InfralinePlus January 2013

January 2013 Volume 1 | Issue 9 | `100 www.InfralinePlus.com

The Complete Energy Sector Magazine for Policy and Decision Makers

Cap on

LPG subsidy... ...booster for gas pipeline firms

YEAR

ENDER

2012

ower • Coal • Pas • Oil & G bles • Renewa

Poor-quality Chinese equipment slow down power growth

GMR may sue Maldives for $1.12 bn damages

Raising of tariffs has not solved our problem, says chief of BSES Yamuna Power, Ramesh Narayanan

Do not buy whatever is available, says Pradeep Lenka, CEO-Power Business, Aditya Birla Group

We have missed the game in liquefied natural gas says Rajeev Sharma, Chief Executive Officer at Adani Gas

India must find its own crop champion for bio-fuel, says Alok Adholeya, Director, Biotechnology & Management of Bioresources, Teri

Bringing EnErgy to thE world

CONTACT: CAPT. VIVEK BHIDE [ MANAGING DIRECTOR, TEEKAY INDIA ] | +91 (22) 6746 8801

InfralinePlus

January 2013 | Volume 1 | Issue 9

The Complete Energy Sector Magazine for Policy and Decision Makers

Editor’s Letter Cap on distribution of subsidized LPG cylinders, biggest-ever hike of Rs 5 in the prices of diesel, worst-ever grid failure, biggest-ever surge in demand for piped natural gas—the year 2012 was a year of superlatives, of the good, bad and ugly kind. Among the bad ones was also a slew of downgrades which international credit rating agencies accorded to India--from S&P, Moody’s to Fitch and IMF. Reason was continued poor performance of the country on economic front and inaction on part of the government to stem the slide. That was the first half of the year.

The “good” started happening in the second half when in September the government announced an innovative method of reducing gas subsidy by putting a cap on the number of below-market-price LPG cylinders that a family could buy. The good work of economic reforms continued in October when the government brought down the deficit of oil marketing companies by increasing diesel prices.

Read this and much more in this Special Year-ender Issue where Team Infraline brings you an encapsulation of the events that took place in the energy sector during 2012. There were inter-ministerial turf wars over clearances and fuel supply issues which proved to be a major dampener for power generation. Not much was done to help the sector get sufficient coal linkages, a promise made by Prime Minister Manmohan Singh to top industry leaders including Ratan Tata, Anil D Ambani and Shashi Ruia proved futile.

The reform measure of capping subsidized LPG cylinders also led to a surge in demand for piped natural gas (PNG). Finally economics did what common sense had not been able to do, so far. The trend of increased PNG consumption is important as piped gas is not only environment friendly but also cheaper and more convenient than LPG. We analyse how absence of manufacturing base and service centres of Chinese power equipment majors is hampering electricity generation in India.

Chinese machines develop technical snags too early in their life and power stations are being forced to ship turbines all the way to China for repairs. In our Off-Beat section, we analyse how rising fares and low domestic traffic are forcing airlines to do away with business class.

Read about the legal options which GMR is considering to challenge the Maldivian government rescinding on the airport contract which was awarded to the Indian infrastructure major two years back. On the other hand, ONGC Videsh has cemented its position overseas by acquiring a stake in Kashagan oilfields of ConocoPhillips in biggest ever deal in Indian history.

Before leaving you with the magazine for a happy reading, I would like to wish you all a very Happy New Year 2013.

SHASHI GARG Managing Director and Editor InfralineEnergy Research and Information Services For Advertisement and Subscription Please contact: Deepshikha Verma Tel.: +91 11 4625 0055 (D) | Mobile: +91 98997 52482 Email: deepshikha.verma@infraline.com Rakesh Ranjan Tel.: +91 11 4625 0078 (D) | Mobile: +91 99588 48386 Email: rakesh.ranjan@infraline.com

Editorial Shashi Garg, Editor Alok Sharma, Assistant editor Pallavi Karan Chakravorty, Assistant Chief-sub editor Neeraj Dhankher, Principal Correspondent Ankita Sharma, Business editor News Team Pankaj Bhagat Ankit Bhatnagar Analysts Isha Gakhar Raeesa Zeb Debjit Das Puneet Paliwal Design Team Gopal Thakur, Art Director

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January 2013 www.InfralinePlus.com

InfralinePlus

Contents Editor’s Letter

1

Cover Story

40 PNG finds takers, finally

40

2

Power News Brief

4

With the recent capping of subsidized LPG cylinders by the government, consumers are queuing up to give up LPG cylinders and taking up PNG connections. Keeping the growing demand in mind, city gas Distribution companies have adopted the acquisition and merger route to gain stronghold in the business. The story also delves on why the progress on piped gas connections has been slow and what are the possible solutions.

In Conversation: Rajeev Sharma, CEO, Adani Gas

Coal

p44

22

p4

News Brief

In Conversation: BSYL Chairman Ramesh Narayanan

p6

In Depth: Faulty Chinese equipments stalling power plants, government recommends caution

In Depth: Delays in clearances for foreign coal equipment stalling growth p24

p8

In Depth: Transfer of coal linkages within a company may soon be allowed p26

p10

In Depth: Acquisition of foreign coal mines gaining turf p28

In Depth: SEBs queue up for tariff hike; riders of bailout package for discoms working

p12

Expert Speak: Pranab Jha, Head - Marketing and Business Development, JSW Infrastructure p30

Expert Speak: Sushanta K. Chatterjee, CERC Deputy Chief (Regulatory Affairs)

p14

Year-ender: Power sector’s biggest happenings round the year Statistics

p18 p20

In Depth: Lack of gas encouraging shifting of power plants to Africa

Expert Speak: Pradeep Kumar Lenka, CEO, Power Business at Aditya Birla Group

p32

Expert Speak: Isha Gakhar, Team lead, InfralineEnergy p34 Year-ender: The biggest tell-tales of the sector

p36

Statistics

p38

Topics Covered:

Topics Covered:

Chinese equipments

Coal linkages

Gas-based power plants

Coal mining

Tariff hike

Coal exploration

Distribution sector reforms

Imported coal equipment

Cover design by gopal thakur

p22

January 2013 www.InfralinePlus.com

Oil and Gas

47

News Brief

Renewable

60

p47

News Brief

p60

In Depth: The menace of fuel adulteration

p48

Expert Speak: BS Negi, former member, PNGRB

p52

Expert Speak: Deepak Mahurkar, Leader Oil and Gas, PwC India

In Conversation: Pashupathy Gopalan, MD-South Asia and Sub-Saharan Africa Operations, MEMC-SunEdison

p61

p54

Year-ender: Round up of the top stories in the sector

In Conversation: Alok Adholeya, Director, Biotechnology & Management of Bioresources, TERI

p64

p56

Statistics

p58

In Depth: States becoming serious about solar power

p66

Year Ender: What were the top headlines in the sector

p68

Statistics

p70

Topics Covered:

Topics Covered:

LPG & PNG

Solar power

City Gas Distribution

Solar equipment

Fuel adulteration

Renewable Energy Certificate (REC)

Crude oil imports

Bio-fuels

Off Beat

Interviews

3

72

GMR likely to sue Maldives for $1.12 billion damages p72 Beyond news: Rising fares, low traffic force airlines to remove biz class p75

Ramesh Narayanan,

Rajeev Sharma,

Chairman, BSYL

CEO, Adani Gas

Alok Adholeya, Director,

Pashupathy Gopalan,

Bio-technology, TERI

MD, MEMC-SunEdison

Plus - Photo Essay

78

A photographical journey through SunEdison’s solar plants in Thailand and India.

78

January 2013 www.InfralinePlus.com

NewsBriefs | Power

4

Odisha-PGCIL pact Aim to strengthen transmission network

NTPC stake sale Bid deadline extended to December 27

Eco clearance norms MoP seeks changes to fasten projects

Odisha plans to spend `10,000 to `12,000 crore on development of transmission during the 12th five year plan period from 2012-17. The transmission projects worth `2000 crore have been signed between the authorities. OPTCL has also plans to enter into a joint venture arrangement with MCL and OMC to implement some transmission projects to cater to the power needs in the state.

The department of disinvestment has extended the date for submission of bids by merchant bankers for handling the government stake sale in NTPC through an offer for sale from December 14 to December 27. Earlier, the government was targeting NTPC offer for sale on January 15, but DoD officials now say this would happen after disinvestment in Oil India Limited.

The Power Ministry is seeking special dispensation from the Ministry of Environment and Forests (MoEF) to facilitate bidding for ultra mega power projects of 4,000 MW each in Odisha and Chhattisgarh. The Ministry wants MoEF to offer in-principle environment clearance to the entire power project prior to bidding, without insisting on environment and forest clearance for the attached coal block.

Udupi power plant sale Lanco in talks with JSW and Adani

BGR-NTPC join hands Supply of generators on agenda

GMR Infrastructure gets a boost Nepal allows firm to increase capital

Lanco Infratech has begun talks with JSW Energy and Adani Power to sell a power plant in Karnataka as banks pile pressure on debt-laden power companies to sell assets and improve cash flow. Preliminary discussions have taken place between JSW Energy, Lanco and Adani for the sale of the 1,200 mw coal-fired Udupi power plant. The decision to sell an operational asset is a shift in strategy for Lanco.

BGR Energy is set to start work on the `1,548-crore contract to supply two 800-MW Steam Turbine Generators for NTPCs Lara Super Thermal Power Project in Chattisgarh. The NTPC project is a 4,000 MW project of 5 x 800 MW and the Chennai-based BGR Energy will provide two (2 x 800 MW) steam turbine generators for the project. The company received the notification of award on Dec 13.

The Nepal government has allowed GMR to increase the authorized capital in its hydro power projects in Nepal to `190 crore while also extending its survey licence by six months. The GMR, which is developing 900 MW Upper Karnali Project had requested the government to extend the licence after it expired recently. Government also extended the survey licence of 600 MW Upper Marsyangdi Power Project.

JV with Bhutan Haryana to set up hydel power project

Uttarakhand-Himachal Pradesh tie up Move to build 600 MW Kishau project

Private firms to power Jharkhand Two greenfield projects to come up

The state government will to set up the project and sign PPAs to buy power from Bhutan. Bhutan and Haryana agreed to explore possibilities of co-operation in the hydropower sector with the intention of Haryana undertaking investments in hydropower generation in Bhutan and receiving power from Bhutan through longterm PPAs and power trading arrangements.

Uttarakhand government has launched efforts for building the 600-Mw Kishau project in joint partnership with Himachal Pradesh.

The technical advisory committee of the Centre Water Commission has given its clearance to multi-purpose project with an investment of `4,000 crore. It would be constructed by the UJVNL at an estimated cost of `3,966 crore.

The chief secretary giving its nod to two private firms to set up greenfield power projects with cumulative generation capacity of about 2,900 MW. The first plant has been proposed by Jindal Steel & Power Limiteds sister concern Gagan Power Limited. The company aims to set up either a 1,320 MW or a 1,600 MW power plant in Dumka, Santhal Pargana commissionary area. The second is proposed by Adhunik Group.

Discoms in Odisha to float tenders `8.05 billion for capex to be raised

Doosan wins NTPC deal To provide two boilers at $560 million

Government set to miss REC target Blames MoEF for the delay

Distribution companies operating in Odisha have floated tenders of `805.29 crore for implementing the capital expenditure programme aimed at slashing AT&C losses.

Nesco, Wesco and Southco controlled by Reliance Energy have managed to arrange counterpart funding of around `80 crore against requirement of `120 crore for Capex implementation in the first phase that was to be completed by March 2013.

Doosan Heavy Industries & Construction Co Ltd said it won a 600 billion won ($560 million) order from NTPC Ltd to provide two boilers for use at a power plant in Chhattisgarh, India. The South Korean company said in a press release it plans to supply the boilers by 2016. ($1 = 1072.5000 Korean won).

The government is likely to miserably fall short of its rural electrification target for the current fiscal as most villages that were to be covered under the scheme are located in difficult terrains, making it difficult for the Rural Electrification Corporation to lay power lines. Delay in forest clearances, remote and treacherous areas and inhabitations in wildlife sanctuaries are the major impediments to providing electricity.

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www.infraline.com/ipp

January 2013 www.InfralinePlus.com

InConversation

Raising of tariffs has not solved our problem, says BYPL chief

6

With the entire power sector in the country facing a rough patch, distribution companies are grappling with their own problems. These are very different from the problems being faced by generation and transmission companies. Reeling under losses despite the recent rise in tariffs by 26 per cent, they are demanding a fresh round of tariff hikes. The Chief Executive Officer of distribution company BSES Yamuna Power Limited (BYPL), which distributes power in 14 districts of the national capital across Central and East Delhi, Ramesh Narayanan speaks to Pallavi Karan Chakravorty about why distribution companies have nothing to do with raising of power tariffs and why the sector is in need of a fresh set of reforms. Excerpts: Has raising of power tariffs solved the problem of a distribution company? If not then what has been the reason behind it?

For a distribution company, 80 per cent of the cost/ expense is the power purchase cost from the generators, 10 per cent is the depreciation cost and the remaining 10 per cent is what we charge from the consumers. The last 10 per cent is used for meeting our operation and maintenance (O&M) expenses, employee cost and other miscellaneous expenses.

Our O&M expenses over the past 10 years have come down. But the tariffs have gone up because the input cost has gone up. I used to get power at `1.41 per unit in 2002, today I get it at `5.37 per unit, so the cost has gone up by 350 per cent whereas my tariff has gone up by only 70 per cent. I manage the remaining 280 per cent cost escalation by efficiency gain. I brought our losses from 60 per cent to 18 per cent, so there was some

extra flow of cash and that has supported that 280 per cent cost escalation.

But I didn’t get any benefit from the efficiency gain; it was all sucked away by the generator and the transmission companies. However, the inefficiencies on the part of the generation and transmission companies are growing in terms of their power purchase cost.

Power from the Jhajhar plant is available at `6.50 per unit, so how am I supposed to support that against my tariff?

The energy bill should have three subheads; power purchase cost, transmission cost and the distribution cost. Let the people know why the hike was essential.

What is your solution for a better distribution network?

The Centre can divide the distribution sector into two parts -- wires and content. Basically, power is not flowing to the end consumer due to lack of wires, the content we already have. For

Ramesh Narayanan CEO of distribution company BSES Yamuna Power Limited (BYPL)

the wires, we can have a similar project finance arrangement. They can have a back-to-back tie-up with an offtaker and have a leasing arrangement. These wire companies can be financed on the basis of the lease agreements. This infrastructure can be created all over the country. The distribution company can lease these wires from the central company upfront without investing in building a new infrastructure.

What, according to you, should be the first thing that the government should do for the betterment of the power distribution sector?

The government has to initiate investments at the distribution level.

For every 1 mw that you add on the generation side, 2.1 mw needs to be added on the distribution side. If we have added 50,000-60,000 mw in the past 20

January 2013 www.InfralinePlus.com

years on the generation side, we have not added around 300,000 mw capacity on the distribution side. So, the power is not able to reach the end consumer.

We never focussed on the transmission and distribution sector. However, later it was realised that the transmission sector too needed a framework similar to the generation side and independent transmission projects started taking off.

What kind of reforms do you think are required in the power sector?

Basically, we need a set of reforms Delhi will be islanded soon, for the distribution sector on the lines in order to avoid slipping into which were provided to the generation darkness following a grid sector. We need a financial, legal and collapse. Being one of the major administrative framework. It is time we power distributers in the capital concentrated on the downstream. what would be BSES Yamuna’s The first set of economic reforms role here? in the country were announced in For islanding, there has to be a certain 1992 by the then finance minister Dr. amount of committed generation for Manmohan Singh. He allowed foreign Delhi, which will isolate itself in case direct investment (FDI) and also created of any crisis on the northern grid. For three frameworks example, National for the generation Capital Power Power is not flowing sector -- financial to the end consumer Station (NCPS) framework, legal or NTPC Dadri due to lack of wires, framework and was supposed to the content we administrative exclusively supply already have. For the power to Delhi, and framework. wires, we can have a it was supposed to International norms similar project finance lay transmission became Indian arrangement.

They can lines from Dadri norms. This gave have a back-to-back a tremendous to Harsh Vihar, boost to investors’ tie-up with an offtaker one of our zones in confidence. From East Delhi. Then and have a leasing 67,000 mw installed all the 900 mw arrangement. These capacity then, we wire companies can be has to flow here. have achieved an financed on the basis of Similarly, power installed capacity of the lease agreements. from Jhajhar Power 206,000 mw now to Mundka, This infrastructure can Plant – a progress of 210 which is 750 mw, be created all over per cent. has to come on a the country.

This installed radial mode. We capacity is also are trying to make a much higher than the demand on the ring around Delhi, which is a 760 kv ring grid. At peak season the demand is being made by the Power Grid. As such 135,000 mw. So, does that mean that we there are two rings 400 kv and 220 kv. have 80,000 mw surplus capacity. No. They are segmented at a few places due It is actually an artificial surplus. Today, to faults which would be rectified. So, some of the power generation companies it is basically an involved subject of a are struggling to meet their fixed costs, transmission network. Once that is done, and it is not only because of fuel. The we can proceed from our end. They have main reason is that the transmission and to deliver. At our end we are assisting distribution sectors have not developed in evacuation facilities from those load and grown the way generation sector has. points or the load centres.

How long will it take for Delhi to be islanded?

It will take at least six months, may be more. Because Power Grid, which is doing that line, is facing some land acquisition issues as the route falls in Uttar Pradesh. Similar issues are there at the Mundka level.

What is your view on Open Access? Do you think it would promote healthy competition in the sector?

Open access is good and it is just a matter of time before it takes off. It is not really happening right now not because anyone has any reservations about it but because there isn’t enough network to transfer surplus power. You need reliable supply of power and also the wires (transmission lines) in place before opting for open access. Today, what is happening is in order to give power to one person, the other is left deprived as both are being catered to by the same transformer. For regular power supply to both the persons, we either need a bigger transformer or two separate transformers.

These are the basic hindrances because of which open access is not taking off.

Today, the biggest challenge is how to accelerate the infrastructure. Open access is being promoted by those who are sitting with surplus generation capacity.

Law is not an issue, the process is not an issue, wires are an issue.

If today I have surplus power, I cannot give it to someone in Gurgaon, Noida or Faridabad. DLF City has asked us to supply power, but I cannot take it there as there are no transmission lines. So, there has to be a right kind of infrastructure for me to take the power there. Till these things are put in place, open access will not happen. Wherever it was feasible, it is happening. For instance, in Mumbai.

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January 2013 www.InfralinePlus.com

InDepth

Poor-quality Chinese machines hampering power generation ►► No after-sales service as Chinese companies have no base manufacturing base in India ►► Initial cost gains of cheap machines nullified by costly and time-consuming repairs

by Pallavi Karan Chakravorty

8

Haryana residents are a harried lot these days. They are facing unprecedented power cuts and are being forced to manage with 1000 mw less electricity than they require. Reason — two of the power stations in the state have broken down and nobody in India knows how to repair them! State-owned Haryana Power Generation Corporation (HPGCL) had bought the turbines for these plants cheap from Chinese vendors two years back. Today when the machines have got stuck, there is no on-site vendor support and the faulty rotors are being shipped all the way to China for repairs. Shanghai Electric Company — the Chinese vendor for the plant -- does not have any service facility in India.

The problem in Haryana is neither new nor exceptional. A year back, the state-owned Durgapur Projects Ltd had approached Bharat Heavy Electricals Limited (BHEL) for carrying out repair and recommissioning of a 300 mw thermal power plant in West Bengal.

Reason: a turbine supplied by Chinese firm Dong Fang Electric Corporation had become inoperable due to some technical snag. Post this issue, Central Electricity Authority (CEA) had issued guidelines saying power equipment suppliers must have manufacturing facility in India so that any technical snag could be repaired without losing time.

At a time when equipment contracts for well over 40,000 mw of upcoming power capacity have already been placed with Chinese vendors, the government is also likely to issue an advisory that

Dong Fang Electric is China’s largest power equipment manufacturer but its turbine supplied to India developed snags within no time

future orders be awarded only after factoring in life-cycle costs of imported Chinese equipment, and not merely the upfront costs.

“Over-reliance on Chinese equipment vendors, without access to adequate and fairly-priced spares, as none of them have a manufacturing base in India, could create a serious crisis for the power sector,” a government official says on condition of anonymity. The Chinese, who have managed to capture the entire manufacturing sector across the world, already have a major share in India’s power sector. Despite language problems and various other hurdles, they have captured almost one-third of the traditional power equipment market besides 57 per cent share in the solar equipment market. They do not sell their technology and their equipment/ turbines

need to be sent back for maintenance, making repairs both costly and time consuming.

Fear of competition Logical as it may sound, the CEA move of making it mandatory for power equipment suppliers to have a manufacturing base in India has not gone down well with Indian power equipment manufacturers such as BHEL and Larson & Tourbo as they worry that they may face unfair competition from China. The power equipment industry has witnessed negative growth for two consecutive quarters, according to Indian Electrical and Electronics Manufacturers’ Association (IEEMA). The dip in growth increased to 4.1 per cent during JulySeptember 2012 against 2.1 per cent de-growth during April-June 2012.

January 2013 www.InfralinePlus.com

China’s top power equipment makers on the other hand are keen to set up manufacturing facilities in India, and are seeking easier visa and import rules.

India’s power sector, which added 20,000 mw of capacity last year, is a lucrative market for foreign firms. Supplies from Chinese firms such as Dong Fang Electric and Harbin Electric International Co would also help power producers who are facing high costs, fuel scarcity and distribution bottlenecks. India had earlier imposed a 21 per cent duty on imported power equipment after strong demand from local suppliers.

Haryana hit hard The All-India Power Engineers’ Federation (AIPEF), the apex body of power engineers in the country, in a letter to the Union power ministry has claimed that old units of indigenous BHEL at Panipat were performing well, while new units from China had developed faults in the turbines at Khedar and Yamuna Nagar units of HPGCL. Both the 300 mw units of the Yamuna Nagar thermal station are shut since early April, while one 600 mw unit of the Khedar unit is shut since end-April. While the Khedar unit -- where the turbine blade has been found to be damaged as apparently a ‘sealing strip’ inside the turbine broke loose and hit the blades, denting about 100 of them -- has been shipped to Shanghai Electric Company’s facility in China, in case of Yamuna Nagar, one turbine unit has been sent to Siemens’ facility in Baroda for repairs. The turbine blades of the second unit are also reported to be damaged.

AIPEF claims that the Chinese turbines were bought at a low cost for short-term gain, but the savings would be wiped out in the first or second year of the plant due to poor performance and generation loss. According to official figures, Haryana procured Chinese equipment at a cost of `3.49 crore per mw at Yamuna Nagar and `3.19 crore per mw at Khedar, while BHEL units would have cost around `4 to 4.5 crore

At a time when equipment contracts for well over 40,000 mw of upcoming power capacity have already been placed with Chinese vendors, the government is also likely to issue an advisory that future orders be awarded only after factoring in life-cycle costs of imported Chinese equipment, and not merely the upfront costs.

Wujing Thermal Power Plant of Shanghai Electric Power Company in Shanghai, China. This company also supplied turbines for two plants in Haryana which have developed technical snags in two years and there are no repair facilities in India.

Photo courtesy Americanprogress.org, AP

for every mw. In fact, China’s power equipment manufacturers have leveraged lower costs and shorter delivery periods to bag orders from India.

To tackle its problems with Chinese machines Haryana is planning to get guides from China. “We are negotiating with Chinese suppliers to get their technicians as guides. Shipping the parts to China for repair is a time-consuming process and hence we want technicians to come here and work on contract basis for six months to one year, so that we do not face the same problem again,” a state

official said. The guides would work in close coordination with their engineers to solve the problems.

Solar market slipping too Chinese suppliers are also threatening the solar power equipment market.

Their cheap solar equipment as well as overcapacity are posing a threat to domestic manufacturers, including BHEL. Going by an estimate, Chinese entities have a share of about 57 per cent of solar equipment using crystalline technology.

The government provides subsidies for solar power. Developers, however, prefer cheaper Chinese equipment as it helps them quote competitive tariffs and win projects under competitive bidding.

Indian suppliers are now bonding together to face the emerging threat from Chinese suppliers such as Suntech, Trina Solar, Yinglee Green Energy, Jinko and LDK who have set their sights on the Indian market with products which are 25-30 per cent cheaper.

According to a study by consultancy firm KPMG, the Indian solar sector has the potential to attract $110 billion investment by 2022, meet seven per cent of the country’s total power requirement, create 1 million direct jobs and avoid coal imports of $5.5 billion. According to sources, apart from the pricing power, the Chinese vendors offer credit, posing tough competition. There is no tariff protection for solar equipment makers, as import duty is nil. Chinese suppliers have been aggressively pushing their products overseas, holding 65 per cent of the global solar power equipment market.

