prices rise to $1,000 a barrel in the global markets, how can we pay? If you have capacity, you can take hard decisions. Can we go back to 1990, when we had to sell our gold for a few millions?,” Mukherjee had said.

Even though the fuel prices are

May 2012 www.InfralinePlus.com

expected to be increased shortly after the passage of the finance bill in Parliament, the Congress led UPA government faces a strong opposition from its key allies including Mamta Banerjee’s Trinamool Congress and DMK -which are also part of the Empowered Group of Ministers (EGoM) on fuel prices under finance minister Pranab Mukherjee that will take a final call on the price of diesel and LPG. “Even if this government collapses, the new government will face the same problem. It cannot come from Siberia. Oil prices can be addressed outside Budget as well. We will have to take our allies on board on oil prices.

We can’t make a proposal that is not acceptable to them. Every budgetary proposal has to be approved by Parliament,” Mukherjee said.

The country meets nearly 80% of its crude oil requirement by way of imports and majority of the oil supplies are coming from the Middle-East. With geopolitical tensions surrounding Iran -- the second-largest producer of oil in the Middle East, any supply disruptions in the region can cast a big impact on India’s economy.

With high prices of crude oil continuing in the global markets and the provision of `43,580 crore fuel subsidy in 2012-13 Budget proposals -- as against `68,481 crore in the current fiscal -- the writing on the wall is quiet clear that frequent fuel price hikes are in the offing.

While both oil companies and the government have stated their intent, the consumers are under the guillotine.

As the government displaying helplessness citing huge crude oil prices in international oil markets necessitating a hike in domestic fuel prices, the fact remains that every time fuel costs is increased by a rupee, it’s not just the oil companies that are compensated but the central and state government together get richer along with every hike. This is due to the high component of taxes and duties that are

largest contributor of revenues for the in-built in the retail price of petrol central and state exchequer. The sector and diesel. contributed `225,494 crore during On every litre of petrol -- priced 2010-11. This year this contribution in at `65.64 a litre (in Delhi), the total the first half itself has been a whopping taxes levied by the central and state over `106994 crore and is expected to government stand at `26.53 and then touch `2.5 lakh crore for the full year. there is an additional `1.50 that you During 2010-11, the petroleum pay to the petrol pump dealer as his sector contributed `1.04 lakh crore commission. Oil companies say they to the central exchequer in the form are currently losing `6.43 on every litre various taxes and duties including of petrol sold. customs and excise duty, service tax Similarly,on every litre of diesel that and the cess and royalty on crude is priced at `40.91 a litre (in Delhi), oiland gas. the consumer is paying `7.42 as taxes In addition, there was also a conto the centre and states and another tribution by the oil and gas PSUs in `0.91 a litre as dealer’s commission. the form of dividend, corporate tax Oil companies are claiming a underand profit petroleum on exploration of recovery of over `13 on every litre of oil and gas, totaling another `32,917 diesel sold. crore. In all, the central exchequer While the Centre charges a specific got `1.36 lakh crore from the sector excise duty of `14.78 a litre on petrol during 2010-11. including education cess, the state During the first six months of charges various taxes and VAT, entry 2011-12, as much as `55, 435 crore tax and others. have been contributed by the petroleum To gauge “There sector to central exchequer. the states’ should be an immediate increase Similarly, states that earn increase in petrol prices. Underrevenues by imposing royalty in recoveries of oil compaon crude oil and gas, sales tax/ revenue nies on petrol are increasVAT on petroleum products and due to ing and we are losing `50 other taxes imposed as octroi hike crore on petrol everyday.” and entry tax -- earned `88,997 in fuel R S Butola, crore during 2010-11 and almost prices, CMD, IOC `51,559 crore for every from the one rupee increase in petrol price per litre, the Delhi government rakes in 20 paise as the VAT rate in Delhi is 20 percent.

Similarly, for every one rupee increase in price of a litre of diesel, the Delhi government raked in 12.5 paise in taxes as the VAT rate for the fuel was 12.5 percent.

The price build-up of petrol and diesel in Delhi, including price before tax and taxes/duties levied by the Central and State Governments, with effect from 16 march, 2012 can be seen in tables.

The petroleum sector remains one of the

7

May 2012 www.InfralinePlus.com

CoverStory

petroleum sector in the first six months of 2011-12.

As petrol prices stand de-controlled, oil companies have already hiked petrol prices several times in 2011. However, prices have been kept on hold since December 2011, first due to assembly elections followed by municipal elections and now till the passage of the finance bill in the Parliament, expected to come up by May 7.

Petrol prices were last revised on December 1, 2011 when they were cut down by `0.78 per litre to `65.64 per litre in Delhi; diesel currently costs `40.91 a litre.

A comparison with the neighbours

show that the price of Petrol in India is more when compared to Pakistan, Ban-

The recent cut in VAT rate by the Goa government would bring down the petrol prices in the state by `11 per litre gladesh, Sri Lanka and is even dearer than what is charged in the US. One litre of petrol costs `52.30 in Pakistan, `55.52 in Bangladesh and `60.06 in Sri Lanka. In India, the fuel costs `65.64 (in Delhi). In the US,

petrol costs much less -- at `44.88 a litre.

So, the solution lies in either increasing the domestic prices of fuel or reduction in taxes and duties by the Centre and states. The recent cut in VAT rates by the Goa state government would bring down petrol prices by as much as `11 a litre clearly shows that if the government wants to help the common man, it can do so. The common man remains the sufferer amidst the constant political drama that goes on in India. Here’s hoping that the message reaches the right ears, and at the right time.

Growing losses of oil companies: HPCL and IOC plunge into losses, BPCL not far behind 8

(`crore) Public Sector Oil Companies** Indian Oil Corporation limited (IOC) Bharat Petroleum Corporation limited (BPC) Hindustan Petroleum Corporation limited (HPC) Oil & Natural Gas Corporation (ONGC) Oil India Limited (OIL) GAIL (India; Limited (GAIL)

2009-10*

2010-11*

2011-12 (April-December. 2011)

10,221

7445

-8,716

1,538 1,301 16,768 2,611 3,140

1,547 1,539 18,924 2,888 3561

2,652 -3,720 19,479 3,002 3,171

Source - Oil Companies * OMCs could make make profit only after taking into account cash assistance from Government and discount on sale of crude oil and products by Upstream oil companies. ** Data for private sector oil companies is not being maintained.

Details of taxes/ duties on contribution to Central and State exchequer by petroleum sector companies (in `crore) Particulars 1. Contribution to Central Exchequer A. Tax/ Duties on Crude oil & Petroleum products Cess on Crude Oil Royalty on Crude Oil / Gas Customs Duty Excise Duty Service tax etc.

Sub Total (A) B. Dividend to Government/ Income tax etc.

Corporate/ Income Tax

2009-10

2010 11

H1, 201112 (prov.)

6,559 3,859 4,563 62,480 982 78,443

6,810 3,652 24,136 68,040 942 103,580

3,477 1,998 8,116 29,400 420 43,411

17,935

17,116

8,345

May 2012 www.InfralinePlus.com

(in ` crore) Particulars

2009-10

2010 11

Dividend income to Central Govt.

Dividend distribution tax Profit Petroleum on exploration of Oil/ Gas Sub Total (B) 2. Contribution to State Exchequer Total Contribution to Central Exchequer (A+B) A. Tax/ Duties on Crude & Petroleum products Royalty on Crude Oil / Gas Sales Tax/ VAT on POL Products Octroi, Duties Incl Electricity Duly Entry Tax / Others Sub Total (C) B. Dividend to Government/ Direct tax etc.

Dividend Income to State Govt.

Sub Total (D) Total Contribution to Stale Exchequer (C+D) Total Contribution of Petroleum Sector to Exchequer (1+2)

8,066 1,864 5,471 33,336

9,807 2,354 3,610 32,917

H1, 201112 (prov.)

1,396 338 1,945 12,024

111,779

136,497

55,435

3,349 64,999 1,888 1,829 72,065

4,636 78,689 2,163 3,488 88,976

3,756 45,321 1,125 1,355 51,555

17 17 72,082 183,861

21 21 88,997 225,494

4 4 51,559 106,994

Break-up of Current Excise duty on Petrol & Diesel (eff. 25.6.2011) (`/ litre) Product Petrol Diesel

Basic Duty 6.35 Nil

Additional Excise Duty (Road Cess) 2.00 2.00

Special Additional Excise duty 6.00 Nil

Total duty 14.35 2.00

Education Cess @ 3% on Total 0.43 0.06

Total Duty Including Cess 14.78 2.06

Changes in Retail Prices of Petrol and Diesel in Asian countries since 2004 The prices of petrol and diesel in Asian countries in 2004 and comparison with prices of 2012 is as underCountry

India Pakistan Bangladesh Sri Lanka Nepal Thailand Philippines Malaysia China Asia - Japan

Petrol Prices

Diesel Prices (`/ litre)

2012**

2012**

SOUTH ASIA 65.64 52.30 55.52

40.91 56.89 37.43

60.06 72.14 SOUTH EAST ASIA 65.68 63.72 47.12 FAR EAST 55.80 DEVELOPED COUNTRIES 89.90

46.41 52.89 50.95 53.02 30.29 59.53 78.13

9

May 2012 www.InfralinePlus.com

NewsBriefs | Power

10

FSAs Power ministry trips on transparency

Karanpura MPP’s Fate continues to be in dark

Odisha Two more ultra mega power projects

Making a mockery of government’s proclaimed transparency drive, the power ministry asks the coal ministry not to make public the list of power projects that would get coal linkage under the new mandatory fuel supply agreements with Coal India. Concern is that such a list could hurt projects not having coal linkages.

For more than a decade the 2,000MW mega power project at Karnapura in Jharkhand awaits approval. Reviving the turf war coal minister has raised the red flag over building such ‘super structures’ on coal-bearing land on the ground these would block efforts to rapidly ramp up production of the primary industrial fuel.

A huge relief for Orissa, the Centre clears the proposal to set up two more UMPP in Odisha. One of them is likely to be set up in Bhadrak. A team from Central Electricity Authority and Power Finance Corporation is to visit the state to identify the sites. UMPPs are generally of over 3,000 MW size at a single location.

ONGC India and ADB Loan agreements for Power Transmission system

ONGC Commissioning Tripura plant in June

Tamil Nadu Hikes power tariff after 9 years

The ADB and the Government of India signs three loan agreements worth $826 million aimed at shoring up power transmission systems to help India efficiently transfer electricity from surplus regions to power-deficit regions.

A $500 million sovereign-guaranteed loan and a $250 million non-sovereign corporate loan will establish a 1,300-plus kilometer interregional transmission link.

ONGC Ltd is expected to commence power production at Tripura Power Company Ltd’s plant in June 2012. The ONGCpromoted TPCL has established a 726.6 MW (363x2) gas-based thermal power plant at Palatana, Tripura, and laid a 650-km-long 400kV direct current transmission system up to Bongaigaon for evacuation of power.

After nine years, Tamil Nadu Electricity Regulatory Commission approved a steep 37% hike in power tariff for one year, effective from April 1. It is expected to generate additional revenue of Rs 7,874 crore for Tamil Nadu Generation and Distribution Company, and recover its full costs in the financial year of 2012-13.

Nalco with NPCIL Plans another nuclear power plant

Transmission National Power Highway by 2014

India Crosses 2 lakh MW India’s installed power capacity

After Kakarapar Atomic Power Station in Gujarat, Nalco mulls another nuclear power plant in collaboration with Nuclear Power Corporation of India.

There are three options to set up the plant, at West Bengal, Odisha and Rajasthan.

NPCIL would be the operator of the project with 51% stake.

The National Power Highway would be created by 2014 linking various regional grids to ensure smooth and uninterrupted transmission of electricity, Union Power Minister says. The power highway would connect various regional grids in the country and make smooth transmission to meet the future requirements in an efficient manner.

With commissioning of a 660 MW unit of a power plant in Jhajjar, the installed capacity in the country has crossed two lakh megawatt mark, according to the Power Ministry. The installed capacity includes 1,32,013 MW capacity in the thermal sector, 38,991 MW in hydro, 4,780 MW in nuclear and 24,503 MW in renewable energy.

Power Ministry Targets 9,20,000 MU this year

Indonesia tax plan Hits India power firms hard

RGREP To light up 82 Bihar villages

The Power Ministry sets target of generating 9,20,000 million units of electricity this year, of which over 1,50,000 million units would come from the private sector alone, says Central Electricity Authority report. Government also plans to add over 1,22,000 million units of hydel power during the same period.

Indonesia’s plan to impose a 25 percent export tax on coal may turn Indian power producers towards other coal exporting countries and increase tensions between companies and the Indian government over electricity tariffs. An additional spike in coal costs would push other plants to raise prices, which would lead distribution utilities to buy less.

Around 82 inaccessible, remote villages in Gopalganj, Saharsa, Supaul and Kaimur districts would be energised under Rajiv Gandhi Rural Electrification programme in Bihar. Around 40 villages of Baikunthpur and other blocks of Gopalganj district have been identified to cover under RGREP for electrification through non-conventional sources of energy.

May 2012 www.InfralinePlus.com

InConversation ‘Imported fuel option will work only with understanding from all stakeholders’

12

J.P Chalasani, Outgoing Chairman, Association of Power Producers and CEO of Reliance Power spoke to Infraline at length about the problems concerning the coal sector, whether imported coal is viable idea for India and his views on the performance of the power sector. Edited excerpts:

and we are confident that this target would also be comfortably achieved.

With this, private sector’s share in the total capacity could increase from the current 23% to 38% at the end of FY 2017. In the right enabling environment, the private sector can far surpass the current levels of capacity addition. However, fuel and distribution issues have emerged as major challenges and the sector needs to find an answer to those issues.

How do you look back on the power sector’s performance at the end of the 11th Plan? Do you think it is possible to replicate this growth in the 12th Plan?

Since the enactment of the Electricity Act, 2003 — a path breaking legislation — for the first time in the 11th five-year Plan the private sector has made its mark by contributing over 58% of the total capacity addition in the country.

Against the 11th plan achievement of 53,922 MW, the private sector contributed 31,372 MW (until February 2012). Thus, against a plan target of 15,043 MW, the private sector has achieved almost 200%. This rise of the IPP that has defined the 11th plan power sector capacity addition.

In the 12th Plan target, private sector is expected to add 42,000 MW (56% of new capacity),

What according to you are the greatest challenges facing the sector?

The biggest challenge is obviously fuel availability and pricing. Another huge challenge is accelerating reforms in power distribution. That’s a crying need.

I see a silver lining in the form of the recommendations made by the Shunglu committee set up to suggest ways of reviving the SEBs/discoms.

It sets out a clear game plan for rescuing the SEBs, by passing the onus of repaying loans to respective state governments, instructing the states to ramp

up transmission and distribution efficiency and for an allotment of distribution areas on a franchisee basis.

Do you think the optimism generated after the much-hyped meeting of industry leaders with the Prime Minister in January was justified?

Oh yes, completely justified. It was the first-ever such meeting with the Prime Minister himself interacting at length with Chairmen of nearly all leading power producing companies. Plus there were follow-up meetings with Principal Secretary, Shri Pulok Chatterjee, which was set up at the Hon’ble Prime Minister’s behest.

As an outcome of that initiative: ▪▪ We had the fuel supply agreement decision on Coal ▪▪ We had a good, encouraging set of budget proposals with seven out of eight APP recommendations being accepted by the Government ▪▪ Reconsideration of decision to impose import duty on power equipment ▪▪ We had a meeting of the EGOM on gas, after which a major initiative to evaluate gas pooling for the power sector has been taken up, to augment dwindling gas supplies ▪▪ We also had a GOM meeting on coal, to expedite forest clearances for coal blocks.

Will the signing of the FSA with Coal India really be of help to utilities?

It is a very positive development for the sector. We are happy that Coal India has taken up this responsibility. It will push CIL to improve efficiencies

and ramp up coal production.

There is at present about 13,000 MW of capacity tied up from imported coal through the competitive bidding route. from imported coal

How do you think domestic coal production cam be ramped up?

Coal India has a crucial role to play in that and the FSA signing is a step towards that objective. Other than that, environmental and forest clearances need to be fast-tracked.

Further, there is significant scope to improve coal production from captive/operating CIL blocks by using enhanced technologies.

With the controversy surrounding captive coal block allocations, do you think increased captive production from private players will be possible?

I am absolutely confident about that.

In fact, the government is already moving forward on coal block auctioning through a competitive tariff-based model, which I think is the best way to move forward. Efficient production of coal from these coal blocks will demonstrate the benefits. The next wave of reforms in coal sector has already begun, with the draft coal regulatory bill being introduced shortly. This would go a long way in liberalizing the sector and introducing a transparent regulatory environment, which would increase FDI and international investment in the sector.

Imported coal options seem to be fast running out with rapid changes in Indonesia and Australia. What are the solutions?

Imported fuel options will work only with the clear understanding from all stakeholders that risks of changes in regulations and law of any country whether India, Indonesia or Australia will have to be passed on. It is important to understand that the price impact of these changes is being passed on to the consumers for all central and state sector power projects that operate on cost plus basis. There is at present about 13,000 MW of capacity tied up

through the competitive bidding route. However, rise in global prices of coal has made this completely unviable. APP has requested the government to constitute an Expert Group to examine the various issues related to increase in international coal prices, and provide a fair and transparent mechanism to in the PPAs to benefit all concerned parties. We understand this recommendation is under active consideration. A direction from the GoI on this aspect would go a long way in providing viability to imported coal based power plants.

15,000 MW of existing gas-based power capacity and another 9,520 MW of upcoming capacity in various stages.

Do you think the competitive bidding model has been a failure? Is it best to revert to the cost-plus model?

Not at all. Tariff determination through competitive bidding has been far better than was the case with cost-plus. The competitive bidding model provides a great incentive for developers to be efficient in setting up capacities through efficient procurement, construction and financing options. Even CERC has recognized this in its study report of September 2010. Of course, fuel pricing risk must be borne by the party that can best manage it.

While there has been so much focus on problems vis-à-vis coal, what about gas projects?

That has been an item on the top of APP’s agenda. Gas based power is a significant component of every country’s power mix, as it is much cleaner, and has a lower carbon footprint. In fact, the Rakesh Nath Committee set up

by CERC to examine peaking power

May 2012 www.InfralinePlus.com

has also suggested that gas based power can be effectively utilized to meet India’s peak power requirement. There is 15,000 MW of existing gas based power capacity and another 9,520 MW of upcoming capacity in various stages of development. We have been pursuing the government that gas must be provided expeditiously to ensure these projects become operational. Recent projections of domestic gas supply indicate a drastic fall over the next two years. In fact, official projections have fallen by over 75% in the last two years. To ensure that the power sector is not affected in this scenario, the best option available may be to augment the domestic gas with imported R-LNG and supply to all the existing and upcoming plants. This would eliminate the possibility of stranded assets and NPAs on account of shortfall in domestic gas supply.

The distribution companies in all states are facing huge financial challenges. What can be the solutions?

I am optimistic on this score. I think there is a growing realisation that distribution reforms are critical for the entire sector. We have today robust regulations under the Electricity Act. The regulatory framework is not the problem, implementation is. Having said that, I view the recent decisions by the government, the central regulator and appellate tribunals as positive for the power sector. The recent tariff revisions by states should be viewed through the prism of positivity.

The Shunglu committee recommends the franchise model of power distribution and a slew of other reforms to ensure that the sector resumes normalcy by 2017. These recommendations should be examined and implemented at the earliest.

For full version of the interview, visit www.infraline.com

13

May 2012 www.InfralinePlus.com

InDepth

Power packed achievement for Shinde ►► India’s power capacity crosses the 2 lakh mega watt mark

14

India’s power sector has made some significant strides this year. After facing criticism for years, the country’s power sector has recently achieved an important benchmark as its total installed capacity addition crossed the 2 lakh mega watt mark on April 13.

The capacity addition fairs well on all scores---whether we compare it plan on plan or year on year, it is indeed commendable. Witness this: Notwithstanding the ongoing fuel shortages, India’s power generation capacity at the end of the 11th plan has been a noteworthy figure of 53,922 mw.

The significance of this capacity addition at the end of March 31, 2012

is that this is more than two and a half times the capacity addition of 21,180 mw in the 10th plan and is close to the total cumulative achievement of 56.617 MW in last 15 years from the three plans put together or the total of the 8th, 9th and 10th plan.

Even during the year, the capacity addition of 19,459 MW in 2011-12 (upto 29.03.12) has been the highest ever capacity addition in a single financial year.

The union power minister, Sushil Kumar Shinde held a media briefing on March 27, 2012 when he declared that India’s total installed capacity has reached is 1,92,792 mw as on 27.03.12

and a capacity of 75,785 MW is planned for 12th Plan.

Within days of this statement came another power packed statement from the corridors of the Shram Shakti Bhawan in New Delhi that houses the power ministry that the country’s installed capacity has crossed the 2 lakh MW mark and has touched 2,00,287 mw. This is indeed commendable for Mr Shinde, who for long has faced criticism from all quarters.

While power capacity addition during the 10th Plan period was 21,180 MW, it was still lower at 19,010 mw during the 9th Plan. However, during 2011-12 alone, a record capacity of

10th Conference and Interactive Workshop

20,501 MW was added in 2011-12, out of which 5,482 MW was added in the month of March 2012 alone. This indeed calls for an applause as this has been the highest ever capacity addition in a single financial year.

The improved performance in capacity addition during the 11th Plan period has been recorded across all sectors including the central, state and private sectors.

While celebrating this important benchmark, Shinde has another daunting task relating to adequate coal and gas linkages for power projects in the sector. Lack of coal and gas linkages run the risk of derailing crores of private sector investment in the sector.

The Prime Minister Dr Manmohan Singh has already set up a Committee of Secretaries (Cos) under his principal advisor Pulok Chatterjee with secretaries from various economic ministries to look into the fuel supply issues to power plants. This followed the visit of a high level delegation of 20 odd top power company CEOs led by Ratan Tata and Anil Ambani, who met the PM in January end for his intervention over resolving the country’s worsening electricity crisis.

These chief executives of private power companies called on Prime Minister Manmohan Singh and other ministers including finance minister Pranab Mukherjee in January, pressing for policy direction, enhanced coal supplies and easier credit to spur investments in the sector.

The delegation of CEOs besides Anil Ambani and Ratan Tata included Cyrus Mistry, Ashok Hinduja, Shashi Ruia, S K Roongta, Sanjay Reddy, Sajjan Jindal (JSW) and Gautam Adani (Adani Group).

The contribution from the private developers cannot be overlooked as they contributed more than 40% (or 25,000 mw) of the power capacity addition in the 11th plan.

Some interesting facts about India’s Power sector: ▪▪ Power generation in India started in 1898 when the first hydro power unit was set up in Darjeeling.

▪▪ In 1947, the country had an installed capacity of 1,362 MW. ▪▪ From 1362 mw in 1947, India has crossed the 2 lakh mega watt mark in April 2012.

▪▪ A capacity addition target of capacity of 75,785 MW is planned for 12th Plan.