Cost advantage aside, Chinese companies cannot compete with Indian suppliers on quality. It will be up to Indian companies now to raise this issue effectively and sensitise public about the importance and long-term costeffectiveness of good quality machines so that they are able to gain back their rightful place in the Indian market.

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January 2013 www.InfralinePlus.com

InDepth

Exodus! Gas-based power plants shifting base to Africa ►► Shortage of gas forcing entrepreneurs to rethink plans in India ►► Generation loss of 11 per cent in 2011-12 due to non-availability of gas

10

Sravanthi Power’s gas-based power plant in Uttarakhand.

by Pallavi Karan Chakravorty

Ghana and Nigeria are the new destinations of choice for Indian entrepreneurs in power sector. Reason: Paucity of power, combined with abundance of gas in the African sub-continent.

Power shortage is acute in India too and ideally all new plants by local entrepreneurs should be coming up within the country but the problem is that there is virtually no gas available here at present to fire these new plants which have already built capacities based on gas as fuel source.

With gas production drastically coming down from Reliance Industries Limited’s (RIL) KG D6 basin, the country’s largest reservoir of the fuel, gas-based capacity of 8,000 mw is stuck.

Whatever gas is available through other

sources is allotted to customers in line with the gas utilisation policy which prioritises users -- existing fertiliser units come first, followed by existing power, petro-chemical and city gas projects.

New gas-based projects are not on the priority list. Due to this, generation from gas-based plants has had a negative growth this year. India suffered a power generation loss of over 11 per cent in 2011-12 on account of fuel shortage, transmission bottlenecks and equipment problems, a Central Electricity Authority review says.

Capacity vs commissioning India has gas-based power generation capacity of 18,903.05 mw with significant capacity under construction.

While around 5,000 mw of gas-based

capacity is ready, there is no fuel to commission these projects. Since capital investment has already been made in setting up these projects, the developers are looking at ways and means to service the loans. Even the commissioned capacity is receiving less fuel than required.

Harry Dhaul, Director, Independent Power Producers’ Association (IPPA), says, “Gas-based power plants contribute approximately 9 per cent of India’s total power generation capacity. However, due to natural gas shortage, gas-based plants are either lying idle or running at low capacity. PLF (plant load factor) for gasbased plants in the country was around 45 per cent in the first six months of the current financial year.”

Just outside Delhi, the first unit of the

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new 1,500 mw gas-based Bawana power plant is ready to generate electricity, but is forced to idle away because the Delhi government-owned Pragati Power Corporation Ltd, which is to run the plant, has failed to arrange the gas needed to operationalise the first of the two 750 mw units. Chief Minister Sheila Dikshit has asked the Centre to ensure gas for the plant. The Centre had allocated 0.93 mmscmd gas from KG-D6 for Bawana for 2009-10 and 2010-11 but as the plant missed the scheduled deadline, the Delhi government could not sign the gas sale purchase agreement with RIL.

Africa bound Indian developers are now looking at countries such as Ghana and Nigeria for relocation. Sravanthi Group’s 450 mw gas-based power project in Uttarakhand, which has already been built but is awaiting gas for its commissioning, is a case in point. An investment of `1,740 crore has been made towards setting up the project, of which `1,300 crore is debt component. “We have completed the project but can’t commission it due to non availability of gas. We have a two-pronged strategy in place. We are trying to relocate our project to East Africa and are looking for right partners.

Power is scarce in Africa so it is an ideal option for us. However, we are also looking at other countries. They are

in Andhra Pradesh is about 60 per cent offering good tariff, which is a plus. We due to shortage of gas. The other plants are also looking at sourcing liquefied too are working at extremely low PLFs. natural gas (LNG) from overseas,” According to George, one of the main says D.V. Rao, chairman and managing reasons why his plants are facing a director of Sravanthi Group. “Being first shortage of gas is that the east coast does generation entrepreneurs we don’t have not have an LNG that much money terminal. All LNG to survive. Also, While around 5,000 mw terminals are right the pressure of financial institutions of gas-based capacity now located on the west coast of India. is increasing by is ready, there is no If a terminal comes the day so we have fuel to commission to get this plant these projects. Since up on the east coast, LNG itself functioning. It is capital investment will become costquite a tedious task has already been effective and power to shift the plant made in setting up generated from it to Africa but right these projects, the will cost just about now I do not see any other option left developers are looking `6-6.5 per unit. at ways and means to And it is not only with us. However, service the loans.

Rao who is thinking gas-based power of packing his bags plants are modular for Africa. Some and can be located are keeping their plans under wraps. from one place to another without much The chief executive of a private power difficulty.” generation firm, requesting anonymity, Another case in point is of GVK says, “A lot of companies are looking Power & Infrastructure which reported at this option. Such a model exists in a net loss of `43.6 crore in the second Bangladesh where developers bring in quarter of the current fiscal, against power plants and operate them. He adds a profit of `38 crore year-on-year. that gas-bearing regions such as west The company’s consolidated net sales and north-west Africa aspire to reduce turnover was up at `640.3 crore versus flaring, and increase gas production. In `477.4 crore last year. Isaac George, years to come, east African gas assets Chief Finance Officer of the company will also be commercialised. In that says the PLF of one of its power plants period, assets stranded for gas in India would be tempted to shift to these regions,” he adds.

With its own needs quite strong, the government will have to take quick steps to prevent the flight of new power operators to overseas shores. Gas availability will have to be augmented through speedy resolution of RIL’s dispute with the government on pricing of this fuel and setting up of more LNG terminals to facilitate speedier imports from west Asia as well as Singapore and Australia.

Control room of KG D6 basin: With production drastically down from the basin, gas-based capacity of 8,000 mw is stuck. Photo courtesy Projectmonitor.com

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InDepth

SEBs queue up for tariff hike; riders of bailout package for discoms working ►► Average hike of 16 per cent effected by almost all states and Union territories ►► Hikes at regular intervals may bridge gap between cost of power and discoms revenue

12

Rajasthan electricity board has raised power tariff by 18 per cent, it needs to increase it by 80 per cent

by Raeesa Zeb

Although only a year away from the general elections, most of the state governments, exercising tight control over the state distribution utilities, have decided against pandering to populism and hike power tariffs. This calendar year has seen 26 states and five Union territories queueing up at the respective regulatory commissions to file for tariff revisions. Driven by the burden of an accumulated loss of `1.9 lakh crore and obligation under the government’s financial bailout package for the beleaguered distribution utilities, most of the discoms have affected double digit tariff hikes.

On an average, the discoms have hiked power tariff by 16 per cent and

Tamil Nadu leads the pack with 37 per cent increase. The fact that Tamil Nadu State Electricity Board (SEB) hadn’t revised the electricity tariffs in the past nine years had contributed immensely to its staggering accumulated loss of `40,183 crore at the end of financial year 2011. Uttar Pradesh, reeling under the burden of a massive `45,124 crore loss, has hiked power tariff for commercial and industrial consumers, while exempting domestic and rural consumers. Power tariff for large and heavy industries has been raised by up to 30 per cent, whereas it has been raised by up to 18 per cent for small and medium industries and by up to 20 per cent for the urban commercial consumers. Overall

an average hike of 17.63 per cent has been effected by the UP state electricity regulatory commission (UPSERC).

While Kerala has hiked tariff by 30 per cent and discoms in Haryana have effected a third hike in power tariff in a span of five months, Rajasthan and Madhya Pradesh have restricted themselves to 18 per cent and 7.17 per cent hike, respectively. To bridge the revenue gaps of their discoms, Rajasthan actually needs to hike its electricity tariff by 80 per cent, Madhya Pradesh by 65 per cent, Tamil Nadu by 55 per cent, Punjab by 24 per cent and Haryana by 15 per cent, according to credit ratings agency ICRA. The million dollar question that arises

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is that despite a financial bailout in 2001 for the distribution companies, what factors precipitated the poor financial health of the discoms that necessitated another government bailout of the scale of `2 lakh crore in just about a decade. Unfortunately, the answers remain the same as those back in 2001.

Inadequate tariff revisions, escalating AT&C losses, billing inefficiencies and rampant power theft are just some of the reasons that have over the years saddled distribution utilities with losses. Besides, buckling under political compulsion to provide unmetered free power supply to agricultural consumers and buying expensive power from short-term markets to wade over power deficit have further aggravated the deteriorating finances of the discoms. The relief package announced by the government although a breather for the cash-strapped utilities is seen by some analysts as a case of ‘Too little and Too late’ and at best a short term fix for the ailing sector.

The discoms were practically insolvent, unable even to raise working capital and trapped in a vicious cycle of debt; running to the banks to borrow just to pay off the interest on earlier borrowing.

Banks and other financial institutions had become wary of lending to the power sector with the banking sector’s short term exposure to the distribution companies estimated at `1.5 – 1.7 lakh crore as on March 2012. This includes 3-3.6 per cent of banking credit and 45-52 per cent of total power credit. A major proportion of these loans were taken to fund the discom losses. Of the total `1.9 lakh crore accumulated losses, the discoms of Rajasthan, Tamil Nadu, Uttar Pradesh, Haryana, Punjab and Madhya Pradesh contributed 70 per cent.

These states are expected to reap the maximum benefits of the government bailout package. However, according to the contours of the financial restructuring plan the state governments have to shoulder a major responsibility to take over the accumulated short term liabilities of the discoms. The state

The silver lining is that since most of the states ruled by a broad range of political parties have gone in for tariff revision, it signifies a collective resolve to prevent another bankruptcy and points towards a much needed reform in the sector.

State

Tariff Hike Actual (in per Requirement cent) (in per cent) Tamil Nadu 37 55 Rajasthan 18 80 Uttar Pradesh 17.6 -Kerala 30 -Haryana -15 Madhya 7.17 65 Pradesh Punjab -24

Tamil Nadu chief minister Jayalalithaa. The state has hiked power tariff after nine years.

To bridge the revenue gaps of their discoms, Rajasthan actually needs to hike its electricity tariff by 80 per cent, Madhya Pradesh by 65 per cent, Tamil Nadu by 55 per cent, Punjab by 24 per cent and Haryana by 15 per cent, according to credit ratings agency ICRA. governments will have to take over half of the outstanding liabilities of the distribution utilities and convert them into bonds that will be issued to the lenders and backed by state government guarantees. The lenders are to restructure the remaining 50 per cent and provide a three-year moratorium on principal repayments. As a part of this package

the state governments need to ensure that sustainable measures such as enhancing operational efficiency of discoms, and taking concrete measures to reduce AT&C losses along with regular rationalization of tariffs be implemented to avoid the need for any such financial aid in the future.

According to ratings agency Crisil, while the cost of supply of per unit of electricity has grown at 9.1 per cent per annum over the last three years, revenues of discoms have seen an annual growth of just 5.2 per cent. Last year while the average per unit cost of electricity was `4.87, the average per unit tariff was just `4.04. Regular tariff revision devoid of any political pressure must be undertaken to reduce this growing gap in cost of power and average revenue realization for the discoms. Also, the AT&C losses must be brought down from the present unsustainable level of 25-30 per cent.

In states such as Jammu and Kashmir AT&C losses run as high as 73 per cent.

While financial bailouts can provide the much needed respite to discoms that had reached the brink of bankruptcy and give them the breathing room to make required adjustments, such measures have to necessarily be accompanied with other concrete steps to avoid the build-up of another debt-bubble. Tariff revision undertaken by most of the states and union territories is a step in the right direction but it must be made a regular practice as mandated by the Appellate Tribunal on Electricity to attract investments into the sector. The government has estimated a requirement of `12.73 lakh crore in the 12th Plan period for generation, distribution, renovation and modernisation of the power sector. Investors and lenders need to be assured of the paying capacity of SEBs and discoms and that is only possible when there is demonstrated improvement in the financial books of the discoms.

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ExpertSpeak

‘Discoms resisting open access as they don’t want to lose customers’ The Central Electricity Regulatory Commission (CERC), a statutory body constituted under the Electricity Regulatory Act in 1998, intends to promote competition, improve the quality of power supply and increase efficiency and economy in bulk power markets.

Its Deputy Chief (Regulatory Affairs), Sushanta K. Chatterjee, talks about the need for open access and the challenges in implementing it.

14

Separation of carriage and content in distribution sounds academic. So be it. It may not be a panacea for all the ailments of distribution segment of the power sector. But it has the potential to change the game and in the process address several critical issues that are before us and for which we do not have an answer. Let us discuss the critical issue of consumer open access that storms power sector today.

Open access is like a mirage at present. The closer we go towards it, the farther it moves from us. Different stakeholders are working at cross purposes in its implementation. The ministry of power has issued a diktat that all one megawatt and above consumers are mandatory open access consumers and that the regulators can no longer fix the tariff for such consumers.

State electricity regulators in Rajasthan, Madhya Pradesh, Punjab and Tripura have interpreted it the other way, while in Himachal Pradesh they have gone with the interpretation of the ministry of power. The Forum of Regulators (FOR) has come out with a position paper highlighting

need to find out some novel methods of handling the cross subsidy.

There are international experiences available on this. For instance, Philippines is understood have taken care of cross subsidy by devising universal charge computed at a particular point of time based on the prevailing cross subsidies between consumer categories. The universal charge was recovered from all consumers - subsidizing as well as subsidized consumers, while tariff increase made for subsidizing consumers in subsequent years was less than the tariff increase for Sushant Chatterjee Deputy Chief (Regulatory Affairs), CERC the subsidized consumers.

We can adopt a the implementation challenges if The model similar to such an interpretation is accepted. fundamental issue regarding this to address The net result is – open access open access the reduction remains elusive. is resistance of to cross The fundamental issue, distribution companies. subsidies however, is resistance of That is because they in tariffs in distribution companies. What cannot afford to India. is the real reason behind such lose their paying/ Separation resistance? Well, they cannot subsidising consumers. of carriage afford to lose their paying / and content can subsidising consumers. They would, definitely bring about therefore, use all force to thwart open transparency in the technical and access. Given that unbundling so far commercial losses in the distribution is a façade, they would also influence segment. If the responsibilities of the the state load dispatch centers to wires business and supply business deny access. are separated and given to two distinct entities, the existing perverse tendency Carriage and content of camouflaging theft of electricity This brings us to the core question as (commercial losses) under the overall to whether separation of carriage and distribution losses would be discouraged. content at the distribution level can To start with, one needs to allocate make open access a reality or bring technical and commercial losses about retail sale competition. There between wires company and the supply is no straight answer to this. So long company based on a study. In fact, as conflict of interest arising from FOR has already undertaken a study existence of cross subsidies in tariffs on component-wise segregation of is concerned, carriage and content aggregate technical & commercial separation cannot address this issue. We

January 2013 www.InfralinePlus.com

(AT&C) losses for six states. Once the baseline loss level is identified, the wires company and the supply company should be made responsible for improving upon this over the period.

As regards the past losses, they can be parked with a special purpose vehicle (SPV) and a charge similar to universal charge discussed in the context of cross subsidy reduction can be levied on all consumers to amortise the accumulated losses within a definitive time frame.

If the government so chooses, it can support through transition financing.

Retail competition Apart from addressing these critical issues of cross-subsidy in tariffs and distribution losses and accumulated financial losses, we also need to do some other preparatory work before embarking on retail sale competition.

For instance, we need to create mediumterm capacity market for contracting power procurement with flexibility. This kind of market structure is required for competing suppliers or large consumers to source power from.

With separation of carriage and content, network expansion in rural areas can also be facilitated. Today distribution companies do not have any interest in expanding the network in rural areas

because they do not see any revenue potential from sale of power in these areas. This conflict gets surmounted if the network company is not concerned with supply business. If the government so desires, it can extend support to the network company for creation of network in rural areas--through targeted subsidy for target consumer categories.

We need to introduce competition

Separation of carriage and content can definitely bring about transparency in the technical and commercial losses in the distribution segment.

If the responsibilities of the wire business and supply business are separated and given to two distinct entities, the existing perverse tendency of camouflaging theft of electricity (commercial losses) under the overall distribution losses would be discouraged.

Open access is like a mirage at present. Photo courtesy www.jisc.ac.uk/blog

amongst suppliers without the requirement of duplicating network in the distribution segments which is not only un-desirable but also a national wastage. The Electricity Act, 2003 allows multiple distribution licensees in the same area of supply but requires each such licensee to lay distribution network. This provision was rooted on the understanding that the existing distribution networks in the country are in a shambles and the mandatory requirement of network building will help supplement efforts at network expansion and strengthening, apart from ensuring universal service obligation without any discrimination.

Not that these considerations are no longer valid but a lot of water has flown under the bridge since the enactment of the law and real life cases today demand re-thinking on this critical issue. Mumbai distribution, for instance, presents a good case study. We are facing problems in bringing about competition in the retail sale business in Mumbai because of ownership of network being with one of the two competing distribution licensees.

We need to create a framework whereby two or more suppliers in an area could compete with one another for supply of energy to end-consumers.

The incumbent licensee may have the advantage of old low-cost Power Purchase Agreements but would be saddled with high level of inefficiency in operation while the new licensee can come with greater efficiency in operation but would have high cost of procurement from new generating plants. These advantages and dis-advantages will counter-balance each other and in the process the consumers will benefit by way of competitive tariffs and better quality of service.

The network business being independent, each of the suppliers can access the network without any discrimination. Akin to what we have in the transmission segment, the distribution network company will have no conflict of interest as the charges for

15

January 2013 www.InfralinePlus.com

ExpertSpeak

Two or more suppliers in an area should be able to compete with one another for supply of energy to endconsumers but this is being resisted by distribution companies. Photo courtesy chicagoboyz.net

16

Today distribution companies do not have any interest in expanding the network in rural areas because they do not see any revenue potential from sale of power in these areas. This conflict gets surmounted if the network company is not concerned with supply business. If the government so desires, it can extend support to the network company for creation of network in rural areas-through targeted subsidy for target consumer categories. network usage will be determined by the regulatory commission. Anybody who uses the network will pay the charge as determined by the regulator. For greater political acceptability, the network company carved out in the process of separation of wires and supply businesses can initially be a government company, except in cases where such network company is being formed out of the existing private licensee.

To start with, we can allow the second or subsequent supply licensee to cater to one megawatt and above consumers. Such consumers can choose to get supply from amongst the competing suppliers. Once two or more supply licensees are there in an area, the regulator need not regulate the tariffs for consumers who have been given the

choice to choose their suppliers. The ‘open consumers’ under this scenario would have the comfort of existence of multiple suppliers with universal service obligation (USO) as also a market place including a capacity market to source power from. This is where the model would stand out from the existing market structure for ‘open access consumers’ who do not have the comfort of alternate supplier with USO, availability of power on long-term or medium-term basis and a guaranteed network availability.

The consumers below one megawatt level can continue to be under the regulated regime till the next phase of take off. The regulator can fix the tariff of such consumers based on supply margin linked to reduction in distribution losses. The network business could

be regulated based on incentive and disincentive linked to network availability on lines of availabilitybased tariff in transmission. Over the period the regulators could come out of the hangover of tariff determination processes at least for supply business and focus more on enforcing performance standards including quality of supply and creating market for electricity.

I am aware that the solution suggested here seems too simplistic to act upon, more so to implement in a federal polity like ours. Yes, there are pros and cons and a number of issues that need to be resolved before the model of carriage and content separation can be given effect to. For instance, there are questions around who would be the provider of the last resort, would consumers have to deal with network company and supply company separately for day to day issues on billing, metering, supply failure etc, what would be the cost implication of such an exercise of creating multiple agencies, how would issues involving asset transfer be handled. Treatment of accumulated loss would be a major challenge. Advance metering would be a pre-requisite.

The list of issues can indeed be long.

But given the apparent benefits, at least the concept deserves incisive debate and deliberation at the national level. We have international experience especially in the UK, Argentina, and Australia which we can study in greater depth to learn from. The reform drivers in these countries have been different from the considerations of reforms in our country.

But one can peep into their experiences at least to be sure that we do not tread on a path which they have traversed and faulted.

It is heartening to note that FOR has initiated the discussion internally. The sector looks forward to generating debate on a larger canvas in near future.

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YearEnder 2012| Power

Action-packed: Grid failure, change of

ministers mark the year for power

Sector: Power. As things touched a new low with the entire nation plunging into darkness due to grid failure on two consecutive days, one positive to emerge out of the situation was that islanding of key regions has been escalated and SEBs warned to clean up books

18

A huge `1.9 lakh crore debt restructuring package was announced for ailing power distribution companies

Why 2012 was different India witnessed its worst-ever grid failure in July this year when its northern transmission grid snapped and later another massive grid failure of three grids--northern, eastern and northeastern—shook the nation and paralysed life, affecting 600 million people or half the country’s population. Frequent power blackouts and inadequate fuel supplies made 2012 a gloomy year for the power sector, considered to be a vital sector for the country’s economy.

The year also saw a change of guard in the power ministry, not once but

twice in less than six months. While in June end, just a day before the grid collapse shook the nation, then power minister Sushil Kumar Shinde was moved as the country’s new Union home minister, an elevation for Shinde.

Reformist and able politician from Karnataka, Veerappa Moily was handed over the charge. However, within few months, the baton of this ministry was handed over to the young and dyanmic Jyotiraditya Scindia as part of a major cabinet reshuffle.

A huge `1.9 lakh crore debt restructuring package was announced

for ailing distribution companies and fast-paced efforts were made to create islanding for power transmission in the national Capital. To be followed by other states, this was among some of the noteworthy decisions taken during the year.

What didn’t change There were inter-ministerial turf wars which led to a slow-down in the execution of power generation projects of many public and private sector generation companies during the year. The differences were over

January 2013 www.InfralinePlus.com

clearances and fuel supply issues.

Whether it was with the ministry of environment and forests or the coal ministry, controversies prevented adequate power addition in the country during the year.

Despite promises made at the highest level—that of the Prime Minister Manmohan Singh to top industry leaders including Ratan Tata, Anil D Ambani, Shashi Ruia, and others to rejuvenate the sector, not much was done to help the sector get sufficient coal linkages.

Promises remained on paper and coal still remains a scarce fuel for the sector.

Many projects continue to be stranded for want of fuel.

Watch out for While Moily will be remembered for his path-breaking measures during his three-month log stint as the power minister, Scindia’s leadership skills and ability to push decisions holds out promise for reforming this sector which is crucial for the country’s economic growth. The Prime Minister has echoed it many a time that a robust power sector is necessary for the country to achieve a 9 per cent economic growth.

After being repeatedly dodged, players in the power sector look for better times in 2013, hoping to see their projects get sufficient fuel linkages. Despite the fuel shortages, the mood of the industry is upbeat. The country, despite constraints on the fuel side, is aiming to add about 88,000 mw generation capacity in the 12th Plan (2012-17).

Even though the biggest debt restructuring package announced by the government in September has not convinced many states to initiate reforms on the distribution side or put their acts together and go in for a power tariff hike, hopes are still alive. As 2012 draws to a close, hopes of an energy packed 2013 under the young and dynamic power minister Jyotiraditya Scindia continue to be fostered in many a heart.

19

Power sector has high hopes from the young and dynamic minister Jyotiraditya Scindia

After being repeatedly dodged, players in the power sector look for better times in 2013, hoping to see their projects get sufficient fuel linkages. Despite the fuel shortages, the mood of the industry is upbeat. The country, despite constraints on the fuel side, is aiming to add about 88,000 mw generation capacity in the 12th Plan (2012-17).

Hot trends As goodwill gesture and to support agriculture sector, governments have

been advocating for free electricity to farmers. The move, however, have depleted the cash reserves of state-run electricity-distribution system. It has financially crippled the distribution network, and its ability to pay for power to meet the demand. To top it there have been examples of government departments that do not pay their bills thereby adding to the problem.

Despite abundant reserves of coal, the country faces a severe shortage of coal. The country is not producing enough to feed its power plants. Some plants do not have reserve coal supplies to last a day of operations. Public sector company Coal India, is constrained by primitive mining techniques. It has consistently missed production targets and growth targets.