Successful EPC Contracting in India Addressing Fiscal & Legal Challenges May 17-19, 2012, Hotel LeMeriden, New Delhi

Private sector potential ▪▪ 25,000 mw--Current installed capacity of these private sector power companies ▪▪ `2,00,000 crores -- Private companies have invested power projects till date ▪▪ `4,00,000 crore ▪▪ Planned outlay of `4,00,000 crore in the 12th plan period (2012 – 2017)

Power woes ▪▪ Severe domestic coal shortage halting output in thermal plants ▪▪ About 18,500 MW of projects commissioned after March 2009 are likely to generate only 55% of their actual output due to domestic fuel constraints.

▪▪ Indian developers have sought to hedge risks through ownership of coal mines, but changes in laws in the producing countries have altered the pricing framework.

▪▪ This has affected financial viability of the imported coal based projects ▪▪ Policy ambiguity on land acquisition and environmental issues have affected production from captive coal blocks ▪▪ Inadequate gas availability for power sector ▪▪ Steep reduction in KG D6 fields have enhanced the supply gap ▪▪ Distribution companies’ losses have increased from `17,000 Crores in 2006 to `57,000 Crores in 2010.

Agenda Points • Orientation to EPC contracts • Tax on Sale/Supply of goods under EPC contracts • Service Tax (Orientation and Advanced) • Excise and Customs duty • Deemed Exports • Interaction with the Industry • Cross roads with VAT Knowledge Partners

For more details email us at conferences@infraline.com

May 2012 www.InfralinePlus.com

ExpertSpeak

Energy & Transport Infrastructure key to sustainable growth India needs to focus on strengthening its infrastructure to push for economic growth. By Sunand Sharma, Country President, Alstom India

16

need for infrastructural development is growing rapidly.

There is a need today for a paradigm shift in how countries think, build, operate and invest in long-term sustainable, clean-technology backed infrastructure development.

Growth and development are good It is increasingly apparent that the words. But what good are these words pattern of growth is just in today’s world if they are not backed as important as the by long-term models? It is an issue pace of growth.

“Paradigm that infrastructure – one of the With shift is needed primary needs of growth and urbanization, in how countries development – faces. Whether it Indian think, build and is energy services, water supply, cities are invest in longroads, railways, ports, airports, facing big term sustainable telecommunications, urban challenges inrastructure services or rural facilities, the for the development” environment, economy and quality of life.

McKinsey Global Institute’s report (April 2010) on ‘India’s urban awakening: Building inclusive cities, sustaining economic growth’ paints a rather challenging picture for India in the next 20 years.

According to the report, Indian cities’ population will increase to 590 million by 2030 -- this is nearly half the country’s population of 1.2 billion today -- with over 68 cities’ headcount of over 1 million.

This rapid growth of cities, in turn, will put enormous challenges on their infrastructural facilities, one of them being greenhouse gas (GHG) emissions. The McKinsey Global Institute’s report said that India’s cities

are expected to emit nearly 1.6 billion tons of Carbon Dioxide Equivalence or CO2e by 2030 from 230 million tons of CO2e in 2005.

Carbon Dioxide Equivalence (CO2e) is a quantity that describes, for a given Greenhouse Gas, the amount of CO2 that would have the same global warming potential, when measured over a Billion tons specified timescale (generally, 100 Carbon Dioxide Equivalence or years) – indeed, CO2e by 2030 from 230 million tons of McKinsey’s CO2e in 2005. predictions are ominous.

1.6

Eye on the future The only way to increase quality of life in cities, ensure competitiveness, and at the same time protect natural resources and the environment is by promoting development of sustainable infrastructure via the clean technology route.

India possesses great intellectual capabilities, dynamic entrepreneurial private sector, a demonstrated ability to compete in the global market, and a commitment to quality higher education and one needs to mobilize all these for accelerated infrastructure development.

The Indian government has made clear recently that it will tap the private sector, in contrast with China’s government-financed model, to help fund and develop infrastructure projects. The 12th plan aspires towards a planned infrastructure spend of around USD 1,000 billion — or

May 2012 www.InfralinePlus.com

Energy and Transport Infrastructure critical for Indian Growth Story

around 11% of GDP, reinforcing the government’s commitment to build up Indian infrastructure. This is achievable if the problems dogging infrastructure delivery are recognized adequately.

However, the question is that how will India raise such an amount private investment? The inevitable answer is private industry. The private industry plays a vital role in achieving the ambitious targets for infrastructure development. In the mid-1990s, governments started to open infrastructure sectors to private investment and operation to improve services.

Incremental Mn reforms have Increase in population by 2030 borne fruit over time, and private participation has grown in recent years. Through Cities with population the PPP model, of over 1 million by 2030 the government has been able to meet its infrastructure goals while addressing the countries’ economic, political, and populace well being.

Given the vast infrastructure needs in India, a progressive approach is needed that levels the playing field, deters political and policy risk, and develops more efficient, transparent market mechanisms.

590 68

Energy – the imperative Indian has set ambitious power targets and goals to meet the energy needs of the country. Currently, the country requires an additional 100,000 MW of generation capacity by 2012, and for which a huge capital investment is required to meet the target.

At the same time, emerging areas like nuclear and renewable energy are gaining steady momentum and viewed as the predominant energy resource of the future because of their various advantages.

Additionally, the government

of India has proposed to double allocation for power development.

With this, the government targets to add over 78,000 megawatt of capacity by 2012. In the Twelfth Plan, 20,334 MW hydro capacity will be added through 87 power stations -- which is again almost double the number planned for 2007-12.

India possesses a vast opportunity to grow in the field of power generation, transmission, and distribution. This has welcomed numerous power generation, transmission, and distribution companies across the globe to establish their operations in the country under the PPP programs. With over 90,000 MW of new generation capacity required in the next seven years, and India pursuing a series of “ultra mega” (8,000-megawatt) generation projects, the power sector is the focus area for the government now.

However, clean power is imperative to pave the way for sustainable development. For one, innovative finance instruments can help channel the unprecedented levels of investment needed in clean technology, while more and more new technologies can be ushered only once public policy and funding sharing risk appropriately with the private sector.

Transport – the key It is universally recognized that transport is crucial for sustained growth and modernization. Adequacy of this vital infrastructure is an important determinant of the success of a nation’s effort in diversifying its production base, expanding trade and linking together resources and markets into an integrated economy.

India’s transport sector is large and diverse; it caters to the needs of 1.1 billion people. In 2007, the sector contributed about 5.5 percent to the nation’s GDP. Since the early 1990s, India’s growing economy has witnessed a rise in demand for transport

infrastructure and services. By the end of 2012, train passenger numbers in India are expected to increase to 8.4 billion annually.

Indian Railways’ current five-year plan foresees investments of approximately €39 billion until 2012. Today, forty-five Indian cities are above 1 million inhabitants and more than 10 urban projects are in progress or planned in Bangalore, Chennai, Delhi, Hyderabad, Kochi and Kolkata. India’s metro market is all set to rise to unprecedented levels owing to its growing urban and suburban transportation system with high traffic volumes.

These statistics are a testimony of the importance of transportation in the context of India’s economic growth.

Private sector participation is expected to help upgrade the technology, improve the quality of infrastructure services and lower the costs and prices of services. The importance of private sector participation in bridging the resource gap and improving the operational and managerial efficiency of the sector has been recognized.

Challenges It is widely believed that the infrastructure industry in India has enjoyed several positive indicators such as exponential demand for infrastructure, an unprecedented pace of growth, increasing Technological sophistication, success of the Public-Private Partnership model and infrastructure incentives amongst others.

While these indicators are likely to continue unabated, given the strong inclination the Indian Government has towards developing the infrastructure of the country, certain hard facts such as time and cost overruns threaten to limit the sector’s potential to achieve growth projections and help ensure efficiency of capital expenditure.

The views in the article of the author are personal

17

May 2012 www.InfralinePlus.com

InDepth

Power sector reforms still a long way to go

18

►► High fuel cost, under recoveries push distribution companies to wall ►► Time now for second generation of reforms, issues more commercial than technical The generation of power sector reforms was first initiated in 1991 as a desperate measure to come out of crisis when the International Monetary Fund/World Bank put that as a precondition to bail India out from the dismal balance of payments (BOP) situation.

The reason was obvious. The status of power sector in the pre-reform era was plagued with over 40-50 percent of T&D losses, which in turn lead to commercial losses (including subsidy) equivalent to one to two percent of India’s GDP. Seeing the domino effect of these shortcomings on the country’s economic growth, the power sector reforms were inevitable to improve the

technical and commercial performance of the sector and make it sustainable.

A journey that began with opening of power generation to private sector in 1991 was followed by regulatory reforms through Electricity Regulatory Commissions Act, 1998 and seemed reaching its destination with the enactment of the Electricity Act, 2003. First drafted in 2000, and after almost ten rounds of iterations, the Electricity Act 2003 was enacted on 10 June, 2003 replacing all the earlier laws, acts governing the Indian power sector; the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948 and the Electricity

Regulatory Commissions Act, 1998.

The Electricity Act, 2003 forced an important transformation on the electricity value chain, mainly by disintegrating it and creating new set of stakeholders. It mandated Electricity Regulatory Commissions to regulate tariff and issue licenses, proposed dissolution of State Electricity Boards into separate generation, transmission and distribution entities. Autonomous regulatory function, de-licensed thermal generation, provision for non-discriminatory open access of the transmission system and gradual implementation of open access in the distribution system seemed to have all the essential ingre-

May 2012 www.InfralinePlus.com

dients, required to create a transparent, financially viable and competitive power market in India. The Electricity Act, 2003 received positive feedback from majority of the industry stakeholders, but there were skeptics as well.

The intent of the act was to make the sector into an investor-friendly sector by minimising administrative hurdles, focusing on distribution reforms and paving way for multi-buyer and open market regime.

But, not all seem to have gone right as envisaged. The adverse situation staring at the face of the sector after eight years of the Electricity Act enactment is reminiscent of the fate earlier reform initiatives had met. Some statistics that would support this view: ▪▪ Commercial losses of SEBs swelled from `3,000 crore in 1991 to `63,000 crore in 2011.

▪▪ Technical and commercial losses have only shot up from around 23% in 1991 to 33% (AT&C) in 2001 now at 27% despite all modernization.

▪▪ Subsidy burden increased from `5,400 crore in 1991 to `30,000 crore in 2011.

▪▪ Average cost of power supply has shot by 240% over 1991 levels.

▪▪ Resistance to tariff revision – states like Rajasthan and Tamil Nadu have revised the tariff after a long gap of eight and seven years respectively Overall in spite of unbundling, most of states continue to face severe power shortages, outages, load shedding, poor quality power supply and rising levels of technical and commercial losses.

Discoms are once again reeling under severe commercial losses and triggers are same age old woes — widening revenue gap, inadequate and deferred tariff hikes and high aggregate technical and commercial losses leading to unserviceable debt with significant interest costs. So, why the reforms failed to deliver the desired results, yet again?

Like any business, there is a cost

that a discom incurs – cost to serve (CtS) – which needs to be recovered to stay afloat and sustain. A situation where the cost escalation gets absorbed for a prolonged period and are not allowed to be a passed through, makes the business unsustainable. Subsidy extended to the distribution companies as a succor to stay afloat can help only to a certain extent when the cost and revenue differential is as high as 60%.

While in the past 18 months, over 24 states have revised their power tariffs in the range of 20–37 percent, the quantum of hikes is still short for full recovery of costs in most states.

While in the past 18 months, over 24 states have revised their electricity tariffs in the range of 20 – 37 percent, the quantum of hikes is still well short of what is required for full recovery of costs in most of the states. These tariff revisions do not still mirror the steep rise in fuel prices which in turn increases the power procurement cost of discoms. While, Fuel and Power Purchase Cost Adjustment (FPPCA) principles is in place and have been implemented across states, the significant lag period for recovery adversely affects the liquidity position of the discoms. Though till recent, these losses were absorbed by discoms through bank borrowings, delaying payment to power and fuel creditors thereby creating a vicious circle of credit squeeze and making the financial restructuring inevitable. As we know financial restructuring can just delay the reality but cannot wish the deficit away. As expected now almost all the vulnerable discoms are in different stages of debt restructuring and also requisitioning government support. It is worthwhile to note that in early 2000, everyone suddenly discovered that the

cure for power sector issues was not generation but distribution.

Given in the last 10 year reforms has taken a full circle and reached a point where it started, may be its time to change the way the entire sector priority is looked at. Investments in power sector follows thumb rule of 2:1:1 across generation, transmission and distribution and this is exactly the major problem. Maybe, it’s time to reverse that thumb rule to 1:1:2.

Distribution sector was often ignored compared to generation and transmission and this still continues to be the case. It is essential to understand whether emulating the western model in India has helped.

However, not all went from bad to worse. There have been improvements in the generation and transmission sectors. Tariff based competitive bidding disallowed future generation and transmission projects to enter into power purchase agreements based on the current ‘cost-plus’. Facilitating multi-buyer model by development of power market, in which generating companies, distribution licensees and energy traders can engage in trading.

Total private sector investment in the power generation rose significantly and private sector added more capacity than state and centre put together.

All said, after 10 years, the situation has moved from bad to worse. In 2001, cash-strapped state electricity boards were bailed out by the government with a write off of around `40,000 crore. Ten years later, discussions are to bail out state power utilities by waiving off dues of over `1 trillion. To survive this crisis, an increase in tariffs by 30-40 percent over the next two years is the only option to go if costs are to be recovered. It’s time in rework the reforms model which centered on effective distribution reforms.

Ravi Shekhar is a Senior Analyst in InfralineEnergy.

He is a co-author of a recent report Merchant Power Plant (2012). The views presented are personal.

19

May 2012 www.InfralinePlus.com

StatisticsPower State-wise List of Power Projects Awaiting Environment Clearance from MoEF S. No. 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

20

15.

16.

17.

18.

Name of Project/Location State Kawas CCPP, Stage-ll (1300 MW), Surat (GuGujarat jarat) Gandhar CCPP, Stage-ll (1300 MW) Bharuch Gujarat (Gujarat) Darlipali STPP (2x800 MW), Orissa Orissa Gajmara STPP (4x800 MW), Orissa Orissa FG Unchahar TPP, Stage-IV (1x500 MW), U.P. Uttar Pradesh Kolodyne-ll HEPP (4x115 MW) Vindhyachal-V (1x500 MW), Singrauli MP Madhya Pradesh Barethi STPP (2x660 MW), MP Madhya Pradesh Dulanga Coal Mining Project, Sundergarh Distt., Orissa Orissa Taiaipalli Coal Mining Project, Raigarh Distt., Chhattisgarh Chhattisgarh 252 MW Devsari HEP, Uttarakhand Uttarakhand 60 MW Naitwar Mori HE Project Uttarakhand Uttarakhand 775 MW Luhri HEP, Himachal Pradesh Himachal Pradesh 66 MW Dhaulasidh HEP, Himachal Pradesh Himachal Pradesh State Sector 200 MW Gundia - St.l HEP Karnataka 1200 MW Kalisindh TPP U-l & II Rajasthan 500 MW Chhabra TPP Ext. U-lII & IV Rajasthan Private Sector 120 MW Dibbin HEP Ar. Pradesh

Agency NTPC

Status with MoEF Revalidation of Environment

NTPC

Clearance (EC)

NTPC NTPC NTPC NTPC NTPC NTPC NTPC

Awaited EC -do-do-do-do-do-do-

NTPC

-do-

SJVN SJVN SJVN SJVN

-do-do-do-do-

KPCL RRVUNL RRVUNL

- dodo-do-

KSK-Dibin

do-

Ministry of Power Achievement for 4th Quarter of 2011-12 Capacity addition during 2011 -12: During the year 2011-12, 20501.7 MW of capacity as against the target of 17601 MW has been achieved. The details are as follows (figures in MW) Particulars

Item

201112

Grand Total for the year 2011-12

Q-1 to Q-3

Qtr.4

Target

4565

1160

5725

Ach.

2820

1950

4770

State

Target

3474

792

4266

Ach.

1618.2

2143

3761.2

Private

Target

5225

2385

7610

Ach.

7064.5

4906

11970.5

Target

13264

4337

17601

Ach.

11502.7

8999

20501.7

Central

Total

Electricity Generation: A target of 855 BUs was fixed for the year 2011-12. With 222 BUs of electricity generation during the 4th quarter, total electricity generated during the year 2011-12 amounts to 876 BUs. Particulars

Item

2011-12

Grand Total for the year 2011-12

Q-1 to Q-3

Qtr.4th

Target (MU)

266.622

87.439

354.061

Ach.

277.22

92.09

369.31

Target (MU)

267.742

92.019

359.761

Ach.

273.19

94.38

367.57

Private

Target (MU)

104.665

36.513

141.178

Ach.

103.62

35.94

139.56

Total

Target (MU)

639.029

215.971

855.000

Ach.

654.03

222.41

876.44

Central State

*Achievement figure of fourth quarter is provisional

May 2012 www.InfralinePlus.com

Generation Loss due to Shortage of Coal for 2011-12 SI. No.

Power Utility

Thermal Power Station

Capacity In MW

Generation Loss in MU *

NTPC

Unchahar

1,050

124

Dadri (NCTPP)

1,820

192

Kahalgaon STPS

1,340

4,821

Singrauli STPS

2,000

188

Rihand STPS

2,000

152

Farakka STPS

1,600

195

Vindhyachal STPS

3,260

749

Talcher STPS

3,000

384

Ramagundam STPS

2,600

546

Simhadri STPS

1,500

498

Badarpur

705

14

Total

20,875

7,861

Satpura

1,143

63

1

2

3

M.P. Power Genco

MAHAGENCO

4

5

* April, 2001 to February, 2012

APGENCO

DVC

Sanjay Gandhi

1,340

94

Total

2,483

157

Khaparkheda-ll

1,340

27

Parli

1,130

324

Paras

500

53

Total

2,970

404

Rayalaseema

1,050

17

Kakatiya

500

28

Total

1,550

45

Mejia

1,340

167

Chandrapur

890

96

Total

2,230

263

Grand Total

30,108

8,731

21

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NewsBriefs | Coal Coal India Ltd Presidential Decree: CIL board gives in, to sign FSA with 50 power companies

Power Construction Corp Chinese Co signs contract for coal-fired power complex in southern India

Trans Damodar Coal Mining Project Inaugurated by West Bengal CM

CIL Board on April 16 agreed o send draft fuel supply agreements to power companies before April 20, though with a negligible penalty clause if it is unable after three years to meet an 80 per cent supply commitment. On April 3, through a Presidential decree, the Central Government had directed Coal India to sign the FSAs. The board has decided on a penalty of 0.01 per cent of the value of shortfall, if the firm fails to deliver 80 per cent of the committed coal. It will also go soft on the earlier decision on not to import or enter into the business of imports and may chart an import policy.

Power Construction Corporation of China says it had signed a $2.4 billion contract to build the second phase of a massive coal-fired power complex in southern India that will help meet soaring local demand for electricity.

The second phase of the project for India’s Infrastructure Leasing & Financial Services Limited (IL&FS) will include the addition of four generators each with a capacity of 660 megawatts (MW), the Chinese group said on its website. This is an EPC contract, meaning Power Construction Corp will be responsible for engineering, procurement and construction of the project.

The West Bengal Chief Minister, rolls out Trans Damodar Coal Mining Project in Bankura district. The Trans Damodar Coal Block is one of the six coal blocks allocated by the Union Coal Ministry through the state dispensation route to the West Bengal Mineral Development and Trading Corporation Ltd (WBMDTC). Both opencast and underground portions will be awarded to WBMDTC. The coal exploited from the block would be sold to the coal using industries based in West Bengal through e-auction and 12.5 per cent coal would be sold to the coal using enterprises in micro and small sectors.

Firestone Firestone Energy rejects bid by Tata Power

Coal India Ltd Narsing Rao appointed CMD of Coal India

Block Auction Coal block auction by June: Jaiswal

Exploration company Firestone Energy has rejected a bid by Tata Power for a 30 per cent stake in a coal project in South Africa, citing a huge undervaluation of the project, a report has said. Tata had offered R480 million for the stake in the Limpopo venture, which is a partnership between Firestone Energy and South Africabased Sekoko Resources, the report by South African daily Business Day said. Tata had based its bid on a valuation of R1 billion, while the true value of the asset was R1.6 billion, Sekoko Chairman Tim Tebeila said.

Coal India Ltd got a full time Chairman and Managing Director.

The appointments committee of the Union Cabinet has cleared appointment of Mr S. Narsing Rao as CMD of CIL for a five-year term. The 53-year, 1986-batch IAS (Indian Administrative Services), is currently the Chairman and Managing Director of Andhra Pradesh Government-controlled Singareni Collieries Company Ltd (SCCL). Mr Rao will be the first non-CIL nominee to assume the top job of the company since July 1983.

Following furore over the initial CAG report that estimated huge losses to the exchequer in the allotment of mines, the government says it is ready with the list of coal blocks to be bid and the auction process will kickstart by June. Barring 12 blocks out of 54, all others would be auctioned to firms for end-use projects. Mr Jaiswal, dismissed the report on allocation of coal blocks without auction as “illogical” arguing that when the blocks were given for captive usage, there was not much demand for coal.

Coal India CIL manages nearly 1 per cent production growth

Vale Australia HC directs Aussie coal firms to pay $159 million to SAIL

Coal India Ltd CIL to invest $14.6 billion in mines and infrastructure

Coal India finally manages to post nearly 1 per cent production growth in 2011-12. The company is headed to end this fiscal with a production of 435-436 million tonne.

The ‘growth’ came as a reprieve to the CIL management, which has been subject to severe criticism for stagnating output, which was 431 mt in 2010-11. When compared to production, coal off-take has moved up at a higher pace of 2.3 per cent from 424 mt to 434 mt, indicating higher supplies.

The Delhi High Court dismisses the plea of two Australian coal firms, Vale Australia (Vale) and AMCI, against an International Court of Arbitration’s (ICA’s) order to them for payment of about $159 million as damages to the SAIL. Justice S Muralidhar upheld the March 10, 2011, ICA’s arbitral award for payment of over $152 million as damages to the Steel Authority of India (SAIL) with an interest of over $6.8 million over it.

Coal India, facing pressure from the prime minister’s office to improve production, plans to invest 75,000 crore ($14.6 billion) in the next five years to develop mines and infrastructure, buy foreign assets and be able to pay a dividend of 6,500 crore every yea. CIL will be investing 40,000 crore in ramping up infrastructure and production for its domestic operations and another 35,000 crore for acquiring foreign assets as well as in its Mozambique operations.

23

May 2012 www.InfralinePlus.com

InConversation

‘Coal Pool Price, Import only way to meet 80% FSA Directive’

24

Nirmal Chandra Jha, former Chairman, Coal India Ltd talks about the constraints of the coal sector. In a freewheeling chat with Infraline, he delves at length on the limitations of increasing domestic coal production and how the increasing demand would require coal to be imported in future.

Coal shortage in India is affecting many new projects. What is the reason?

Over-dependence on coal as the primary energy supplier has led to increased thrust on domestic coal availability, which in turn has its own constraints, leading to its shortage.