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StatisticsPower All India State / UT-wise Forecast - 2012-13 to 2016-17 Electrical Energy Requirement at Power Station Bus Bars (Utilities Only) (U/R) (In Million Unit) State/UTs

20

Delhi Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan Uttar Pradesh Uttarakhand Chandigarh Northern Region Goa Gujarat Chhattisgarh Madhya Pradesh Maharashtra D. & N. Haveli Daman & Diu Western Region Andhra Pradesh Karnataka Kerala Tamil Nadu Puducherry Southern Region Bihar Jharkhand Orissa West Bengal Sikkim Eastern Region Assam Manipur Meghalaya Nagaland Tripura Arunachal Pradesh Mizoram North E. Region Andman & Nicobar Lakshadweep All India

2012-13 29100 40750 8974

2013-14 31011 44254 9421

XII Plan 2014-15 33047 48060 9891

2015-16 35217 52193 10384

2016-17 37529 56681 10901

14425

14872

15333

15808

16298

51595 54243 93148 10735 1767 304737

55567 59382 102924 11207 1859 330497

59844 65007 113727 11700 1956 358565

64450 71166 125664 12214 2058 389153

69410 77907 138854 12751 2165 422498

3641 82331 17703 56763

3912 88254 19146 61448

4204 94603 20707 66519

4517 101409 22396 72010

4853 108704 24222 77953

140736 4977 2375 308527

147402 5276 2479 327917

154383 5593 2587 348597

161695 5930 2700 370655

169353 6286 2817 394188

93189

101231

109968

119458

129767

58513 20516 91625 3024 266867

63001 21889 97865 3155 287141

67833 23354 104529 3293 308977

73036 24917 111648 3436 332495

78637 26584 119251 3586 357826

16529 21309 26265 51021 440 115564

19096 22844 28374 55288 461 126063

22062 24407 30652 59912 482 137515

25489 25990 33113 64923 504 150018

29447 27691 35772 70352 528 163790

6392 737 1749 692 1029 524

6953 840 1861 725 1112 531

7562 956 1981 760 1201 538

8225 1089 2108 796 1297 545

8947 1241 2243 834 1401 552

503 11628

588 12609

686 13684

801 14862

936 16154

328

337

347

356

366

43 1007694

45 1084610

47 1167731

49 1257589

52 1354874

Peak Electric Load at Power Station Bus Bars (Utilities Only) (U/R) (In MW) State/UTs Delhi Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan Uttar Pradesh Uttarakhand Chandigarh Northern Region Goa Gujarat Chhattisgarh Madhya Pradesh Maharashtra D. & N. Haveli Daman & Diu Western Region Andhra Pradesh Karnataka Kerala Tamil Nadu Puducherry Southern Region Bihar Jharkhand Orissa West Bengal Sikkim Eastern Region Assam Manipur Meghalaya Nagaland Tripura Arunachal Pradesh Mizoram North E. Region Andman & Nicobar Lakshadweep All India

2012-13 5290 7291 1459

2013-14 5547 7944 1558

XII Plan 2014-15 5818 8655 1665

2015-16 6101 9429 1778

2016-17 6398 10273 1900

2471

2523

2577

2631

2687

10292 9396 14152 1716 352 44033

10770 10360 15993 1824 370 47758

11271 11422 18073 1938 387 51799

11794 12594 20424 2060 406 56181

12342 13886 23081 2189 426 60934

622 13047 3534 10299

666 14350 3792 11102

712 15782 4070 11967

762 17358 4367 12899

815 19091 4687 13904

22368 693 380 46909

23795 749 394 50300

25313 809 409 53936

26928 874 425 57835

28645 944 441 62015

15553

17044

18681

20476

22445

9742 3701 14174 533 39850

10473 3922 15736 555 43623

11258 4157 17497 579 47752

12102 4405 19489 604 52273

13010 4669 20816 630 57221

2843 3452 4397 8289 117 16638

3277 3727 4686 9052 123 18291

3777 4010 4994 9887 130 20109

4354 4301 5322 10798 137 22106

5018 4616 5672 11793 144 24303

1300 180 338 145 254 111

1414 212 362 154 274 117

1537 249 388 164 294 123

1671 294 415 174 317 129

1817 346 445 185 340 135

174 2214

197 2382

223 2563

252 2757

285 2966

59

61

63

65

67

8 143967

9 156208

10 169491

10 183902

11 199540

Sector and Fuel-wise Capacity Addition Plan During XII Plan SECTOR CENTRAL STATE PRIVATE ALL INDIA % age

HYDRO 6,004 1,608 3,285 10,897 12.3

COAL 13,800 12,210 43,270 69,280 78.2

THERMAL BREAKUP LIGNITE GAS/ LNG 250 828 0 1,712 270 0 520 2,540 0.6 2.9

TOTAL THERMAL

NUCLEAR

TOTAL

%

14,878 13,922 43,540 72,340 81.7

5,300 0 0 5,300 6

26,182 15,530 46,825 88,537 100

29.6 17.5 52.9 100

January 2013 www.InfralinePlus.com

Details of 14 Smart Grid Pilot Projects Shortlisted by Ministry of Power SI. Utility Name Area Proposed No. 1 CESC, Mysore, Karnataka Mysore Additional City Area Division 2 APCPDCL, Andhra Pradesh Jeedimetla Industrial Area 3 APDCL, Assam Guwahati Project Area 4 UGVCL, Gujarat Naroda/Deesa 5 MSEDCL, Maharashtra Baramati, Pune 6 UHBVN, Haryana Panipat City Sub Division 7 TSECL, Tripura Electrical Division No. I, Agartala 8 HPSEB, Himachal Pradesh ESD Kala Amb Under Electrical Division, Nahan 9 Puducherry Div 1 of Puducherry 10 JVVNL, Rajasthan VKIA Jaipur 11 CSPDCL, Chhattisgarh Siltara, Chhattisgarh 12 PSPCL, Punjab Mall Mandi City Sub-Division Amritsar 13 KSEB, Kerala 14 WBSEDCL, West Bengal Siliguri town, Darjeeling District AMI R- Advanced Metering Infrastructure for Residential Consumers AMI I- Advanced Metering Infrastructure for Industrial Consumers OM- Outage management PLM- Peak Load Management PQ- Power Quality Management DG- Distributed Generation

Functionality Proposed AMI R, AMI I, OM, PLM, Micro Grid/DG AMI R, AMI I, PLM,OM, PQ PLM, AMI R, AMI I, OM, DG, PQ AMI R, AMI I, OM, PLM, PQ AMI R, AMI I, OM AMI R, AMI I, PLM AMI R, AMI I, PLM AMI I, OM, PLM, PQ AMI R, AMI I AMI R, AMI I, PLM AMI 1, PLM OM AMI I AMI R, AMI I, PLM

Initial Consumer Base 21,824 11,904 15,000 39,422 25,629 30,544 46,071 650 87,031 2,646 508 9,000 25,078 4,404

Input Energy (In MU) 151.89 146.48 90 1700 261.6 131.8 128.63 533 367 374.68 2140.9 29.9 376 42

State and Fuel-wise Capacity Addition Plan During XII Plan SI. No. State/ Uts 1 Delhi 2 Haryana 3 Himachal Pradesh 4 Jammu & Kashmir 5 Punjab 6 Rajasthan 7 Uttar Pradesh 8 Uttarakhand 9 Chandigarh Sub Total Northern Region 10 Chhattisgarh 11 Gujarat 12 Maharashtra 13 Madhya Pradesh 14 Goa 15 Daman & Diu 16 Dadra & Nagar Haveli Sub Total Western Region 17 Andhra Pradesh 18 Karnataka 19 Kerala 20 Tamil Nadu 21 Puducherry Sub Total Southern Region 22 Bihar 23 Jharkhand 24 Orissa 25 Sikkim 26 West Bengal Sub Total Eastern Region 27 Arunachal Pradesh 28 Assam 29 Manipur 30 Mizoram 31 Meghalaya 32 Nagaland 33 Tripura Sub Total N. Eastern Region Total

HYDRO 0 0 3583 1109 0 0 0 1025 0 5717 0 0 0 400 0 0 0 400 410 0 100 60 0 570 0 0 0 2066 292 2358 1710 0 0 60 82 0 0 1852 10897

THERMAL 750 1160 0 0 3920 1530 4730 0 0 12090 12840 2852 10300 6980 0 0 0 32972 8360 0 0 4710 0 13070 4690 2080 3960 0 1800 12530 0 850 0 0 0 0 828 1678 72340

NUCLEAR 0 0 0 0 0 1400 0 0 0 1400 0 1400 0 0 0 0 0 1400 0 0 0 2500 0 2500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5300

TOTAL 750 1160 3583 1109 3920 2930 4730 1025 0 19207 12840 4252 10300 7380 0 0 0 34772 8770 0 100 7270 0 16140 4690 2080 3960 2066 2092 14888 1710 850 0 60 82 0 828 3530 88537

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January 2013 www.InfralinePlus.com

NewsBriefs | Coal

22

Lanco Infratech Wins Perdaman Chem case in Australia

Fast Paced Coal Mines To get automatic nod

Note on Coal price pooling CCEA to monitor next month

The Supreme Court of Western Australia has ruled in favour of Griffin Coal Mining Company PTY Ltd., a subsidiary of Lanco Infratech Ltd, in a case filed by Perdaman Chemicals and Fertilisers Pty Ltd. The order paves the way for signing a revised coal supply agreement with the Griffin (Bluewaters) Power entities, which is soon to be acquired by Japanese consortium of Sumitomo Corporation and Kansai Electric.

In an attempt to fasttrack coal production, the ministry of environment and forests (MoEF) has decided to allow companies with mining leases to expand production by 25% over the initially approved plan, without having to secure a fresh environment clearance. The move will help companies avoid the cumbersome process of getting EC approvals.

The Cabinet note on pooling price of coal through blending domestic fossil fuel with imported coal costs is likely to be placed before CCEA next month. “It was further agreed that the note on pooled prices would be placed for CCEA’s consideration by the third week of January,” said the minutes of meeting held under Principal Secretary to the PM Pulok Chatterji.

Blocks valuation Coal Ministry To use discounted cash

Increase offtake target for DecemberCIL increases target for Dec-March

Single fuel supply pact for public, private power cos: Coal Minister

After facing much flak for literally giving away coal mines without conducting any auction and evaluation them and in the process causing a loss to the tune of `1.86 lakh crore to the national exchequer, the government now plans to calculate the floor price of at least nine blocks through the discounted cash flow (DCF) method.

Having missed its supply targets by almost 6 million tonnes during April-Nov, CIL has now increased monthly off-take targets for its subsidiaries for the remaining period by the same amount so that monopoly can meet its annual target of 470 million tonnes.

CIL officials, however, feel the monopoly may miss its annual supply target.

Both public and private sector power producers will have similar clauses in the fuel supply agreements (FSAs) with Coal India, said Coal Minister Sriprakash Jaiswal. However, it remains to be seen if Coal India would once again approach its Board to change clauses in the FSA. The public sector miner’s Board finalised the FSA on September 26.

Eco nod vital to execute coal lines on time: Railway Board chief

Equipment buying policy Coal India plans major changes

JVs of Odisha PSUs Ministry of Coal seeks details

Clearances from MoEF key to complete three railway tracks in Odisha, Jharkhand and Chhattisgarh, said Vinay Mittal, Chairman, Railway Board. The lines are ToriShivpur-Kathotia in North Karanpura (92 km); Bhupdeopur-Korba and Gevra Road to Pendra Road in Chhattisgarh (180 km) and Barpali-Jharsuguda-GopalpurManoharpur in IB Valley in Odisha (53 km).

Coal India is considering broad-spectrum changes in its procurement policy to save on contract value.

With multi-billion dollar opencast equipment purchase plans on hand, the initiative may result in savings of thousands of crores. CIL is scheduled to invite tenders for large numbers of high-tonnage dumpers, shovels, dozers and other equipment, beginning early 2013.

After de-allocating three coal blocks- Utkal-D, Manadakini-B and Baitarani West allocated to Odisha PSUs, the Coal ministry has sought details of JVs with private players and mode of selection of the JV partners. The coal ministry in a recent letter to Odisha chief secretary, sought to know if the state PSU that was allotted coal block entered into a JV.

Coal set to surpass oil as world’s top fuel: IEA

Parliamentary panel: Early development of 54 mines necessary

Development of mines CIL submits initial plan for 119 mines

Powered by the growth in emerging market giants China and India, coal is set to surpass oil as as the world’s top fuel source by around 2017, the International Energy Agency forecast. Coal’s share of the global energy mix continues to rise, and by 2017 coal will come close to surpassing oil as the world’s top energy source, IEA said.

Early development of 54 identified mines is necessary to boost the country’s coal production, a Parliamentary panel said and asked the Coal Ministry to begin allocating mines through the bidding route without any time loss. Of these, 16 are earmarked for power sector, 16 for government firms, and 22 for allocation through auction route.

The government said Coal India (CIL) has submitted an initial perspective plan for developing 119 mines allocated to the PSU firm. Ministry of Coal in May 2012 has tentatively assigned 116 coal blocks to CIL. Further, three coal blocks viz Brahmini, Chichro Pastimal and East of Damogoria have been assigned to CIL.

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InDepth

Delays in clearances for foreign coal equipment stalling growth ►► Suppliers unhappy that even global quality equipment is put to inspection ►► Lengthy approval process may act as deterrent for foreign investment, feel experts

by Alok Sharma

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Foreign mining equipment companies which have tried to bring in latest technology to India in the recent past have failed to start the work because of lengthy tendering and approval procedures and also because domestic companies get protection from the government. “It takes too long to get approvals particularly for underground mines that hold high and quality coal reserves. The practice not only delays the development of coal blocks but also pulls the country’s economy down as there exists huge gap between power demand and supply,” says an official from Coal India Ltd (CIL).

“Equipment suppliers are not comfortable with the fact that the Directorate General of Mines Safety (DGMS) inspects equipment within the country even when they meet international standards,” says the official.

Hindustan Global Resources, sole representative of Australia’s Valley Long-wall International for India, says that DGMS is very strict on testing equipment even when it is certified to highest international standards. The officials here insist on testing even those equipment which have excellent safety records when deployed in underground coal mines.

“These equipment are not manufactured in India and the overseas manufacturers are not inclined to being subjected to cumbersome procedures for getting DGMS clearance. To top it all, individual components of these equipment are not even tested

Indian mining is in dire need of latest technology and equipment

Overseas companies have to get their equipment tested for safety by DGMS once they are selected for an Indian contract. However, foreign companies allege that DGMS does not have the competence to test many advanced technologies that are not available in India. in one place but are sent all over the country--one component is tested in Nagpur, the other in Bangalore and the third in Pune,” says Amar Bhasin, VicePresident of Hindustan Global Resources.

Dominic Posavec, general manager at Australia’s DMS Group, feels that lengthy procedures in India would mar foreign suppliers’ interest.

“We invest money on research and development in India and are kept

waiting for information,” says Posavec.

Other countries, including China, do not insist upon such quality checks while importing equipment, he adds.

According to the norms that are generally followed within the country, overseas companies have to get their equipment tested for safety by DGMS once they are selected for an Indian contract. However, foreign companies allege that DGMS does

January 2013 www.InfralinePlus.com

not have the competence to test many advanced technologies that are not available in India.

DGMS Director General Satish Puri, on the other hand, dismisses the allegations saying their process is very simple and it does not take long as alleged by the equipment companies.

He claims that DGMS asks the foreign equipment makers to get only that equipment tested for which they have indigenous technology available. For equipment that are not available in India, the Directorate accepts standards put in place by international agencies, he says.

Puri, however, puts a rider, “We are very strict about giving approvals to equipment manufactured in China.” He clarifies that most private companies, which conform to Indian law, do not face any such problem.

A senior coal ministry official said they have asked labour ministry, which controls DGMS, for leniency in cases where the equipment meets global standards.

India being one of the leading producers of coal, still depends on age old mining technologies to evacuate the raw material. “We must allow international players to bring in latest technologies in the sector for optimal utilization of coal reserves,” says Amit Kapur, Partner at J Sagar Associates.

CIL to increase output

Even as the mining sector around the globe faces a slowdown, the world’s largest coal miner Coal India Ltd has decided to ramp up production by 180 million tonne in five years. Leading mining equipment companies, including Caterpillar, Komatsu, Hitachi and P&H intend to take part in multi-billion dollar equipment purchase plan. Though the development has not been official confirmed by Coal India, sources say that the PSU monolith would use part of its $11-billion cash reserve on equipment.

Shopping List

• Tender for acquiring 77 dumpers (trucks used for removal of over-burden material in opencast mines) of 190 tonnes each are in advanced stages of consideration. Sources say that tenders may soon be floated for the purchase of 30 more dumpers of 240 tonne and nearly 15 wheel-dozers.

• The coal miner may also purchase 70 dumpers of 190 tonne, primarily for Northern Coalfields; 20 high-capacity 320-360 tonne dumpers for South Eastern Coalfields and Mahanadi Coalfields and 150-tonne dumpers for Eastern Coalfields.

• As matching equipment, 30-56 cubic metre shovels (for filling the dumpers) may also be acquired. All purchases will be backed by an 11-year maintenance and repair contract.

• The purchase of dumpers alone may cost CIL over `5,000 crore.

DGMS Director General Satish Puri dismisses the allegations saying their process is very simple and it does not take long as alleged by the equipment companies.

Foreign suppliers complain that their equipment is put to test even when it meets international standards

Absence of international players deprives this sector of best mining practices and technologies which are used in other parts of the world. The extent of technology coverage in the mining sector can be gauged by the fact that over 81 per cent of coal production in India is from opencast mines, while only 19 per cent comes from underground mines.

While working with imported coal in short to medium term, we need to simultaneously fix and optimize our domestic coal throughput, says an industry expert. Even with increasing demand of coal, the country’s dependence on opencast mines has not reduced much. Majority of the underground mining potential lies unused as expertise in underground mining is limited in the country.

Adequate capital investment to meet the burgeoning energy needs of the country has not been forthcoming from coal mine owners. Unscientific mining practices adopted by some of them and poor working conditions of labour in some of the private coal mines remain matters of concern.

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InDepth

Transfer of coal linkages within a company may soon be allowed ►► Move likely to bring down generation cost of power companies and prevent rise in electricity bill ►► Rationalisation of linkages within a company will reduce pressure on transportation system

26

Transportation and freight charges are a big component of a power generating companies’ cost

by Team InfralinePlus

Swapping of coal linkages between projects operated by a single company is likely to become a reality soon, as per the recommendation of the power ministry to the coal ministry. This will reduce the ever-increasing gap between demand and supply of coal and benefit companies such as Adani Power, Reliance Power and Tata Power who have projects (proposed and operational) both in the country’s hinterland closer to coal mines as well as near the coast.

The way it will work is that coal

linkage for one project could be used to meet the shortage of fuel for another project in case the location of the coal block is closer to the second project. The second project could use coal either from the nearest located source linked to the company or meet the shortfall from imports, said an industry expert. Coal linkages are provided to companies in power, steel and cement sectors and are exclusive to a particular project. At present these linkages are non-transferable even

between group companies.

The system of linkages which Coal India Limited follows now is governed more by demand-supply pressures rather than by logistical feasibility. For example, a project located in eastern part of the country may get coal linkage from Western Coalfields while Eastern Coalfields may be providing coal to south based projects. This creates unnecessary pressure on transportation network and increases the cost for generating stations.

With swapping of coal linkages in

January 2013 www.InfralinePlus.com

place, the generation cost for power companies will come down as they will be able to cut down freight charges and optimize plant performance. This is likely to prevent a probable rise in electricity bills. The recommendation of the power ministry is aimed at optimising the resources available to a company operating projects at more than one location. It will have no commercial implications on linkages of state-owned Coal India Limited (CIL). As of now the coal mining behemoth provides linkages to meet 100 per cent requirement of plants located in the hinterland, while it supplies 70 per cent of the total coal requirement of the plants in coastal belts.

Coal production in India was 532 million tonne in the financial year ended March 31, 2012 while there was a shortfall of about 90 million tonne which was bridged by imports. Experts feel that this shortfall may rise to 200 million tonne by the end of 12th Plan.

Director-General, Association of Power Producers (APP), Ashok Khurana, says it is a welcome move as it will rationalise coal movement. “It can actually save on coal transportation

cost and time. But the plan will only work efficiently when the government will adopt a price pooling policy where the cost of coal for user industries will be determined by taking into account price in both domestic and international markets,” he says.

Far-reaching benefits The move will not only help power companies reduce their cost of production but also allow steel companies to swap their coal linkages among group entities, subsidiaries and special purpose vehicles. The coal ministry has already forwarded the

The move will not only help power companies reduce their cost of production but also allow steel companies to swap their coal linkages among group entities, subsidiaries and special purpose vehicles.

Power play Power projects are being developed at various locations in the country— hinterland / coastal areas, by a company itself or through its SPV or subsidiary project companies. CIL grants coal linkages of 100 per cent of normative requirement for hinterland projects and 70 per cent for coastal projects. In many instances the allocated coal supplies to these projects involve cross country railway transportation.

In view of the present scenario of domestic coal, CIL is not in a position to fulfil its obligations to supply 100 per cent of normative coal requirement of power projects. Therefore, even if a fuel supply agreement (FSA) is executed

by CIL with take or pay level of 80 per cent, there will be shortfall of minimum 17 per cent to achieve normative availability of 85 per cent under executed power purchase agreements (PPAs). Thus the hinterland projects will be required to undertake avoidable imported coal movement from ports and coastal projects will be required to transport domestic coal from hinterland coal mine locations, Further, many projects are not designed for use of imported coal blend; hence, they will face unwarranted technical constraints in plant operations.

There is an opportunity to reduce generation cost and optimize plant performance if a company having projects at multi-locations is allowed to transfer / swap allocated domestic coal linkages amongst its own plants.

This will help reduce transportation cost and lead to optimization of coal blend to best suit the plant design.

proposal to CIL. “We are examining a proposal on swapping of allocated domestic coal linkages to reduce transportation cost and put domestic coal to best possible use... We have shared the proposal with Coal India and are awaiting its views on the issue,” a Coal Ministry official told InfralinePlus. The proposal was initially suggested by APP. When power plants in the hinterland face coal shortage, they import coal through ports and when coastal plants require coal, they source it from hinterland mines. This anomaly not only raises generation costs but also leads to concerns on supply side. The cost of transportation in these cases puts pressure on the cost of production.

“The ministry recommends coal mix optimisation may be allowed on a caseto-case basis for a limited period after taking into account the recommendations of Central Electricity Authority, wherein swapping of a linage at a company level is applicable only between projects owned by a company or the parent special purpose vehicle or subsidiaries with a common parent company,” the power ministry wrote in a letter to the coal ministry. The ministry of power also clarified that swapping of linkages may be allowed in case when the two projects of the same company fulfil all criteria for coal supply, including achieving milestones under letters of assurance. It further says that the swapping of linkages should not breach power purchase agreement obligations of the firms.

“All the risks associated with swapping would have to be borne by the developer, including lower availability of coal for a particular power project after the coal mix optimisation,” the power ministry recommendation says.

“The proposed coal mix optimisation would help to reduce strain on the capacity of country’s transportation system,” says a CEA official. CEA has already agreed implement a new mechanism on a case to case basis.

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InDepth

Acquisition of overseas coal mines gaining momentum ►► Government working on ways to mitigate risks involved and making acquisitions work ►► Spot market and the ability to price power as per demand has made coal imports viable

by Puneet Paliwal

28

Coal mine acquisitions by Indian players in countries like Australia, Indonesia and Mozambique has caught up pace in recent years. Various private sector players like Adani, Essar, GMR, NTPC and even public sector players like Coal India and Steel Authority (SAIL) have aggressively acquired coal-rich mines in these nations.

However, most of the countries, in which Indian companies have shown

interest, have issues similar to those in India, including that of inadequacy of infrastructure for transport and export.

Generally, the cost of developing a supporting infrastructure has to be borne by the miner which requires huge investments creating an unfair burden on individual companies. Risks are also there relating to political stability, law changes and frequency of tax changes in the nation. An investment can quickly

Indonesian coal mines are a good source of supply of coal

turn unviable for a company with the slightest change in these factors. For example, in 2011, Indonesia’s move to change its mining laws and pricing methods resulted in coal becoming almost four times costlier giving a setback to key buyers. Other major exporting nations are also in the process of amending their laws (as recently Australia has introduced Mineral Resources Rent Tax and Carbon Tax) which could seriously affect investors.

Therefore, there’s a requirement of an exhaustive assessment of all the factors prior to investing in overseas assets.

The inevitability of imported coal playing a major role in satisfying the country’s energy needs is well understood now and the government, along with the major customers of coal, has started strategizing to make the process more economically viable. The key concern in importing coal from nations like Australia, Indonesia and South Africa are the high prices, which are much higher than the domestic coal prices.

The direct impact of these high prices falls on the primary consumer which, in India, is the power generation sector for steam coal and steel manufacturing sector for coking coal. For power generators, importing coal is a serious financial burden which cannot be easily transferred to the end consumers, given that the electricity sector is regulated such that inefficient supply

January 2013 www.InfralinePlus.com

of committed quantity attracts heavy penalties for generators.

A ray of hope, however, lies in the recent evolution of spot power markets through which prices much higher than the contract prices of electricity can be availed by electricity generators based on real time demand-supply situation.