Due to domestic coal shortage and the spiraling prices of imported coal, many new power projects in the country are operating at sub-optimal capacity.

Coal deficit in India is likely to grow from 115 million tonnes in 2011-12 to 265 million tonnes by 2016-17 and may further rise to 473

million tonnes by 2021-22 i.e. the terminal year of the13th Plan period.

The demand for coal is projected to rise at the rate of 6.4% (CAGR) from 696 million tonnes in 2011-12 to 980 million tonnes by 2016-17 and is likely to continue rising @ 7.3% (CAGR) to a level of 1373 million tonnes in the 13th Plan period. CIL’s contribution to all India production is projected to reach to 556 million tonnes on business as usual case and 615 million tonnes on best case scenario by 2016-17 from the level of 436 million tonnes in 2011-12.

In view of the widening demandsupply gap scenario, Government of India had put in place a system for allocation of coal blocks to various government companies, private companies and Ultra Mega Power Projects (UMPP). As of 31st March 2011, about 216 coal blocks (including some blocks which had subsequently been de-allocated) with an aggregate geological resource of about 50 billion tonnes of coal have been allocated to attract investments in the coal sector and increase production. Out of the 216 coal blocks allocated, only 28 coal blocks had commenced production by 2010-11, contributing a meager quantity of 34.60 million tonnes, representing a dismal 6% of all India coal production (533.07 million tonnes).

What are the major constraints in increasing production?

The major constraints in augmenting coal production as per the five year plan projection are mainly due to severe problems encountered in land acquisition and associated R&R issues.

As a matter of fact, about 90% of India’s coal production is obtained from opencast projects, which requires land for its continued operations. Land in effect can be considered as a basic input for the coal industry. Even though the state and central governments have formulated Rehabilitation and Resettlement (R&R) policies for land losers, serious problems are faced in taking possession of land.

In the recent past, obtaining environmental and forestry clearances have been perhaps the most critical issues. Ironically, coal in India is found in forests and places that are inhabited by tribes. Mining disturbs both and therein lies the complexity of problems, hindering the commencement of scheduled production. If the project has both forest and non-forest land, work is not permitted even on non-forest land till Forestry Clearance(FC) is obtained for the project. Thus, a mining project cannot commence its operation till FC for the project is obtained, even if, the forest land is not required for its operation in initial stages. The average pendency in obtaining forestry clearance at Stage –I and Stage-II levels at the States is alarmingly high in excess of three years each. As on date, for Coal India alone about 125 forestry proposals are awaiting Stage-I approval and 52 proposals await approval at Stage-II level. Thus, a total of 177 forestry proposals, involving about 29300 Ha of land in the name of forest, for a projected output of approx 207 million tonnes per annum, are awaiting clearances.

Although coal mining has long

May 2012 www.InfralinePlus.com

been a part of wilderness, new projects and expansion of ongoing projects are facing increased environmental scrutiny from environment groups.

The concept of Comprehensive Environmental Pollution Index (CEPI) was introduced in the year 2010, which put on hold the EC of mining projects in 8 coal bearing areas. While the restriction has now been gradually lifted in some of the clusters, the same is still continuing in other clusters. As a result of CEPI embargo, about 17 projects have been affected that would have contributed around 39 million tonnes of coal in the last fiscal.

What kind of policy reforms are being made?

The new National Mineral Policy 2008 seeks to develop a sustainable framework for optimum utilisation of the country’s natural resources for the industrial growth in the country. It also envisages action areas for improving the life of people living in the mining areas, which are generally located in the backward and tribal regions of the country. The policy also enunciates that special care will be taken to protect the interest of host and indigenous populations through developing models on best practices. Project affected persons will be protected through comprehensive relief and rehabilitation packages in line with the National Rehabilitation and Resettlement Policy.

Further, the Mines and Minerals Development and Regulation (MMDR) Bill 2011 provides that for all exploration activities, suitable compensation shall be payable to the person or family holding occupation or traditional rights on the area of exploration. All mining lease holders will be required to pay annually into District Mineral Foundation, a sum equivalent to royalty in case of major minerals (other than coal) and a sum equivalent to 26% of profit in case of coal. Mining companies are required

to allot at-least one share at par to each person of the family affected by mining so as to give a sense of ownership in the enterprise, provide employment or other compensation as stipulated under the R&R policy, etc.

A new Land Acquisition and Rehabilitation & Resettlement (LARR) bill has recently been introduced in the Parliament which also has provisions for increased compensation to land losers and one job per affected family.

CIL will have to bring in the concept of pooled price mechanism and fix prices of domestic and imported coals periodically.

What have been the government’s directives to CIL in recent times?

In the light of the New Coal Distribution Policy (NCDP), issued by the Government of India in 2007, Coal India Ltd was directed to issue letters of assurances (LOAs) to the power projects likely to come up in future. After this CIL did not have any option but to issue LOAs, whether it had coal availability or not. Over the years, a large number of LOAs have been issued amounting to around 423 million tonnes per annum of additional coal supply commitment for the power projects alone out of a total of 490 million tonnes per annum LOAs issued. Coal India had signed the fuel supply agreements with the power projects already existing till March 2009 for the total annual commitment of 306 million tonnes. For the power projects that have come up after March 2009, Coal India Ltd, in view of acute shortage of domestic coal, had been insisting for supplying coal from domestic sources to the extent of 50% of total requirement and the balance to be supplied from imports at a price that it would be available. The Government

of India, through a presidential directive, has now directed Coal India Ltd to sign fuel supply agreements with a commitment to supply at least 80% of their requirement, even by resorting to imports.

Going by the production plan of Coal India Ltd for the next five years and also the LOAs granted for the power plants, commissioned in the last three years as well as likely to be commissioned over next five years, there appears to be a huge shortfall of coal availability from domestic sources in the coming years.

Considering the situation, is importing coal an option?

Coal India, being a business organization and having been listed on the Stock Exchanges, definitely cannot afford to bear this additional price of imported coal. It will have to bring in the concept of pooled price mechanism and fix the prices of domestic and imported coals periodically. With the system of coal pricing on GCV base having been adopted now, pooled price mechanism will be easier to formulate.

This will help both Coal India and the consumers of coal, as both estic and imported coals to any consumer will be available at the same price for any particular GCV band.

But won’t the constant increase in demand for coal and limited availability of domestic coal would eventually require importing of coal?

Absolutely. Ever-increasing coal demand and increasing limitations on availability of domestic coal would spiral the need for imported coal in future years. This situation cannot be allowed to continue for long in the interest of the national economy.

Production of domestic coal will have to be increased to match the growth rate of the country.

For full version of the interview, visit www.infraline.com

25

May 2012 www.InfralinePlus.com

ExpertSpeak

Indian Power Sector on the Move, Coal Crisis Holds It

By R.V. Shahi, former Secreatary, Ministry of Power

26

Indian economy is mainly dependent upon domestic coal as the source of energy. Coal constitutes more than 50% of commercial energy. Indian power sector is dependent on coal based generation to the extent of almost 75%, even though, in terms of installed capacity, coal based power plants constitute 55% of the total capacity. Power sector and coal sector are so much mutually interdependent that while 75% of power generation is coal based, more than 85% of domestic coal production is consumed by the power industry. It is precisely for this reason that the adverse performance of coal industry, in last three years, with virtually no growth in production, has so severely impacted the power sector, so much so that, as at present, more than one third of 95 power plants across the country are faced with critical and supercritical stock position. During the three year period 2009-10 to 2011-12, almost 40,000 MW of Thermal Power capacity has been added. Unfortunately, during the same period, production in Coal India has stagnated at around 430 million tonnes. Obviously, the crisis created is unprecedented. The problem has got compounded because of the disproportionate amount of coal that needs to be imported to see that power plants do not close down.

Fuel mismatches have not only severely affected the smooth operations of the power plants, but also the investment sentiments. In view of the similar performance in the gas sector, in the past, gas based power plants always had the problem of shortage, resulting

in reduced capacity utilization, as low as 50 to 60%. This did affect their financial performance. But, since the total capacity of the gas based power plants is only around 10% of the total installed power generation capacity, it did not affect so significantly the overall power supply. But, if a similar phenomenon is faced by the coal based power plants, which seems to be an emerging scenario, the adverse impact would be huge, affecting all sectors of the economy.

Power sector reform initiatives, led

by Electricity Act 2003, were indeed responded overwhelmingly by private sector, resulting in massive capacity additions completed or underway.

Based on the understanding given by the Indian Coal Companies, large number of power plants have been established and are being established.

However, Coal India has been reluctant to sign Fuel Supply Agreements which would commit them to supply only 80% of the requirement, fearing that they may not be able to ramp up coal production to meet these obligations. In

spite of rising import of coal, whose price is becoming excessively high, thus making power cost unaffordable, uncertainties about adequacies of fuel supplies for the power plants have led to serious concerns among Developers and Lenders. Financial closures of new power projects are faced with serious question marks. Even disbursements in cases of those power projects, already financially closed, are also becoming uncertain. Large capacity additions in the last few years are the outcomes of power projects started in Tenth and early years of Eleventh Plans. Fuel mismatch uncertainties, leading to issues of financial closures, are going to severely impact interests of developers, and hence capacity addition programmes in the future.

This situation has obviously been caused primarily on account of virtually no reform initiatives in the coal sector. Indian power and coal industries are like two wheels of a cart – one has moved forward, another has remained stagnant. Coal Mines (Nationalisation) Amendment Bill 2000

May 2012 www.InfralinePlus.com

was introduced in the Parliament earlier than the Electricity Bill. Electricity Act became a reality in June 2003, Coal Bill is still pending in Parliament.

Several recommendations made in the Integrated Energy Policy (2006) have remained unattended. It was decided almost six years back that Coal Regulator will be put in place at the earliest. This is still to happen. On the top of it, a lot of uncertainties have been created by the new MMDR Bill, which seeks to allow 26% of profit to be shared to the locals at District levels.

This provision has created a large number of questions than answering the major issues confronting the development and growth of coal sector.

If a greater degree of energy security has to be brought about, and power sector facilitated to grow at 9 to 10%, a similar growth in the coal sector is essential. This could be possible only through a radical restructuring of the coal sector, just as was done in the case of power sector. Coal sector has to be opened up, and the Bill, which has been on the back burner, for over a decade, needs to be enacted.

The method of allocation of coal blocks has come under debate. It is needless to emphasise that it does require a transparent process to be followed. But, any attempt at Bidding/ Auction, with the sole objective of generating revenue for the Government, would be counterproductive.

Bidding must aim at reducing the cost of production and, accordingly, price at which coal will be supplied to the power industry.

In India, manufacturing sector needs power at a price which will make them competitive globally just

as service sector, agriculture, and other consumers also need power at affordable rates. This will not be possible, if the Government wishes to, through Bidding, generate huge revenue.

Enhancing Coal Production Production in Coal India had been witnessing a growth of 5 to 6%, prior to 2010-11. With serious efforts we could expect that the production could pick up to provide 6 to 7% growth. On account of the backlog created in view of stagnation during last two years, unless domestic coal production grows at around 9 to 10%, the crisis would continue even though the supply is augmented through import.

In the short term, following two steps could partly mitigate the problem – (a) Emergency Coal Production Plan, and (b) Deployment of Mine Development Operator.

►► Emergency Coal Production Plan Each subsidiary of Coal India may formulate Emergency Action Plan to commit a growth of more than 6.5%, which has been the average in the last few years. During 2005-06 such an action did lead to positive outcome.

►► Mine Development Operator Without any need for change in Law or Policy, beyond a projected growth of 6 to 7% assigned to CIL, about 3% additional growth could be earmarked for production through Mine Development Operator(MDO). The following outline presents a brief about Mine Development Operator.

▪▪ CMPDI/concerned Coal India Subsidiary may identify investigated coal blocks with a potential of five to ten million tonnes of annual production each. The companies could be NCL, SECL, CCL, and MCL or any other subsidiary in which this could be easily done.

▪▪ As much as possible, pre-

construction risks such as Geological Investigations, Land Acquisition, Environment and Forest Clearance could be completed by CMPDI and/or concerned CIL subsidiary.

▪▪ On a global basis Expression of Interest could be invited, as a parallel exercise, to shortlist such potential mine developers as have the capacity to render atleast five million tonnes of annual production and have commensurate financial strength.

▪▪ After pre-qualification, during the commercial Bidding process, the only criterion to evaluate may be the extent of reduction in prices for similar grades of coal, with reference to Coal India prices, that the Bidders could offer (this exercise proved to be very successful in case of DVC selecting the mine development operator in 2004-05).

▪▪ In order that the Bidders make required investments in plant and machinery, the Contract could be for a period of, say 25 years.

In the short term, one of the actions to increase coal production could be to allow additional production, to the extent of 25 to 30%, from the present coal mines for which Ministry of Environment and Forest and other authorized agencies would have given clearances. There are several instances in which it is feasible to substantially enhance production, but that is not permissible. In view of the fact that several other mines in the area may not have started production, even though environmentally cleared, such increases in the existing mines may not interfere with the environmental limits that might have been stipulated.

This initiative could lead to increased availability of coal in the shortest possible time.

The announcement by the Ministry of Environment and Forest, couple

27

May 2012 www.InfralinePlus.com

ExpertSpeak

28

of years back, putting embargo of “No-Go-Area”, which meant almost 50% of coal reserves declared untouchable, has been the single most important factor causing coal crisis in the country. It is good that this decision has been neutralized in principle. Its outcome, however, needs to materialize in ground realities, because even now the Forestry Clearance process is unduly long. A significant dent on the problem would be possible only if Coal India and other Companies are facilitated to secure faster clearances (both environment and forest). The present uncertainties on Land Acquisition Policies are also impacting the opening up of new mines.

A reasonable formulation in Policy and commensurate cooperation from the State Governments would be essential, if these important projects have to move forward. The present thinking in the Government to shirk the responsibility of land acquisition and leaving it to the Companies, Private or Public Sector, would only mean hurdles and delays in commencement of projects.

Captive Coal Block Allotment Policy was streamlined as a part solution to the problem caused by inordinate delays in consideration and passage of the Coal Mine Amendment Bill. However, the outcome of these allotments has not been as expected. It would be essential that the mines development under this category is closely monitored. Those who have valid reasons for delays could be allowed extensions, and in cases of those where delays are attributable to the developers, the allotments should be cancelled. This would send a strong signal and all others would make serious efforts to develop mines and add to overall coal production in the country.

Dealing with Problems of Imported Coal We may classify the problems into three categories – (a) Coal companies not being able to supply as per

committed linkage, (b) Captive coal blocks not taking off, (c) Imported coal based plants being unable to buy imported coal due to steep rise in prices not adequately covered in Power Purchase Agreements.

▪▪ Domestic coal supplies by coal companies have suffered because of zero growth in production in last two years. This is partly because of draconian step of “No-GoAreas” declared by Ministry of Environment and Forest, and partly because of internal inefficiency of coal companies. Slight mismatch in linkage and supply was always there, but what is causing a challenge is that this mismatch is reaching a point of supply not more than 60 to 70 percentage of linkage in some cases 50 percent. Import of coal has become inevitable.

The only solution is that, if a power plant has to import to substitute the shortfall of supply by coal companies, the additional cost burden may be allowed to be a pass through just as it is being allowed in case of Central and State public sector companies.

▪▪ Wherever a power plant was given Captive Coal Block, and it has not been possible to start production on account of reasons attributable to Government agencies including Ministry of Environment and Forest, it would necessitate substitution of supply either through tapered linkage, e-auction coal, and/or imported coal. In such cases, a mechanism will need to be worked out in consultation with CERC and Forum of Regulators to allow pass through of additional cost burden.

▪▪ The most tricky situation is in relation to the power plants which have been developed and are being developed based on imported coal.

In view of radical increases in coal prices abroad the economics of power generation do not entirely match with the commitments in the

PPA’s. The problem is most acute in cases of power plants which have sourced coal from Indonesia because of a major change in Indonesian Law. A highly technical and simplistic view, which buyers of power and also authorities seem to be taking, is that it is the Contract which should be binding. Obviously, Law changes requiring such drastic increases in the prices of Indonesian coal were never anticipated. The 4,000 MW Tata’s Ultra Mega Project at Mundra has thrown a real problem which needs to be solved.

The plant is ready to operate and deliver power. Obviously, they will not do at a loss. The unprecedented change in Law, even though outside India, needs to be recognised and appropriately dealt with. No doubt, it is a big challenge how to analyse the issue, bring out the actual adverse impact, reconcile with the provisions of the PPA, and yet, see that a viable solution emerges, so that the plant is allowed to operate and the developer gets its return on investment.

The problems relating to the first two categories are such that they require just a decision followed by action.

Such pass throughs have been in practice in most cases, and, therefore, it should not be difficult to accept them.

The third category of problem would need a deeper analysis, but it should be possible to come out with workable solutions in next two months or so.

In absence of clear cut approaches in respect of any of the above three categories of problems, power sector has put itself into the riskiest category of investment.

Domestic lenders are all scared and have put on hold many of the financial closures, in many cases put on hold disbursements even when financial closures exist. In the last one year among all sectors, power sector stocks have suffered maximum decline.

May 2012 www.InfralinePlus.com

NewsAnalysis

Presidential decree: Hauling CIL over the coals Coal India Limited’s board met on April 16 to send draft fuel supply agreements (FSAs) to power companies before April 20, though with a negligible penalty clause if it is unable after three years to meet an 80 per cent supply commitment. On April 3, through a Presidential decree, the Central Government had directed Coal India to commit at least 80 per cent supply to power companies.

The board has decided on a penalty of 0.01 per cent of the value of shortfall, if the firm fails to deliver 80 per cent of the committed coal. It will also go soft on the earlier decision on not to import or enter into the business of imports and may chart an import policy.

“We will be signing the FSAs within the time limit before April 20 — that is by 15 days of the issue of the Presidential directive. Power companies with long-term power purchase agreements will have to come forward now,” said acting chairman and managing director Zohra Chatterji.

Power producers say keeping such a low penalty defies the Presidential directive on assured supply. “The low quantum of penalty, and the fact that it will come into force only after three years, nullifies the concept of assured supply. This is a reversal to the earlier regime of supply-at-will by Coal India,” said Ashok Khurana, director-general of the Association of Power Producers.

The directive was slapped on the PSU, when it did not sign FSAs by the deadline of March 31, which was set by the Prime Minister’s Office.

The Presidential directive has brought succor to all those coal-starved power plants which have been lying idle due

to inability of Coal India to supply coal.

From the initial estimates it appears that the state-run firm will have to feed roughly 28,000 MW of power plants that were built after March 2009 and

by December 2011, and another 22,000 MW, that will be constructed in the next three years.

All said and done, however harsh the Presidential decree may appear to some, it is definitely not unfair. Coal India can charge a premium if it manages to supply more than 90 per cent of the contracted amount. But would Coal India have sufficient coal to honour all the FSAs it signs?

The maharatna’s production of raw coal during 2011-12 was 435.84 million ton as against 431.32 million ton produced in 2010-11, a growth of 4.52 million ton in absolute terms (1.0 %) over the corresponding period last year.

CIL cited some valid reasons for slowdown in production like, worker strike, excess rainfall in most of the collieries between August to September, and shortfall in rakes.

The PSU’s production has remained stagnant over the last few years due to regulatory hurdles in its

expansion programme.

In order to meet the supply to its customers, the company has sought early clearance of projects and have requested for an expeditious government approval for at least 70 project proposals in the Twelfth Five-Year Plan (2012-17) period.

It is also upping its investments for exploring overseas buying of mines, particularly in Africa.

The Q4 number have place the maharatna on the optimistic path and it raised its production guidance for 2012-2013 to 470 million ton from 463 million ton announced earlier.

Coal India is racing against the time to scale-up output.

Company has an insurmountable task ahead. Will the government let it allow imports in order to escape the penalty? The company’s inclination towards importing coal to meet its commitment may not find favour with the government.

The coal ministry is of the view that the PSU would be able to meet the requirements by ramping up production and through its inventory stocks.

29

May 2012 www.InfralinePlus.com

InDepth

30

A Risky but Attractive Proposition: Imported Coal based MPP in India ►► India’s high peak power deficit and volatile market-tariffs make Merchant Plants a good option ►► Imported Coal based MPPs can still give 20% return on equity over 20 years project life Asian Development Bank, while proposing the screening approach for financing risky investments, once observed, “The question is not whether the investments are too risky, but rather how to measure the risk so that the debt instruments can be priced commensurate to the risk level”. The analogy befits merchant power scenario in India. Merchant Power Plants or MPPs are those plants that do not rely on long-term Power Purchase Agreements (PPA) and have a specificcustomer independent dynamic pricing model thus lying at the extreme end of the risk-reward continuum as compared to PPA based conventional projects.

MPPs while being opportunistic, do

market making and supply power to meet unforeseen deficits. Though, it is healthy for a market to have long-term agreements in order to have security of supply but there is seasonal demand and intra-day peaking demand that the Merchant market caters to.

According to the credit rating agency Moody’s, the recurring theme of merchant power risk is “increased uncertainty and increased volatility”.

It says that nowhere in the analysis is the phenomenon more evident than in projection of power in a given market.

In power trading, such is the dynamic nature of electricity prices, that momentous variation of as high as 400 percent has been observed

in a single day itself, making it by far the most risky commodity in the commodities market. High price volatility creates significant challenges amongst developers since it directly impacts their market demand, as they can sell in the electricity commodity market only if the selling bid price is lower than the market clearing price. As if electricity market risk was not enough, MPPs entail other type of risks as well.

Besides the electricity price and demand risk, a high fuel price risk looms over the MPPs owing to unfavorable policy and regulatory regime forcing them to look towards expansive imported fuels. This further

exposes them to high geo-political and third country regulatory risks.

Other system oriented issues like availability of transmission capacity, applicability of open access also affect the development of MPPs. For instance, the congestion in grid causes a loss of more than 10 percent of the potential transactional volume in the short-term market.

Business Case for MPPs Nonetheless, MPPs have been able to attract equity and non-recourse debt from investors and lenders without the benefit of traditionally structured PPA based off-take contracts. This is because of country’s high peak power deficit scenario of more than 10 percent and increased discom’s participation in short term market. Power shortages and geographical power imbalance is expected to prevail for at least two more decades and consequently, MPPs are expected to remain attractive in the long run. Besides these traditional drivers, industrial power tariff deregulation, coal crisis, capacity addition slippages and price increase in short-term market create a favourable environment for MPPs. With increasing role of private IPP segment in capacity addition in future years, large dependence on short-term arrangements, greater industralisation

India to have Peak Power deficit for next 10 year at least presenting a good business opportunity for MPPs

and increased quantum of power trading, MPPs are perceived to have good opportunities in short to medium-term or at least till the peak deficit starts to subside.

Imported Coal – A viable fuel option for MPPs Currently, MPP of capacities of around 5,000 MW are under operation and and of around 30,000 MW is under various stages of planning and construction.

Out of which around 90 percent capacity is based on coal. As per the 12th Plan Coal Linkage Policy and a separate EGOM directives, MPPs would not be either able to source domestic coal or get domestic gas leaving the MPPs with practically no choice but to be dependent on imported coal. Generation based on imported coal is cheaper than generation fueled from R-LNG at $15-$20/MMBtu. According to an analysis by InfralineEnergy, imported coal based MPPs can earn around 20 percent return on equity over the 20 year project life. Such RoE is possible due to supply side issues impacting the cost of generation and average short-term market tariffs that are expected to increase from the current price of around INR 4-4.5/unit to around

May 2012 www.InfralinePlus.com

Peak Power Deficit Scenario Forecast 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 5.00%

FY 2012

FY 2017

FY 2022

FY 2027

FY 2032

FY 2037

Peak Deficit Source: Infraline Report on Merchant Power Plants (2012)

INR 5.43-6.57/unit till FY 2041. In comparison to this, the levelised cost of generation is expected to increase from INR 4.43/unit to INR 5.15/unit only.

Owing to the disparity between the imported coal and electricity prices, the project IRR is expected to be around 20 percent. Hence in midst of the ongoing electricity and coal crisis in India, imported coal based generation and selling power on merchant basis comes out to be a viable option. However the returns of 20 percent is viable only if coal of 6000 GCV is sourced at prices less than $50. And to address the downside risk in electricity market prices,, it is essential to adopt newer and smarter strategies. To meet such challenges, a five-point check list is recommended for the MPP developer.

1. Pursue backward (upstream) integration for efficient and economical fuel sourcing The best way to ensure a steady supply of fuel at competitive prices is backward integration by a developer on fuel side. Integration becomes particularly important under cases of high degree of fuel price volatility and can be achieved by acquiring a coal mine or having equity stake in a mine through setting up a subsidiary company by a MPP. “Coal-based merchant power plants are more viable if you already have coal

31

May 2012 www.InfralinePlus.com

InDepth

linkages — if you are tied up with coal mines. That is more advantageous.

Apart from providing a steady and adequate supply of coal, it would help in cushion against any sudden increase in coal prices. Moreover, integration should not stop on having control in fuel production source, rather a multithronged integration strategy should be pursued including investments in every stream of logistics for a better control of fuel supply.

2. Ulitise derivatives to hedge fuel market risks Forwards, Spark-Spread Options and Contract for Derivatives are some important financial derivative instruments which should be used

by MPPs to hedge risks. One easy but effective way to hedge the fuel price risk is an agreement of CFDs with a fuel supplier, where fuel prices are indexed with the electricity prices. Though it would regulate the return of a developer, but is worthwhile in mitigating the exposure to any fuel price risk.

3. Use innovative financial enhancements For seamless financing, particularly for project finance and investmentrelated debt, MPP should adopt project covenants such as cash flow sweeps,

cash flow traps, Debt Service Reserve Account (DSRA) as a security feature to satisfy lender requirements. In case of further insistence by lenders, hybrid financial instruments such as senior and subordinated debt should be relied on for financing.

Merchant projects intending for project finance and high degree of financial leverage must execute fuel subordination agreements and develop optimal power sale portfolio. This would not only assure financers but would also lessen the project risks, in case of any unanticipated fuel price increase or electricity price fall.

5. Adopt innovative marketing skills To acquire and retain market share, MPPs should employ superior marketing capabilities and function as power marketers. This would entail seeking of niche market segments, targeting specific customer groups and providing superior service offering to customers based not only on prices but also on service reliability and better customer service.

Ravi Shekhar is a Senior Analyst in InfralineEnergy.

He is a co-author of a recent report Merchant Power Plant (2012). The views presented are personal.

6.6

0.7

6.2

0.65

5.8

0.6

5.4

0.55

5

0.5 FY 2023

FY 2028

FY 2033

Agenda Points • Gas Reserves and Production • Evolving LNG Market, Globally as well as in India • Evaluating Gas Availability from Transnational Pipelines • Gas Supply Options and Mitigating Economic Uncertainties

• Managing Fuel Shortage • Price Sensitivity and Criticality of Supply Discontinuance Sponsor

Supporting Partners

FY 2038

Average Merchant Power Price, PI Change in Average Merchant Power Price, ΔPI Source: Infraline report on Merchant Power Plants (2012)

Change in Average Merchant Power Price, ΔPI (%)

0.75

FY 2018

May 3-4, 2012, New Delhi

• Regulations & Policy Environment

7

FY 2013

Gas for Power Generation

4. Pursue contractual enhancements

Merchant Power Price (Forecasted) Average Merchant Power Price, Pi (INR/unit)

32

2nd Annual Conference on

Five step approach for risk hedging

For more details email us at conferences@infraline.com

Infraline follows the practice of formulating a Research Report Calendar detailing research subjects along with methodologies likely to be taken up in a given calendar year. Each research topic is subjected to different filters like relevance, impact, shelf life of the analysis and value add to the industry. Following is the report list for the year 2011-12.

REPORT LIST Iron Ore Market

Business Report

All

Launch Date Jul-12

Global LNG Market

Business Report

Oil & Gas

Jul-12

50,000

Opportunity Assesment

Power

Jul-12

50,000 35,000

Report Topic

Power Sector Opportunity Mapping Coal Outlook

Report Series

Sector

Price 50,000

Oulook Report

Coal

Jun-12

Benchmark Report

Renewable

Jun-12

50,000

Mining Equipment

Market Research

Power

May-12

1,00,000

Power Back-up Solutions

Market Research

All

May-12

1,00,000

Renewable

March 12

50,000

Infrastructure March 12

40,000

Solar PV Benchmarking

Solar Power Outlook: 2017 and Beyond - Marching Towards Grid-parity

Business Report

Investment in Indian Roadways - An Opportunity Untapped

Business Report

Merchant Power Plants in India: Evaluating the Business Case

Business Report

Power

March 12

50,000

Power market dynamics in India: Envisioning the $5.5 billion opportunity

Business Report

Power

March 12

50,000

Steam Coal Imports – Sourcing Options, Prices & Economics

Business Report

Coal

March 12

Switchgear Market in India 2011

Market Research

Power

Feb 12

1,00,000

50,000

Energy Efficiency in India: $16 Billion Opportunity

Business Report

All

Jan-12

50,000

Power Procurement in India : Analysis The Need for Smart Planning City Gas Distribution in India: Demystifying the Opportunity, Growth and Investment Potential Benchmarking Indian BTG Market

Business Report

Power

Nov-11

50,000

Business Report

Oil & Gas

Nov-11

50,000 1,00,000

Benchmark Research

Power

Oct-11

Proposed Thermal Power Projects 2011

Business Report

Power

Sep-11

50,000

Diesel & Gas Engines Market in India-2011

Market Research

Oil & Gas

Sep-11

1,00,000

Fuel for Power Generation in India: Options and Consequences

Business Report

Power

Aug-11

50,000

Natural Gas Market in Gujarat: Assessing the progress and prospects

Business Report

Oil & Gas

Aug-11

50,000

Wind Power Outlook in India: 2015

Business Report

Renewable

Aug-11

30,000

Captive Coal Mining in India - Trends, Investments & Competitive Bidding

Business Report

Coal

Aug-11

50,000

Directory on Upcoming Renewable Power Plants: Understanding Future Dynamics

Business Report

Renewable

Jun-11

50,000

Evaluating the attractiveness of business opportunity in Biomass Power in India

Business Report

Renewable

Jun-11

50,000

Case I & Case II Bidding: Unfolding of Competitive Regime in Indian Power Sector Global Coal Acquisitions and Imports: Opportunities and Sustainability Assessment for India Opportunity in Electricity Distribution Franchisee in India

Business Report

Power

May-11

35,000

Business Report

Coal

May-11

50,000

Business Report

Power

Mar-11

50,000

Repowering of Old wind Farms

Business Report

Renewable

Mar-11

20,000

Underground Coal Gasification in India: Assessing the Commercial Viability

Business Report

Oil & Gas

Feb-11

20,000

Power Sector Opportunitties in India: Perception vs Reality

Business Report

Power

Jan-11

50,000

Power Transmission in india: Evaluating the opportunity Road Map

Business Report

Power

Jan-11

50,000 75,000

Shale Gas: An Unconventional Energy Source Potential and prospects in India

Business Report

Oil & Gas

Jan-11

Solar Power Outlook

Business Report

Renewable

Dec-10

20,000

Distribution Transformers Market in India

Business Report

Power

Oct-10

50,000

Merchant Power Plants in India: Evaluating the Business Case

Business Report

Power

Sep-10

50,000

Coal Washeries in India: A $5 billion Opportunity

Business Report

Coal

Sep-10

50,000

Power generation outlook in India: 2015

Business Report

Power

Aug-10

20,000

14th Floor, Atmaram House,1, Tolstoy Road, Connaught Place, New Delhi - 110001, India +91 11 46250000 (B), 9560626589 (M) richa.pasricha@infraline.com; reports.support@infraline.com For more details, visit http://www.infraline.com/Store/Books-and-Reports.htm

May 2012 www.InfralinePlus.com

StatisticsCoal Company-wise Coal Production during February 2012 (Million Tons)

Name of the Company

34

Annual

During the Month

Corresponding month of Previous year

Upto the Month

Corresponding period of Previous year

Target

Target

Achievement

Actual

Target

Achievement

Actual

ECL

33.00

3.57

3.45

2.90

28.99

25.62

26.74

BCCL

30.00

2.70

2.96

2.52

26.58

26.19

25.67

CCL

51.00

5.08

5.56

4.91

43.60

40.53

40.18

NCL

68.50

6.07

7.51

6.06

60.92

57.79

58.67

WCL

45.50

4.05

3.82

3.99

41.25

38.82

39.47

SECL

112.00

10.53

11.16

10.40

103.01

102.19

100.81

MCL

106.00

10.16

11.26

8.24

93.84

90.13

88.12

NEC

1.00

0.14

0.09

0.14

0.99

0.44

0.95

CIL

447.00

42.30

45.81

39.16

399.17

381.70

380.61

SCCL

51.00

4.37

5.46

4.35

46.34

46.50

45.87

Others*

56.00

4.67

3.83

3.26

51.33

40.92

40.08

All India Total

554.00

51.33

55.10

46.77

496.84

469.12

466.56

Company-wise Coal Despatches during Feb 2012 (Million Tons) Name of the Company

Annual

During the Month

Corresponding month of Previous year

Upto the Month

Corresponding period of Previous year

Target

Target

Achievement

Actual

Target

Achievement

Actual

ECL

33.60

3.17

3.21

2.52

30.22

26.88

26.13

BCCL

29.84

2.54

2.53

2.39

27.18

27.13

26.58

CCL

51.99

4.61

4.26

4.16

46.62

42.91

41.58

NCL

68.50

5.89

6.35

5.83

61.91

56.99

57.84

WCL

45.48

4.00

3.72

3.76

41.19

38.07

38.67

SECL

111.98

9.27

10.12

9.22

101.87

104.42

99.20

MCL

109.00

9.37

8.99

7.08

99.14

92.57

92.90

NEC

1.00

0.10

0.07

0.13

0.90

0.66

1.00

CIL

451.39

38.95

39.25

35.08

409.02

389.63

383.89

SCCL

52.78

4.36

4.88

4.04

48.03

45.90

44.95

Others*

56.00

4.67

3.75

4.14

51.33

40.09

39.99

All India Total

560.17

47.98

47.87

43.26

508.38

475.61

468.84

* Excluding Meghalaya, N. A. = Not Available

May 2012 www.InfralinePlus.com

Revised New and Effective prices of Coal by CIL (Feb 2012) GCV Bands (Kcal/kg)

New Price after revision on Jan 31,2012 (For Power Sector) but effective from Jan 1, 2012 (INR/ton)

New Price after revision on Jan 31,2012 (for non-power sectors), but effective from Jan 1, 2012 (INR/ton)

Indicative Grades (as per previous classification)

Price/Range Price/Range Change as on Feb 27, as on Feb for Power 2011 (Power 27, 2011 for Sector Sector) as per non-power (INR/ton) Grades and sectors as per mine to mine grades (mine (INR/ton) to mine) (INR/ ton)

Change for Other Sectors (INR/ ton)

7000+ 6700-7000

* 4870

* 4870

A

3690

4100

730 to 1180

320 to 770

6400-6700 6100-6400 5800-6100

4420 3970 2800

4420 3970 2800

B

3590

3990

5500-5800

1450

1960

C

1050 to 1500

1300 to 1860

(-)20 to (-)1110 100 to 660

5200-5500 4900-5200 4600-4900

1270 1140 880

1720 1540 1180

D

790 to 1240

1110 to 1560

(-)790 to (+) 380 (-)50 to (+)450 30 to 480

E

730 to 1020

870 to 1080

100 to 180

4300-4600 4000-4300 3700-4000 3400-3700 3100-3400 2800-3100 2500-2800 2200-2800

780 640 600 550 500 460 410 360

1050 870 810 740 680 620 550 490

F

570 to 610

630 to 860

50 to 150 and in some cases (-) 240 30 to 70

G

350 to 700

440 to 650

150 to 200

90 to 300

Ungraded

NA

NA

430 to 610

35 10 to 240

NA

Coal Requirement as per FSA / LOA for CIL Linked Power Projects S. No 1 2 3 4

5 6 7

8 9

Year of Commissioning Units Commissioned by March 31, 2009 2009-10 2010-11 2011-12 (Expected) Total (2 to 4) 2012-13 2013-14 2014-15 Total (5 to 7) Total (2 to 7) 2015-16 2016-17 Total (5 to 9) Total (2 to 9) Capacity as on March 31, 2017

Capacity (MW) 67370 5395 6205 16671 28271 XII Plan 9,835 10,845 11,127 31,807 60,078 5502 660 37,969 66,240 133,610

FSA / LOA Quantity (MT) 304.8 24.36 24.93 71.75 121.04 39.58 44.19 46.95 130.73 251.8 23.87 2.34 156.94 277.98 582.82

InfralineEnergy Weekly Newsletter Series

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May 2012 www.InfralinePlus.com

NewsBriefs | Oil & Gas NELP IX Cabinet approves awards of 16 blocks

PNGRB hits IGL With gas price blow

Stuck in bureaucratic tangle 80 blocks with $13.5 billion investment

The CCEA approves award of 16 oil and gas blocks for ninth round of bidding under NELP. Under it ONGC corners six blocks, the OIL led consortia gets two onland blocks. Deep Energy walks away with two cambay basin blocks while focus Energy bags one in Rajasthan. Five blocks awarded to companies like Sankalp Oil and Natural Gas, Pratibha Oil and Natural Gas Pvt Ltd., Pan India Consultants and KGN Enterprises.

PNGRB has directed IGL to reduce prices for Delhi consumers with effect after factoring in the reduction in both network rates and compression charges on CNG. Gas utility stocks took a beating led by Indraprastha gas ltd. which shed almost 34 percent. The company has approached the Delhi High Court challenging the constitutionality and legality of the powers of the board to fix the tariff.

Nearly 80 oil and gas blocks with an investment of $13.5 billion are stuck in bureaucratic tangle in the Ministry of Defence, DRDO, Ministry of Environment and Department of Space awaiting clearances for years.

Frustrated with the merry go round approach, Petroleum Ministry has sought setting up of an Inter-Ministerial Committee with power to give one time clearance.

RIL-BP gas investments: DGH wants Oil Ministry to decide

Tax holiday ends IOC, Nagarjuna to be hurt

Oil ministry Against RIL gas price hike

DGH has asked the Oil Ministry to take a call on allowing RIL and its partner BP plc to invest in pre-development activities in 16 gas discoveries in KG-D6 block, most of which have not yet been proved to be commercially viable at current prices. A block oversight panel, called the Management Committee (MC) would meet to approve the pre- development surveys only after the Oil Ministry gives its nod.

IndianOil to lose Rs330 crore every year once its Paradip refinery in Orissa comes on stream - because it missed the March 2012 deadline to complete the project in order to enjoy a 7-year tax holiday. Ditto the Cuddalore refinery promoted by Nagarjuna Oil Corporation.

The 6 million tonne per annum refinery is expected to lose over Rs70 crore a year once it comes on stream.

The ministry of petroleum and natural gas has opposed a proposal of Reliance Industries Ltd (RIL) for an increase in the price of gas, saying that would lead to an additional burden of $8 billion on the exchequer. The petroleum ministry recently communicated its view to the law ministry, from which it is seeking legal opinion on the revision proposal.

RIL KG-D6 gas output Shows Constant dip

UP Entry Tax UP VAT issue on gas sale

IPI and TAPI pipeline Projects rejoined by India

Reliance Industries reports further drop in Natural gas production at its eastern offshore KG-D6 Block to about 34 million standard cubic meters per day. KG-D6 gas output in the week ended March 25 was 34.09 mmscmd as against 34.62 mmscmd in the begging of the month.

IFFCO finds itself badly caught in double taxation within the country row. RIL is supplying gas to IFFCO from its D6 field. UP Government has levied 26% VAT claiming that the gas is consumed within the state. IFFCO maintains that it is paying CST to Andhra Government as it is inter-state sales and the title is transferred in Andhra Pradesh only.

India is preparing a cabinet note to get the approval for signing the GSPA for TAPI Pipeline Project.

Further, Iran-PakistanIndia Gas Pipeline Project has been under discussion with the government of Iran and Pakistan 60 mmscmd of gas is proposed to be supplied in Phase-I, to be shared equally between India and Pakistan.

Tax blow For for Essar Oil

Stake sale: Reliance Gas Transportation

Yasmine Hilton To take over as Shell India chairman

While Essar Oil is in talks with banks to repay sales tax worth crores of rupees to the Gujarat Government concerning its Vadinar refinery, the Gujarat makes it clear that Essar Oil will not be given any concession with respect to sales tax.

The company faced a sales tax liability of Rs 6,300 crore after the Supreme Court set aside a Gujarat High Court order.

Mukesh Ambani wants to sell the gas pipeline business as the low gas output is unable to justify large investments in these pipelines. NYSE listed energy major, Enbridge, along with GAIL, Oil India, IL&FS and private equity players 3i, Blackstone and KKR have shown interested in buying part or whole of RGTIL and are in talks with Mukesh Ambani’s group company.

After 24 years, Mr Vikram Singh Mehta, Chairman, Shell Group of Companies in India, is stepping down, effective October 31, 2012. Succeeding him is Dr Yasmine Hilton. Dr Hilton could be the first woman to head an energy company in India. Born in Mumbai, Dr Hilton joined the Shell Group in 1979. She will be relocating to India in September 2012.

37

May 2012 www.InfralinePlus.com

InConversation

‘ONGC Share sale could have been better managed’ Once in the hot seat as the CMD of ONGC, RS Sharma speaks at length about the ONGC share sale, its stagnating oil production, low exploration as compared to private players such as Reliance and much more.

Infraline gets him talking.

Excerpts:

38

Do you think, it was a prudent government decision to sell five percent stake of ONGC, at a premium of 2.3 percent to the day’s closing price? What in your opinion caused the government to misjudge the investor sentiments?

A seller would like to have best possible price for selling a commodity and the same principle applies to stake sale being planned by a company as well. At best even ONGC was hopeful of getting as best a price as they could by offloading their five percent stake in the company. Also, we all saw that there was lot of activity in ONGC’s stock leading upto to stake sale. It leads one to believe that there was deliberate effort to push up ONGC share prices leading upto IPO. Sentiments such as these got validated with media reports claiming that LIC was very active in buying the shares in the market to ensure that sentiment on share prices remained high.

Firstly overhang of sale of equity proved to be detrimental for ONGC because five percent equity in absolute

terms turns out to be very high.

Secondly keeping floor price higher than the price at which the shares were trading preceeding the launch of IPO was a strategic mistake. This defied logic and did not conform to global practices. The level at which you set the floor price does not necessarily mean that you have to sell at that price.

In fact, based on the appetite and assessment anybody can bid at higher price than the floor price. Keeping floor price high was a strategic error because unlike an FPO it turned out be an auction process.

I was Chief Financial Officer of ONGC when we came out with an FPO in March 2004 and from that experience I can confidently say that the success of stake sale of any entity would depend on the price at which it gets traded after the stake sale. I am unable to figure out what would have been the logic behind keeping the floor price higher than the previous day closing price.

To my mind this was not correct and the act did not conform to the global practices.

Incidentally, the day the auction opened I was in Singapore. Talking to Foreign Institutional Investors (FIIs) I realised that everyone out there had an impression that ONGC sale stake was stage managed and that is the reason why FIIs kept away from the IPO. The widespread impression amongst investors was

that government seemed to have already identified and got committed buyers at that price. So, why should anybody else show interest in ONGC stake sale?

Having served on board of the company for nine years and serving more than half of that period as its Chairman – I feel hurt at allegations

“I was hurt when national newspaper called ONGC share sale a fraud, but you couldn’t find any fallacy with this assessment.”

May 2012 www.InfralinePlus.com

being hurled at ONGC. A front page report by leading newspaper Indian Express called ONGC share sale a fraud. I felt hurt reading it but sadly one couldn’t find any fallacy with that assessment. The report claimed that LIC picked up majority of the stake in ONGC and within a matter of time LIC was made poorer by `1,100 crore.

LIC has lost money in crores and it is not government money, it is policyholders’ hard earned money.

No individual or entity has a right to incur a loss to support government strategy. So, the shareholders have a right to ask why LIC bid at such a high price. I’m sure these issues are going to come up sooner or later and need to addressed adequately.

Now look at the bigger picture. Had this issue sailed through smoothly, the government would have been in a strong position to make further disinvestments through auction route in various other entities. So, at whatever level ONGC share pricing got decided, I would not be able to justify the decision.

What is your take on the Finance Minister’s proposal of raising cess on crude oil by 80 percent and the proposal to increase the rate of cess to `4,500 per tonne from the existing `2,500 per tonne?

The way cess was increased in the budget cannot be seen as a professional move. I’m saying this in the backdrop of the fact that the ONGC stake sale was pushed through just before the budget. Ethically this was not the right way to move forward on cess issue.

Investors have been let down on this score because decision of raising cess would have been finalised well in time before the ONGC auction. Following the budget announcement indicating increase in oil cess - sentiment around ONGC turned completely negative.

This resulted in steep fall experienced

Carrying out Share sale just couple of days before hiking oil cess was not correct. It should have been disclosed.

in ONGC share price.

On the positive side, no one can question the government’s right to raise the cess because to my mind cess of `2,500 per tonne got fixed almost four to five years back. During the intervening period crude prices itself have increased many fold. So, in principle raising the cess is justified.

But here again what comes up for questioning is issue of governance. A sudden steep increase of cess to the extent of 80 percent cannot be viewed as the right step. The increase itself should have been staggered.

As Chairman, ONGC, I had made submissions to the government in the past that as far as cess on oil is concerned – instead of making it absolute amount, it should be made ad-valorem. To make it ad valorem, the government is required to make relevant amendment Oil Industry Development Board (OIDB) Act. Or else cess should be caliberated in a way that it stands to increase or decrease in accordance with crude oil prices.

ONGC continues to serve as a cash cow for the government for under recoveries. How long will this practice continue?