This opportunity has provided them the option to invest in imported coal and has opened up a more reliable supply option of acquisition of coal mines in other coal bearing nations. Even for the steel sector, which imports majority of its coking coal requirements due to low availability of domestic high quality reserves, the option of acquiring coal mines abroad has increasingly become an attractive option to ensure continuous supply.

Each country has a specific set of advantages and disadvantages which may make it attractive or unattractive to investors depending upon the weightage given to each factor. Imports, overseas mine acquisitions or being completely

Infrastructure

Mining Costs Key Factor Affecting Overseas Mine Acquisition

Quality and Quantity of Reserves

Countries Reserves Mining Costs Infrastructure

Tax Regime

Political Stability Proximity to Indian Ports

Political Stability

Australia 76.4 BT High High

Transparent.

Introduction of MRRT and Carbon Tax is an additional burden.

Stable Takes about 18 days to India’s west coast and 14 days to east coast

Proximity to indian Ports

Indonesia Mozambique South Africa 5.5 BT 16 BT 30.2 BT Moderate Moderate Moderate High.

Low. Needs Moderate.

Upgradation heavy Inadequate Rail Requirement investments Infrastructure.

Favorable to No specific Frequent mining policy changes in foreign investors mining laws. with no such in place.

Favors domestic issues of local Encourages ownership. local ownership players. of mines.

Stable Stable Stable Takes about 12 days to India’s west coast and 9 days to east coast

For power generators, importing coal is a serious financial burden which cannot be easily transferred to consumers since the sector is heavily regulated and inefficient supply of committed quantity attracts stiff penalties.

Coal mine in Indonesia

Tax Regime

Takes about 10 days to India’s west coast and 12 days to east coast

Takes 12 days to India’s west coast and 14 days to east coast

dependent on coal India for supplies, whatever might be the coal sourcing strategy of various consumers, the ground reality indicates that the demand for coal is growing. With no robust plans of the government for energy diversification, coal will continue to be the prime source of energy in the country for at least the next 30-40 years. Sourcing coal from outside sources has become more and more essential to meet the growing demand.

The government has also realized this fact and is continuously working out mechanisms like price pooling of coal to make imported coal more economically viable for the buyers. The best possible strategy for the buyers under this scenario is to source coal from a variety of supply options so as to minimize supply shortage risks to as low level as possible.

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ExpertSpeak

‘Use of coal will grow faster than any other source’ Pranab Jha, Head - Marketing and Business Development, JSW Infrastructure – speaks about the inevitability of having coal as a major source of fuel, the challenges in its imports and the need for improvement in transportation system to take care of on-land linkages.

30

Despite the fact that all of us are aware that coal is not a completely clean source of fuel, it is still among the best sources of energy. It is the world’s fastest growing fuel and its use is expected to grow faster than that of any other fuel in future.

Coal provides about 30 per cent of global primary energy needs and generates about 41 per cent of world’s electricity. Besides power there are several other industries that cannot do without this black gold. For instance, it is used to produce nearly 68 per cent of the world’s steel.

Asia’s growth is largely dependent on the cost of power generation and here coal takes a lead over other sources of energy. The two fastest growing nations in the world – India and China depend on coal to boost their economies. Other fuels which can replace coal in steel and power sectors are either too expensive or are simply not available in abundance so as to meet the world’s requirement.

India is home to about 286 billion tonne of coal out of which only 114 billion tonne is proven. About 137 billion tonne is indicated and rest 35 billion tonne is inferred. Since Indian coal contains high ash, there is a need

Pranab Jha, Head - Marketing and Business Development, JSW Infrastructure

to import coal and mix it with domestic variety for better heat. Imports are now necessary because many of the new mega power projects are based on imported coal. Actual coal imports in 2011-12 crossed 100 million tonne and total coal imports are likely to cross 200 million tonne by 2016-17.

India has been importing steam coal from Indonesia and South Africa, while for coking coal it is dependent on Australia. The US and Mozambique are also now emerging as significant suppliers of coking coal.

Infrastructure availability While the country would need increased quantity of coal, the port infrastructure available is not in tune with the import requirement of natural resources.

In 2011-12, coal comprised 14 per cent of the total volume handled at major ports and 22 per cent of the volume handled at non-major ports. By 2020, coal will constitute 18 per cent of

the volume handled at major ports and 27 per cent of the volume handled at non-major ports.

At present, very few ports have dedicated facilities for handling coal.

There is no arrangement for storing coal and there have been instances where coal has been left uncovered, without any protection from rains. We still employ conventional methods of handling coal whereas there are advanced technologies available for better handling of the raw material which is very important for a energy starved country like ours. There is a need to increase minimum drafts at major ports to 14.0 metre and hub ports to 17.0 metre.

Besides improving port infrastructure, the country will also have to provide improved rail and road connectivity to ports for smooth evacuation of natural resources.

Even as a few greenfield ports are being set up in coastal states there are no clear-cut guidelines on railway connectivity. The condition of roads also needs to be improved besides strengthening the existing road network. There is an urgent need to re-look at the conventional truck loading system as higher turnaround time would offset increased coal import at the ports.

Increased pressure on roads is causing high costs, pollution, accidents, damage due to overloading, loss to economy due to burning of costlier fuel. We will have to look at other modes of transportation including ‘inland water transport’. To develop such a mode of transportation, we will have to improve navigability of rivers.

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• Capacity constraints at ports • Most Indian ports have shallow drafts • Coastal shipping is not developed • Hub ports feeding smaller ports through barges, feeders and self unloaders • Less developed trans-shipment options • Lower percentage of cape size vessels

LT & HT Motors Market in India (2011-12) November 2012

LT & HT Motors Market in India (2011-12) November 2012

Besides improving port infrastructure, the country will also have to provide improved rail and road connectivity to ports for smooth evacuation of natural resources. Even as a few greenfield ports are being set up in coastal states there are no clear-cut guidelines on railway connectivity.

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With the kind of water flow we have in Indian rivers, we need an out of the box solution to develop this mode of transportation which would reduce overall logistic costs. Apart from developing water ways, we would need suitable vessels to help transport the resources that would be made available to us either through imports or from mines within the country.

Views expressed in this article are personal.

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ExpertSpeak

‘Overseas coal assets: Think before you buy’

32

With three decades of experience in power sector, Chief Executive Officer, Power Business at Aditya Birla Group, Pradeep Kumar Lenka, talks about the strategies that Indian companies may consider while acquiring coal assets abroad. He has experience in generation, transmission and trading of power and has been actively involved in the development and execution of few power plants. Here he offers help on mitigation of risks that delay acquisition processes overseas.

At a time when India’s power requirement is swelling by the day, country’s fuel output growth does not seem to match even with the efforts that government is undertaking. In this scenario when raw material within the country may not prove sufficient, the country will have to look out and acquire assets overseas to ensure continuous supply of fuel. Companies, however, need to do proper homework before approaching promoters / governments to acquire stakes in assets that are in operation.

Before one goes for coal asset acquisition overseas, there are few issues that need serious deliberation.

Companies looking for a buyout should have a clear-cut strategy in place. Thorough understanding of the power project, for which coal is required, is essential for continual fuel supply and smooth running of the plant. Buying whatever is available

very important as it has long term effect on the productivity of the plant for which assets have been acquired.

Rather than going for buyouts wherever the asset / block is available, think tank of the company should identify blocks that fall in line with its growth plans. There is a need to trade cautiously on the pricing front as overpricing (of the asset) may impact the company’s balance sheet.

One may not need to have controlling stake in assets overseas but may consider various options based on the capacity of the plant. Idea is to have control over assets abroad that are cost Pradeep Kumar Lenka, Chief Executive Officer, competitive.

Power Business at Aditya Birla Group There are various Price models around the may not be a sensible idea as of globe for having there are various other factors acquisition has long-term that come into play and could long-term raw material financially impact the buyer. impact on the security at Understanding of the productivity of the right price. technology that is being plant for which Companies employed in the plant, which assets are may look for requires import coal mix for acquired. assets which are power generation, becomes very operating and are ‘on important for coal imports. Among sale’ or ‘on joint venture’. It makes other things, one should take into sense to have controlling stake in account the capacity of the plant and overseas assets only when generation the extent of blending (with imported is on the higher side and transportation coal) the boiler can tolerate. More costs are not too high compared to than required quantity of imported the size of the plant. If generation coal in the boiler may impact the capacity is less than 600 mw, one can equipment’s output and damage the consider long-term supply and not go machinery in the long run thereby for equity stake in the block. putting pressure on the cost of However, one does not have production. One would also need to the luxury of options in certain consider the location of the plant, its geographies. For example, companies connectivity with nearest port and rail need to have a local partner in / road infrastructure around the plant.

Indonesia and South Africa while Price of acquisition also becomes

January 2013 www.InfralinePlus.com

Thorough understanding of the power project, for which coal is required, is essential for continual fuel supply and smooth running of the plant. Buying whatever is available may not be a sensible idea as there are various other factors that come into play and could financially impact the buyer.

Coal Sourcing Strategy 1. Secure long term supply 2. Minimize price volatility 3. Optimal initial investment 4. Two pronged strategy (ownership & LT supply) 5. A mix of equity owned and long-term off-take arrangement 6. Multi location sourcing plan acquiring assets in the two nations.

One thing that a company should always check before buying a particular asset is – it should be operational and should at least have 100 million tonne of balance recoverable reserves.

Among other options is –acquiring minority stake in a joint venture in mining company for a short term and later (depending on the financial muscle and raw material requirement) increasing the stake to be the major partner.

In terms of targets there are few countries with right kind of resources.

Points to keep in mind while acquiring coal mines abroad 1. Check the capacity build-up of the mine 2. Check if coal is for UMPP / Merchant / Blending operation 3. Identify the project location and capacity 4. A coastal / load centre project should not be more than 100 km away 5. One should acquire an operating asset ‘on sale’ or ‘on joint venture’, with 100 mt minimum / probable reserves (5 mmtpa production–if capacity of the power generation plant is greater than 1000 mw) 6. Leverage acquisition for setting up a 660-1320 mw merchant plant–super critical– high efficiency / low coal consumption 7. If capacity is less that 600 mw one can consider long term supply

Most companies prefer countries such as Indonesia, South Africa and Australia as they have proven reserves of high grade coal. Besides, there are locations including Vietnam, Botswana, Mangolia, Madagascar and Mozambique that offer coal.

But valuations are high for fully operating mines.

Companies with deep pockets and immediate requirement of raw material may look at this option.

Countries having natural resources also put lots of checks and balances on foreign firms that intend to acquire assets and the processes can be frustrating at times. In some countries there is too much price volatility, while in others one needs to have a local partner and cannot go for majority stake in any block.

However, for purely green field mines there are separate strategies that should be employed. One may consider sharing the development cost with a local partner or acquire licence to explore at a reasonable entry fee. Other option could be -- full development cost with minimum entry fee and royalty on production.

Views expressed in this article are personal.

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January 2013 www.InfralinePlus.com

ExpertSpeak

Supply of washed coal way short of demand

34

Ms. Isha Gakhar leads the team on coal and power in the research and consulting division of InfralineEnergy.

Development of coal washeries in India is not keeping pace with the growing demand for washed coal. At present, our country has nearly 52 commercial washeries with installed capacity of about 131 million tonne per annum (mtpa) which cater to less than onesixth of the total coal output which stands at roughly 600 million tonne.

Coal India Limited (CIL) operates 17 coal washeries, of which 11 are for coking coal and the remaining are non-coking coal washeries, with a total capacity of 39.40 mtpa.

Earlier, coal washing practice was associated only with steel industry that required coking coal with less than 17-18 per cent of ash content. However the trend of washing of non-coking coal has picked up pace. To sustain in strict environment regulations coal washeries have to take a bigger role in

the industry to produce less moisture and ash-based fuel. Keeping in view the future demand for washed coal, the government through Coal India Limited (CIL) encourages setting up of washeries on “Built Operate and Own” basis to be constructed on company’s land. There is an urgent need to augment the capacities for coal washing particularly for power generation.

The average ash content in Indian coal ranges from 35 - 40 per cent and its calorific value is around 4000 kilocalories / kg. Washing helps in reduction of ash content by 7-8 per cent and enhances calorific value to around 5000 kilocalories / kg. The pit head price of Indian coal for Coal India comes to $30 per tonne and during washing about 20 per cent of coal is lost as waste which increases the cost by $6. Apart from this, per tonne coal washing cost is about $4. Hence the total cost of washed coal to Coal India comes to around $40 whereas the pit head cost of similar Indonesian coal is $55-$60. The freight charges of Coal India are also less compared to the freight charges of Indonesian coal.

This shows that coal washing ensures that the quality of Indian coal is at par with imported premium coal, while being cheaper.

Indian coal is drift in origin due to which it gets mixed with mineral matter leading to high ash content.

The higher ash content in Indian coal makes it unfit for direct utilization in power generation, manufacture of steel or cement. Combustion of coal with high ash content leads to emission of carbon dioxide (CO2), sulphur dioxide

(SO2) and other particulate matter, all of which contribute significantly to pollution of air. The inherent ash of coal cannot be removed as it is embedded at a very fine level.

However, extraneous ash in the coal can be removed by coal washing.

Coal washing is a process by which the quality of raw coal is enhanced by reducing the ash content and extraneous matter that gets extracted at the time of mining.

Washeries are basically of two types based on the method of washing, dry or wet washeries.

Coal washing is a process by which the quality of raw coal is enhanced by reducing the ash content and extraneous matter that gets extracted along with the mined coal. Based on the medium used for coal washing or cleaning, coal washeries are segregated into two categories - dry and wet.

Coking coal is washed primarily for manufacturing of hard coke for making steel whereas washed non-coking coal is primarily used for power generation, cement manufacturing, sponge iron manufacturing and other industrial purposes. Coal washing is a costeffective and an important step towards improving the quality of coal.

Beside this there are both economic and environmental benefits of using washed coal. In power plants, washed

January 2013 www.InfralinePlus.com

coal increases plant utilisation factor. It also eliminates the need for support fuel oil besides improving the efficiency of boilers, reducing power consumption and reducing the transportation cost of coal.

In cement plants, washed coal improves the thermal efficiency of the kiln and increases the overall productivity of the plant.

BENEFITS OF WASHED COAL In Power Plants In Cement Plants Regulates the Reduces quantity quality of coal feed of coal required for the kiln Improves plant Improves the utilization factor thermal efficiency of the kiln Eliminates need for Improves the quality support fuel oil of clinker Reduces auxiliary Reduces power power consumption consumption Reduces Improves the transportation cost productivity of the of coal plant Increases boiler Reduces cost efficiency of cement manufacturing

In 1997, the ministry of environment and forest (MoEF) issued a directive that all power plants located in urban sensitive areas, critically polluted areas or those located 1,000 km away from the pit-head, should necessarily use coal having less than 34 per cent ash.

The ministry wants power companies to go green while improving efficiency.

So it has drawn up new guidelines mandating the use of better quality coal. The draft guidelines set a 34 per cent ash content cap on coal used by any thermal power plant 500 km away from the pit-head, any captive thermal power plant with installed capacity of 100 mw and 500 km for the pit head, any captive power plant above 100 mw or standalone thermal power plant located in an urban or ecologically sensitive area.

In recent years coal has been in focus as an alternative source of energy. It contributes nearly 30 per cent of global primary energy consumption and accounts for about 42 per cent

35

Indian coal has high ash content and needs washing to improve its quality

In 1997, the ministry of environment and forest (MoEF) issued a directive that all power plants located in urban sensitive areas, critically polluted areas or those located 1,000 km away from the pit-head, should necessarily use coal having less than 34 per cent ash. The ministry wants power companies to go green while improving efficiency.

So it has drawn up new guidelines mandating the use of better quality coal. of power generation in the world.

As per the estimates of the Planning Commission, coal constitutes more than half of commercial primary energy demand and one third of total energy requirements of India. In view of the high cost of the imported crude and depleting indigenous oil and gas sources, the situation is likely to continue for a long time. The demand for coal is projected at 773 million tonne and 980 million tonnes in

2012-13 and 2016-17, respectively.

You can read more about the economics of coal washing, cost benefit analysis of using washed coal, future expected trends of coal washeries in India and the opportunities to be tapped in this field, in an upcoming report of InfralineEnergy titled “Indian Coal Washing Industry – Present and Future”.

For suggestions email at feedback@infraline.com

January 2013 www.InfralinePlus.com

YearEnder |2012| Coal Coal

From coal-gate to sole mate Sector: Coal. The Indian coal industry, which experienced a roller coaster ride during 2012 triggering investigations and de-allocation of various blocks, is headed for year 2013 with new set of rules, goals and challenges.

36

Matching demand with supply continues to be a challenge Why 2012 was different The year saw an alleged scam in coal block allocation process, where the government auditor Comptroller and Auditor General (CAG) calculated a financial gain of `1,85,591.34 crore to private parties. The auditor took into account the average sale price of all grades of coal of Coal India Ltd in opencast mines as well as average cost price of all grades of coal in the public sector monolith and added additional financial costs to arrive at the loss figure. The government, however, contested the accusation saying that the report was flawed on

“basic fundamentals” related to the geological sector.

What didn’t change The major challenge in the country of matching the rising demand for coal remains intact. As per industry estimates, the demand for coal has grown at a compound annual growth rate (CAGR) of over 7 per cent in the last decade and has reached around 600 million tonne (mt), whereas the country’s coal production has increased by a mere 28.5 per

cent over last five years.

“The country’s coal production has increased from 431 mt in 2006-07 to 554 mt in 2011-12,” says a recent report by Indian Chamber of Commerce and PricewaterhouseCoopers. The total demand-supply gap is currently pegged at around 98 mt, of which India imports around 85 mt of coal every year.

Watch out for Even as the government has rubbished the CAG report which alleges irregularities in the allocation of coal blocks, it has started working on a new policy on coal block allocation. In

January 2013 www.InfralinePlus.com

June, the coal ministry decided to form an Inter-Ministerial Group (IMG), to decide on either de-allocation of coal mines or forfeiting of Bank Guarantees of the companies which had not developed the allotted coal blocks.

The panel recommended de-allocation of 13 mines to private firms and also asked for imposition of bank guarantee in six cases and deduction in two. The government has accepted the panel’s recommendation in totality. At present, the panel is evaluating blocks allocated to public sector companies. The move is aimed at penalising firms which have not invested on block development and bring in transparency and investor faith in the system.

As India’s energy consumption is set to grow with demand coming from both the industry and domestic quarters, the government would definitely feel the pressure on output front.

Hot trends According to analysts, the Indian coal market is expected to witness major

boost in near future mainly driven by proactive government initiatives.

The reformative step of de-allocation of coal blocks and allocating them only to serious players is expected to increase production and attract investment in the coal industry.

To meet the spiralling demand, domestic companies are expected to focus their strategy on

To meet the spiralling demand, domestic companies are expected to focus their strategy on acquiring assets overseas. Besides, un-conventional alternatives such as coal gasification may also attract more players in future. But coal will remain the cheapest power source.

Coal market is expected to witness major boost in near future

acquiring assets overseas. Besides, un-conventional alternatives such as coal gasification may also attract more players in future. But coal is likely to remain as the major source of fuel as it is the cheapest source of electricity generation.

The government is also trying to put in place a detailed transparent mechanism for coal block auction.

While the government enjoys a monopoly with over 90 per cent of coal being produced from governmentcontrolled mines, captive mining policy, introduced in 1993, also allows opportunity to private sector investment. But private companies do not have the luxury of selling coal. At best they can use it for their captive power generation facilities. However, contrary to the expectations, the move has not helped increase production of the fuel. Out of the 200 allocated blocks (22 have been de-allocated), only 30 mines have commenced production. As per the ICC-PwC report, the combined production from these was merely 36.30 mt in 2010-11 against a target of 104 mt.

The industry argues that there are contentious issues such as availability of geological data, land acquisition, environment clearances, mining lease, etc hindering production. The government has promised a slew of measures to remove all such bottlenecks and improve coal output for country’s all-round growth.

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January 2013 www.InfralinePlus.com

StatisticsCoal Import of Coal by the Power Utilities During 2007-13 (November 2012) Year

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 (upto Nov.)

Coal import by Thermal Power Stations Designed to operate on Domestic coal Designed to operate on Imported coal (In (for blending) (In Million Ton) Million Ton) Domestic coal Based TPS (for blending) Imported coal Based TPS 8.1 2.1 13.9 2.2 18.8 4.4 21.3 9.2 27.2 17.7 18.6 17.9

Total Import (MT)

10.2 16.1 23.2 30.5 44.9 36.5

Demand and Availability Position of Coal for Power Sector during 2011-12 and April-November 2012 (All figures are in MT) 38

SI. No.

Description

1 1.1

Total Coal requirement Coal requirement for plants designed on imported coal Coal requirement for plants designed on indigenous coal Coal availability from indigenous sources target given From CIL sources From SCCL From captive mines Other Domestic coal equivalent import of coal 35 = 53 (27.9 x 1.5 =)

1.2 2 2.1 2.2 2.3 2.4

SI. No.

Description

1 1.1

Total Coal requirement Coal requirement for plants designed on imported coal Coal requirement for plants designed on indigenous coal Coal availability from indigenous sources target given From CIL sources From SCCL From captive mines Other Domestic coal equivalent import of coal 35 = 53 (27.5 x 1.5 =)

1.2 2 2.1 2.2 2.3 2.4

Requirement for 2011-12 475 20

Actual Despatch

%

430.35 17.7

90.6 88.5

455

412.65

90.6923

402

370.8

92.24

347 33 22 0 53

307.9 35.4 22.3 5.2 41.85

88.73 107.27 101.36 0 78.96

Requirement for 2012-13 500 24

Pro-rata Programme Actual Despatch for April- November during April-Novem2012 ber 2012 280.14 260.265 14 14.93

%age

92.91 106.64

476

266.14

245.335

92.18

407

225.9

220.9

97.79

347 35 25 0 69

191.9 19.4 14.6 0 40.24

185.6 21.3 14 0 24.435

96.72 109.79 95.89 0 60.72

January 2013 www.InfralinePlus.com

Target and Actual Despatch of Coal and Coal Products to Power Utilities from 2009-13 (October 2012) (Mill.

Tes) Co. ECL BCCL CCL NCL WCL SECL MCL NEC CIL

2009-10 Target 26 17.56 31.8 58.8 34.83 73.4 69.12 0.2 311.71

Despatch 25.22 16.82 28.2 61.06 34.46 74.2 57.97 0.1 298.03

2010-11 % Mat 97% 96% 89% 104% 99% 101% 84% 50% 96%

Target 26.4 19.08 32.92 63.05 34.56 76.94 79.63 0.2 332.78

Despatch % Mat 26.21 99% 21.09 111% 29.69 90% 58.36 93% 31.02 90% 76.25 99% 61.17 77% 0.33 167% 304.15 91%

2011-12 (Provisional) Target 29.58 22.1 32.91 61.29 34.45 79.07 67.94 0.2 327.54

Despatch 24.98 22.08 33.24 57.98 29.36 80.46 63.75 0.35 312.2

% Mat 84% 100% 101% 95% 85% 102% 94% 176% 95%

2012-13 (Apr-Oct’12) Target Despatch 15.24 15.57 13.14 14.51 20.89 21.21 34.18 31.44 17.54 16 46.9 47.92 41.44 38.71 0.29 0.13 189.62 185.49

(Prov’) % Mat 102% 111% 102% 92% 91% 102% 93% 43% 98%

Supply of Coal to Power Utilities by CIL and SCCL from 2004-05 to 2012-13 (November 2012) Year

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13.(till 19th November, 2012) (ProvI)

Coal supplies to power utilities Coal supplies to power utilities

by CIL (Million Tonnes)

by SCCL (Million Tonnes) 249.26 256.44 261.81 280.04 295.81 298.64 304.02 311.63 202.32

25.69 25.53 26.88 29.85 29.72 33.83 32.79 36.88 23.06

Total Coal supplies to power utilities by CIL and SCCL (Million Tonnes) 274.95 281.97 288.69 309.89 325.53 332.47 336.81 348.51 225.38

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January 2013 www.InfralinePlus.com

CoverStory

LPG cap unlocks demand for PNG as cooking fuel ►► Cities witness increase in registration post capping of LPG cylinders ►► Sector likely to witness spate of mergers & acquisitions soon

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Mahanagar Gas has augmented its distribution network by commissioning a permanent and high capacity skid of its second city gate station at Mahape, Navi Mumbai. The facility was inaugurated last year by senior officials of GAIL and MGL.

by Neeraj Dhankher

When GAIL (India) and Hindustan Petroleum Corporation Limited (HPCL) set up their joint venture Aavantika Gas Limited (AGL) in end2011 in Indore to supply piped natural gas (PNG) to domestic consumers, they had expected to do roaring business.