I would not buy this statement. This is so because ONGC until March 2002 was operating under administered pricing mechanism which governed sale of its products including oil as well as gas. Product pricing followed cost plus mechanism. So, whatever used to be the cost of the company product it used to get a mark up on that for oil as well as gas. And the product pricing used to get settled on that.

When oil and petroleum prices got deregulated in April that year – crude

prices at the time hovered around US$22/barrel.

Historically, the average crude prices hovered in the range of US$18-22/barrel.

Then we also experience spike in crude prices going upto US$27-28/per barrel. And there were also lows with crude prices going down as low as US$10/barrel in the year 1999. At the time of deregulation crude prices were averaging around US$22/barrel and at that time it was thought that this was the price at which one could deregulate oil and petroleum product prices. However, as our experience showed the prices of crude since then have been constantly moving up. So, ONGC and Oil India have been beneficiaries of the windfall gain with oil prices going up. The reason why I’m calling it a windfall gain is because the oil production is coming from the blocks which were awarded to these companies on nomination basis. Another reason being that in nominated blocks there is no production sharing arrangement.

So, in a PSC regime, whatever the upside or downside it gets shared between the government and the companies involved.

In the absence of production sharing arrangement, options before the government was either to place all these blocks following deregulation under the PSC regime or to collect that upside in some other manner. But when I say, in some other manner, again, the government’s right to collect that upside in the form of either windfall gain tax, higher cess or higher royalty or any other mechanism exists.

The only issue here is that this gets collected in a purely ad hoc manner, at times it is on quarter to quarter basis, the upside gets shared in the form of subsidy discounts to be given to the OMCs. Or at times it gets

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May 2012 www.InfralinePlus.com

InConversation

40

collected after the quarter is over and the invoices get revised downwards to give effect to t discounts.

The issue that comes up for discussion is one of transparency. This is especially so in case of minority shareholders in a listed company who take a call on the crude oil prices, who take a call on the company’s bottom line. In case of an upside they have every right to enjoy benefit from the resultant upside. And now look at the other scenario. If crude prices crash, will the government come to support those minority shareholders? The answer is no. In such a situation, what we are implying is that shareholders invested in the company to surrender upsides that rightly belong to them without any comfort that somebody would come forward to share their downside as well. I don’t see this practice getting discontinued at any point of time in near future. But in case a sincere effort is made to address the issue we can put up a mechanism which takes care of underrecoveries.

ONGC’s stagnating oil and gas production on the domestic front is a cause for worry...

ONGC continues to make the discoveries, albeit on a much smaller scale. But it is true that ONGC’s reserve replacement ratio for the past five to six years has been constantly more than one. However, it is also a fact that ONGC has not made any major discovery in the last two and half decades. The last major discovery for ONGC had come in mid 1980s in Gujarat. In deep waters we have discoveries in KG basin and Mahanadi.

With deep water discoveries one has to see as to what are the returns one is getting against high investment that one is making in them. Most of these are gas discoveries and there has to be a reasonable price for ONGC to get a comfort that these make for viable

investments. And it’s only then that the board would approve the investments.

What are the steps that the government should take to bring in more technical and financial capability into the domestic E&P sector?

I feel the government should seriously send out a strong message to established global players to come and invest in India. This message has to be in terms of attractive fiscal regime for the upstream activities.

Do our policies really indicate investor friendly climate for foreign companies in the backdrop

“Strong fiscal incentives are required to attract foreign investors in the country.” of the recent arm twisting that the government resorted to while approving the Cairn-Vedanta deal.

I myself feel that the current climate does not inspire enough confidence in foreign investors to come and invest in the country. But I do not agree with the statement that there was any arm twisting as far as Cairn-Vedanta deal is concerned. It’s an issue of legality. With the legal interpretation of a signed contract, there are two issues – one is the policy intent and the second is the legally binding contract.

The intent in the pre-NELP regime when the blocks were allotted to the companies had been that the National Oil Companies – Oil India and ONGC – will be made the licensees and those companies would be exempted from payment of any cess or royalty.

But, once the contract is signed, it is presumed that both the parties have read the clauses of the contract and as per the signed contract it is silent as to

which party would be paying the cess.

But maybe the way it was handled because it stretched for long…

I wouldn’t put the blame for this on the government, instead I find fault lay with Cairn Plc. They should have kept their stakeholders well informed about the risk factors, about lack of clarity in the contract. The dispute had already been there and letters had been exchanged in an attempt to settle the dispute between the government and ONGC and Cairn. The thing is that lack of unanimity came into the public domain after the deal got announced.

Whatever the viewpoint taken by ONGC, as long as operations were continuing there was a comfort that adjustments would come in due course of time. But when one of the parties was exiting, they were selling their stakes, then the new party would say whatever the understanding the entity which is exiting with the seller is going out with the seller and they should accept this. So, the issue precipitated at this point of time. Rather than the dispute itself, it this lack of clarity related to contract was kept away from the investors by Cairn Plc. What should be India’s approach while pursuing overseas energy assets given most often we lose bids to more aggressive Chinese players?

Under the current mandate given to OVL – the company is doing encouragingly well while pursuing overseas energy assets. I do not find any fault with OVL’s current philosophy of going after economically viable overseas assets. You take a call Again if you have a scenario where the mandate for acquiring overseas assets is guided by factors other than the commercial mandate, then it is difficult to compete with such players.

For full version of the interview, visit www.infraline.com

May 2012 www.InfralinePlus.com

InDepth

CNG losing its sheen as cost advantage erodes ►► CNG prices across the country at an all time high. In Ahmedabad, differential with diesel at zero ►► CGD business model requires deeper introspection to ensure sustainable viability

42

There has been a spate of Compressed Natural Gas (CNG) price hike in the recent past. CNG marketers across the states, barring a few, have increased CNG prices manifold since January 2011.

Delhi alone has witnessed an increase of `5.05/kg increase in 2011 apart from the hike of `1.75/kg early this year, and the most recent one of `1.70/kg on March 5 taking the price to `35.45/kg. In NCR region the most recent hike of `1.90/kg took the price to `39.80/kg.

The earlier notion of CNG being the cheapest fuel is being put to question with the reducing price differential between CNG and other transport fuels.

“We had to revise the retail price of CNG due to increase in the overall input cost of natural gas being sourced by us, and that is because of increased dependence on imported spot R-LNG,” remains a standard answer of the CGD companies.

CNG Price

Source: Infraline Research

While IGL has access to a comparatively greater share of domestic gas, the situation is quite

different in Gujarat. City Gas Distribution (CGD) entities in Gujarat such as GSPC Gas, Adani and Gujarat Gas (GGCL) have been facing severe crisis in their domestic gas supplies.

As a result, GSPC Gas is completely relying on imported Re-gasified Liquefied Natural Gas (R-LNG) to maintain its supplies for the 119 CNG stations it is operating across 28 cities in Gujarat to which CNG connectivity has been established. The company last increased CNG price recently by `5/kg to `45.25/kg. Adani Gas which is operating 47 CNG stations in Ahmedabad and 7 in Vadodara has also hiked CNG price by a similar level, selling CNG from its stations at `45.50/kg.

Gujarat Gas which charges the least CNG price in Gujarat has hiked CNG price from `43.40/kg to `44.90/kg in December 2011. GGCL is currently operating through its 42 CNG stations in Surat, Bharuch and Ankleshwar.

Mahanagar Gas (MGL) has been able to show a greater restraint in increasing prices, though the company was compelled to raise the price to `33.10/Kg in February this year.

However, this is the only hike that MGL has declared since June 2010.

The company has been able to get a larger share of its gas supplies from domestic sources and as a result has been able to contain costs better than its counterparts.

The price of CNG in Delhi increased by `1.20/kg in 2009.

Subsequently, 2010 witnessed a steep

increase of `6.05/kg and the year 2011 witnessed a similar increase of around `6/kg. The increase in price corresponds to the drop in production of natural gas from the domestic fields and increased imports of R-LNG. While price of CNG has been increasing incessantly, the price of other transportation fuels such as diesel and petrol have also increased to some extent. Diesel being primarily regulated in terms of price determination, has maintained lower levels of price hike, whereas price revisions for petrol has also seen a huge jump.

During the period January to December 2011, the price (Price at Delhi) of CNG has increased by 16.37 percent while it has increased by 13.79 percent for petrol and 8.37 percent for diesel. As of April 2011, 10,68,319 vehicles are running on CNG on a network of 724 CNG stations across the country.

Why hike in prices?

The current domestic production of hydrocarbon increase is dismal at best and is only able to meet the runaway growth in demand of energy products partially and is dependent hugely on imports of energy resources.

In FY 2011, India imported over 20 percent of its natural gas supplies of 166 million standard cubic meters (mmscmd) to meet the demand though this is not enough to meet the entire demand existing in the market.

Imported gas is costlier than the prevailing domestic prices by almost

May 2012 www.InfralinePlus.com

Price of CNG back in 2008 was `18.90/kg in Delhi and has increased by more than 78 percent within a span of three years, while in Gujarat, the price has almost doubled in a similar span of time.

$5-10 per million British thermal units (mmBtu) which has a direct bearing on the end consumer price of gas. Similarly, the country imported over 80 percent of its crude oil requirements in FY 2011, bearing a huge exposure of internationally traded prices to domestic retail prices. As a result, the prices of petrol and diesel have also increased during the same period.

With any swing in the demand and supply of natural gas and crude oil in the international market, there is a consequent swing in the prices of these products. However, the prices more often move northwards with stronger demand scenario in the international market.

A little deeper introspection into the developments in the natural gas sector in India answers the question about the price hikes. During 2010-11 the total CNG consumption in the country was 4.96 mmscmd out of which around 13.6 percent was sourced from R-LNG imports. As R-LNG prices are now increasingly being benchmarked to global crude prices, its price are higher than the price of domestic gas.

Moreover, the price of R-LNG is further escalated due to the customs Date Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec11 Overall Inc (%)

(`/Kg) 29 29 29 29.3 29.3 29.3 29.8 30 30 32 32 33.75

Source: Infraline Analysis

CNG %Inc/Dec 4.50 0.00 0.00 1.03 0.00 0.00 1.71 0.67 0.00 6.67 0.00 5.46 16.37

duty of 5 percent applicable to imported gas (though now scrapped). As a result, the input cost of the CGD entities have increased.

Plus, the Rupee has depreciated by 16 to 17 percent against the dollar during this period which has had a compounding effect on the prices of fuels in the domestic market.

At the same time, the operating cost of CGD networks have also gone up. The CGD companies as a result have been compelled to pass on the increased cost to the consumer.

Entities like GSPC Gas, GAIL and many others are completely dependent on R-LNG as a source of natural gas and hence are directly exposed to the price volatility. With the tightening of gas supplies in the international market, the price of spot R-LNG has been rising. Hence, any increase in the price of R-LNG results in consequent increase in the prices of CNG. Justifying continues increase in CNG prices by CGD companies, BS Negi, former, Member (Infrastructure) Petroleum and Natural Gas Regulatory Board (PNGRB), says, “With declining or no access to APM gas most of the CGD companies are being forced to rely on LNG. With increased dependency on imports these companies have no option but to effect (`/Ltr) 58.37 58.37 58.37 58.37 63.37 63.37 63.70 63.70 66.84 66.84 68.64 66.42

Petrol %Inc/Dec 4.47 0.00 0.00 0.00 8.57 0.00 0.52 0.00 4.93 0.00 2.69 -3.23 13.79

(`/Ltr) 37.75 37.75 37.75 37.75 37.75 41.12 41.29 41.29 41.29 40.91 40.91 40.91

Diesel %Inc/Dec 0.11 0.00 0.00 0.00 0.00 8.93 0.41 0.00 0.00 -0.92 0.00 0.00 8.37

an increase in CNG prices as well.

However, companies having access to cheap APM gas should have no excuse to increase CNG prices because they have been access to cheaper gas by government especially for CNG and PNG operations.”

Share of companies in gas sale

Source: Infraline Oil and Gas Database

MGL on the other hand has a marginal share of imported gas to the extent of 5.60 percent and hence has been better able to keep prices of CNG lower. IGL’s share of domestic gas availability has shrunk in the past few months due to the decline in the KG-D6 supply to CGD sector and its consumption of imported gas has increased to 17.20 percent which is a clear indication of the reason the company has been instigated to hike prices of CNG quite frequently in FY 2011 and FY 2012.

Another element of the end consumer CNG price is the Central and State taxes which have a bearing on the final price. While Central Sales Tax (CST) is applicable across the country at 2 percent, Value Added Tax (VAT) rates ranges typically between 12 to 15 percent across different States.

Moreover, Excise Duty of 14.2 percent and Service Tax of 12.36 percent are also levied on sale of CNG. All these components add to around 30 to 35 percent of the final sale price of CNG.

Evaluating the Attractiveness of CNG A city-wise comparison of price differential between diesel and petrol to CNG shows that

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May 2012 www.InfralinePlus.com

InDepth

44

Price cost differential in Diesel & CNG reduce to almost zero in Ahmedabad

Ahmedabad and Gandhinagar have of refilling stations not being the least differential of `4.77 in case available at regular intervals on the of diesel and `25.66 in case of petrol highways and expressways. on energy equivalent terms. Delhi on “As of now, CNG remains an the other hand has a price differential attractive substitute to Petrol and Diesel of `12.24 for diesel and `34.51 for and recent hike in the CNG prices petrol. The highest differential in price hasn’t diluted its competitiveness. of CNG with diesel and petrol exists in The government is now keen to Mumbai where there is a difference of promote CNG as an environment`17.50 for diesel and `40.09 for petrol. friendly fuel and is aiming to build an Consumers with CNG fuelled efficient pipeline infrastructure. Also, vehicles still have respite from the high we will see substantial efforts by the petrol prices as the price differential government to ramp up the domestic is still significant given the rapid rise production, and to strengthen the in petrol prices since deregulation. regulatory board for efficient pricing by The scenario is somewhat different opening up the market for competition” in case of diesel vehicle owners. The says Mr. Sunil Mehra, CMD, Tractebel differential in the price of diesel and Engineering Pvt Ltd. CNG has narrowed down to a very The government’s plan to adopt negligible level in Ahmedabad.

CNG as the fuel of future has infact The retail selling price of CNG in left the CNG marketers concerned, if the state of Gujarat registered highest the Government makes environmental levels at `45.50 per kg due to the norms more stringent and effective. recent increase in prices by Adani and GSPC Gas. At such high prices, it will Need of the hour be difficult to lure more consumers to To arrest the frequent price hikes in change over to CNG from conventional CNG and to address the issues of fuel usage as price was one of the existing CNG consumers and potential most attractive propositions given new users, the government has to

by CNG suppliers when CNG was address the supply side issues first. initially proposed as an alternative A comparison of gas supplies from transport fuel.

Cities Moreover, declining Price/Price Ahmedabad/ domestic gas output is another Fuel Differential Delhi Gandhinagar dampener to the attractiveness Price per unit 35.45 45.25 CNG (`/Kg) of CNG as a fuel as it means Energy Eq Price 35.45 45.25 that the CGD companies Price per unit 66.45 70.82 Energy Eq Price 70.96 75.63 have to rely more and more Petrol (`/Ltr) Energy Eq Price on imported gas which is 35.51 30.38 Differential not going to get any cheaper Price per unit 40.91 46.25 in the near future.

Energy Eq Price 40.91 46.25 Diesel (`/Ltr) Energy Eq Price Another factor that is 5.46 1.00 Differential impairing the growth of CNG Source: Infraline Analysis, *EE – Energy Equivalent as the fuel of choice is the lack of sufficient refilling Current SPOT LNG infrastructure. Consumers (APM + LNG Marubeni KGD6 + (Brent have to line up in long queues SPOT LNG) $110/bbl) at the refilling stations and the Gas Cost ($/mmbtu) 6.53 15.79 16.04 waiting time is significant.

Gas Cost (`/Kg) 14.26 34.45 35.01 Moreover, consumers who Consumer Price of 29.8 52.9 53.54 intend to travel across CNG `per Kg Source: Infraline Oil and Gas Database cities have apprehensions

various sources with the respective prices shows that CNG would prove to be attractive only with a combination of gas supply from domestic Administered Price Mechanism (APM) gas sources, KG-D6 supplies and supplies to some extent from imported gas.

Presently, gas supply for transport sector has been accorded fourth position in the priority list for allocation of existing domestic gas supply sources. However, any new domestic supply source that is available in future should have preferential allocation for CNG to maintain a higher share of domestic gas in the total supply portfolio so as to keep the overall price of gas competitive.

The other major change required is to grant a declared goods status to natural gas. It will effectively bring down the VAT rates across different states to a uniform level of 5 percent thus reducing the end consumer price of gas.

The April 9, 2012 order of PNGRB of cutting network tariffs by 64% and compression tariffs by 60% of IGL (and of other companies to follow) with retrospective effect from 2008 will also help in bringing the costs for the consumers.

Mumbai The immediate reduction would imply IGL cutting 33.1 CNG prices by ~20% 33.1 or `7.2/kg (including 71.47 76.32 14.4% excise duty) and PNG prices by ~`1.8/scm 43.22 (8% for residential, 5% 45.28 for industrial).

45.28 A major restructuring is 12.18 needed to fuel the growth of CNG as an alternative transport fuel, be it in terms Long of ensuring affordable gas term LNG supplies or restructuring the taxation on natural gas to 10.34 ensure that CNG remains 22.56 to be attractive to the 39.29 end consumers.

May 2012 www.InfralinePlus.com

ExpertSpeak

Initiatives required for Fast Track Exploration Regulatory and fiscal initiatives would play a decisive role in the success of Shale gas exploration.

By Dr VK Rao, Senior Vice President Reliance Natural Resources Limited The sedimentary basins of India encompass an areal extent of 1.79 million sq kms in the onland and offshore part (up to 200m bathymetry). An additional area of about 1.35 million sq km in deep waters is also estimated. The total sedimentary area thus works out to be 3.14 million sq km. Altogether 26 sedimentary basins have been demarcated covering these sedimentary areas.

India is endowed with thick shale sequences in some of these sedimentary areas -- particularly in the onland basins. Shale Gas is fast emerging as a predominant unconventional natural gas source, particularly in the US and Canada, contributing nearly 20% of the total gas production.

Major oil companies are now pursuing Shale gas reserves in the UK, Poland, China and Australia at a faster pace.

Shale Gas exploration assumes greater significance in the Indian context as there are many a compulsive factors for India to go for Shale Gas exploration at an accelerated pace. Some of the important ones are: ▪▪ Rapidly growing gas markets ▪▪ Widening demand-supply gap ▪▪ India has high natural gas prices ▪▪ Increasing dependency on LNG imports ▪▪ Nascent CBM industry that has not taken off as expected ▪▪ Rising Energy Consumption

Basin, Damodar Basin and other Gondwana Basins ▪▪ Reatively good infrastructure pipeline network ▪▪ Rapidly growing economy

▪▪ Transnational Pipelines -unfulfilled Projects due to geopolitical indecisions & impediments

Shale Gas exploration assumes greater significance in the Indian context as there are many a compulsive factors for India to go for Shale Gas exploration at an accelerated pace.

The Indian sedimentary basins, particularly in the onland part, have thick shale sequences. Some of the commendatory factors, which favour well with Indian Shales are: ▪▪ Thick shale sequences in our sedimentary basin areas ▪▪ Comparable TOC and VRO values to producing US basins ▪▪ Proven source rock characteristics for discovered oil and gas fields in our producing basins ▪▪ Demonstrated case studies of shale gas finds in Cambay

As India embarks on its foray into Shale Gas exploration and is likely to announce the bidding round during the 1st quarter of 2013 as being announced by the Ministry in various forums, it is imperative to understand that the regulatory and fiscal incentives to be offered by the government play a decisive role for the success of Shale gas exploration in India.

Potential Shale Gas Basins of India Among the 26 sedimentary basins, the eight most prospective basins identified are: Cambay Basin, Assam-Arakan Basin, Gondwana Basin, Krishna-Godavari Basin, Cauvery Basin, Vindhyan Basin, Rajasthan Basin and Bengal Basin. The Shales in the Stratigraphy, the shale characteristics based on available data and geological parameters are briefly summarised in the following table for six high potential basins.

Exploration challenges in India In order to explore our shale gas basins effectively, following challenges need to be addressed; ▪▪ Acquisition of geologic and engineering data in identified shale gas Basins through pilot wells and laboratory investigations ▪▪ Customization of technology and development of right models to suit to Indian basins ▪▪ Forging partnerships with

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May 2012 www.InfralinePlus.com

ExpertSpeak

▪▪

▪▪

▪▪

technologically advanced companies ▪▪ Tackling environmental externalities in Indian context

Introspection on initiatives and need to review 46

▪▪ Although four pilot wells have been drilled in Gondwana basin for shale gas exploration by ONGC, the results are yet to be known ▪▪ The pilot wells could have been placed in different basins rather than in one basin only. That way we could have assessed data for other basins as well. It is not clear that why all the pilot wells were placed in one basin only?

▪▪ The multi organisational teams (MOT) for data accumulation and its analysis are formed of selective governmental agencies only.

Participation of private/domestic

▪▪

▪▪

companies which have ventured Shale Gas Resource into Shale gas forays overseas Estimations would have added value.

Various agencies have projected Opinions being expressed by some the resource potential of Shale gas agencies on prospect potential in based on their perceptions of Indian northeast are mostly inferential shales. Since neither any significant and speculative as no detailed laboratory analysis have been carried laboratory investigations on out on Shales in Indian basins nor any shales are done. well tests are performed to know the The estimates of US EIA Report are productivity of shales, the resource conservative as only four basins are prognostications are varied, subjective evaluated with scant geologic data. and may be taken as indicative figures The regulatory and contractual only. Schlumberger which is in the policy aspects could have been forefront of ONGC initiatives to discussed in a brain storming explore shale gas in the sessions with Gondwana inputs from basin has The estimates of US EIA indicated a all interested Companies Report are conservative resource potential in India and between 600 and as only four basins are overseas. This 2000TCF for evaluated with scant would be a India. McKinsey geologic data. While critical factor to McKinsey has indicated and Company attract foreign have indicated around 100 TCF of investments around 100 TCF recoverable shale gas. into this cost of recoverable intensive shale gas in one exploratory venture of their presentations. THE US EIA Coherent policy and consistent Report has estimated around 70 TCF commitments would go a long way of recoverable shale gas within the four for foreign investors to earmark basins of India. Directorate General their budgetary provisions of Hydrocarbons (DGH) has forged We are a hydrocarbon deficient agreements on Co-operation with country. Thus it is imperative that USGS to work out resource assessment our energy security policies should for the various basins of India and is be prioritised both in terms of in the process of offering shale gas finding our own domestic resources exploration acreages in near future. and also global hydrocarbon diplomacy initiatives.

The views in the article of the author are personal.

Description Thickness (m) Age

Cambay 200-1900 PaleoceneOligocene

Assam-Arakan 400->2500 PaleoceneMiocene

Depth(m) TOC % Vro % Kerogen Type Remarks

1200-2500 1.00-4.00 0.53-0.85.

II & III Shale gas finds in wells

2000-3500 1.00-6.20 0.57-1.94 II & III

Krishna-Godavari 400->1800 PermoCarboniferous-Lr Eocene 1000-2500 1.2->23.0 0.40-1.40 II & III

The parameters shown are the average range values in different basins

Cauvery 1000-2000 Lr- to Upper Cretaceous

Vindhyan 80-350 Proterozoic

Gondwana 200->1000 Late Permian-Up Cretaceous

1000-3200 0.32-4.70 0.45-1.15 II & III

900-2000 0.60->14.0 No Data II & III

1000-2500 4.0-10.0 0.67-1.20 III Shale gas finds in wells

May 2012 www.InfralinePlus.com

ExpertSpeak

All shareholders are equal but some more equal than others Oil PSUs are routinely directed by Government to bear subsidies in an arbitrary and opaque manner.

Government in this position is legally non-tenable as minority shareholders can ask tough questions from Boards failing in their fiduciary responsibilities.

By Sanjeev Prasad, Senior Executive Director and Co-Head, Kotak Institutional Equities.

The Indian energy sector suffers from very poor corporate governance with the Indian government using its controlling shareholding to indulge in unfair corporate practices that are hugely inimical to the interests of minority shareholders. The government forces the government-owned oil marketing companies and upstream companies to meet its social and political agenda by asking them to bear a portion of the subsidies incurred from selling certain fuels below market prices. The unequal treatment of the majority and minority shareholders is a severe violation of corporate governance practices and is legally indefensible. It is patently clear

that the government is depriving minority shareholders of their legitimate share of profits by diverting revenues and profits of the companies to meet its social and political objectives.

There is no legal basis for the current practice of government-owned oil and gas companies bearing a portion of subsidies since FY2005. In theory, all fuel prices have been deregulated since April 1, 2002 and there is no legislation of the Indian Parliament or an executive policy of the Indian gov-

“There is no legislation of the Indian Parliament or an executive policy of the Indian Government that entails that Government-owned companies should bear a portion of the subsidies� ernment that entails that governmentowned companies should bear a portion of the subsidies. In practice, the government-owned companies have borne a cumulative subsidy of `2.6 tn out of

5.7

2.6

Total subsidies provided

by Government since Financial Year 2005

Cumulative subsidy borne by Government owned companies

Trillion

Trillion

`5.7 tn of total subsidies since FY2005.

The upstream companies sell crude and LPG at a discount to the downstream companies and the amount of discount depends on the total amount of subsidies decided by the government as the share of the upstream companies.

The government pays some compensation to the downstream companies.

The government simply directs the government companies to bear subsidies that it decides in an arbitrary and opaque manner. The boards of the companies have accepted the decisions of the government on the amount of subsidies to be borne by the companies and compensation received by the government. Thus, the boards of the companies have failed in their fiduciary responsibilities to safeguard the interests of the minority shareholders.

The government’s position is even more legally untenable with the oil companies not raising prices of petrol despite large losses on selling petrol below market prices and announcement of deregulation of petrol prices on June 25, 2011. The managements of the oil marketing

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May 2012 www.InfralinePlus.com

ExpertSpeak

48

companies have periodically threatened to raise prices over the past few weeks in lieu of compensation from the government but presumably have not been able to raise prices pending approval from the government.

The government’s practice of using its companies to finance subsidies has weakened the financial positions of the companies considerably and may have had other severe long-term negative implications for the companies and economy. (1) A weaker position of government companies may have jeopardized energy security of the country; companies could have been in a better position to enhance India’s energy security with stronger balance sheets. (2) The oil public sector companies have lost their preeminent positions in the Indian refining sector with several private companies gaining market share at the expense of the oil PSUs. (3) Foreign investors perhaps no longer feel confident about investing in the Indian oil and gas sector given inconsistent policies. Other than the vexatious issue of pricing of fuels, the recent increase in cess on crude oil and imbroglio over taxation of gas produced in NELP blocks may have further dampened investment sentiment. Many of them have closed their operations in marketing of LPG and auto fuels given their inability to compete against subsidized fuels of Government companies. (4) Private companies have also closed their operations in marketing of fuels resulting

in absolutely no competition in the marketing segment. (5) Large subsidies on fuels results in large overall subsidies and fiscal deficit that results in ‘crowding out’ of the private sector and higher interest rates in the economy.

There are two ways to improve corporate governance in the Indian energy sector and restore investor confidence in the sector.

▪▪ The Government can adopt a more transparent subsidy-sharing system with the share of underrecoveries of the upstream and the downstream companies being set as per a pre-defined formula or the pricing of crude oil of the upstream companies established as per a pre-defined formula. The Kirit Parikh Committee had made fairly sensible recommendations on this matter. However, it would be best to extract higher taxes in a legal manner through higher royalties on crude oil in order to avoid legal challenges and let the upstream oil companies realize full global prices of crude oil. The higher royalties so paid by the upstream companies can be used to subsidize fuel prices.

▪▪ The government can adopt a policy

It is patently clear that the Government is depriving minority shareholders of their legitimate share of profits by diverting revenues and profits of the companies to meet its social and political objectives.

that results in upstream companies paying more dividends to the government in lieu of bearing subsidies. The government can then compensate the downstream companies from higher dividends, dividend distribution tax, royalties and income taxes of the upstream companies arising from the higher revenues and profits of the upstream companies. The upstream companies are largely owned by the government and rewarding minority shareholders through dividend payouts may make investors more amenable to investing in future divestments of the government of India.

The recent debacle of the divestment of ONGC amply shows that minority shareholders want a fairer treatment before they commit to investment in government-owned upstream and downstream companies.

The facts that (1) most investors did not participate in the divestment of ONGC or (2) investors are quite underweight in their holdings against benchmarks display their lack of confidence about them being treated as equal shareholders by the government of India. The disturbing event of the Government raising cess on crude oil (which will impact ONGC’s profits negatively) a few weeks after the ONGC divestment further demonstrates the Government’s callous attitude towards the sector and minority shareholders.

The government may well want to listen to market feedback if it wants to renew its fiscal pact with minority shareholders. They may not want to protest against continued unfair treatment given various practical considerations but they may have already decided to ‘vote with their feet’ and stay away from Government-owned oil and gas companies.

The views in the article of the author are personal

Infraline’s Report on:

Evaluating the Emerging Global LNG Markets: Assessing the Impact on LNG Sourcing Options for India

July 2012

InfralineEnergy Business Report Series

Evaluating the Emerging Global LNG Markets

Assessing the Impact on LNG Sourcing Options for India

July 2012

Infraline is coming out with a business series report on “Evaluating the Emerging Global LNG Markets: Assessing the Impact on LNG Sourcing Options for India”. The report is a massive compendium of the latest developments in the major LNG exporting markets with details on the trade dynamics, liquefaction and re-gasification capacities, contractual and financial framework and key strategies adopted by major players in the countries for successful LNG business model.

The prime objective of the report is to capture the global LNG dynamics so as to comprehensively evaluate the various sourcing options for India after broad analysis of the pricing, regulatory and geo-political scenario emerging in the exporting countries. The report further captures the LNG infrastructural developments in India and forecasts the price of LNG for Indian markets along with scrutinising the viability of LNG for various industries in India.

Critical Investigative Points

Pivotal Features of the Study ►► Mapping the shifts in global LNG trade movements and implications thereof ►► Liquefaction and Re-gasification capacity forecasts 2020: Capacity Building Scenario ►► Risk Mapping and Financial Analysis of LNG projects ►► Impact assessment of shale gas and unconventional gas price on the LNG demand – supply ►► Comparative feasibility analysis of LNG vs. Trans National Pipeline in Indian context ►► Planned R-LNG Terminals in India and Investments thereof ►► Economic Viability of LNG for various industries and sectors in India (CGD/Power/Fertilizer/ Petrochemical/Steel)

►► Can gas price decouple from oil price? - The indexation of oil price to gas price ►► What are the prospective LNG sourcing options for India? ►► How India is emerging as a centre piece of Asia Pacific LNG Market? ►► What is the underlying opportunity potential for stakeholders across the LNG value chain? ►► How LNG shipping economics is on rebound with the evolving shipping trends? ►► What could be the trading and hedging strategies to optimize risk-return trade-off? ►► How the emerging trends of FSRU, LNG as shipping fuel and LNG TT can revolutionise the landscape of LNG market?

Who Should Buy ►► LNG Infrastructure Operators ►► International Oil and Gas Companies ►► Gas Producers (National and International) ►► Gas Marketers and Traders ►► Shipping Companies ►► EPC companies ►► Financial Institutions Others Oil & Gas Reports: City Gas Distribution in India: Demystifying the Opportunity, Growth and Investment Potential Natural Gas Market in Gujarat: Assessing the progress and prospects Underground Coal Gasification in India: Assessing the Commercial Viability Shale Gas: An Unconventional Energy Source Potential and prospects in India

►► Power, CGD, Fertilizer, Steel and Petrochemical companies ►► Consultancies ►► Equity Research / Stock Broking Companies ►► Equipment Suppliers ►► Educational / Training Institutes ►► Regulatory Bodies

Business Report Series Business Report Series Business Report Series Business Report Series

Nov-11

`50,000

Aug-11

`50,000

Feb-11

`20,000

Jan-11

`75,000

Pricing Options for “Evaluating the Emerging Global LNG Markets” Report – Hard Copy

`1,00,000

Report - E-copy (Single User License)

`1,75,000

Report - E-copy (Corporate License)

`4,00,000

Report + BRP (approx 100 slides)

`1,25,000

*BRP (Business Report Presentation – PPT version) cannot be provided as Standalone

For any further information, kindly contact us on below mentioned coordinates:

Ankur Seth

Ph. +91 11 4625 0000 (B), Mobile: 9560626589 Email: ankur.seth@infraline.com, reports.support@infraline.com

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May 2012 www.InfralinePlus.com

ExpertSpeak

Effect of Natural Gas Pricing on Gas Sector Growth A look at the factors contributing to India’s energy security and how to design the right strategy: By Shri B S Negi, Former Member (Infrastructure), Petroleum and Natural Gas Regulatory Body

50

In India the natural gas market which has a very slow growth initially during the period of eighties, has now witnessing an asymptotic growth soon after import of LNG in 2004 and KG D-6 gas flow in 2009.

India’s hydrocarbon vision statement envisages the share of natural gas to be about 25% by 2025. Traditionally the power and the fertilizer sectors require the maximum amount of gas.

In the future also the trend is expected to be same.

The power and fertilizer sectors are sensitive to price volatility.

Power tariffs are regulated and the fertilizer price is also controlled by the Government. The return on investment is assured by providing subsidies. In both these cases, as a social commitment, the Government considers itself as a major customer and the subsidy is provided through PSUs and the Government treasury.

Presently, different prices of natural gas prevail in the country. Before the KG D-6 gas production commenced, almost 40% of the total gas being supplied was based on APM. Even for APM gas, there are different prices for the priority sectors, i.e. power and fertilizer, North Eastern region and the non-priority sectors. The priority Sector gas price is now $4.2/mmbtu

From 1976 to1991, GOI fixed Gas price on cost plus formula on year to year basis. To develop a rational pricing basis, Government in January 1992 appointed Kelkar Committee to suggest Natural Gas Pricing mechanism..Kelkar committee suggested Natural Gas Price for 4 years as under.

▪▪ APM basic price $1.47/mmbtu ▪▪ JV Niko and Laxmi field $3.68/ mmbtu ▪▪ PMT $ 1.92/mmbtu APM Gas Price translated to (`/1000 scm) is shown in table-1 and the price for non-priority sector is $5.35/mmbtu with a concession for North East region users. Different prices are applicable to gas flowing from various JV field including for the gas from various field under Production Sharing Contracts (PSC), be it from PMT, RAVVA, RAVVA Satellite; KG basin or other fields. Third category of gas price is for LNG, which is available broadly at the prices based on buyerseller long term contracts or spot cargo based pricing.

Historically, Indian gas market within its span of four decades has seen many varied pricing regimes. For example, prior to 1970 Gas price was fixed by the Government based on the recommendation of Expert Committee.

In early Seventies, ONGC as producer set the gas price on negotiated basis.

This led to different price to different customers in same or different regions.

In mid seventies, producers fixed uniform price on cost plus and pooled basis. This again resulted in price variation on time basis.

Table-1 Year

All India# except NE

NE*

1992

1550

1000

1993

1650

1000

1994

1750

1000

1995

1850

1000

*Further provision of giving discount of `400/Ksm3 on case to case basis # 15% discount allowed for interruptible supplies or supplies from developing fields

Again in January 1995, TL Sankar Committee was appointed for natural Gas Pricing. This committee proposed Natural Gas pricing on the basis of the linkage to international fuel oil basket and suggested that the pricing be effective from 1-10-1997. The year wise linkage is shown in Table-2 Table-2 Year

Linkage(%)

1998-99

65

1999-2000

75

2000-01

75

2001 0n wards

100

May 2012 www.InfralinePlus.com

The approach suggested by TL Shankal was an approach to gradually adopt the international energy price, but the its suggestion that the price be kept within a band of `2150/mscm to 2850/mscm for gas with CV=10,000 Kcal/scm. The band for NE to remain between `1200-1700/mscm. This band proved to be a lever which broke the market based energy pricing. For example till June, 2003 when the gas price as per the oil parity pricing had reached `8140/ mscm, the producers were paid only `2850/ mscm. It can be well imagined the dis-incentive to the producers in Indian E&P sector It was with great difficulty that in July 2003, the ceiling price was raised to `3200/mscm for Fertilizer and `3600/ Kscm for others.For NE ceiling raise to `1920/mscm In 2009, the Ceiling price was further raised to `4100/mscm and in early 2010 ,Gas Price Fixed to $4.2/ mmbtu (`8000/mscm) for gas produced from KG D-6 block. While the gas price for KG D-6 remained same, the gas price for APM was raised to $5.35/mmbtu in November 2010 for non priority sector. Again in April 2011 government fixed CBM price for ESSAR Jharia field at $ 5.35/ mmbtu with transportation Tariff at $

1.00/mmbtu. In the same region the Government had fixed CBM price at $6.79/mmbtu.3 years back for GEECL Asansol. $6.79/mmbtu. There is no simple logic to understand this process even we do not wish to say this arbitrary approach.

A look on the gas pricing provision under NELP give a reasonable understanding that for gas marketing:▪▪ The Contractor shall have the freedom to market gas ▪▪ The contractor shall endeavour to sell Natural Gas produced and saved from the contract area at arm’s-length price to the benefits of the parties to the contract ▪▪ The formula or the basis on which the price shall be determined shall be approved by the Government prior to the sale of natural gas to the consumers, within 60 days from receipt of the proposal or the clarification, if, asked by the Government. For granting this approval, Government shall take into account the prevailing policy, if any, on pricing of Natural Gas including any linkage with treaded liquid fuels, Four important aspects emerge from PSC provisions. First the freedom to

operator or producer to market the Gas, second sell gas at arm’s length, third the Government to approve the price once determined from consumers at arm’s length, and fourthly Government approval to be based on the Policy (if any) or the linkage with liquid fuels.

The Government in all fairness and transparency should not negotiate or revise the pricing formula. It may either accept the price or reject for any reason such as the arm’s length price determination. Under the PSC provision possibility of getting a market determined price may vary from source to source since the pipeline connectivity of all producing field has not been achieved so far. Also the linkage with the liquid fuel pricing is well recognized fact as the Gas is having competition with liquid fuels in most of the time. I think this is a good guide line for enabling Government to take timely (within 60 days) When Government action on pricing comes up fast and follows the provision of PSC, Indian gas sector will witness a sea change growth .However, with limited pipeline Infrastructure, different production costs for conventional and unconventional gas, the gas market still has regional characteristics and a single price throughout the country would be a dream. In addition the transportation tariff and the tax structure have direct bearing on the cost of natural gas to the customer.

So, what should be done on the issue of gas pricing/? The answer is not so simple but the simple option is to leave the gas pricing issue to the market to decide. The government dilemma of social responsibility can be addressed by providing subsidy to socially qualifying industry or customers directly from Government treasury. Hon’ble Prime minister did mention about suitably incentivizing the gas producers, while addressing AGPS on 23rd March 2012, in New Delhi.

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May 2012 www.InfralinePlus.com

StatisticsOil & Gas Indian Crude Oil Basket Price and Annual Changes (2001- July 2012) 120

50

100

40

$/Bbl

Percentage Change

30

80

20

60

10

40

0

20

-10

0

-20

Crude oil (Indian Basket) $/bbl

Annual Change (%)

Crude Import / Processing, Import and Net Export of Products (MMT) 1999-00

Installed Capacity * 112.49

85.7

57.8

Net Import of Product 15.9

2000-01

114.59

103.1

74.1

0.9

-

2001-02 2002-03

114.67

106.5

78.7

-

3.1

114.67

112.56

81.9

-

4.7

2003-04

127.37

121.84

90.4

-

6.6

2004-05

127.37

127.41

95.9

-

9.4

2005-06

132.47

130.10

99.4

-

9.8

2006-07

148.97

146.55

111.5

-

15.8

2007-08

148.97

156.10

121.7

-

18.3

52

Crude Processing Import of Crude

Net Export of Product -

2008-09

177.97

160.7

132.7

-

20.4

2009-10

185.4

186.6

159.3

-

36.3

2010-11

187.39

196.8

163.5

-

41.78

2011-12 (Apr - Feb)

193.4

186.7

155.7

-

42.37

Refinery Utilization Available Capacity

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (Apr - Feb)

(MMTPA) 2006-07 137.42 148.97 156.67 177.97 187.39 193.4

Crude Processing (MMT) 137.42 141.46 150.8 160.7 186.56 196.8 186.67

Capacity Utilization (%) 141.46 103 101 103 105 102 -

May 2012 www.InfralinePlus.com

India’s Crude Oil Import Dependence

MMT

200

75.00

150

50.00

100

25.00

50

Percent Dependence

100.00

250

0.00

0

Crude Processing

Import of Crude

Import Dependence

Refining Capacity as in November 2011 Sl. No.

Location of Refinery

Capacity (MMTPA)

1

Digboi

0.65

2

Guwahati

1

3

Barauni

6

4

Koyali

13.7

Haldia

7.5

Mathura

8

5

Company

IOCL

6 7

Panipat

15

8

Bongaigaon

2.35

9 10 11 12

CPCL HPCL

13 14

BPCL

15

Chennai

10.5

Narimanam

1

Mumbai

6.5

Visakhapatnam

8.3

Mumbai

12

Kochi

9.5

Bina

6

16

NRL

Numaligarh

3

17

ONGC

Tatipaka

0.078

18

MRPL

Mangalore

Sub Total (PSU)

11.82 122.898

19

RIL

Jamnagar

33

20

RIL (SEZ)

Jamnagar

27

21

EOL

Jamnagar

Sub Total (PVT) Total Refining Capacity

10.5 70.5 193.398

53

May 2012 www.InfralinePlus.com

NewsBriefs

54

Clean Energy Investment Second-highest growth in investment

L&T Commissions India’s largest solar PV power plant

Alstom Commissions 220 kV substation for solar plant in Rajasthan

India’s clean energy sector experienced the second highest growth in investment among G-20 countries in 2011.

India ranks sixth among the world’s 20 leading economies in attracting funds for clean energy projects, a new report states. India’s National Solar Mission, with its aim to have 20 gigawatts of solar power installed by 2020, as helping to drive the country’s seven-fold jump in solar investments in 2011, to $4.2 billion and an additional 2.8 gigawatts of solar capacity installed.

Engineering and construction major Larsen & Toubro said it commissions India’s largest solar photo voltaic (PV) based power plant (40 MWp) owned by Reliance Power Limited at Dhursar village in Jaisalmer district of Rajasthan.

L&T Construction, as the largest EPC (engineering, procurement and construction) player in solar power, executed the plant from concept, including detailed design, to commissioning in 129 days. With this, L&T has installed 114 MW of utility scale solar PV power plants over the last fiscal, a benchmark in India’s solar EPC industry.

Alstom T&D India has successfully commissioned 220 kV substation in the presence of Farooq Abdullah, minister of MNRE, Ashok Gehlot, Chief Minister of Rajasthan. The substations will serve Reliance Infrastructure 40 MW solar photovoltaic plant located near Pokhran in the Jaisalmer district of Rajasthan. North-west India. This turnkey contract worth Rs 400 million involves design and construction of the substation including control, protection, monitoring systems and complete civil works including land development at the plant.

WTO Solar Procurement under Government Ambit

CLP Power Plans `1800 cr in Wind Market

BOSCH Plans 10 MW Solar projects

Indian Solar mission and WTO rules - India tells US that it does not intend to alter the domestic content requirement in its ambitious national solar power generation programme as it is essentially procurement by the government, which is outside the purview of the World Trade Organisation. US commerce secretary John Bryson had in a recent meeting with commerce and industry minister Anand Sharma raised concerns about the 30% local sourcing requirement in projects under the Jawaharlal Nehru National Solar Mission, saying it might be in violation of WTO norms.

CLP Power India, a wholly-owned subsidiary of Hong Kong-based CLP Holdings Ltd, plans to invest around Rs 1,800 crore in India to add over 200 MW capacity in wind energy in the fiscal year 2012-13. The company has delivered over 200 MW wind energy last fiscal year, through its wind farm projects existing in six states, Maharashtra, Gujarat, Rajasthan, Tamil Nadu, Karnataka and Andhra Pradesh. This year CLP plans to invest over Rs. 1,500-1,800 crore to generate another 200 MW. The company is also evaluating options to set up a solar power plant.

Global supplier of technology and services, Bosch, is in talks with private players for developing 10-MW projects in the next few years.

Bosch entered into the solar energy space in the country last year and has jointly developed a one-MW project with the Gujarat Government. The company is also executing up to 100 kilo watt roof top project under National Solar Mission in Karnataka.

The company is also executing up to 100 kilo watt roof top project under National Solar Mission in Karnataka.

BHEL Forays in Wind Equipment

Exxaro-Tata Suzlon to supply Turbine 138 MW project in SA

In a bid to create newer streams of revenue, Bharat Heavy Electricals Ltd (BHEL) is mulling entry into production of wind energy generation equipment. BHEL has already floated an expression of interest and some parties have also shown interest. They are still deciding on the suitable business model, and might tie up with or acquire a party in the renewable energy area.

Cennergi, a joint venture between South Africa’s Exxaro Resources Limited (Exxaro) and The Tata Power Company Limited (Tata Power) selected Suzlon group (Suzlon), the world’s fifth largest wind turbine manufacturer, as the preferred supplier for a 138 MW wind energy project currently under development in South Africa. Cennergi has chosen to use 66 of Suzlon’s S97-2.1 MW turbines for the project, located in the Eastern Cape.

Wind Tax Break End of Accelerated Depreciation India ends a tax break for wind farms that helped drive 70 percent of installations last year in the world’s third-largest market for turbines. Starting April 1, wind power projects can no longer claim accelerated depreciation at the rate of 80 percent on the cost of their equipment, says a circular on the website of India’s income tax department.