PNG is, after all, both economical and convenient to use as domestic

fuel compared to liquefied natural gas (LPG) which comes in heavy cylinders and the refill lasts barely a month.

Twelve months into the business, however, they could penetrate only 500 households. Till September, they had established only 1000 connections.

Come December and they have set a target of 5000 new connections in the

next three months alone.

What has changed the company’s fortunes virtually overnight is the government’s decision of September 13 as part of which unlimited supply of subsidized LPG cylinders to every household has been capped to six cylinders per year. Finally economics has changed what logic and common

January 2013 www.InfralinePlus.com

sense could not and more and more consumers are queuing up to give up LPG cylinders and take up PNG connections. The company is now eying several new areas in Madhya Pradesh for domestic supplies.

Mahanagar Gas Ltd (MGL) which supplies PNG to around 5.85 lakh domestic consumers in Thane, Mumbai; Navi Mumbai and MiraBhayande regions of Maharashtra, has seen an increase in demand for piped connections. According to sources, applications for new connections have gone up from 50 in the entire month of August to around 70 every day in September.

Similar views have also been expressed by Rajeev Sharma, chief executive officer (CEO) of Adani Gas which supplies PNG in Ahmedabad.

According to Sharma, “With capping of LPG cylinders, we have felt the demand for PNG increasing little faster.” AGL’s Managing Director Pradip Madan recently acknowledged that post LPG regulation, the inquiries for fresh domestic connections have risen by around 10 per cent and would surge further in the months to come.

Mergers and acquisitions With the sudden surge in demand, city gas distribution--of which domestic PNG is a small but important part--has seen some shift in strategy by interested players to strengthen their foothold.

The Gujarat government-owned Gujarat State Power Corporation (GSPC) Group, through its subsidiary GSPC Distribution Networks Ltd, has recently signed an agreement with British Gas Group to acquire 65.12 per cent stake in Gujarat Gas Company Ltd (GGCL).

With this, GSPC is set to become the largest city gas distribution company in terms of customers in India.

GSPC provides PNG to domestic customers through its wholly-owned subsidiary, GSPC Gas. The acquisition of controlling stake in GGCL would double the number of customers for the

With the sudden surge in demand, city gas distribution has seen some shift in strategy by interested players to strengthen their foothold. The Gujarat government-owned Gujarat State Power Corporation Group, through its subsidiary GSPC Distribution Networks Ltd, has recently signed an agreement with British Gas Group to acquire 65.12 per cent stake in Gujarat Gas Company. group to 700,000 across the state. The customer base would outnumber that of the existing leading gas distribution companies in India.

At present GSPC Gas supplies PNG to 370,000 customers across Gujarat while GGCL has a domestic customer base of about 350,000, located mainly in Surat. Now, the group will have a consumer base of 350,000 million in south Gujarat.

New Delhi-based Indraprastha Gas Limited (IGL) has around 355,000 domestic customers, while Mahanagar Gas Limited, which supplies PNG to households in Mumbai, has 585,000 household connections.

Even merging of assets is being looked at by some companies to gain advantage in market share. Not keen on going in for acquisition, Adani Gas is following a somewhat different strategy to increase presence in the city distribution segment. It is looking at new and virgin markets to tap demand rather than invest in markets which have reached saturation. The private major is in advanced stage of discussion for acquiring 20 per cent equity in

Green Gas Limited (GGL) – a joint venture between GAIL and Indian Oil Corporation. It is looking to do business jointly with Green Gas by merging its assets in Lucknow and Agra and also contemplating a similar strategy to set up base in Noida. “After this exercise (acquisition of equity in Green Gas), if we find it successful, we will look for similar arrangement at Noida with IGL and GAIL”, says Sharma.

Changing mindset For long the city gas distribution companies (CGD) had been trying to promote the use of PNG, urging the consumers to surrender their LPG cylinders in return, but the progress had been slow. The biggest challenge in this transition so far had been changing the mindset of consumers, who preferred keeping an LPG cylinder at home than go for PNG connections because they had simply got used to doing this.

But now the government has decided to limit the use of subsidized LPG cylinders (14.2 kg gas) to six per family per year, while allowing the consumers to buy additional cylinders at market price. In New Delhi, the cost of subsidized LPG cylinder works out to be 410.50, while that of un-subsidized cylinder is `895.50.

In contrast, the cost of using PNG is much lower even after taking into account its initial installation charges.

According to industry experts, PNG will prove beneficial to large families which will have to pay market rates after they exhaust their newlyintroduced quota of six subsidized LPG cylinders a year.

Piped gas prices vary between `25 per scm (standard cubic meter) to `35 per scm depending on the usage. A basic calculation reveals that a family consuming one LPG cylinder per month will consume about 15 scm of piped gas, which will be billed at `25 per scm. So, the monthly bill will be about `425 including 13 per cent value-added tax.

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January 2013 www.InfralinePlus.com

CoverStory Advantage PNG

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Price is not the only factor which has worked to PNG’s advantage, feel experts. According to Sharma of Adani Gas, “Even when the cylinders were not capped, we had put up 1.8 lakh connections in Ahmedabad.

There are advantages with taking PNG connections. People will go for PNG because of convenience. In India pricing is always a factor but you have to appreciate that LPG is heavily subsidized while we don’t buy gas with any subsidy. Still we are somehow trying to maintain it, but I don’t think it is sustainable in the long run. We are doing roughly 4045,000 PNG connections every year in Ahmedabad. I don’t foresee more than that happening.”

Experts feel that piped gas has several advantages over conventional LPG. For one, it offers the convenience of ensured continuous and adequate supply of gas at all times, without any problem of storing gas in cylinders.

Having a PNG connection is much more convenient as well. In case of domestic LPG, consumers have to

take upon themselves the trying task of booking a cylinder refill, time and again. Then starts the wait for the deliveryman to deliver the cylinder.

Switching over to PNG renders this exercise unnecessary. PNG also eliminates the tedious routine of checking LPG refill cylinder for any suspected leakage, or it being underweight, at the time of delivery.

Moreover, the user is spared the inconvenience of connecting and disconnecting the LPG cylinder when out of gas. Precious space, occupied by LPG cylinders is also saved.

PNG is described as a safe fuel. The combustible mixture of natural gas and air does not ignite if the mixture is leaner than 5 per cent and richer than 15 per cent of the air-fuel ratio required for ignition. This narrow inflammability range makes PNG one of the safest fuels in the world. On leakage, LPG expands 250 times, which is not the case with PNG. Supply in PNG can be switched off through appliance valve (inside the kitchen) and isolation valve (outside kitchen premises), which fully cuts off the gas supply.

The billing process is also convenient whereby the user is charged only for the amount of PNG used, and no pilferage is possible with PNG as the billing is done according to the meter.

A unique feature is that the user gets to pay only after consumption of gas. The domestic consumer pays the PNG bill only once in every two months.

Moreover, there are no minimum consumption charges i.e., if there hasn’t been any consumption, there shall not be any bill. The user pays the gas consumption charges based on the exact consumption reading provided by the meter installed at his premises. The bill is delivered at the user’s doorstep.

Round-the-clock customer support ensures that complaints, if any, are promptly redressed.

“Natural gas is being used predominantly as a versatile fuel in many major cities catering to domestic and commercial applications, as a cooking fuel, and other purposes.

Gas is one of the cleanest burning fossil fuels, and helps improve the quality of air, especially when used in place of other more polluting energy sources. Its combustion results in virtually no atmospheric emissions of sulphurdioxide (SO2), and far lower emissions of carbon monoxide (CO), reactive hydrocarbons and carbon dioxide, than combustion of other fossil fuels,” claims an industry expert.

Expansion a challenge

LPG cylinders becoming scarce now. Photo courtesy: lifewatchnews.blogspot.com

While PNG has several advantages, the Parliamentary Committee on Petroleum & Natural Gas in its recent report has expressed unhappiness over the fact that said the petroleum ministry and the PNGRB are at loggerheads on various issues thereby affecting the implementation of CGD projects.

The government has ambitious plans to expand CGD networks to 200 cities by 2015 but uncertain policy framework is a stiff challenge today. Gas firms have already connected 20 lakh households and provided compressed

January 2013 www.InfralinePlus.com

natural gas (CNG) to 16 lakh vehicles in 77 cities but experts feel further expansion remains a challenge.

Against the total demand of 15.83 mmscmd in 2010-11, 21 city gas firms received only a third of it at administered rates, which are lower than imports. They received barely 4 per cent of the country's output of 120 mmscmd. They had to import 6.2 mmscmd of expensive LNG to meet the demand.

IGL and MGL in Delhi and Mumbai, respectively, were allotted 78 per cent of their natural gas requirements from domestic sources while GGCL was allotted less than 10 per cent of its need. "The future of regulations, gas supplies and tariff is uncertain. The PNGRB has not been awarding firm licences since its inception and it is making future of CGD expansion bleak” the committee said.

As per the committee, "The city gas distribution sector is at crossroads and we need to take stock on the current bidding framework. We need to consider if we are putting correct policies in place, which will invite investment in the sector and encourage the players - both incumbents and new ones as well”.

While regulatory issues remain a concern, the growth of PNG network has also remained slow due to inability of CGD entities in achieving their set targets. IGL, for example, has been rapped time and again by the standing committee for its inability to provide connectivity to all designated locations in and around Delhi. The committee has expressed unhappiness over the fact that although IGL had started operation in Delhi as early as in 1998, the entire Delhi region was still not connected by its network.

Considering that so far, 2.63 lakh connections have been released in Delhi which corresponds to 33 per cent of all households, the standing committee has termed the progress achieved in the past

THE CITY GAS DISTRIBUTION MARKET Company IGL

Domestic*

Industrial*

Commercial*

No of CNG stations

Gas sales (mscmd)

355,000

223

640

266

3.5

MGL

585,000

1,700

-

150

2.5

GSPC Gas

374,000

1,685

1,440

45

4.3

GGCL

350,000

-

-

28

3.2

*Base of customers Source: Company websites

While regulatory issues remain a concern, the growth of PNG network has also remained slow due to inability of city gas distribution entities in achieving their set targets. IGL for example, has been rapped time and again for its inability to provide connectivity to all designated locations in and around Delhi despite the fact that it started operations in the National Capital Territory as early as in 1998.

15 years as very modest in view of the fact that 67 percent of the household are yet to be covered by PNG connections.

The committee now wants the petroleum ministry to ensure that IGL achieves its targets quickly.

According to Sharma of Adani Gas, “Piped natural gas is a new concept in India and is known only for last 20 years. Local bodies did not foresee see it. Most Municipal Corporations are cash starved and they find ways to ways and means to take revenue from whichever source they can.

Unfortunately, they are looking at revenue from laying of pipelines in cities, which to my mind, is a utility. If you charge anything for laying pipeline, any company doing it will have to pass it on to the customer, which will make

City Gas more and more non lucrative.

There is no other way.”

The politics surrounding the capping of LPG cylinders is also something which has not sent the right signals to the sector. Already, the Congress has announced an increase in the capping of LPG cylinders from six to nine in states in which it has formed a government.

Even the petroleum minister, Verappa Moily recently decided to increase the number of capped cylinders from six to nine.

According to Adani Gas’ CEO, Rajeev Sharma, “The government keeps changing its views again and again. Now there are reports that the capping is being increased to nine cylinders. I don’t know if it will go up from nine to 12. So how can you make strategies on basis of decisions taken which can be revised?”

It is in everyone’s interest that expansion of PNG is done successfully.

The Centre would save substantial subsidy to the LPG and diesel by expanding CGD network. As per the data available, the average savings in subsidy per cylinder comes to `468, which translated into a saving of `39.17 crore between September 13 and October 31, 2012 on account of capping use of subsidized cylinders to six. The figure is expected to increase in the future. In addition, CGD is the key to turn Vision 2015 into reality by replacing LPG with piped natural gas to reach out to larger audience with cleaner fuel.

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January 2013 www.InfralinePlus.com

CoverStory | InConversation

‘We have totally missed the game in LNG’

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Adani Gas, a wholly-owned subsidiary of Adani Enterprise Ltd, was incorporated for setting up distribution network in various cities to supply natural gas to industrial, commercial, domestic and CNG customers. Its Chief Executive Officer Rajeev Sharma, in conversation with Neeraj Dhankher, explains why administering prices of CNG is not a good idea.

Excerpts from an interview: Please provide an update on Adani Gas’ CNG and PNG activities in Gujarat and Haryana At the moment we are operating in Faridabad in Haryana and Ahmedabad and Vadodara in Gujarat. In terms of gas quantity, we are selling around 1.1 million cubic metres of gas per day in all the three locations. In Ahmedabad, we have 1.8 lakh PNG connections and a few thousand in Vadodara and Faridabad. In Faridabad, we initially provided PNG connections in rural areas and now we have started PNG connectivity in Faridabad cityas well.

In Ahmedabad& Vadodara we have 60 CNG stations and in Faridabad, we have eight CNG stations. We plan to add about 6 to 8 Stations in Ahmedabad & Vadodara and a4 stations in Faridabadin 2013-14n.

Currently, price of CNG is higher than that of diesel in Gujarat and coupled

subsidies. Until we with the high cost of converting buses extinguishthe from diesel to CNG, the CNG program We subsidies, these in the state is facing challenges. But should things will I am sure the value of environment have been continue. preservation will be given thinking in terms of We expect priority in times to come and investing in upstream that over CNG will remain an important assets outside India to secure our a period area of activity for us and all supplies at a of time, CGD companies. reasonable the price price. of domestic Given the acute shortage of gas gas will also at present, do you think that there be revised and is a need for the government to brought at par with the long term accord higher priority to the CGD R-LNG prices.. sector in gas allocation?

It will not be correct to say that there How much of RLNG is is shortage of gas. Rather, being used by Adani it ischeaper domestic gas Gas to fuel its CGD which is in short supply. projects in Gujarat But RLNG is available and Haryana? Please but there is a price factor provide details on the attached to it. different categories of As regards to providing gas being used by the higher priority to CGD company along with sector in gas allocation, their price.

I feel that the sector has In Ahmedabad we do not already been given high receive any domestic gas, it is priority. The government 100% on RLNG. has also to keep in mind This is requirements of one fertilizer of and power sector and other

January 2013 www.InfralinePlus.com

the reasons as to why CNG price is higher in Ahmedabad and Vadodara In Faridabad, we receive around 250,000 SCMD of domestic gas for use of CNG and domestic. , RLNG is beingsupplied to industrial and commercial consumers.

Adani Gas recently received authorization for supplying gas in the city of Khurja in Uttar Pradesh.

What are your plans?

We got authorization only a few days back. We have already laid a network in Khurja and are awaiting pipeline connectivity from GAIL. Here also only RLNG will be supplied for which we have already signed agreement with GAIL.Large part of our network is ready and connectivity should come through by end of this financial year. Once connectivity is provided, we will be able to supply gas to houses and industrial units within 24 hours. We are already approaching industries for tie up. We are in talks with existing petrol pumps for exploring scope for adding on CNG facilities. While Khurja industries today are dying for fuel, still, I think that there will be some resistance in initially due to higher pricing. I feel there should be a policy which ensures that price to all CGD company is brought to same level. Only then can you call it a level playing field. In today’s scenario, few CGD companies are getting APM gas not because of design but because they existed earlier when APM was available.

What is the current situation in cities like Noida, Udaipur and Jaipur where you have received NOC for laying CGD network?

We have laid networks in Noida, Jaipur, Udaipur and Lucknow. But there has been no progress due to regulatory issues.

In Lucknow, we were not provided connectivity and Green Gas has been authorized to supply gas. But we are in talks with Green Gas to work jointly in Lucknow. In Noida,even though wehave

laid network, IGL has been selling gas in the city. I am sure that we will find similar solution as we do in Lucknow.

In Jaipur and Udaipur, the PNGRB has rejected our application under Section-18 (1) of the PNGRB Act. But when we had applied, Section-16 was not notified.

Now Section-16 has been notified and we have represented to the Board to include authorization under the section and our application is still pending.

Transparency has never been a problem, but bidding parameters [in allocation of city gas distribution networks in different geographies] were not correct.

We have made some suggestions to the Board and they are looking into it.

What are the reasons behind decision to pick up stake in Green Gas? Why has it been delayed and by when the deal is expected to be finalised? Are there issues over asset valuation?

We are in discussions with Green Gas and its promoters for merging our assets in Green Gasand picking up some equity stake in the company.

We have jointly appointed SBI Caps as consultant for evaluation and I am sure some solution will come soon.

Valuation exerciseinherently evokes divergent views but SBI Caps as an independent consultant shall be able to resolve it. Once the deal is worked out, we will jointly work with Green gas in Lucknow and Agra. After this exercise, if we find it successful, we will look for similar arrangement at Noida with IGL and GAIL. In case this deal does not go through in Lucknow, we will pursue PNGRB to take a decision.

What steps are being envisaged to increase Adani Gas’ market share in the City Gas Distribution segment, especially after the recent takeover of a majority stake in Gujarat Gas by GSPC? There are two ways to look at itorganic and inorganic. Acquisition and mergers is one way to grow big, other way is the normal way- you keep bidding and keep expanding. Adani Gas, in a short span, is the only CGD Company which is working in four different states in eight different cities.

That way we are number one.

With regard to GSPC’s acquisition of Gujarat Gas, they must have found it a good deal and so have taken it.

We didn’t think it was a good deal and felt that Gujarat’s market is saturated and therefore we didn’t find any big upsidein it.

Which regions are you targeting for participation in future PNGRB bidding rounds?

We will surely bid in areas where we feel there is potential. We don’t want to just bid just for the sake of it. We want to make sure that it should make good business proposition. A geographical area does not really matter and hence we have no specific preference.

The Supreme Court has ruled that PNGRB does not possess powers to fix or regulate the maximum retail price at which gas is to be sold by entities nor can it fix Network Tariff and Compression Charge for any entity. What are your views on the whole issue?

It is very unfortunate. The Act was enacted in 2007, and the rules came later. Till then no one objected. When it starts affecting, only then one starts challenging. Nowhere in the world have I seen that a regulator does not have powers to regulate.

As regards to IGL’s stance, the spirit of the Act says that regulator should

45

January 2013 www.InfralinePlus.com

CoverStory | InConversation

have powers to regulate tariffs. When you actually read the Act, the Board is only regulating network tariff or compression charge, not marketing margin. So in a nutshell, they are not regulating MRP. 46

Do you feel that the current system of inviting bids for setting up CGD network in different Geographical Areas by PNGRB is justified? Few months back, the regulator had cancelled the bids received in earlier CGD bidding rounds. What are your suggestions to make the bidding mechanism smoother and efficient?

We have no problems with the bidding route for selecting the CGD entity for a geographicalarea. Infact that is the only way it can be done. But we had certain reservations regarding the bidding parameters from day one. We have made some suggestions regarding this to the Board and I am sure they would be considered by the Board while reviewing the bidding parameters.

Please outline the roadmap for Adani Gas for the next five years?

Is CGD expected to be the core business or there are plans to venture into other areas?

We are purely in CGD business. As and when new cities will come, we will definitely be bidding. And as regards to Adani Group is concerned, we are setting up an LNG Terminal in Mundrain association with GSPC and we have plans to acquire some oil and gas assets overseas.

What are the biggest challenges that you are currently facing in your operations?

It is a comparison of unequal. While CNG is being sold at market price, we are supposed to compete with diesel, which is heavily subsidised and its price is artificially kept low. How can you compare these two? No effort isbeing made to ensure that this parity comes.

Moreover, diesel is more polluting thansay even petrol. If one is seriously concerned about city environment, then the domestic gas given to steel and other industrial units can be given to CGD entities for CNG so that the prices can be lower.Even the current domestic gas price is setto increase.

Therefore, everything should be market driven.If any subsidy has to be given, the same should be provided directly in bank accounts.

Today, taxation varies drastically across states, which also pose a stiff challenge in operations.

I also do not understand the concept of gas allocation. Why there should be an allocation? There should be a single price for gas and people should be allowed to purchase it. Even if D-6 field would have produced at optimum level, I don’t think it would have been enough to meet gas demand in the long term. As a country, we have missed the game in LNG. We knew that gas would remain short. We should have been thinking in investing in upstream assets outside India to secure our supplies at a reasonable price.

There have also been reports over delay in laying pipelines in absence of permissions from Municipal bodies. Your comments.

Piped Natural Gas is a new concept in India and is known only for last 20 years. Local bodies did not foresee see it. Most Municipal Corporations are cash starved and they find ways and means to augmentrevenue from whichever source they can. Unfortunately, they are looking at revenue from laying of pipelines in cities, which to my mind, is a utility. If you charge anything for laying pipeline, any company doing it will have to pass it on to the customer, which will make City Gas more and more non lucrative.

For full version of the interview, visit www.infraline.com For suggestions email at feedback@infraline.com

January 2013 www.InfralinePlus.com

NewsBriefs | Oil & Gas Rangarajan committee For $8 gas, production-linked payments

Govt allows Cairn India To further explore Rajasthan oilfields

Oil blocks with over $1 bln invesment Will be covered under “concurent audit”

The Rangarajan committee has recommended near doubling of domestic natural gas price from $4.2 per unit besides sweeping changes in the way profits from oil and gas fields are shared with the government in future. This may be an acceptable compromise between interests of producers who bring risk capital, the government that owns natural resources.

The oil ministry has decided to allow Cairn India to further explore Rajasthan oilfields, a decision that could raise the block’s output by over 70 percent and reduce dependence on imported oil. The decision will also intensify exploration activities in other producing fields operated by other companies including ONGC, GSPC and Reliance Industries, government officials said.

The Rangarajan panel has proposed creating a mechanism to carry out “concurrent audit” of blocks where companies have invested over $1 billion, enabling the government to keep a real-time vigil on the books of oil and gas producers.

RIL’s KG-D6 block, and the Rajasthan oilfields operated by Cairn and ONGC will be covered under such audits.

Videocon Industries To take heat of Mozambique tax norms

Cairn India May revise output guidance in Jan 2013

BPCL, Videocon project To turn Mozambique block into LNG unit

Videocon Industries is likely to take a tax hit of `3,800-5,100 crore on a potential sale of its 10% stake in Mozambique’s Rovuma basin, unless it is able to push through a deal before the start of the new year when the African country’s recentlyamended corporate tax regime takes effect.

Videocon, which invested $100 million in stake buy in the block, had valued its stake in the gas block at $2.26 billion in August.

Cairn India is facing some reservoir pressure problems in the Bhagyam field in Rajasthan. Despite getting all the approvals from the government for almost 11 months now, the company is unable to ramp up the entire Rajasthan production. It can increase the production to 40,000 barrels a day from the current 20,000 barrels. The company may announce lower guidance in January.

Following the huge natural gas discovery in a Mozambique block where BPCL and Videocon are partners, the operators have decided to turn it into LNG plant. Eni SpA of Italy will be roped in to build the plant. Anadarko Petroleum, the operator of Offshore Area 1 where BPCL and Videocon hold 10 per cent each, and Eni will join forces to build a single liquefaction plant that will turn gas in the two fields into liquid.

Reliance Industries Embarks on gas find at Cauvery Basin

IOC debt at `980 billion Borrows for working capital

GAIL India seeks to Sign 5-year gas supply deal with Pak

Government has given a green signal to Reliance Industries to assess its new discovery at the deepwater CauveryPalar basin. After a number of discoveries including the Krishna - Godavari, the energy giant has come up with another discovery in the Cauvery basin. Initial findings suggest that the first well SA 1 has a potential of over 100 million barrels of condensate or liquid oil and around 3 trillion cubic feet of gas.

Saddled with one of the largest debts for an Indian company, state-run Indian Oil Corporation has accumulated dues that are over `98, 000 crore. The company is likely to lose `21,000-22,000 crore in revenue during the quarter ending December 31. Sale of subsidised diesel and cooking fuels has put the company under pressure, forcing it to borrow to meet its working capital requirement.

GAIL India plans to enter into a five-year gas supply agreement with the Pakistan government to supply around 5-6 million standard cubic meters of gas per day (mmscmd) from its Ludhiana-Jalandhar gas pipeline that would be extended up to Amritsar in the coming months. GAIL would be amongst the first Indian government controlled companies to start trade with the Pakistani government.

Petronet LNG Seeks foreign ally for Gangavaram

Next Fuel Inc. signs Pact for Coal-to-Gas operations in India

Krishna-Godavari basin May become new source of shale gas

Petronet LNG is looking to offer a stake in its proposed LNG terminal at Gangavaram Port in Andhra Pradesh to a foreign gas supplier to secure the commodity on a longterm basis and cater to the growing domestic demand. Petronet intends to keep a majority stake, part stakes will be offered to a supplier, Hindustan Petroleum and to the Gangavaram port.