May 2012 www.InfralinePlus.com

ExpertSpeak

Non-conventional Extraction of Coal: CMM, UCG and CBM

By A.K.Singh, CMD, Central Mine Planning & Design Institute Ltd. (CMPDI) Coal is the backbone of our energy supply and meets about 53% of the total commercial energy needs while Oil and Gas contributes to about 40%. However coal industry is marred with several constraints, like getting environmental clearance, rehabilitation and other local site specific problems, is gearing itself to meet the challenge. Utilization of coal in the present form is a matter of concern environmentally and to make it eco-friendly is a major challenge before the coal industry. New area of clean coal technologies like Coalbed Methane (CBM) and Coal Mine Methane (CMM), Underground Coal Gasification (UCG) and Coal Liquefaction are under focus and Government/Indian Coal Industry is taking all the necessary steps for development of these areas.

Development of Coalbed Methane (CBM): Indian perspective Coalbed Methane (CBM) is a hydrocarbon and is a by-product of coalification process. India is bestowed with substantial quantity of coal reserves, which is 6th largest in the world. Many of the coalfields of India are having high rank of coal, which is amenable for implementation of CBM projects. In India, CBM related work was started in the early 90s by Central Mine Planning and Design Institute Ltd. (CMPDI) and Coal India Limited (CIL).

The real thrust on its development came with the formulation of CBM

Policy in the year 1997 and blocks amenable for CBM development were identified and were allotted through global bidding process. Several blocks were identified by Ministry of Petroleum and Natural Gas (MoP&NG) in consultation with Ministry of Coal (MoC) and 33 such blocks have been awarded for commercial development in four rounds of global biddingstarting from 2002. The fiscal package offered by the Govt. resulted into good response and there was a general consensus of enthusiasm for taking up developmental work in the allotted blocks. CBM production has also started in few allotted blocks.

However, the pace of development of production of CBM could not meet the envisaged projection and going by an unconfirmed report, the current production is about 0.2 million cubic meter per day (MMSCMD). This is a matter of concern and a close analysis is required to be made so that this new and upcoming industry meets its envisaged growth. The CBM industry needs support on the following fronts: ▪▪ Expediting granting of clearances and licenses for CBM operation, viz, Petroleum Exploration License (PEL), Environmental Clearance,

Mining Lease (ML), etc., required to be taken under different laws of the country.

▪▪ Local Problem: Many of the allotted prospective CBM blocks fall in disturbed areas and carrying out operation in these areas has own limitations.

▪▪ Land acquisition problem: Although, CBM operation requires much less land as compared to conventional mining operations, even getting the required land is difficult.

Coal Mine Methane (CMM) Coal Mine Methane is extraction of methane from the active or projectised mining areas. CMM constitutes 8% of global source of anthropogenic methane emissions. Going by an estimate of US EPA, the Indian coal mining industry emits about 1 billion cubic meters of methane annually in the atmosphere through underground coal mining operation. To prove the efficacy of harnessing methane from the coal mining areas and its gainful utilization, a CBM/CMM demonstration project has been successfully implemented at Moonidih Mines of BCCL. The total cost of the project was Rs. 92.43 crore and had been funded by GoI/ UNDP/ GEF. CMPDI and Bharat Coking Coal Limited (BCCL)- another subsidiary of CIL, were the implementing agency for the project on behalf of the Ministry of Coal. The project has proved efficacy of CMM production in Indian geomining condition. Recovery of CBM gas from two wells has been established in May, 2008 and February, 2009, respectively. The recovered gas is being utilized to generate electricity through

55

May 2012 www.InfralinePlus.com

ExpertSpeak

indigenous gas based generators, which is continuing since June’2008. The successful implementation of the project has proved the efficacy of the technology of CMM extraction and its utilization in Indian mining scenario.

CMM development: Indian perspective

56

In India, history of coal mining is over century old. It has spread in large areas, mainly in Damodar Valley Coalfields, which have been characterized by occurrence of multi-seams of high rank coals. At many places while the upper seams have been worked, the lower seams are still lying virgin. These areas are potential source of coalmine methane. It has been estimated that about 150 billion cubic meter of CMM resource is existing in 5 coalfields namely, Raniganj Jharia, East & West Bokaro and South Karanpura.

For early commercialization of CMM, efforts are being made to overcome the technical and commercial issues like CBM resource assessment in destressed conditions, techno-economic evaluation of the prospect, utilization of the produced methane, etc., which are being addressed through a R&D project, which is currently under implementation at CMPDI. Visualizing the need for early commercialization of the resource regulatory framework for harmonious extraction of coal and CBM is currently under finalization at Govt. level.

CBM Rig Unit at Moonidih The successful implementation of the Demonstration Project at Moonidih Mine has given enough confidence for taking up commercial development of CMM in other potential areas. In the mean time, MoC has made CMPDI, nodal agency for development of CMM in the country and also gave direction for replicating CMM projects in other potential areas. Development of CMM is also an important agenda of CMM/CBM Clearinghouse, which is functioning under the aegis of MoC & US EPA.

Under the above situation, CMPDI on behalf of CIL identified 5 suitable CMM blocks and started the process of commercial development of CMM from the active mining areas. Deliberations were made with the probable service providers as such expertise is not available with CIL. Further, it was thought that as all these areas are falling within the mining lease hold, the implementation could start without any delay and the implementation could be taken up with the available infrastructure of operating coal mines. The ownership issue of CMM had been deliberated at the highest level and matter is likely to be resolved soon and commercial development of CMM could start from the identified areas.

Underground Coal Gasification (UCG) Underground Coal Gasification (UCG) is a physico-chemical process, by which, coal is converted in-situ to a combustible gas that can be used as a fuel or chemical feed stock. The UCG offers a potential economic means of extracting energy from deep seated coal/lignite deposits which are not amenable to conventional extraction on account of prevailing techno-economic considerations.

In India, UCG was taken up in mid 1980’s by ONGC and CIL under technical collaboration with erstwhile USSR. Although one lignite block “Merta Road” in Rajasthan was found suitable, pilot appraisal could not be taken up due to apprehension of contamination of ground water.

With the advancement of technology, development of UCG is a priority area both at Govt. and coal industry level as it is a part of clean coal initiatives.

UCG Development: Regulatory Status To expedite development of UCG, MoC has issued a Gazette Notification dt.13.07.07, which specifies production of syn-gas obtained through coal gasification (underground & surface) and

coal liquefaction to be end uses for the purpose of Coal Mines Nationalization Act, 1973. This notification has paved way for taking up UCG by public/ private entrepreneurs. India is having considerable coal reserves and there are several areas, where the occurrence of coal seams are deep lying or isolated in nature, where coal mining operations is not possible due to techno-economic considerations. These areas are suitable for taking up UCG

UCG Blocks within CIL Areas: Consequent to signing of MoU between CIL & ONGC in November, 2005 for taking up pilot scale studies for UCG, CMPDI has prepared data packages for 5 prospective UCG sites. Out of the five sites, one Kasta block in Raniganj coalfield was selected by the consultant engaged by ONGC. As required, drilling of 12 nos. of slimholes for generation of additional data has been completed in Kasta block for examining possibility of taking up pilot scale UCG project. The analysis of the samples generated through the drilling has been taken up and is being examined

by Russian experts.

In addition, 2 more blocks within the CIL area, namely Kaitha in Ramgarh CF within CCL command area and Thesgora-C in Pench Valley CF within WCL command area have been identified for development of UCG. Concluding the above, it may be seen that there is substantial scope for development of coal based nonconventional energy resource and as such, there is an urgent need for extending help to this nascent high technology area so that the technology is brought and tested in the Indian geo-mining conditions. This will be in the best interest of the Indian energy scenario, as the energy produced in this resource will add to the energy supply in the country, which is strained due to gap in the demand and supply scenario.

Great Eastern Energy Corporation Ltd. (GEECL) is the Pioneer in the field of Coal Bed Methane (CBM) in India.

GEECL’s first CBM block is the Raniganj (South) block (210 sq. km) in the Damodar Valley, West Bengal with an estimated Gas-in-Place of 2 TCF. GEECL commercialised CBM for the first time in India in 2007.

GEECL was awarded a second block at Mannargudi, Tamil Nadu, situated at the southern part of India under CBM IV in 2010. The Block spreads over an area of 667 sq. km. The CBM resource of the block is estimated at 0.98 TCF as per the Directorate General of Hydrocarbons (DGH).

Upstream

GEECL’s pioneering effort is helping in maintaining the ecological balance in West Bengal’s coal bearing areas where methane gas is escaping into the atmosphere and damaging the ozone layer. It will result in the demethanation of coal-beds and avoidance of methane emissions into the atmosphere.

GEECL has laid its own dedicated pipeline which runs through the heart of the Asansol-Durgapur Industrial belt, supplying CBM gas to various industrial consumers in the Asansol-Durgapur area. We also supply CNG via cascades to vehicles through a franchisee agreement with Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL).

Midstream

GEECL is also involved in various CSR activities in AsansolDurgapur area for the benefit of the people and has undertaken number of initiatives, including sponsorship of medical camps, sporting events, health initiatives, etc.

GEECL became the first CBM Company in India to receive the Quality, Health & Safety and Environment certification (ISO 9001:2008, OHSAS 18001:2007, ISO 14001:2004) by TUV NORD CERT GmbH for its operations in the Raniganj (South) block and for its Corporate Office at Gurgaon.

Our Vision: To maximise the Economic Recovery of the Reserve, whilst Maintaining International Quality, Health, Safety & Environmental Standards.

Corporate Office: Signature Towers - ‘A’, 14th Floor, South City, NH-8, Gurgaon - 122 001, Haryana, India

Downstream

Regd. Office: M-10, ADDA Industrial Estate, Asansol - 713 305, West Bengal, India info@geecl.com, www.geecl.com

May 2012 www.InfralinePlus.com

InDepth

Telecom Goes Green: Solarising telecom towers ►► Solar PV to replace DG sets for 20 and 33 percent of towers by 2015 and 2020 ►► Total switchover to save `6,500 crore of Diesel every year for Telecom Tower companies

58

Boarding the bandwagon, it is the turn of the Telecom industry to go Green as the Government now plans to make it mandatory to replace DG sets for telecom towers with Solar Panels. The carbon foot print -- total emission of the telecom industry in India is around 1 percent of the country’s total CO2 emissions as against 0.7% worldwide – precisely points the driving case for going green in telecom. However, carbon foot print is just not the only dimension; the other is use of subsidized diesel in the sector. After transportation, telecom is the second largest consumer of diesel and on an average about 3-4 billion litres of diesel is consumed annually by the telecom industry.

Diesel is used in gensets to power telecom towers. The argument is why government should not stop prolific usage of subsidized diesel in an Industry that’s witnessing annual growth in profits of at least 10 percent.

The government and green activists have started raising questions on the usage of unsustainable and inefficient model of power generation. However, considering the state of power scenario in India, telecom service providers cannot be entirely blamed for the choice made. A large part of the country is yet to be electrified, which poses a barrier in the growth trajectory of the telecom sector. In order to surmount this, telecom sector highly relies on diesel fired DG sets which provide power to telecom towers. At present, the total electricity requirement for about 400,000 telecom towers in India is about 12,264 MU.

Of which, about 60 percent is met by DG sets and the remaining 40 percent is met by grid supply. This results in high level of expenditure on the fuel requirement. During the year 2010-11 the telecom sector spent an amount of `7,000 crore to power about 350,000 telecom towers in the country.

During 2010-11, the telecom sector spent an amount of `7,000 crore to power about 350,000 telecom towers The telecom Regulatory Authority of India (TRAI) has initiated the consultation process on green energy use by different stakeholders like, telecom service providers and telecom

equipment manufacturers. “With the increasing energy consumption and rising cost of fossil fuel, it is important that the focus shifts to energy efficient technologies and alternate sources of energy,” said the regulator. According to TRAI, a total switch-over from diesel would save nearly 200 crore litre of diesel — about 3 litre per subscriber — and `6,500 crore per year.

Out of the number of clean energy options available in India, solar energy has immense potential to power the telecom sector. Solar power can be applied in microwave repeaters, cellular base stations, VSATs, telephone exchanges and satellite earth stations, etc. Solar transmission towers and repeater stations can be established in remote locations far from grid lines and even in difficult terrains.

May 2012 www.InfralinePlus.com

Indus Towers, the country’s largest telecom tower company, a joint venture between Bharti Airtel, Idea Cellular and Vodafone, recently announced it has begun replacing diesel generators with solar panels. The company has announced a pilot programme to convert nearly 2,500 towers from diesel to solar which, the firm said, will save it around 20-25% of their running costs Wireless Telecom Subscriber growth in India

Source: TRAI

Cost Economics of Diesel based Telecom Towers in India, 2011

things like solarising telecom towers,” Guha told Infraline Energy in an interview. He said that Mahindra has an advantage because of DG sets. “We have many existing customers with large number of telecom towers. So can we go there and try a diesel abetment model for the customers. I am sure it is worth exploring, added Guha” Realising the need of the hour, more and more telecom service providers have started pilot projects to replace diesel and grid power with solar power.

Idea Cellular has explored a Solar Hybrid Solution for running BTS in parts of rural Bihar. “We plan to install Solar Hybrid sets at 200 sites by end of FY 12. This will reduce the fuel consumption of power generator from running for 15-16 hours to less than 5 hours a day in these locations” said the company notification. As per Bharti Infratel, it is the only telecom tower company, which has installed almost 3 MW of solar capacity on its network, generating more than 5 mn units of electricity every year. Its GreenTowers P7 programme aims to cover 22,000 tower sites and provide solar solutions, out of which 5,500 sites have already been implemented in the first year as part of this three-year programme.

Once completed, the initiative will reduce diesel consumption by 66 mn litres per year; with a significant carbon-di-oxide reduction of around 1.5 lakh MT per year.

TRAI Roadmap towards Green Telecommunications Source: Infraline Research, *Cost of Diesel-`45

Replacing diesel generator (DG) sets with solar panels is one such solution which can bring a sustainable and clean solution in telecom sector by reducing the operating cost.

Mahindra Solar One CEO Chandan Guha, a prominent industry leader, who recognises the immense potential in this segment. “We are looking at

Recognizing the potential of renewable energy in the telecom sector, the government is taking steps to mandate the use of renewable power by telecom service providers. In a directive released in January, 2012 TRAI has directed service providers to use hybrid power (Renewable Energy Technology (RET) and grid power) for at least 50 percent of all rural towers and 20 percent of the urban towers by 2015.

During the process of consultation

with the stakeholders for introduction of green technologies in the Indian telecom space, the participants told TRAI that on the face of power outages for the larger part of the day in rural area, the opportunity was to reach uncovered rural markets through green energy alternatives.

InfralineEnergy estimates that urban subscriber base will grow at the present rate of about 10 percent per annum till 2015. After that the market is expected to 50% of rural towers 20% of urban towers saturate a bit, but still would continue to witness a growth rate of 5 percent.

75% of rural towers In rural areas, 33% of urban towers the subscriber Source: TRAI base would continue to grow at 10 percent per annum till 2020 and will improve the overall tele-density.

As a thumb rule, it has been observed that about 100,000 towers are required to support a subscriber base of 220 million. This trend is expected to continue till 2015. However, with gradual improvement in technology and more network sharing arrangements among the various service providers, it is expected that at least 240 million users can be supported by 100,000 towers. InfralineEnergy estimates that India will need a total of 750,000 towers to power the telecom needs of about 1.8 billion wireless telecom subscribers by 2020.

As TRAI has introduced a roadmap for green energy in telecom sector, solar PV based systems are the most suitable option among other renewable energy technologies (RETs) to achieve this target. InfralineEnergy estimates that solar energy will contribute at least 30 percent and 70 percent respectively, to the energy requirement of hybrid towers in urban and rural areas.

In urban areas, the remaining 70

2015

2025

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May 2012 www.InfralinePlus.com

InDepth Future outlook of Telecom subscriber base in India

Source: Infraline Research, figures are in million

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percent energy requirement will be met through grid power. In rural areas, other than solar power, biomass energy and grid electricity are expected to meet the remaining 30 percent of the total energy requirement.

SPV Potential in Rural Segment Solar energy possesses immense potential as the TRAI green energy roadmap focuses more on the rural telecom segment. Majority of rural India is still un-electrified. Even areas with grid connectivity get an electricity supply of only 3-4 hours. In these parts of the country the telecom towers are mainly dependent on diesel generator sets to meet its energy requirement. Solar energy is expected to play a leading role in this endeavour and would have a total potential of 1225 MW and 2573 MW by 2015 and 2020 respectively.

SPV Potential in Urban Segment The energy requirement of urban telecom towers is primarily met by the grid electricity. DG sets are used as the back-up power sources for about 4-6 hours a day. However, with increasing pollution level in these areas, the government envisages to use solar PV to replace the DG sets for about 20 percent and 33 percent towers by 2015 and 2020 respectively. Solar energy has the potential 410 MW and 780 MW by 2015 and 2020 respectively to meet this energy requirement.

However, efforts to solarise telecom tower are bound to face headwinds from India-specific issues such as the oft-mentioned “policy paralysis”, infrastructure constraints that prevent scaling up of activities and also international telecom players’ fist-tightening in the wake of the 2G telecom scandal.

Tower requirement and Solar PV potential in urban India as per TRAI green energy roadmap, 2020 Year Total Tower 2011 2013 2015 2020

260,000 320,000 39,0000 450,000

Urban India Solar Energy Hybrid towers No of Hybrid Towers (@20% till Energy requirement requirement (MU) @30% (MU) @ 3.5 kW/ 2015 and @33% tower till 2020) 52,000 1,594 478 64,000 1,962 589 78,000 2,391 717 148,500 4,553 1,366

Source: Infraline Research

SPV Module Potential MW (@20% cell efficiency) 273 336 410 780

“We have installed more than 1,000 power backup systems for the telecom sector, but these days because of 2G scam etc, people are not putting much money into the sector,” said Amardeep Raina, General Manager, Conergy.

Talking about the implications of the cost on the widespread use of the green technology, Anand Dalal, Vice President-Corporate Regulatory Affairs of Tata Teleservices limited said, “ While we are confident of the technical feasibility, it is evident that financial viability for solar/ solar-wind/ fuel cell hybrid renewable energy systems in shared mobile infrastructure sites in rural/remote areas will need to be supported by government incentives.

However the present cost of using such technologies based on Solar, Wind and fuel cell, etc. is expensive and the payback period for such investment is ranging from 6 to 10 years. Hence we request the Regulator/ DoT 16 to approach the Ministry of New & Renewable Sources of Energy (MNRE) to subsidize the Capital expenditure of such investments to minimize the payback period to two years, similar to the promotions being done by MNRE”.

With the government’s mandate is in place, the telecom sector in India will certainly be pushed towards widespread deployment of solar PV panel to power its telecom towers. The deployment in urban areas would be less as space could be a concern for solar power roll out. But rural India is set to have a wider acceptability of solar energy as it is cost competitive to the DG sets and have zero emissions.

To meet the target of the government’s green energy roadmap for telecom towers the total solar PV potential in India would be 1635 MW in 2015. The respective solar PV potential by 2020 would be 3353 MW.

Ravi Shekhar is a Senior Analyst in InfralineEnergy.

He is a co-author of a recent report Merchant Power Plant (2012). The views presented are personal.

May 2012 www.InfralinePlus.com

StatisticsRenewableEnergy Renewable Purchase Obligation (RPO) for the financial year 2011-12 State Gujarat Maharashtra Uttarakhand Manipur Mizoram Jammu & Kashmir Uttar Pradesh Tripura Jharkhand Himachal Pradesh Assam Bihar Orissa Goa & Union Territories Madhya Pradesh Haryana Rajasthan Punjab West Bengal Delhi Meghalaya Andhra Pradesh Nagaland Chhattisgarh

Percentage to be procured from Solar 0.50% 0.25% 0.50% 0.25% 0.25% 0.10% 0.50% 0.10% 0.50% 0.01% 0.10% 0.25% 0.10% 0.30%

Percentage to be procured from Non-Solar 5.50% 6.75% 4.50% 2.75% 5.75% 2.90% 4.50% 0.90% 2.50% 10.00% 2.70% 2.25% 4.90% 1.70%

0.40% 0.50% -0.03%

2.10% 1.50% 9.50% 2.37%

0.10% 0.15% 0.25% 0.25% 0.25%

3.00%

1.90% 1.05% 4.75% 6.75% 5.00%

Source: ERCs

Solar PV Cell and Modules Manufacturers in India, As on Dec’ 2011 S. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

SPV Module manufacturers Indosolar XL Energy PLG Power Websol Energy Moser Baer Tata BP Solar Solar Semiconductor EMMVEE Titan Energy Vikram Solar Waaree Group Photon Energy Systems Limited Surana Ventures Reliance Solar HHV Solar Premier Solar CEL USL Photovoltaics Pvt. Ltd.,(UPL) Euro MV Others Total

Module Manufacturing Capacity (MW) 192 100 60 90 125 195

Cell Manufacturing Capacity (MW) 160 120 60 120 100 84 -

135 100 100 75 50

-

40 30 30 30 12 10

10 -

126 1500

40 6 700

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Source: Infraline Research

Status of Renewable Energy Deployment in India, As on Jan- 2012 Achievement During Total Achievement January, 2012 During 2011-12 Grid-Interactive Power (Capacities In MW) 101 2023 48 257.50 25 145.5 20 285

Renewable Energy Programme/ Systems Wind Power Small Hydro Power Biomass Power Bagasse Cogeneration Waste To Power -Urban -Industrial Solar Power (SPV) Total

1.2 1.2 291.6 445.55 485.6 3157.75 Off-Grid/ Captive Power (Capacities In MWeq)

Waste To Energy -Urban -Industrial Biomass(Non-Bagasse) Cogeneration Biomass Gasifiers -Rural - Industrial Aero-Generators/Hybrid Systems SPV Systems (>1kw) Water Mills/Micro Hydel Total No. of Remote Village/ Hamlets Provided With RE Systems Other Renewable Energy Systems Family Biogas Plants (No. In Lakhs) Solar Water Heating - Collective Areas (Million M2)

0.94 4.4 0.192 1 0.06 5.02 52 Nos. 11.61 Remote Village Electrification 25

0.21 0.1

Cumulative Achievement (Upto Jan 2012) 16179 3300.13 1142.6 1952.53 20.2 53.46 481.48 23129.4

27.31 51.89

3.5 89.43 347.85

1.642 10.89 0.33 11 350 Nos. 103.06

15.99 132.27 1.45 81.01 2025 Nos. 671.5

905

9009

0.7 0.52

44.75 4.98

May 2012 www.InfralinePlus.com

ExpertSpeak

‘Renewed’ dimensions of clean energy industry Gokul Chaudhri is Partner with BMR Advisors, with responsibilities that include leading the firm’s direct tax practice and the industry program for energy and environment. He is the lead partner for select Fortune 500 client accounts of the firm.

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Climate change initiatives have gradually moved from the center stage of policy and planning in the domestic and international arena to action, reflected by investments and projects; India has tripled its renewable capacity in the past five years and ranks fifth in the world in total installed renewable energy capacity. Given the renewable energy potential (~150GW), implementing robust facilitative policy framework for the sector holds the key for sustaining the momentum in medium to long run.