Next Fuel, Inc., has signed an agreement to conduct a pilotscale project for enhanced production of coalbed methane (CBM) for Visat Oil-tech Private Ltd. (Visat). Under the agreement, Next Fuel will conduct a pilot project at Visat’s site in Gujarat, India to produce CBM (natural gas) using the Company’s proprietary biogenic coal-to-gas (CTG) technology.

The KG basin could soon become a new source of shale gas, which promises to provide energy for the next 200 years. It is one of the few places identified in India for the exploitation of shale gas. The potential deposits of shale gas in the country has been estimated at between 600 and 2,000 trillion cubic meters. Shale gas is a natural gas trapped within shale or finegrained sedimentary rocks.

47

January 2013 www.InfralinePlus.com

InDepth Strict checks by OMCs bring down cases of adulteration of petrol, diesel ►► Very few to nil cases reported by oil marketing companies in past four months ►► Direct cash transfer of subsidy meant for PDS kerosene has helped curb illicit mixing

48

Sales voume of petrol and diesel in the country are, respectively, close to 71.89 thousand kl and 260.22 thousand kl per day

by Debjit Das

There has been a significant reduction in fuel adulteration cases in the country due to the recent stringent steps taken by oil marketing companies (OMCs) to curb the menace. Between April and September 2012, BPCL reported no adulteration cases while IOCL and HPCL reported only four and one such cases, respectively. Strict punitive action to the extent of terminating the errant retail outlet’s (RO) dealership licence or transportation contracts of tank truck contractors has brought down illicit

trade activities in the retailing of fuels.

Implementation of No Automation No Operations policy aggressively, direct transfer of cash subsidy to the intended users of kerosene distributed through public distribution system (PDS)—a pilot scheme for this was implemented in Kotkasim tehsil of district Alwar, Rajasthan and subsequently the scheme was rolled out in 11 states; facility to test nozzle samples of petrol and diesel at RO on customers’ request and extension of

surveillance audit of ROs of OMC by third parties to ROs selling below 100 kilo litres (kl) per month are some of the steps recently taken by OMCs which have helped bring down adulteration of petrol and diesel with PDS kerosene and other adulterants.

In addition to focusing on ROs, OMCs in conjunction with government agencies have taken several steps to check adulteration at various possible intermediate stages of transportation and retailing of transport fuels right from the

January 2013 www.InfralinePlus.com

terminals / depots where tank trucks are filled with the fuel to the point of sale of these transport fuels. The tankers are sealed with tamper proof locking system before they move out of the company premises and the tank trucks are fitted with global positioning system (GPS) to monitor their movement during transportation. Additionally, sampling of fuel is carried out at three stages--at the supply location, at the delivery point from tank trucks to retail outlets and at the retail outlets.

During April to September 2012, oil marketing companies took 49,723

samples of which only 72 samples failed the tests. Of these 72 failed cases only 37 samples were suspected to be cases for fuel adulteration. However, this might also include some amount of sampling errors. In comparison to the samples checked during 2011-12 in which 104 samples were suspected to be cases of fuel adulteration, the number of suspected adulteration cases has also significantly declined. See Box 2 for the declining trend of fuel adulteration cases.

Fuel adulteration has been a constant menace over decades for OMCs in India. Petrol and diesel – the transport

The difference in price of these comparable fuels is a result of the subsidy-based pricing system prevalent in the retail fuel market which has kept the price of PDS kerosene artificially lower than its market price by around `33.93 per litre.

fuels, sold from across 45,104 retail outlets in the country are victims of this adulteration.

With sales of petrol and diesel registering a monthly growth in the range of 5-7 per cent, the market for adulterated fuels would only have expanded if OMCs had not taken Courtesy: Nepal Times

aggressive steps to curb such malpractices.

Why, where, what and how The key incentive for adulteration of transport fuels is the price differential between the fuels in context and the adulterant i.e. kerosene diverted from that being supplied through PDS. While the current prices of petrol and diesel in Delhi are `67.24 per litre and `47.15 per litre, respectively, the price of PDS kerosene is `14.83 per litre.

This differential in price, of `32.32 per litre in case of diesel and `52.41 per litre in case of petrol with PDS kerosene, leaves a lot of scope for adulteration. The difference in price of these comparable fuels is a result of the subsidy-based pricing system prevalent in the retail fuel market which has kept the price of PDS kerosene artificially lower than its market price by around `33.93 per litre. The purpose of providing kerosene at a subsidized rate is to provide cheaper domestic fuel to the needy; however a significant portion of the subsidized fuel does not even reach the intended recipients and is diverted into adulterating the transport fuels due to inefficiencies in the public distribution system.

While the sales voume of petrol and diesel in the country are close to 71.89 thousand kl and 260.22 thousand kl per day, even if 10 per cent of this fuel is adulterated with 2 per cent kerosene, it would lead to gains of around `2.44 crore per day for the adulterators. For a retail dealer who sells 100 kl of diesel in a month, the gains can translate into an additional cash flow of around `64,640 per month, which is a significant

49

January 2013 www.InfralinePlus.com

InDepth

Price Differential between Transport Fuels and PDS Kerosene

Price of PDS Kerosene (Delhi)

Price of Deisel (Delhi) 47.15 14.83

Price of Petrol (Delhi) 67.24 14.83

32.32

52.41

Price Differential (`/Ltr) Source: Infraline Analysis

The key incentive for adulteration of transport fuels is the price differential between them and the adulterant i.e. kerosene diverted from that being supplied through the public distribution system. While the current prices of petrol and diesel in Delhi are `67.24 per litre and `47.15 per litre, respectively, the price of PDS kerosene is `14.83 per litre.

Steps taken by OMCs to curb fuel adulteration • Regular surprise checks by OMC field officers / senior officers • In case of stock variation beyond permissible limits, density failure, filter paper test failure and in case of specific complaint against the retail outlets, company officials draw samples and forward them for testing as per laid down procedures.

50

• Surprise inspections by Quality Control Cell team of OMC, reporting to a different function than marketing.

• Samples drawn from petrol pumps at random and sent for testing to authorized laboratories.

• Blue dyeing of kerosene is being done to detect / prevent adulteration.

• Robust third party audit of retail outlets. Under this, surveillance audit of OMC outlets selling above 100 kls per month is being done by third parties.

• Automation of retail outlets selling more than 200 kls per month enabling OMCs to keep a track of the activities at the retail outlet.

• Inspection by mobile vans.

• Various government agencies carry out inspections under MS / HSD Control Order: • Food & Civil Supplies Department • Weights & Measures Department

Adulteration of fuel is a global menace and is not restricted to India

incentive for engaging in such illicit practices.

The adulteration of fuel takes place mostly at two levels, namely during transportation of these fuels from the oil marketing company terminal / depots to the retail outlets or at the retail outlets.

The tank trucks / lorries after refilling at the terminals / depots are directed to locations where the adulteration of fuel happens. Alternatively, the stock at the retail outlets is mixed with quantities of the adulterant to tamper with the quality of the fuel.

Under the three-tier sampling system, test results of samples drawn from ROs are compared with the test results of the tank trucks retention sample and supply point sample. In addition to the sampling activities and random checks, the OMCs have also taken many other steps to ensure that there is minimal

possibility of adulteration in these fuels.

While kerosene is the most commonly used adulterant due to its characteristics of density and viscosity which closely resembles that of petrol and diesel, other adulterants such as naphtha, solvents, raffinates and slops are also used to adulterate fuels. In order to curb adulteration of fuels, the government had notified supply control orders on these products namely, Naphtha (Acquisition, Sale, Storage and Prevention of use in Automobile) Order, 2000 and Solvent, Raffinates and Slops (Acquisition, Sale, Storage and Prevention of use in Automobile) Order, 2000 in June 2000. These control orders have been largely helpful in controlling the rampant use of such products for adulteration.

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ExpertSpeak

‘City gas:Moving at a slow pace due to low margins in distribution’ BS Negi is a former member of Petroleum and Natural Gas Regulatory Board. He has been associated with city gas distribution in the country since 1992. In this column he analyses why the network of pipelines has still not penetrated the country.

52

The history of city gas in India dates back to pre Independence era when the Oriental Gas Company Limited was registered in England under the Joint Stock Companies Act 1856 to manufacture and supply gas for lighting in the vicinity of town of Calcutta.

The same company was authorised to supply gas beyond Calcutta in 1867.

Interestingly there was no molecule of gas being produced in India at that time.

Today, when India has produced 140 mmscmd of gas and imports close to 30 per cent of its gas production, city gas distribution (CGD) is limited to 24 geographical areas operated by 18 CGD entities. The progress on CGD front has been very slow and so far 2 million households have been connected which is only 0.8 per cent of the total households in India.

The application of natural gas in CGD is most benign considering its eco friendly characteristics, ease of operation as compared to alternative fuel, safety angle and its economics .

Still gas consumption in city gas has not exceeded 10 per cent of total gas consumed in India. The government of India having enacted the PNGRB Act in 2006 empowered the board to authorize transmission network and gas retailing network. The board started

in most of the cities is vanishing as industries are relocated away from urban areas, but the commercial segment still makes good business on volume-based profitability. CNG has not been able to capture good business because of long wait of vehicles at CNG stations for refill and dieselization of auto industry on account of the present policy of the government on subsidizing diesel.

2. The government has not adopted a uniform allocation of Controlled Price Gas (CPG) to all authorised CGD entities. As a result, companies with more CPG gas allocation are BS Negi, Former member of Petroleum and Natural Gas Regulatory Board making huge profits against CGD entities which are functioning from June 2007 and City barely surviving formally notified in October 2007. gas has four on Regasified In the five years since it has come distribution LNG for their into existence in India, the board segments out of areas. This has not shown any impressive which the most has not only impact on CGD growth. Only five paying is CNG based discouraged new areas have been authorised so on per unit volume profit and the CGD far to three entities against a plan least one is companies but of covering 100 areas. One would PNG. has also slowed definitely like to introspect as to what down the growth of has gone wrong creating such a gap CGD in India. Even if one were to between planning and implementation. buy the argument that indigenous With my exposure to CGD since 1992 gas or CPG is not available to cope where I started implementing city gas with the entire demand of CGD, it as a pilot project in the cities of Delhi, can easily be argued that whatever Mumbai and Vododara on the directions gas the government decides to of the Supreme Court to GAIL India allocate to CGD must be equitably Ltd. through Ministry of Petroleum and allocated to all authorised entities.

Natural Gas (MOPNG), I can spell out This will smoothen the aberrations the following reasons: in profit margins of inter-CGD 1. City gas has four business segments, entities. The government needs namely PNG, CNG, commercial to allocate at least 10 per cent of and industrial, out of which the indigenous gas it controls for CGD most paying is CNG based on per on priority basis and disburse the unit volume profit and the least same in proportion to the population one is PNG. The industrial sector

January 2013 www.InfralinePlus.com

of area of the authorized entity. This allocation shall have to be relooked periodically so as to apportion from the revised domestic gas availability and to the revised number of CGD entities.

3. The cooperation from various stake holders such as the mMinistry of surface transport/RTO, MOEF, MoPNG, EPCA, CCOE /PSO, conversion workshop, ARAI (type approving agency), local government and oil marketing companies is very important for the growth of CGD. The two tier CNG filling could be an option to increase filling points and reduce waiting time. The recent approval of PESO for shifting of compression equipment on the floor above dispensing station is a welcome step in this direction.

Once this is proven for safety, multi tier filling could be allowed with all inbuilt safety provisions so as to further reduce the waiting time for filling CNG. 4. On the regulatory side the roll out for CGD needs to be done on a fast track basis. Even though the bidding parameters and conditions were exploited by bidders, it is legally tenable as long as the competitive spirit of the Act is fulfilled and bidders have played within the rules

prescribed by the Board for the game (of bidding). The intended modification in the bidding process is still not considered foolproof or even better than the existing one. The whole process of CGD regulation started with proposed bidding only for tariff (revenue stream). And in fact the existing regulations are the modification of the original concept with active participation of all the stake holders. An imposed infrastructure investment may have lesser force to implement than the one proposed by the bidders.

In its five-year existence, the regulatory board for PNG has not shown any impressive impact on CGD growth in India. Only five new areas have been authorised so far to three entities against a wishful plan to cover 100 areas.

One would definitely like to introspect as to what has gone wrong creating such a gap between planning and implementation.

CNG has not been able to capture good business because of long wait of vehicles at stations

5. Gas availability can also be overcome by a very benign concept of bio gas for city gas distribution.

On an average, 20 kg of cow dung gives one cubic metre of natural gas. The yield further increases if the poultry waste is added to this and the revenue from residual cow dung waste in the form of compost manure or wormi manure is further advantageous. The bio gas can be sweetened by a simple indigenous process. In India even PESO has allowed bio gas for CNG application with cylinder fill pressure of 150 bar. Bio gas either as stand alone or in combination with domestic gas, regasified LNG or LNG by tanker process makes good sense for CGD. 6. To overcome pipeline connectivity for CGD growth, LNG can be transported in cryogenic tankers to the CGD locations and regasified for CGD use. The economics work favourably up to 600 km from LNG terminal comparable with pipeline transportation.

7. The application of LNG would go a long way in addressing the limited range of CNG vehicles. Many countries are using LNG on board for fuelling vehicles. The application goes beyond car, buses and covers even railways and helicopters.

8. We also need to relook at the fiscal regimes for CGD business. The local government needs to encourage the laying of distribution network and establishment of CNG stations with reasonable charges. Taxation in various states also needs to be smoothened. As of now, disparity ranges from 0 per cent tax in Delhi, 5 per cent in Haryana to 26 per cent in Uttar Pradesh. It would be beneficial if a uniform value-added tax regime is implemented across the country.

Mr Negi has authored three books, the latest being “Pipeline is Lifeline�. It is published by a trust named Virasat which can be contacted on virasat3344@ gmail.com.

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ExpertSpeak

‘We are paying heavy price for over dependence on crude oil imports’ More than 70 per cent of India’s crude oil requirement is met through imports. Almost 50 per cent of our import bill comprises crude. Deepak Mahurkar, Leader Oil & Gas, PwC India, explains why and how it is possible to unlock India’s hydrocarbon potential and achieve self sufficiency.

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India is poised to make a significant mark on the world energy map as its primary energy requirement at the very least more than doubles to 1,464 Mtoe1 by 2035 from 559 Mtoe2 in 2011. India is also expected to double its share in global primary energy consumption by 2035. The country’s per capita primary energy consumption is the lowest among all major developing economies in the world. Though this can be attributed to the service-oriented nature of the economy, it holds true even when India is compared to countries such as Brazil, Argentina and Mexico which have a gross domestic product (GDP) mix similar to that of India.

The fact that India is dominated by a rural population, which largely depends on non-commercial sources to meet its energy needs also contributes to the low recorded per capita energy consumption. As the country moves towards urbanisation, the energy demand is set to go up significantly.

At present, coal dominates the country’s energy mix with a robust 53 per cent share in primary energy consumption. The country incurred huge losses (7.7 billion and 5.9 billion units of generation in 2010-11 and 2011-12, respectively) owing

production and consumption of crude oil and natural gas has increased over the past decade, and that is further projected to widen leaving India vulnerable on the energy security front.

Hydrocarbons can make or mar

Deepak Mahurkar Leader Oil & Gas, PwC India

to the poor quality of Indian coal.

Therefore, if India were to continue its dependence on coal, a substantial rise in imports will be required as reliance on domestic coal will prove to be inefficient. The price vagaries of imported coal coupled with domestic infrastructure constraints make this a difficult proposition.

While hydroelectric power plants account for 19 per cent of power generated in India, developing them involves major rehabilitation and resettlement, land acquisition as well as environmental clearance.

Nuclear power currently constitutes only 1 per cent of the total primary energy consumption of the country and its share in the primary energy mix is expected to increase only marginally to about 3 per cent in 2035 indicating limited potential for nuclear fuels in India.

Oil and gas are, therefore, important for fueling India’s growth story, given the constraints and limitations of other primary fuels. The gap between

India pays a heavy price for its high oil import dependency. Oil imports in 2011-12 accounted for almost 50 per cent of the country’s total exports.

Fifty-four per cent of the country’s trade deficit was owing to the oil trade deficit.

This fuelled substantial weakening of the rupee and resulted in a drawdown of foreign exchange of $12.8 billion.

The drawdown Oil could have imports in been avoided 2011-12 had India accounted for produced almost 50% of the 17 million country’s total exports. Nearly 54% tonne over of our trade deficit its current was due to oil domestic imports. production. In other words, with higher domestic production, rupee depreciation could have been arrested, inflation could have been contained, the import bill reduced–all translating into a higher gross domestic product (GDP).

Such is the power of the E&P sector.

Energy security India would have increased its GDP by a whopping 6.5 per cent if the import of crude oil were avoided completely.

Add to that the sector would have provided 9.4 million persons years of employment over a period of 20 years.

Partial, if not complete, independence from crude oil imports would fetch

January 2013 www.InfralinePlus.com

additional economic benefit of value equal to or more than the economies of countries like Cyprus, Kenya and Bulgaria. That is not all. The government’s share of profit oil, royalty and net taxes is estimated to be in the range of $8 billion to $20 billion for the partial independence scenarios assumed.

Norway and Brazil Following a strategic and focussed vision for the domestic E&P sector, Norway, from being nowhere on the global E&P map in the 1970s, is today counted among the top 10 hydrocarbon producing nations of the world. On the back of stable policy implementation and persistent efforts, Brazil has more than doubled its oil reserves every 10 years consistently over the last three decades. India was no different from Brazil and Norway then, and has the opportunity to focus on domestic exploration for energy independence.

Services industry More than 60 per cent of the E&P spend is for specialized services. They form the backbone of the E&P industry.

In order to achieve energy security, developing the sector in India will be rewarding. It will avoid delays and premiums in obtaining services, save on foreign exchange drain, and promote employment. The Nigeria-promoted free zone hosts 140 service companies which resulted in employment generation for over 30,000 people.

Power of unity In many contexts, the objectives of governments practiced through National Oil Companies (NOCs) and those of private companies synchronise. Indian NOCs are rather ‘international NOCs’ seeking reserves globally, satisfied with accreting reserves, without necessarily aspiring to gain a technical edge.

The private sector, however, aspires to be technology savvy. They book reserves and increase shareholder value

India’s GDP can go up by 6.5 per cent if import of crude can be avoided completely

Energy security is compelling for the economic advantages which it brings. We need a debate on the critical energy sector in India with the hope of arriving at a clear consensus on what should ideally shape the exploration and production sector.

Energy security is no longer just a desire but a critical imperative for India as it stands at the threshold of economic maturity. through efficient operations. They take calculated risks. Service companies excel technologically, but do not take underground risks. All three can create partnerships in a country like India by allowing each to utilise their strengths, partner at strategic or asset levels, and bring in the necessary resources.

Brazil, Norway like countries did it.

India, therefore, will do well to create an enabling environment for the service companies to set up base in India. The tangible and non-tangible benefits of such an initiative can be gleaned from the success stories scripted by Nigeria through promoting an oilfield services hub and by Singapore becoming a rig building yard hub.

State governments can benefit States such as Gujarat, Andhra Pradesh, Maharashtra and Rajasthan stand out on the hydrocarbon map of India. Rajasthan transitioned from a revenue-deficit state into a revenue-surplus one in 2010-11 on the back of the commencement of production from the Barmer facility in late-2009. Gujarat’s penchant to develop a gas market has led to the creation of manufacturing and process industry hubs. A well-developed oil and gas economy in the state has generated employment, enhanced living standards and improved the human environment.

The views in the article of the author are personal For suggestions email at feedback@infraline.com

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YearEnder 2012| Oil & Gas

With cap on LPG refills, govt enters where angels feared to tread Sector: Oil & Gas. Jolted out of its inertia by a series of rating downgrades by international agencies, the government took shaky steps towards a second round of reforms with corrections in prices of diesel, curbs on cheap LPG cylinders and ultimatum to SEBs Why 2012 was different

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Turning the page on 2012 will not be easy for the energy sector. Though it started on a note that put a question mark on decontrol of petrol pricing itself, by the time the year ended crucial remedial measures had been taken by the government leaving an air of expectancy which is likely to see greater acceptance for market-based pricing among the common man.

In the first half of the year, both power and oil and gas sectors attracted the attention for unsustainable levels of subsidy and losses. If it was the accumulated losses of power distribution companies that had touched `2 lakh crore in March 2011, it was the whopping under-recoveries of `85,600 crore in diesel, domestic LPG and kerosene during the first half of 2012-13 that had policy makers worried. Anything to do with consumer price has direct political ramifications and tackling these wasn’t easy for the UPA government.

By September, it had gained the courage to increase diesel prices by `5 a litre and in a more daring move capped the number of subsidised LPG cylinders to six in a year.

The next logical step for a government determined to tackle subsidy would have been to decontrol diesel.

After all, two years back, in June 2010 the government had decontrolled petrol with a result that the acceptability for market price for the fuel has been well established. But instead of dealing with diesel under-recoveries head on, the government yet again chose to go for

Cap on LPG cylinders led to widespread protests. Photo courtesy ibnlive.com

a one-time increase. The decision on LPG nonetheless was path-breaking and considering that this was done even when Trinamool Congress had walked out of the ruling alliance speaks of the firmness of the government.

On the power distribution side things appeared brighter. As part of the September debt restructuring package, state distribution companies are cleaning up their act. But the political compulsion of reducing power cuts could see these distribution companies resorting to purchase of expensive power in the open market especially in poll-bound states.

What didn’t change Essentially, as Prime Minister Manmohan Singh outlined at the recent Ficci meeting, the focus would be on “well targeted subsidies” that have an important role to play in softening the

harsh edges of extreme poverty. “It is necessary that we all understand that the subsidy bill, as it has grown in recent years, is constraining the government in its efforts for the economic well-being and empowerment of our people.” The subsidies on oil alone are more than what the government spends on health and education put together. “We need to address these issues even as we ensure that the poor and the vulnerable are effectively protected,” he said.

Last year the central government’s fiscal deficit touched a high of 5.9 per cent of the gross domestic product.

The government has drawn a roadmap for itself to reduce it to 5.3 per cent this year and to 3 per cent by 2016-17.

The action in correcting distortions in energy pricing, reducing diesel and LPG subsidies, was aimed to achieve this objective.

January 2013 www.InfralinePlus.com

Pricing along with fuel supply will be the crucial factors for the power sector in 2013. Though domestic coal-based power plants may heave a sigh of relief with the government intervening to ensure that fuel supply agreements are signed with Coal India Ltd, contractural issues and the burden of increased pooled price of coal could disturb the mechanics for some power producers especially government ones like NTPC Ltd and Damodar Valley Corporation.

Imported coal-based power plants on their part are still stuck with the issue of how to pass on the increase in fuel price to power tariffs. Strictly sticking to the contractural positions, state governmentowned offtakers are unwilling to budge and the issue appears not to be reaching any resolution.

Watch out for Transfer of LPG subsidy directly through cash credit will be a significant move in 2013. Except for the cash transfer and that too in certain notified districts, it appears now the government may not make any significant move when it comes to LPG. For kerosene, it is already trying out cash transfers in pilot programmes. A full decontrol of diesel pricing is also not likely in the near future despite Singh maintaining that under-pricing of energy, particularly electricity and petroleum products, has greatly affected the resources available for investment in infrastructure as well as and social development.

When it comes to the upstream sector of oil and gas production, the most closely watched policy announcement would be the Rangarajan report on the production sharing contracts which is likely to recommend a simpler system of sharing production with the government than the current system where the operator offers the government a share in the profit portion of production after costs have been recovered. Also, significant on the upstream side would be the process for revision of natural gas price. Since Reliance Industries Ltd’s KG-D6 gas

How to solve the problem of oil subsidies is the main question before Prime Minister Manmohan Singh

price is the benchmark for all domestic gas and a revision is due to be effective from 2014, lobbying both for and against market-based pricing is expected to happen. Rangarajan panel will give the vital input on this along with the pricing of coal bed methane.

In the main, while 2012 in itself was significant for the energy sector, not much should be expected from next year primarily because the government will be bound by political compulsions and would only be tickering on the periphery

A full decontrol of diesel prices is not likely in the near future despite the PM maintaining that under-pricing of energy products has affected the resources available for investment in infrastructure as well as social development.

to prevent subsidy in the sector from bloating significantly. Soon enough the countdown for general elections will begin. The fact that the polls are more than a year away is no comfort since elections to more than half a dozen state assemblies are also due in 2013.

Hot trends Oil and gas sector fuels the industries of the country. It is one of the main industries in the country and plays a crucial role in enabling decisions in all other spheres of the economy. However, policy environment for the E&P sector remains not so favourable with prevailing uncertainties on the role of the regulator in areas of pricing and allocation of hydrocarbon resources; granting of approvals and various clearances; and interpretation of the terms of the production sharing contracts and other framework agreements.

Given the current scenario, crude oil has been trading well above $100 thereby putting immense pressure on Indian crude oil basket. Efforts on development of non conventional hydrocarbon resources like coal bed methane and shale gas have not also been inspiring. And with various structural uncertainties existing, these are unlikely to become major contributors to the country’s energy security in the foreseeable future.

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StatisticsOil & Gas Oil & Natural Gas Data Sets (October 2012) Crude Oil Production (October 2012) (Qty: ‘000’ Ton) Name of the Production Company/Unit

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1. Oil & Natural Gas Corp. Ltd. Onshore Gujarat Andhra Pradesh $ Tamil Nadu Assam Tripura Mumbai High Offshore Oil Condensates 2. Oil India Ltd. (OIL) Assam Arunachal Pradesh 3. DGH (Private / JVC) Onshore Arunachal Pradesh Assam Gujarat Rajasthan Offshore GRAND TOTAL (1+2+3) Onshore Offshore

Planned Production October 2012 2027.400 605.400 459.000 26.000 18.000 102.000 0.400 1422.000 1224.000 198.000 335.800 333.800 2.000 1031.596 765.565 10.488 0.000 11.823 743.254 266.031 3394.796 1706.765 1688.031

October 2012 *

Production October 2011

September 2012 **

1882.000 577.000 434.000 24.000 21.000 98.000 0.000

2025.000 625.000 479.000 25.000 21.000 100.000 0.000

1808.000 564.000 418.000 23.000 21.000 102.000 0.000

1305.000 1130.000 175.000 314.865 313.042 1.823 1006.707 764.981 8.839 0.000 11.408 744.734 241.726 3203.572 1656.846 1546.726

1400.000 1232.000 168.000 325.630 323.600 2.030 866.410 561.680 7.840 0.030 11.770 542.040 304.730 3217.040 1512.310 1704.730

1244.000 1082.000 162.000 305.029 303.237 1.792 951.520 732.612 8.205 0.000 11.938 712.469 218.908 3064.549 1601.641 1462.908

*: Provisional. Note: Totals may not tally due to rounding off figures. $: Includes production from offshore east coast. **Revised

Refinery Production in terms of Crude Throughput (October 2012) (Qty: ‘000’ Ton) Name of the Refinery Public Sector 1. IOC, Guwahati 2. IOC, Barauni 3. IOC, Koyali 4. IOC, Haldia 5. IOC, Mathura 6. IOC, Digboi 7. IOC, Panipat 8. IOC, Bongaigaon Total IOC 9. BPCL, Mumbai 10. BPCL, Kochi 11. BORL, Bina Total BPCL 12. HPCL, Mumbai 13. HPCL, Visakh Total HPCL 14. CPCL, Manali 15. CPCL, Narimanam (CBR) Total CPCL 16. NRL, Numaligarh 17. MRPL, Mangalore 18. ONGC, Tatipaka Private Sector $ 1. RIL, Jamnagar 2. Essar Oil Ltd. (EOL), Vadinar TOTAL (B) $

Planned Production October 2012 $ 11031.900 90.000 411.000 1310.000 660.000 699.100 43.000 1073.000 170.000 4456.100 1151.200 870.000 545.000 2566.200 651.700 822.000 1473.700 929.400 61.400 990.800 265.000 1275.000 5.100 4299.900 2639.000 1660.900 15331.800

October 2012* 11066.335 100.790 525.120 1285.646 654.994 691.043 40.994 1148.444 209.291 4656.322 1132.501 901.645 564.045 2598.191 729.377 725.897 1455.274 742.731 55.217 797.948 254.748 1300.158 3.694 4795.850 3067.000 1728.850 15862.185

Production October 2011 9989.707 95.436 545.360 1305.066 674.319 304.659 61.049 1390.283 182.407 4558.579 1145.709 865.547 0.000 2011.256 640.650 824.195 1464.845 800.886 70.584 871.470 247.783 831.794 3.980 3196.744 2934.000 262.744 13186.451

September 2012 ** 9398.054 73.491 468.724 1121.163 526.968 665.129 54.036 984.291 180.416 4074.218 943.846 902.633 102.350 1948.829 706.225 648.472 1354.697 515.499 50.742 566.241 251.720 1198.128 4.221 4594.901 2906.500 1688.401 13992.955

*: Provisional. Note: Totals may not tally due to rounding off figures. ** Revised $: RPL (SEZ) Planned targets & production (in terms of crude throughput) not reported by the refinery.

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Refinery-wise Capacity Utilization (October 2012) (Qty: ‘000’ Ton) Name of the Refinery

1. IOC, Guwahati 2. IOC, Barauni 3. IOC, Koyali 4. IOC, Haldia 5. IOC, Mathura 6. IOC, Digboi 7. IOC, Panipat 8. IOC, Bongaigaon Total IOC 9. BPCL, Mumbai 10. BPCL, Kochi 11. BORL, Bina Total BPCL 12. HPCL, Mumbai 13. HPCL, Visakh Total HPCL 14. CPCL, Manali 15. CPCL, Narimanam Total CPCL 16. NRL, Numaligarh 17. MRPL, Mangalore 18. ONGC, Tatipaka Private Sector $ 1. RPL, Jamnagar 2. Essar Oil Ltd. (EOL), Vadinar TOTAL $

Prorated Installed Capacity $ 85.000 510.000 1164.000 637.000 679.000 55.000 1274.000 200.000 4604.000 1019.000 807.000 510.000 2336.000 552.000 705.000 1257.000 892.000 85.000 977.000 255.000 1274.000 6.000 4332.000 2803.000 1529.000 15041.00

October, 2012 Actual Crude Throughput * 100.790 525.120 1285.646 654.994 691.043 40.994 1148.444 209.291 4656.322 1132.501 901.645 564.045 2598.191 729.377 725.897 1455.274 742.731 55.217 797.948 254.748 1300.158 3.694 4795.850 3067.000 1728.850 15862.18

% utilization of I/C 118.6 103.0 110.5 102.8 101.8 74.5 90.1 104.6 101.1 111.1 111.7 110.6 111.2 132.1 103.0 115.8 83.3 65.0 81.7 99.9 102.1 61.6 110.7 109.4 113.1 105.5

*: Provisional. I/C: Installed Capacity. $: RPL(SEZ) refining capacity 27 MMT but crude throughput not reported by the refinery and not included in total prorated installed capacity.

Natural Gas Production (October 2012) (Qty: Million Cubic Metres) Name of the Production Company/Unit 1. Oil & Natural Gas Corp. Ltd. Onshore Gujarat Rajasthan Andhra Pradesh Tamil Nadu Assam Tripura Offshore 2. Oil India Ltd. (OIL) Assam Arunachal Pradesh Rajasthan 3. DGH (Private / JVC) Onshore Arunachal Pradesh Assam Gujarat Rajasthan West Bengal $ (CBM) Madhya Pradesh (CBM) Jharkhand (CBM) Offshore TOTAL (1+2+3) Onshore Offshore

Planned Production October 2012 1998.771 429.456 103.580 1.258 85.379 114.945 38.471 85.823 1569.315 259.200 236.700 1.600 20.900 1248.853 11.243 2.029 0.000 9.074 0.000 0.000 0.140 0.000 1237.610 3506.824 699.899 2806.925

October2012 * 1979.184 459.891 153.517 1.400 101.774 102.926 42.537 57.737 1519.293 225.778 204.140 1.779 19.859 1223.295 73.083 1.717 0.000 15.834 46.202 8.781 0.292 0.257 1150.212 3428.257 758.752 2669.505

Production October 2011 1956.710 484.037 159.440 1.492 114.099 110.763 42.871 55.372 1472.673 235.800 212.655 1.869 21.276 1835.081 58.949 1.728 0.204 19.872 29.862 6.766 0.219 0.298 1776.132 4027.591 778.786 3248.805

*: Provisional. Note: Totals may not tally due to rounding off figures. $: Coal Bed Methane production .** Revised

September 2012 ** 1924.277 439.641 150.320 1.379 98.107 99.851 41.815 48.169 1484.636 225.229 204.600 1.762 18.867 1213.258 64.166 1.322 0.000 15.942 37.364 8.838 0.506 0.194 1149.092 3362.764 729.036 2633.728

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NewsBriefs | Renewable

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Mahanadi Coalfields Plans `46 billion integrated solar plant

IIFCL Keen to fund renewable energy projects

Solar industry hit by Purchase obligation, funding issues

Mahanadi Coalfields has unveiled a plan to invest around `4,600 crore in a vertically integrated solar value chain. Using its mining expertise, the CIL subsidiary is banking on the large quartz deposits in the western part of the state for producing silicon, basic raw material required for solar cell. MCL plans to produce 6,000 metric tonne of silicon that will be sufficient for the installation of a 1,000 mega watt solar power plant.

India Infrastructure Finance Company Ltd awaits final nod to launch the credit enhancement scheme next month. It is also seeking a bigger role in lending to the country’s renewable energy sector. Harsh Kumar Bhanwala, Executive Director, IIFCL, said the Government-promoted corporation hopes to get the nod for the scheme which will give infrastructure sector a boost and make finance easily available.

Renewable Purchase Obligation, funding for solar projects and active participation by States are key issues that need to be addressed in Phase II of the Jawaharlal Nehru National Solar Mission (JNNSM). Industry players feel these are the main hiccups that may dampen the Centre’s ambitious solar plan,. As per RPO norm, each electricity distribution utility must buy a part of its electricity needs from renewable sources.

Greenko Group expects S$435 mln from Wind, Hydro power

ACME Bikaner Solar Power Wins 25 MW solar project in Odisha

MNRE Nod to develop 54 cities as Solar Cities

Greenko Group Plc, sees annual sales of 330 million euros ($435 million) by building and buying 1,000 megawatts of renewable- power facilities including wind and hydropower by 2015. Greenko will take control of about 540 megawatts of wind energy and 450 megawatts of hydropower, as well as biomass and gas operations, Mark Thompson, director of corporate affairs at the Hyderabad-based company, said.

ACME Bikaner Solar Power Pvt Ltd has emerged the winner in the 25 MW solar PV programme of the Odisha Government, quoting a tariff of `7.28 per kWhr. The company, a subsidiary of ACME Tele Power Ltd, will invest `200 crore in the project. Among the other bidders were Welspun Renewable (which quoted `9.40) and Essel Mining and Industries Ltd (Aditya Birla Group venture in Solar) (` 9.50).

DR. Farooq Abdullah said that in-Principle, approval has been given to 54 cities for developing as Solar Cities. The draft Master Plans have been prepared for 28 cities, out of which 8 Master Plans have been approved for implementation. So far, an amount of `19.23 crore has been sanctioned for preparation of Master Plans, Solar City Cells and Promotional Activities for 41 cities, out of which `. 4.22 crore has been released.

Suzlon Group REpower wins 105 MW order in Canada

APGenco Out of solar power race

Tata Power Solar To add 96MW of cell capacity in 2013

Suzlon Group company REpower Systems SE said it has concluded a contract with wpd Europe GmbH, a subsidiary of project developer wpd AG, for the delivery of 51 wind turbines. As part of this, a service and maintenance agreement for a total of 15 years for the new projects was also concluded. REpower also plans to set up a new rotor blade facility in Southern Ontario.

The state-owned APGenco pulled out of the race for solar power generation after the state government fixed the unit price between `6.50 and 7.50, the lowest in the country. After finding it unviable to set up solar power plants to sell at the rate fixed by the state government, APGenco decided to pull out of the race.

Tata Power Solar continues to be one of India’s largest solar cell and modules manufacturing facility. The company currently operates world class facilities in Bengaluru for the production of solar cells and modules that are known for their quality, high efficiency and durability.

Company has 125MW of module and 84MW of active cell manufacturing capacity; an additional 96MW of cell capacity is available for rapid ramp in coming year.

AP solar power project norms Bidders seek fine-tuning

BHEL To set up photo voltaic module unit

Raasi Green Energy To set up `9.20 bln solar farm in TN

Potential bidders for solar power projects in Andhra Pradesh, have sought some clarifications with regard to the uniformity of price and more tweaking of the norms. At a pre-bid conference, the potential applicants wanted the transmission corporation of Andhra Pradesh to take into consideration the recent order of the Central Electricity Regulatory Commission with regard to cost of setting up of a solar power project.

BHEL is contemplating to set up a total integrated plant starting from polysilicon to photo-voltaic (PV) systems including silicon wafer, solar cell and module, involving an investment of approx. `2,000 Crore, Praful Patel minister for heavy industries and public enterprises said recently. Future investments will be made after a incentive for domestic industry are put in place by the Government.

Raasi Green Energy Private Ltd signed a MoU with the Tamil Nadu Government to set up a solar farm in the state with an investment of around `920 crore. The new plant will come in the southern district of Ramanathapuram. The company exchanged a MoU with Tamil Nadu Industrial Development Corporation in front of Tamil Nadu Chief Minister J Jayalalithaa at Chennai.

January 2013 www.InfralinePlus.com

InConversation

‘Eligibility for subsidy under solar mission should be raised to 1 mw’ Pashupathy Gopalan is the Managing Director, South Asia and Sub-Saharan Africa Operations for SunEdison.

Responsible for building SunEdison’s solar energy services business in India, Saarc, South East Asian region, and SubSaharan Africa, he led the team that managed the acquisition of SunEdison by MEMC in 2009. Here, in conversation with Ankita Sharma he shares his views on why it is wrong to say that solar power generation has not taken off in India and how the first phase of Jawaharlal Nehru National Solar Mission has been a success. Excerpts: With bright sunny almost throughout the year, India at one point in time was considered to be a hot destination for solar energy generation. Companies even made investment plans but they could not translate into reality to the extent one had expected. What according to you went wrong?

From August 2011 to July 2012, India went from 2.5 mw of grid-connected solar photovoltaic power (PV) to over 1,000 mw. This is a significant achievement for any country just starting to develop its solar programme and policies. And this is just the beginning. Therefore, I wouldn’t say anything went wrong. Definitely, with one of the best insolation in the world, 300+ sunny days and cost of deployment rapidly coming down, solar is on its way to becoming the key source of energy in India.

With policies having shown the way, this number will only increase steeply in the coming years. After information technology (IT) and telecom, India

will witness the solar boom in the next few years as this form of power will eventually attain grid parity.

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Pashupathy Gopalan, MD, South Asia and Sub-

The country has a potential Saharan Africa Operations, SunEdison to harness about development programmes, 20,000 mw energy Policies policies should focus on further through solar should strengthening of payment route. But focus on further security mechanisms in order the current strengthening of to attract more investment in installed payment security the sector. capacity is mechanisms to little over attract more How do you see the input 1000 mw investment. cost (equipment and only. What photovoltaic panels) panning kind of policy out in near future. How far spur do you think is would India benefit from the required in this sector? competitive market?

Solar sector in India is just beginning The cost of equipment has substantially to grow now and we are destined to come down in the last two-three hit the 20 gw mark for solar power years since the Jawaharlal Nehru generation. As the industry is evolving, National Solar Mission (JNNSM) was it is essential that the government announced. Costs have not stabilized accords importance to sufficiently yet and we’ll see them decline further developing the manufacturing and in the coming few years. This provides servicing ecosystem for solar power in great opportunity to develop solar the country. projects. India will benefit from the Specifically for solar power

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InConversation competitive market as competition enables price discovery and inspires companies to focus on quality in order to differentiate.

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How well do you think phase I of the National Solar Mission performed? What will be the repercussions of phase I? Any learning from there (for the industry)?

The first phase of National Solar Mission is a very successful programme which has shown the way for solar power development in the country. The support from MNRE and various state governments is very encouraging and we are thankful to them for developing very well-thought out solar programmes in the country.

Awarding projects in a phased manner is a great initiative as it allows the developers to build more economical projects by taking advantage of the continuously declining project costs. Competitive bidding is a great means of price discovery in the market.

What is the industry expecting from phase II? Any specific demand as the government would soon start preparations on the Union Budget?

Phase I of JNNSM has been a very well managed, transparent and organized programme and we are thankful to MNRE and NVVN for that.

We have been awarded projects in both batches – 5 mw in batch I and 20 mw in batch II. We have great expectations from phase II and are confident of its success, just like the first phase.

While the policy has been extremely encouraging and supportive, it would help the industry grow if phase II focuses on development of solar parks in states where infrastructure like land and evacuation is provided to the developers once the project is awarded. Additionally, maximum size

of projects eligible for capital subsidy under the off-grid solar programme should be increased to 1 mw. There are large rooftops in India which can really benefit from this. Lastly, the true potential of solar power lies in remote electrification. Concrete proposals for village electrification should be included in phase II which enable developers to responsibly deploy village electrification projects.

For solar power development programmes, policies should focus on further strengthening of payment security mechanisms in order to attract more investment in the sector.

What major reforms are required in the present policies to ensure a better future for the industry?

We greatly applaud the policymakers in India for developing the comprehensive Jawaharlal Nehru National Solar Mission for the country and the various other state solar policies. These programmes have provided the much needed impetus for development of solar power in the country.

The true potential of solar lies in the fact that it can be quickly deployed anywhere and is a reliable source of energy. Therefore, we need to give a greater push to decentralized model of power generation to fully realize the benefits of harnessing the sun. While the policies have shown the way for utility scale grid-connected solar parks, some suggestions that will help provide a boost to the captive residential and commercial rooftop solar market – introduction of reforms like net metering and time of day pricing will help customers realize actual monetary

savings on their electricity bills and make these business models viable.

Which are some of projects that you plan to do?

We are currently implementing a 20 mw project in Rajasthan which was awarded under the JNNSM programme Phase I, Batch II. SunEdison is also one of the winners of the nation’s first roof-top solar program (2.5 mw) in Gandhinagar, Gujarat. We are deploying solar PV projects on over 50 rooftops, making Gandhinagar the first solar city in the country. Apart from this, we are also developing several large-scale rooftop projects for universities in Tamil Nadu and commercial and industrial customers in NCR, Tamil Nadu and Rajasthan.

Under the ‘SunEdison Eradication of Darkness’ program, we are developing solar powered microgrids in 29 villages in India and are deploying solar water pumps to aid farmers in agriculture in many states such as Rajasthan and Tamil Nadu.

This will result in additional income and ease of operations for them.

In South Africa, our team is implementing 60 mw projects.

Why is Gujarat so attractive for companies in the sector?

Can other states replicate Gujarat’s model?

Gujarat’s solar programme is an extremely well managed and well structured programme. The vision to become a solar state in India is exhibited well in the state’s initiative to develop one of Asia’s largest solar parks. Facilities and infrastructure ecosystem for land and evacuation are provided for in the solar park which makes it very easy for developers to execute effectively and on time.

Yes, other states can definitely learn from and replicate Gujarat’s model and in fact many states such as Tamil Nadu and Andhra Pradesh are alreadey

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and more financial institutions gain the confidence that these projects are economically viable and sustainable.

Solar panels generating 5 MW electricity at Dhama Village, Gujarat

moving in that direction with their state programmes.

What is the scenario at lending front? Are banks and institutional lenders willing to lend money given that it is a capital intensive sector?

Compared to other industries, risks in this industry are well defined and there are not many variable factors.

Indian developers face the off-taker risk as lenders are hesitant to fund projects due to the risk of payment security. As the industry is maturing, everyone is learning and becoming more comfortable with the technology.

This is a positive sign and is definitely going to result in more comfort and willingness on part of the institutional lenders to invest in solar sector.

As some experts feel that India requires euro 30 billion investment to develop 20,000 mw of grid connected solar power by 2012. Is that kind of money available for investments in India?

SunEdison has a stellar reputation

Costs have not stabilized yet and we’ll see them decline further in the coming few years.

This provides great opportunity to develop solar projects. India will benefit from the competitive market as competition enables price discovery and inspires companies to focus on quality in order to differentiate. among PV lenders worldwide.

Globally, we have the experience of raising $5 billion finance for solar energy projects. In India, we are grateful for the support extended by IFC, OPIC, IDFC, L&T Infrastructure Finance, Reliance Capital and State Bank of Mysore for financing our projects.

Solar projects in India will definitely attract more investments as more

What is the current project pipeline and what is the capacity that you plan over the next two years. Also share the current capacity.

Globally, SunEdison has deployed 1000 mw of solar PV systems across over 960 projects. In India, we have installed more than 55 mw across 16 solar PV plants. We design, develop, finance and operate both large-scale utility projects as well as smaller commercial rooftop plants. In the region, we have built over 35 mw in Thailand, distributed over four gridconnected utility-scale power plants.

Now we are implementing 60 mw projects in South Africa and over 25 mw in India.

SunEdison has a strong commitment towards pioneering innovative affordable solutions and making them available in all parts of the world. In the next two to three years, we will continue to strengthen our leadership position in the world. We see a great potential in deployment of distributed solar, as solar power is available at or lower grid rates in many areas of the world today. With policies having shown the way for deployment of utility scale solar, we are extremely encouraged by interest shown by companies and investors in the development of solar farms for wheeling in power for captive consumption or for sale to third parties.

With our relentless R&D efforts and business model innovation, SunEdison is in a position to provide solar energy at less than INR 7/ unit for rooftop installations today. Our plan ahead is to make rooftop solar widespread and within the reach of common man.

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InConversation

‘India must find its own crop champion for bio-fuel’ A beneficial plant fungus called mycorrhiza is slowly becoming a rage the world over due to its potential to increase the nutrient uptake in plants and also improve their productivity. Recent experiments in India show significant improvement in the growth of crop after the use of mycorrhizal components. Dr Alok Adholeya, Director, Bio-technology and Management of Bio-resources, The Energy and Research Institute (TERI), believes mycorrhizal biofertilizer can slowly replace chemical fertilizers completely. He has developed techniques to harness the power of mycorrhizae to not only increase the productivity of plants but also restore degraded lands. Here he tells Ankita Sharma about the present state of bio-mass industry and its future prospects. Excerpts from an interview: 64

What major reforms are required in the present policies to ensure a better future for the biofuel industry?

Different countries have brought about major changes by prioritizing and focusing on a particular crop to ensure their goals are achieved. The US concentrated on corn – produced 19 million tonne in 2007; Brazil concentrated on sugarcane – produced 15 million tonne in 2007; Indonesia on palm oil-based bio-diesel with great results.

The Indian bio-fuel Industry is in its nascent stage. The current policy is fairly broad consisting of 400 species.

The need of the hour is to emphasize on a few crops. Also, insurance, loan, minimum support price and premium pricing should be provided to boost the sector and incentivise farmers.

What is the status of bio-mass availability in the country?

Bio-mass atlas has estimated

approximately 7400 mw of energy from agricultural residue for the entire country with Punjab and Uttar Pradesh leading the potential. Also, there is 40 million hectares of wasteland available which needs to be further categorized and evaluated for actual availability for jatropha plantation.

Punjab and Haryana have a good potential to produce energy with agricultural residue for power plants and few combustion plants in Punjab are already operational. There is also some development in Karnataka.

We have to strengthen our research and development activities for different technologies for bio-mass conversion into energy.

How much can the bio-fuel industry contribute in power generation in the short-term?

Wheat and rice residue has cellulose, hemi-cellulose and lignins which could be converted into bio-ethanol and other important by-products for

Alok Adholeya, Director, Bio-technology and Management of Bio-resources, TERI

industrial use such as bio-plastic.

Bio-fuel policy is concentrated on catering to the transportation sector. It may be decentralized for local energy needs for agriculture and rural sector also. Bio-diesel and bio-ethanol is itself in the form of usable energy so there may be no need to convert it into electrical energy.

What do you think is the best revenue model to push growth in this sector? Will a generationbased model work?

In the case of bio-fuels, a generation based model would help once the industry has crossed its nascent stage, like the wind sector. Execution of policy needs to be robust with a driven time frame; otherwise industry / entrepreneurs lose interest.

Why are we relating bio-diesel to the current petroleum price? It should get premium pricing to motivate poor farmers who are the major stakeholders in producing feedstock and bringing about energy security in their regions.

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From very positive projections until a few years ago, the biofuel industry is witnessing rather tremulous times. What is needed to push growth in this sector?

A national mission on bio-diesel is necessary for India’s energy security.

Operational guidelines for the research phase and demonstration phases 1 and 2 need to be defined. However, in the long run, an end-to-end business model with robust monitoring and evaluation is required for best results.

When talking about production in terms of megawatts, I believe that mixing bio-diesel and bio-ethanol with fossil diesel and petrol can cater to the transportation sector in a big way.

with our water resources. However, both these resources need to be tapped.

Among all the renewable resources, I believe that our expertise lies in biomass based energy generation.

For all potential renewable sources, foreign direct investment, mergers and acquisitions may be the policies, but we also need investments in R & D on new and better technologies to harness energy. We need to strategize policies to incorporate rural development.