Government’s policies and fiscal incentives programmes for renewable energy and clean technologies have evolved over the past decade; some of notable programmes are cost escalation-linked feed-intariff; generation-based incentives; renewable purchase obligations (RPOs) for state utilities; central, state and regional capital subsidies; income tax holiday and accelerated depreciation for generation assets, and host of indirect tax incentives, such as reduced custom and excise duty, state specific VAT incentives, and so forth. In aggregate, these fragmented efforts, provide a welcome framework, albeit the Government’s tentativeness accompanied by policy flip-flop concerns and worries serious investors.

A recent instance is the move to withdraw accelerated depreciation benefit for windmills installed with effect from April 1, 2012. Although, withdrawal of accelerated depreciation was not fully unexpected given the build- up of select low productive wind assets and resultant inefficiency in generation of wind energy; it is the overnight policy shift approach that worries the industry. Industry would have expected that the generation based incentives (per unit) would be enhanced with a voluntary trade-off for reduced depreciation benefit. High-capital intensive solar projects (both thermal and photovoltaic) are primarily viable based on accelerated depreciation and are rightly concerned by the potential cascading impact if the policy shift was to turn adversely in their direction.

Another instance of tentative policy behaviour of the government witnessed by the power sector at large is extension of tax holiday to this sector on a yearon-year basis. The uncertainty has had private power producers on tenterhooks as they revisited their ambitious

investment plans, until the Budget proposed a year of extension of tax holiday till March 2013.

Interestingly, the present incomelinked tax holiday would yet again be replaced by investment linked incentive in less than a year as Direct Taxes Code (DTC) is likely to be implemented from April 2013. The impact of this fundamental shift in fiscal programme for power sector is yet to be ascertained with precision; it is almost certain that such shift will have a bearing on financial returns of investors, especially for less capital-intensive renewable energy sources such as wind, biomass, and small-hydro.

In the context of indirect taxes, since output of a power plant (ie electricity) is not liable to Central or State indirect taxes, indirect taxes on input side stack up as project cost. The tax cascade is not likely to undergo any fundamental change even under GST regime unless electricity duty is subsumed within GST. Given the cascade effect of input taxes, the industry has persistently demanded for allowance of refund of input side indirect tax costs - a demand that has not been paid much heed to, except by certain growth-friendly states which permit partial refund of input side tax to a power producer.

Increase in median rate of indirect taxes from 10% to 12 % (barring the basic import duty) proposed by Finance Bill 2012 would certainly add to woes of this sector as increase in project cost are likely to proportional to rate hikes proposed in the Finance Bill.

While excise duty exemptions are available on several key renewable energy devices like wind powered

May 2012 www.InfralinePlus.com

generating sets, solar PV modules, mounting structures, invertors etc, no such benefit is available under service tax. In addition, state level tax legislations lack uniformity of approach.

Generally state VAT legislations in India provide for concessional rate of VAT on sale on solar/renewable equipments (for eg Gujarat, Haryana, Punjab, Karnataka, Meghalaya, Chandigarh, New Delhi, Tamil Nadu, Uttar Pradesh, etc) which ranges between 4% to 5%.

The States of Maharashtra, Madhya Pradesh and Rajasthan even allow for a complete exemption from VAT on solar photovoltaic modules. However, in absence of all-pervasive policy guaranteeing exemption from local taxes or allowing refund of all noncreditable taxes for the power developer, the indirect tax costs will continue to hinder the dream of bringing down the per-unit cost of power generation for renewable energy generation.

Going back to the point of service tax, where under no exemptions are provided for renewable energy projects, it is pertinent to note that one of the most significant developments of the Union Budget 2012 is the proposal to introduce a negative list based approach to levy of service tax. This would be implemented from a date to be notified after the enactment of the Finance Bill, thereby providing a window of time for the taxpayers to prepare for this paradigm shift. The introduction of a negative list based approach to levy of service tax represents a fundamental shift in India’s approach to taxation in services (which currently taxes only certain specified services). A negative list based approach to service tax will lead to a scenario where service tax could effectively become payable in every transaction for money other than certain

specified categories like sale of goods, immoveable property, specified services in connection with education, transport of passengers etc. Hitherto untaxed transactions for example non-compete fees, fees for right of first refusal etc could potentially become liable to service tax. This, when implemented, would further add-on to the service tax cost on power generation.

Specifically, given the imperatives of merger & acquisition activities in the renewable space, it is particularly important to evaluate possible impact of service taxation rules (under the proposed negative list based service tax regime) on ‘Business Transfer Agreements’. Given the wide definition of ‘service’ proposed under Budget 2012, any set of legally enforceable reciprocal promises may fall under the service tax net now – whether or not intended as a ‘service’/ economic transaction.

Whilst largely changes proposed in the Finance Bill to service taxation appear to have drawn on principles enshrined in European Union VAT laws, exclusion of certain activity from definition of ‘services’ (such as Business Transfer Agreements) as prevalent in EU laws have not been provided for by the Finance Bill.

Change in rules for taxation of services is significant as it could potentially cause business re oganisation and brown-field investments in the renewable energy sector more expensive.

To sum up, the pace and impact of changes in the fiscal framework, some of these changes being specific to renewable energy sector, could raise risk barriers emerging from uncertainties for investors in this sector. Although sporadic and decentralized incentives

are available to renewable energy sector, lack of coordination between central and state incentives programs pose a significant challenge to the ‘economicsbased least-cost development’ approach to tapping the country’s renewable energy potential.

Besides deficiencies of fiscal incentive programme, limited availability of evacuation infrastructure and grid interconnections continue to remain one of the biggest obstacles to harnessing renewable energy potential.

Much economically attractive wind and small hydropower potential remains untapped because of lack of adequate grid evacuation capacity and approach roads. The lack of good-quality data on renewable resources remains a problem, despite investment commitments by the MNRE in collecting data on renewable energy. The lack of support infrastructure in the form of a strong indigenous supply chain remains a major hindrance to harnessing of fullpotential of this sector.

Lastly, it is imperative to address the last mile hitches for developers in the form of making single-window clearances process more effective, especially for smaller renewable energy projects. Robust governance standards need to be implemented to prevent speculative blocking of land which is becoming ubiquitous leading to unsustainable rise in project cost.

Robust and stable fiscal policies hold the key for development and delivery of renewable projects, which will not just provide clean energy, address climate change concerns but also generate direct and indirect employment and revenues to the exchequer. The policy initiatives need to be stated and implemented boldly and with confidence, and any measure that causes removal or reversal of the policy should be constructed in a manner that will not adversely impact the economics of developed or under development projects.

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May 2012 www.InfralinePlus.com

TailPiece

Ensuring Water security is Essential for Energy Security It is important to ensure water security if the country wants to ensure development of Hydropower. says Anil Kumar Razdan, former Secretary, Ministry of Power

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Water and Energy are essential inputs of almost any civilisation, particularly modern civilisations, where organised networks for their availability at affordable costs are deemed to be essential ingredients of public policy. Water and Energy are largely interdependent, if not inter twined in modern economies, rural as well as urban. There is almost no energy security without water security and vice versa. And yet there is no integrated planning of these vital ingredients of the economy and the social fabric.

There is scant understanding of the gravity of the problem of ensuring continued availability of finite water resources and the importance of water in harnessing most commercial forms of energy. Conversely, water cannot reach most intended end uses without energy inputs.

The cleanest form of affordable bulk commercial energy is hydropower.

It is the vital balance between peak and baseload power requirements.

Hydropower is clean, almost entirely indigenous, inflation free in its availability, and non-consumptive in its use. The non-availability of water could devastate any urban settlement and spark instant riots. Yet the Constitution makers listed water and water power as State list subjects, while electricity is in the Concurrent list and Coal, Petroleum

and Natural Gas in the Central list.

This anomaly would need correction sooner than later.

Both water and electricity need correct pricing and compulsory metering to ensure sustainability of operation and attaining desirable levels of efficiency.

Hydropower is the ideal ingredient for grid stabilisation, given its instant switch on switch off capability, particularly from large storage systems.

Its ideal share was assessed at 40% in a hydro-thermal mix in India. However, its share has fallen from 50% in the 1960s to 20% in 2011-12 in terms of installed capacity and 15% in respect of overall generation. Imports from Bhutan accounted for only 0.60%.

The contribution of hydro in 2011-12 was only 130, 430 MUs out of a total

generation of 876,337 MUs, exclusive of captive generation. The installed capacity is only 39, 000 MW out of a total non-captive capacity of 2, 00, 000 MW today. The total hydro potential has been assessed at around 1, 50, 000 MW. We need urgent clearances for pending projects.

Interestingly, water and electricity have almost similar management or mismanagement issues. In fact the mismanagement of water is probably greater as it is thought to be a God given resource. While the population is going on increasing, the per capita water availability is decreasing rapidly.

India has 16% of the world population and only 4% of usable fresh water.

India’s electricity and commercial energy consumption levels have to grow almost four times to reach global levels. Both water and electricity need correct pricing and compulsory metering to ensure sustainability of operation and attaining desirable levels of efficiency. In recent years, while energy audits are becoming the order of the day, water use and efficiency audits are largely non-existent. The pricing of water could become an issue of greater political power play than electricity. There is an immediate need for making energy efficient water pumping devices mandatory in surface water distribution, water and sewage treatment and attaining possible efficiency improvements of upto 50%.

A Bureau of Water Efficiency on the pattern of the Bureau of Energy Efficiency could help device and enforce water use standards.

It has been estimated that in India,

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80% of water usage is in irrigation, while 60% of this irrigation water and 80% of rural drinking water is from ground water sources, necessitating energy use in extraction. In fact between 2002-08 there has been 70% increase in ground water extraction compared to the previous decade.

Water conservation measures like piped water conveyance systems and drip irrigation need to made mandatory.

There are ample instances to show that more water use means more electricity / energy and more energy use needs more water.

Specific water consumption in industry, particularly in the thermal power sector has been shown to be high and unsustainable when compared to the best global practices. A study has shown specific water consumption in coal based thermal power plants between 3.5 to 8 litres per KWh, mainly in cooling towers and ash handling, while the best

practice norm is 1 litre per KWh. Water is also needed in coal washeries. If this is not attended to, water availability, which cannot be supplemented by imports, could become a greater constraint than coal availability. Similar improvements are warranted in pulp and paper, and integrated steel plants. Waste water and grey water recycling, rain

A study has shown specific water consumption in coal based thermal power plants between 3.5 to 8 litres per KWh, mainly in cooling towers and ash handling, while the best practice norm is 1 litre per KWh. Water is also needed in coal washeries.

water harvesting are critical to water availability and security.

Rapid urbanisation has led to large scale change of land use and state revenues. The CLU charge needs to be linked directly to the cost of energy and water foot prints for specific locations per capita, relative to population density, and not generalised figures, leaving the provision of water and electricity to already bankrupt local bodies. The limits to urbanisation have to be water availability and not the advertising budgets and unenforceable promises of real estate developers.

Water security is a scary scenario and too sensitive an issue to be left to unaccountable self-styled do-gooders.

While the total water resource availability in the country remains the same, the per capita water availability is reducing rapidly.

It has declined from 5200, 2200 and 1820 cubic metres in the years 1951, 1991 and 2001, and is expected to go down to 1340 and 1140 cubic metres on an average by the years 2005 and 2050 respectively. While electricity cannot be stored, water can be safely stored in large surface storages. In this respect India’s record is dismal.

Live storages account for only 11% of the average annual water resources potential of the country. India can store only 30 days of rainfall compared to 900 days in major river basins in arid areas of developed countries.

The per capita storage in India is about 210 cubic metres when compared to 6103 in Russia, 3145 in Brazil, 1410 in Spain, 1111 in China and 753 in South Africa. I dread to think of a scenario in the coming years if the natural locations for possible storages are inhabited and lost to us for ever, or upstream storages are developed in neighbouring countries before we do so. In such a scenario, both water and energy security will have been severely compromised and jeopardised.

The views in the article of the author are personal.

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May 2012 www.InfralinePlus.com

NewsAnalysis

Tax Break for Solar Industry, `7.49 /unit bid augurs well

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The tax breaks offered by Budget 2012-13 for setting up of solar plants and equipments will go a long way in scaling up solar power production in India. The country has realized that if it wants to join the super power club, it has to secure its energy needs for future.

By 2011, the installed solar capacity in India was 0.45 GW, a miniscule, compared to the global leader like Germany with a solar capacity of 24.7 GW. However, Jawaharlal Nehru national Solar mission (JNNSM) and state incentives are driving the growth and the country is marching ahead with 41.2 CAGR to meet the JNNSM target of 20 GW by 2022.

The country is likely to see installation of 9000 MW of solar projects between 2013 and 2017, the phase II of the National Solar Mission.

Domestic and foreign project developers are finding it tough due to high cost of finance, which may spoil the party for the solar power project developers. However, as per reports, flow of private investments into India’s solar energy sector has risen by 54% to over $10 billion in 2011, marking the second-highest growth rate for such investments among the G-20 nations.

Inflow of private investments is likely to boost the manufacturing side of the industry.

With the current growth trends, India is set to reach the CERC target of 3 percent RPO for solar market in India. The solar landscape of India is dominated by Gujarat with 71% of the total solar capacity of India, followed

by Rajasthan.

The falling of international prices across the segments in the sector good news for the Indian industry, which is heading towards grid parity with the lowest bid tariff in Jawaharlal Nehru National Solar Mission ( JNNSM) batch-2 bidding reaching as low as `7.49 per unit.

Domestic manufactures of solar PV cells and modules have been lobbying since long for exemption of all duties on raw materials and imposition of import duty on foreign finished PV cells and modules. The industry is of the view that the measure would have brought down the input costs and help Indian companies with their Chinese counterpart.

Chinese manufacturers are selling components which are 30-40% cheaper than Indian manufactured components.

As per the industry, it’s the high cost of

capital which is stifling the growth of domestic manufacturing.

Government on the other hand has asked the project developers to compulsorily to source at least 30% of equipments and components from the local manufacturers. In order to encourage the domestic industry, the authorities may even consider putting a ban on import of equipments and related supplies. This is expected to aid the domestic manufacturers to compete on equal footing with its Chinese and other foreign counterparts. The industry would indeed welcome the move; however, restriction or ban on imports of components from overseas market may slowdown the pace of project development in the country.

The government may have to wait beyond 2022 to see 20,000 MW of solar energy capacity in the country.

May 2012 www.InfralinePlus.com

PhotoEssay

Alstom turning the tide at Chamera Power is the foremost requisite for a nation’s growth and development, which needs to be sustainable. Currently more than 20 percent (38GW) of the country’s power demand is fulfilled through hydro power, which is the most mature source of renewable energy. With an estimated potential of 150GW of hydro power from all available sources, the opportunity lies in the 75% untapped hydro potential in India.

Escalating thrust on combating climate change and CO2 free environment has opened enormous venues for hydro power plants in India. By 2030, the world will witness a significant change in the power generation mix with an increased share of CO2 free and renewable power but this cannot be accomplished with conventional strategy. Constant innovation, substantial investment in research and continuous improvement based on past experience are fundamental drivers of this holistic growth concept.

Indian hydel sector has witnessed a similar success story of such growth model. Alstom, the French equipment major has achieved a new industry benchmark by successfully spinning

1

three turbines at a rated speed of 333 RPM in less than 10 hours for Chamera III Hydro power plant (3 x 77MW), where the industry average is around more than 30 days.

Alstom was awarded the Chamera III HEP contract by NHPC in 2007.

The scope of work included turnkey execution of Electro-Mechanical lot comprising of hydro turbines, generators and auxiliaries. Alstom’s Hydro unit in Vadodra has executed the works for the project. Emphasising the role of Alstom Hydro India’s contribution to the hydro market in India, Mr. Alain Spohr, Unit Managing Director, Alstom Hydro India, said, “The spinning of all three machines in record time is testimony to the exemplary work and coordination of the team. We at Alstom are committed to provide cutting edge technological expertise and clean power generation solutions to our customers and partners and will continue to do so in the future as well. The hydro facility at Vadodra is one of the three large hydro equipment manufacturing hubs for Alstom along with China and Brazil. This factory is fully geared to meet the needs of domestic and international projects.”

2

The fundamental choices of turbine type, generator and balance of plant technology are different in every case.

Everything is tailor-made based on the conditions of each site such as the head, flow and plant configuration.

Alstom ensures that power produced should not have any environmental side effects, through Alstom’s Plant Integrator solutions which maximise performance, with extensive range of environmental products that enables to supply the cleanest power plants in the industry. Global Technology Centres of Alstom are equipped with advanced simulation software and scale model test rigs that allow Alstom to fully verify every stage of the design and engineering process, also eco-friendly oil free turbine components, fish friendly turbine designs and other relevant operations and innovations which ensure efficient and effective process towards achievement of the desired objective. Currently in India more than 9GW are under construction, which are likely to benefit in XII FYP and more than 5GW hydro power plants already commissioned in XI FYP. Infraline’s trip to this project was at the invitation of Alstom Projects (India) Ltd. The trip was sponsored.

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May 2012 www.InfralinePlus.com

PhotoEssay

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7 8

Photo Caption: 1. Comprehensive view of 200kV D/C transmission line from Budhil-Chamera III GIS pooling station of 3x77 MW Chamera III HEP constructed by PGCILin Chamba district of Himachal Pradesh.

2. Exclusive view of best in class newly constructed 68m high long concrete gravity Chamera III hydro dam on one of the most difficult terrains of river Ravi in Chamba valley of Himachal Pradesh.

3. View of Alstom’s exclusively designed 200 m head Francis TurbineGeneratorcoupling shaft (Unit I) for 3 x 77 MW Chamera HEP. 4. Swift lowering of 77 MW exclusively designed Francis Generator Rotor for Unit II of Chamera HEP. Alstom was awarded the Chamera III project in 2007, which includes turnkey Electro-Mechanical package of 3 x 77 MW Francis Units size along with associated Balance of Plants.

5. An ALSTOM employee monitoring Main Inlet Valve (MIV) from turbine floor, which is connected to 6.5m dia horse shoe shaped tunnel 15.995 kms long HRT, at the Underground power house consisting of 3 units of 77 MW each.

6. TG unit’s meticulous erection during construction phase of Chamera III HEP. 7. All 3 Units of 77 MW each of Chamera III ready to be synchronised after successfully spinning at rated speed of 333 RPM in less than 10 hours, industry average for completion of this critical milestone, can usually take up to a month to achieve for a single project unit.

8. Exclusive view of newly constructed best in class 220 kV D/C transmission line from GIS pooling station Chamba-Chamera-III HEP for seamless power evacuation of Chamera III HEP

May 2012 www.InfralinePlus.com

`700 cr project debt financed by ADB and EXIM Bank of US

PhotoEssay

Reliance Power: Dhursar Solar Power Project

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Reliance Power commissioned India’s biggest solar plant in Dhursar village in Jaisalmer district in Rajasthan on March 31, 2012. Comprising more than 500,000 ground-mounted photovoltaic thin-film modules, the 40 megawatt plant will deliver clean and green power to Maharashtra. Spread over an area of 350 acres, the solar plant was built in just over four months. It is expected to generate on average 70 million kilowatt hours of clean energy annually. This kind of output would make the site India’s biggest solar PV plant in terms of electricity generation.

The plant will cater to the needs of more than 75,000 households. It will displace more than 70,000 metric tonnes of CO2 emissions per year, the equivalent of taking more than 25,000 cars off the road. This is the first project being set-up under Rajasthan government’s open access policy.

The solar panels for the project have been sourced from First Solar, a US manufacturer and the project and the construction and commissioning work was done by Larsen and Toubro. The long term Power Purchase Agreement (PPA) for PV project has been signed with Reliance Infrastructure.

More than 1,400 kilometres of cable has been laid, more than the distance between Delhi and Mumbai.

Construction of the plant involves erection of more than 5 lakh PV modules, laying of more than 1500 kms of cable and erecting more than 8000 tonnes of steel, as much steel as there is in the Eiffel Tower in Paris.

The `700 crore, is financed at a debtequity ratio of 75:25. Reliance Power infused the entire equity, US Exim Bank and Asian Development Bank

(ADB) have provided the debt to the project at competitive rates. This is the first direct loan sanction by ADB to a private sector solar project in India.

What makes the site unique is that at the same site, Reliance Power is also constructing India’s largest Concentrated Solar Thermal (CSP) plant of 100 MW capacity, awarded to the company under the Jawaharlal Nehru National Solar Mission. It will be the only solar power generation facility in India producing power from both PV and CSP at the same location.

Anil Ambani, Chairman, Reliance

1

Power said, “The Dhursar plant demonstrates the huge potential of solar energy to help India meet its growing energy needs in the most environmentally friendly manner.

The plant is testimony of the quick timeframe in which solar power plants can be built and commissioned.

Reliance Power’s vision is to become India’s largest green power company and the commissioning of this project is the first step in that direction.”

Infraline’s trip to this project was at the invitation of Reliance Power. The trip was sponsored.

May 2012 www.InfralinePlus.com

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May 2012 www.InfralinePlus.com

PhotoEssay

72

4 1. Another view of the PV thin-film modules

The clean energy generated by the Reliance Power plant will displace 70,000 metric tonnes of CO2 emissions – equivalent to taking 25,000 cars off the road

2. A Reliance Power engineer stands next to the PV modules

Team Reliance Power developed this 40 MW plant, India’s largest solar power project, in a record time of 129 days

3. Providing clean energy to the nation

The clean and green energy generated by Reliance Power’s Dhursar plant will serve the energy needs of more than 75,000 households

4. A view of the 350-acre solar power plant

The vast area covered by the 500,000 solar PV modules (350 acres) is 23 times the size of the Eden Gardens Stadium in Kolkata

5. Panoramic view of India’s largest solar power plant

5

More than 500,000 ground-mounted solar photovoltaic thin-film modules capable of generating 70 million kWh of clean energy

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Key Highlights ► Ground realities on extractable reserves, actual productivity and efficiency setbacks ► Captive coal demand sizing through scenario based outlook on aggregate demand and supply position by FY20 ► Recent trends in block allocation and production ► Impact analysis of the proposed competitive reserve-price tag mechanism (MMDR Act, 2010) ► Comparative analysis on different sourcing options viz Captive, Imported and Linkage Coal ► Business case analysis - capital cost of coal mining projects and contracting arrangements ► Feasibility of the emerging business models like trading surplus coal, merchant mining etc.

Key Highlights ► Availability and production shortfall issues for coal in India ► Major Power Plants investments contingent upon imported coal in India ► Players shaping the global coal trade ► The bottlenecks around ports and logistics in India ► Volatility of coal pricing in international trade ► China’s strategy for energy diplomacy ► In-depth analysis of emerging destinations for coal import and acquisition ► Long term sustainability of imported coal for India

Others Coal Publications: Coal Outlook Development of Isolated Coal Blocks in India Coal Washeries in India: A $5 billion Opportunity CBM Development & Associated Coal Blocks in India: 2010 Coal Import Observatory

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