Bio-mass can be the renewable resource which can change the face of rural India by including the rural population across its entire value chain; promoting employment, education and better standards of living.

With continuous feed supply being a major concern, what measures do you suggest to ensure financial viability of the generation plants all the year around?

Kharif and rabi are the two major seasons when crop residue is produced but it is not consistent for the entire country as agriculture is heavily dependent on rain and we lose rabi crops in many areas. We can have planning of storage, supply chain infrastructure and technology customized for different regions and feedstock. Mortality of existing plantation may be replaced with local varieties / improved planting material / germplasm as per the availability.

The country has planned a capacity addition of 30,000 mw energy through the renewable route. What policies should the government adopt to attract investment in the sector?

When talking about the various renewable resources, India’s installed wind capacity has crossed 17000 mw and ranks sixth in the world. Even for solar and hydro projects, India as a country has over 300 days per year of good sunlight, and similar is the case

The current policy is fairly broad consisting of 400 species. The need of the hour is to emphasize on a few crops. Also, insurance, loan, minimum support price and premium pricing should be provided to boost the sector and incentivise farmers.

What is the scenario at the lending front? Are banks and institutional lenders willing to lend money given that it is a capital intensive sector?

I think micro finance systems are best suited considering the gestation period.

Loans / funding for jatropha projects should be provisioned for the first four years for survival of plantation during gestation period and securing the plantation till it starts giving substantial yield and payback period may be designed after the yield stabilization of five-six years.

Banks may have a guideline to promote renewable energy projects.

In bio-fuel sector, banks are willing to lend but it was generally back ended subsidy by National Bank for Agriculture and Rural Development (Nabard). Unlike other sources of renewable energy, the poor farmers are the major stakeholders of the bio-fuel energy sector and a special plan has to be prepared for lending provisions to them owing to their numbers.

Mycorrhiza is a beneficial plant fungus which is now being commercially produced to make bio-fertilisers

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InDepth

States becoming serious about solar power ►► Uttar Pradesh offering 50 per cent subsidy on setting up solar plants of up to 200 mw ►► Bihar planning to exempt registration and entry tax on installation of plants on wasteland

by Ankita Sharma

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Four states—Uttar Pradesh (UP), Punjab, Bihar and Tamil Nadu—have recently announced schemes to spur generation of solar power. The UP government has decided to subsidise this technology. In rural areas the village pradhans, who are willing to set up a solar power plant of up to 200 mw, are being given 50 per cent subsidy by the government, a senior state government official said Punjab government has agreed on a proposal to offer subsidy on solar panels to make them popular among domestic consumers. Installation of these panels is going to be made mandatory in public and private buildings in the state with certain riders on construction in urban areas. The state government has introduced New and Renewable Sources of Energy 2012 Policy (NRSE) which aims at maximizing and improving the share of new and renewable sources of energy to 10 per cent of the total installed power capacity of the state by 2020.

The policy will also focus on attracting private investments in NRSE projects.

Bihar, which enjoys 280 days of sunshine, has tremendous scope for developing solar energy market.

The state government plans to exempt registration and entry tax on installation of solar energy plant on wasteland. Proposals for generation of 250 mw through solar projects have been sent to the state cabinet for

Solar panels need to be cleaned regularly to function at full capacity. Photo courtesy: exposolar.org

India has the potential to generate 5000 trillion kWhr/yr of electricity by tapping sun’s rays but the current production of solar energy stands at a negligible 1000 mw in India.

approval, energy minister Bijendra Prasad Yadav recently said.

In Tamil Nadu, the state generation and distribution company will soon call for bids from solar power generators to enter into long-term power purchase agreements with the utility. The Tamil Nadu Generation and Distribution Company (TNGDC) plans to tie up 1,000 mw of solar power in line with

January 2013 www.InfralinePlus.com

the plans outlined in the Tamil Nadu Solar Energy Policy 2012 announced recently. “Grid connected solar power producers in Tamil Nadu can be confident of timely tariff payments and evacuation… Additional evacuation capacity will be created wherever needed,” state electricity minister, Natham R. Viswanathan, recently said.

In a country which receives bright rays of the sun almost throughout

the year and which has the potential to generate 5000 trillion kWhr/yr of electricity by tapping these rays, the current production of solar energy stands at a negligible 1000 mw in India. Assuming that the efficiency of photovoltaic module were as low as 10 per cent, the power generated would still be a thousand times greater than the domestic electricity demand projected for 2015.

Even as states are increasingly adopting solar power technologies to reduce their dependence on conventional sources, experts believe that lack of uniform standards is posing problems in the sector’s growth. Standardisation will lead to rationalisation of costs as companies will be able to invest in R&D and newer technologies.

Solar resource map of India. Courtesy: Wikipedia.org

Several solar vehicles are now being designed for commuting at short distances. Photo courtesy: mosssolar.com

Even as states are increasingly adopting solar power technologies to reduce their dependence on conventional sources, experts believe that lack of uniform standards is posing problems in the sector’s growth.

“Major factor restricting the growth of this sector is the lack of standards, resulting in the fragmentation of the market among manufacturers and suppliers. Standardization of systems will lead to rationalization of cost, as companies can invest in R&D and newer technologies to meet common specifications,” says Tarun Agarwal, CEO of Ecco Electronics.

Facilitating closer industry – government cooperation and increasing consumer awareness about the benefits of solar energy are some of the other main challenges currently faced by the industry, says Agarwal.

The prices of solar panels have fallen by 60 per cent due to a number of reasons such as cheap raw material-poly silicon--and high competition between major module manufacturers because of which processing costs have come down.

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YearEnder 2012| Renewable

India enters the 1 gw club in solar power capacity Sector: Renewable Energy. A right mix of policy boost by the government and a dip in the prices of solar panels helped India achieve 1000 mw solar capacity in less than two years even as Renewable Purchase Obligations became mandatory across the country Why 2012 was different

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The Renewable Energy Certificate (REC) regime has taken off to a good start in India. A testament to this is the fact that in just a little over one year, almost 15 per cent of renewable energy capacity has been registered under this mechanism. Every month, about 170 mw of capacity gets added to the REC regime. The existing rules envisage two kinds of renewable certificates: solar

RECs for generation through solar photovoltaic cells and solar thermal technology, and non-solar RECs for generation through renewable sources other than solar.

In June 2012, India broke into the 1 gw-club of countries in terms of total installed solar power generation capacity. For a country which had less than 10 mw of solar capacity as lately as December 2009, the achievement

was nothing short of spectacular.

What didn’t change The regime, however, is still in a nascent stage. Half way through the second year, there are a number of problems, mainly in terms of oversupply of instruments. The biggest users of instruments are state-owned electricity distribution companies, which are not in good financial

Solar power capacity has zoomed at a phenomenal pace in past two years

Photo courtesy: Engineers India

January 2013 www.InfralinePlus.com

health. They have kept away from the REC market, thus taking out a big demand force.

The regulators have shown understandable leniency to them as they have little money to meet their obligation. Courts, however, have not discharged discoms of their obligations and have given them one-year time to meet them. This is expected to improve the financial health of discoms in months to come.

Watch out for Under the 12th Plan, about 32,000 mw of capacity is foreseen to be contributed by renewable energy sources. Removal of accelerated depreciation from wind generation and the uncertainty on GBI benefits leaves REC mechanism as the only alternate option for investors. Given the importance of this mechanism, it is expected that appropriate measures would be taken to strengthen this market.

Another issue which the industry is keeping close tabs on is the ‘co-gen’ issue. The debate over considering electricity generation from cogeneration plants (most of which are based on conventional fuels) be treated as ‘renewable’ or not, is the crux of the present problem. If such eligibility is established, market will witness additional REC supply of large magnitude. However, recently the courts have said that co-gen plants in Uttar Pradesh are not to be treated as renewable energy power stations.

This ought to set a precedent, and is a favorable development for the market. Yet another issue that requires some thought is that of Renewable Purchase Obligation (RPO) targets.

With RPO becoming mandatory across the country, a number of regulators have opted for very conservative RPO targets and states like Tamil Nadu and Rajasthan have even reduced their targets. This has resulted in significant reduction in expected

Renewable Energy Certificate regime is still at a nascent stage in India. Half way through the second year, there are a number of problems, mainly in terms of oversupply of instruments. The biggest users of instruments are stateowned electricity distribution companies, which are not in good financial health. They have kept away from the REC market, thus taking out a big demand force. demand for green power and REC. Despite a very modest demand for solar RECs, prices have remained significantly higher due to their unavailability. With non-existence of GBI and accelerated depreciation benefits in wind generation, it can be expected that a significant chunk

of investors would opt for solarbased generation where not only accelerated depreciation is available, but many states are also offering other incentives like favorable provisions for faster statutory approvals (Andhra Pradesh, Uttar Pradesh, Gujarat), energy banking (Andhra Pradesh, Karnataka--under discussion), nominal wheeling charges, refund of VAT (Andhra Pradesh) etc.

However, bankers need to be convinced of the solar-REC regime, because the inflow of funds from sales of solar RECs is significant and material to the viability of the solar projects. The industry has been asking the government for an extended applicability period (called ‘control period’), more than the current five years. A positive response will make bankers comfortable.

Hot trends Even though the enforcement scenario is rather uncertain, with no resolutions for current problems in the pipeline, it is foreseen that solar-REC (S-REC) demand will exceed supply by a wide margin. This will be due to slow growth of REC mechanism in case of solar capacity addition. All this will result in S-RECs trading well above floor prices up to 2016-17.

Projections suggest that S-REC capacity will reach 70 mw by March 2013, and 300 mw by March 2014. Of this, 50-75 mw is expected to be from independent power producers. This will result into about 14,000 S-RECs issued this year and 1,20,000 S-RECs in 2014. When looking at the demand side, even though there is moderate level of compliance, it is expected that demand for S-RECs in 2012-13 will reach 1,40,000 and about 2,30,000 in 2013-14. This is also likely to result in S-RECs trading well above the floor price in this period.

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StatisticsRenewableEnergy State-wise Grid Solar Power projects taken up and commissioned during last 3 years (2009-10, 2010-11 & 2011-12) and the current year up to on 31.10.2012 (Under Government of India Schemes)

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Sl. No.

State / UT

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Andhra Pradesh Arunachal Pradesh Assam Bihar Chhattisgarh Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttarakhand West Bengal Andaman & Nicobar Chandigarh Dadra & Nagar Haveli Daman & Diu Delhi Lakshadweep Puducherry TOTAL

Projects Taken Up/ Allotted No. 17 2 1 9 8 2 3 10 9 10 75 10 6 3 2 18 185

MW 97.5 4 20 8.8 16 6 5.25 47 13 16.5 882 27 13 5 7 0.99 1169.04

Projects Commissioned as on 31.10.2012 No. MW 13 21.75 2 4 8 7.8 8 16 2 6 3 5.25 7 17 9 13 7 9 43 158.5 8 16 5 12 3 5 1 2 7 0.53 126 293.83

Includes 27 no./28 MW allotted and 16 no./21.5 MW commissioned projects under schemes prior to JNNSM

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State-wise Installation of SPV Systems during the last 3 years and 2012-13 (31.10.2012) Sl. No. State/UT Lanterns

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Andaman & Nicobar Andhra Pradesh Arunanchal Pradesh Assam Bihar Chandigarh Chhattisgarh Delhi Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Lakshwadeep Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Puducherry Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttrakhand West Bengal Others Total

0 6208 496 0 0 0 119 54 181 0 48893 939 15813 7000 0 13186 5289 35 60000 904 0 3777 1361 0 0 0 0 19550 0 21922 10332 0 14000 0 230059

Solar Photovoltaic Systems Home Street Lights Light Nos. 63 32 5927 2540 10302 183 0 0 3799 265 0 898 226 633 0 0 71 312 0 0 26155 15493 5746 5064 26364 310 3277 0 19701 423 25 645 0 1725 1025 3144 2617 4929 1015 558 0 0 3756 116 365 0 0 15 0 0 0 1296 57109 220 5653 277 6309 3678 29023 426 137561 113463 0 5679 45981 6475 15463 0 407533 168799

Pumps

0 0 17 0 0 0 147 1 0 0 0 0 0 0 19 0 0 0 11 28 0 0 0 0 0 7 1418 0 0 126 4 0 0 0 1778

Power Plants Stand Grid alone Connected kWp MW 0 0 759.935 21.65 9.2 0 802.5 0 775.6 0 0 0 7132.72 4 52 2.5255 0 0 344.7 690 391.35 7.8 600 0 133.25 0 480.9 16 225 14 13 0 15 0 1060.6 7.25 907.26 20 188 0 0 0 132 0 374 0 10 13 0 0 210 9 3987.2 201 20.3 0 579.72 17 10.43 0 3341.26 12 100 5 154 2 2830 0.81 25639.925 1043.0355

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OffBeat

GMR likely to sue Maldives for $1.12 billion damages Male insists the amount would be much less, between $150-350 million.

Legal battle to be fought in Singapore, airport development charge did GMR in

by Team InfralinePlus

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On December 14, top GMR Group executives were closeted for nearly four hours in a meeting at their Udaan Bhawan office next to the swanky Terminal 3 of the Delhi airport.

The meeting took unusually long to get over. The GMR top brass was brainstorming with their legal team, devising the strategy for the long legal fight ahead. Days before, the Maldives government had slammed the door on the Indian company, which was the private operator of the Ibrahim Nasir International Airport (INIA) in Male, and wrested control of the project.

Male airport deal had been awarded to GMR during the previous regime of President Mohamed Nasheed. It was “unilaterally” terminated on November 27 by the current government – a move that left New Delhi rattled.

The meeting at Udaan Bhawan was called to draw up GMR’s strategy and decide the compensation amount the company would seek from the Maldives government for terminating the airport deal. Top GMR sources say the Indian infrastructure giant was planning to seek a compensation of $1.12 billion from Male. However, Male insists that the amount would be much less and as per its estimates, could be anywhere between $150-350 million.

Action now moves to Singapore where the legal battle would be fought.

As per the concession agreement between the corporate group and Male’s government, in case of any differences between parties, the law of either

Singapore or the UK would apply.

The GMR Group runs airports in Delhi, Hyderabad and Istanbul and controls the Delhi Daredevils IPL team. The Group has considerable clout in the power circles of Delhi. The company rose to prominence when it bagged the Delhi airport contract in January 2006 beating the likes of Anil Ambani-led Reliance Group. Since then, the power and influence of GMR has only grown. The company has said it would bid for the new airport project in Navi Mumbai and has set its eyes on airport development projects across the globe.

Chinese whispers Male, which has a strong Indian influence, is believed by many to be slowly drifting towards China and many saw a “foreign design” behind the unceremonious exit of the Indian conglomerate. The issue became a diplomatic bone of contention between the two countries.

Relations between India and the Maldives had been cordial until the change of regime in that country. The coup, in which Mohamed Nasheed lost power, gave rise to an anti-India government in the country. In order to put pressure on Male, India froze $25

Male international airport is the gateway to the idyllic and enchanting Maldives island and is one of the fastest growing airports in the region

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Istanbul Airport GMR made its maiden international foray by winning the bid to develop Istanbul Sabiha Gokcen International Airport (ISGIA) in Turkey, along with its consortium partners Limak Holding, Turkey (Limak) and Malaysia Airports Holdings Berhad (MAHB). The consortium inaugurated ISGIA on 31 October 2009, a full year ahead of schedule.

Delhi Airport DIAL is a joint venture consortium of GMR Group (54 per cent), Airports Authority of India (26 per cent) and Fraport & Eraman Malaysia (10 per cent each). GMR is the lead member of the consortium; Fraport AG is the airport operator, Eraman Malaysia is the retail advisor.

In January 2006, the consortium was awarded the concession to operate, manage and develop the IGI Airport following an international competitive bidding process. DIAL entered in to Operations, Management and Development Agreement on April 4, 2006 with AAI. The initial term of the concession is 30 years extendable by a further 30 years.

In March 2010, DIAL completed the construction of integrated passenger terminal (Terminal 3). The first phase of the airport is designed and capable of handling 60 million passengers per annum (mppa).

Hyderabad Airport GMR Hyderabad International Airport Limited is a joint venture company promoted by the GMR Group (63 per cent) in partnership with government of India (13 per cent), government of Andhra Pradesh (13 per cent) and Malaysia Airports Holdings Berhad (11 per cent).

The project is based on Public Private Partnership (PPP) model and is structured on a Build, Own, Operate and Transfer (BOOT) basis.

The Rajiv Gandhi International Airport (RGIA) was inaugurated on March 14, 2008 and commenced commercial operations with effect from 00:01 hrs on March 23, 2008.

The airport, which was commissioned in a record time of 31 months, has an initial capacity of 12 mppa and 100,000 tonne of cargo handling capacity per annum. million in aid to the tiny nation. Though India conveyed its displeasure as soon as news of the termination came, the Maldivian government chose to ignore its fuming neighbour.

GMIAL – Successful bidder GMR International Airport Pvt. Ltd., a joint venture company promoted by GMR Infrastructure Limited (GIL) along with its sole consortium partner Malaysia Airports Holdings Berhad (MAHB), had on June 24th 2010, won the deal for the Malé International Airport (later renamed as Ibrahim Nasir International Airport) for a period of 25 years, extendable by

GMR Group has considerable clout in the power circles of Delhi. The company rose to prominence when it bagged the Delhi airport contract in January 2006 beating the likes of Anil Ambani-led Reliance Group. Since then, its power and influence has only grown.

another 10 years, post a successfully run international competitive bidding conducted by International Financial Corporation, an arm of the World Bank.

INIA is the special purpose vehicle formed in Maldives pursuant to the concession in which the stake of GIL and MAHB was 77 per cent and 23 per cent, respectively.

Male international airport is the gateway to the idyllic and enchanting Maldives island and is one of the fastest growing airports in the region. Situated on Hulhulé island in the politically stable archipelago of Maldives at the South Western tip of India, it is the largest airport in Maldives. The consortium started operating the airport from November 25, 2010.

Biggest FDI in Maldives The total cost of the modernization and expansion project, estimated at $511 million, remains the single biggest foreign investment in the island nation till date. The project was funded through a combination of debt and equity in the ratio of 70:30.

The debt component of $358 million was tied up with Axis Bank, Singapore branch, which acted as the sole underwriter and mandated lead arranger for the entire debt facility. The debt has a door to door tenure of 12 years with ballooning repayment over seven years commencing from June 2015. Axis Bank also acted as the security trustee and facility agent whereas State Bank of India, Maldives branch was the account bank for the debt facility.

The GMR consortium was tasked with upgrading, maintaining and operating the airport as well as building a new terminal by 2014. GMR planned to develop a (0.6 million sq feet) state-of-the-art integrated world class passenger terminal increasing the terminal capacity to handle 5.5 million passengers per annum (mppa) and a (20,000 sq feet) VIP terminal, apart from landside development and improving existing terminal.

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January 2013 www.InfralinePlus.com

OffBeat Beginning of trouble

74

Change of government in Maldives in February spelt trouble for the GMR-led consortium. The company’s decision to impose an airport development charge (ADC) of $25 per departing passenger became a bone of contention between the company and the government. The finances of the deal went askew when a local court struck down ADC, terming it illegal, though the provision for the charge was there in the contract.

GMR proposed to waive off the ADC for Maldivian citizens but the government did not respond. On November 27, MACL (state-controlled Maldives Airport Company Ltd), based on Maldivian government’s instructions, terminated the airport contract. GMR officials were called and told that the government wanted a smooth transition.

An initial reprieve for the GMR Group from the Singapore High Court was shortlived as the Singapore Supreme Court gave a verdict in Male’s favour.

Protests from New Delhi – foreign minster Salman Khurshid spoke to his counterpart in Male at least thrice – were of little help. “The government’s decision is very clear. It is non-reversible and non-negotiable. Our decision was based on legal advice we got from our lawyers in the UK and Singapore,” Maldives President Mohamed Waheed’s press secretary Masood Imad said.

“Where compensation is adequate, an injunction cannot be issued. A court cannot issue such an injunction against a sovereign state,” he added. “The law of Singapore and Britain is very clear.

It does not permit issuing an injunction where compensation is adequate”. From December 8, the control of the airport shifted back with the local government.

Relations between India and the Maldives had been cordial until the change of regime in that country.

Compensation Senior GMR Group officials said the company will exploit all legal remedies and might even approach the International Court of Justice to fight their case. While GMR is planning to seek a $1.12 billion compensation from the Maldives, Male is insisting on a “forensic audit” as it feels the actual amount would be less than half. However, the Maldives Attorney General had in September calculated the compensation at $700 million.

“We have sent a letter to the Maldivian government indicating a number of more than $800 million as compensation amount. This is our initial estimate. The final figure would be based upon various calculations, loss of profit among others,” a senior GMR official said.

The Maldivian government, has however, debunked the calculations and insisted on getting a forensic audit done through an international firm. “We will go in for a forensic audit as we want to see how much money has poured in to GMR coffers through the Male

IN HAPPIER TIMES: A ground breaking ceremony was held at Hulhule on 19th December 2011 to mark the beginning of work on the new terminal of Ibrahim Nasir International Airport (INIA)

International Airport and how much actual money has been spent here. As per our information, GMR has cashed in only $150 million of the about $350 million loan it had bagged through a bank,” press secretary Imad has said.

Asked if GMR is open to a forensic audit, a company official said, “Our books are transparent. The concession agreement signed with Maldives government did not have the clause of forensic audit. But we don’t have any objection to an audit. It has to come through proper legal process though”.

Sources in the Maldivian government say that the compensation amount, as per their calculations, should come to about a lower limit of $150 million and an upper limit of $350 million. “We will present our case before the Singapore Court and let them take the call,” a source said.

Political angle The Maldivian government cited “national interest” as a reason for termination of GMR’s contract. Political analysts, however, are of the view that the real reason may be political mileage for the Mohammed Waheed Hassan government. Elections in the Maldives are due in 2013. Hassan had removed Nasheed in a coup in February this year.

Moreover, India is not happy with the growing Chinese influence in the island nation. Relations between Sri Lanka and India have already been affected

by Chinese investments in the emerald isle. Apparently, a few elements in the Maldivian government want to push the Indian company out and rope in a Chinese firm instead. Chinese companies are also eyeing the Gan International Airport in Addu Atoll in the Maldives and another one closer to India’s Lakshadweep islands. China has already selected a site to build its embassy in Male. Looking at the tense Sino-India relations, these developments are not calculated to please New Delhi.

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January 2013 www.InfralinePlus.com

OffBeat

Rising fares, low traffic force airlines to remove biz class

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IndiGo, the largest domestic carrier by market share, flies only economy class

by Team InfralinePlus

Business class cabins in new aircraft deployed by Indian carriers on domestic routes are likely to become a thing of the past as rising air fares and dwindling passenger demand is forcing airlines to opt for economy-class-only seat configurations on new deliveries.

National carrier Air India has started converting 14 of its 62 Airbus-320 aircraft to single-class configuration and reducing the number of businessclass seats in 43 others from 20 seats per aircraft to 12.

The reason behind this is rise in air fares in the past one year which has made flying economy class also

a luxury. On an average, fares have nearly doubled this year compared to last year. Overall, business class fares this year have averaged about `20,000 for a one-way ticket compared to `11,000-12,000 in the same period last year.

Due to this the overall passenger traffic is coming down. In the first six months of the current financial year, about 210-220 passengers travelled one way on a sector such as Delhi-Mumbai compared to 280-290 passengers travelling one way per day in the same period last year. Similarly, on the Delhi-Bangalore route, only

about 30 passengers flew one way this year compared to 100-110 passengers last year.

Global blues The fall in demand for premium seats in India is in keeping with the global trend-- airlines around the world are curbing their luxury offering as a result of the global downturn. The International Air Transport Association (IATA) has also forecast that global industry profits will be around $3billion this year, down from a peak of $15.8 billion in 2010.

American Airlines earlier this year

January 2013 www.InfralinePlus.com

OffBeat

Airlines embrace economy • Airlines in India are slowly but steadily changing aircraft configuration, replacing business class seats with economy seats.

• Out of over 200,000 domestic seats on offer daily by airlines, around 10 per cent are business class seats. Six months back, business-class seats were 15 per cent of the daily seats on offer • Air India is decreasing business class seats in 57 out of 62 aircraft of the Airbus 320 family. The exact reduction is tough to calculate as each aircraft has different utilisation.

Since November, Kingfisher, which flew a two-class configuration, cut its operations from 420 flights per day to 120 flights. IndiGo and SpiceJet, low cost carriers with all-economy configuration, added capacity in the market during the same period

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reduced its international first class seats by nearly 90 per cent while United Airlines reduced its overseas first class rows by around a third. Also cutting back are Australia’s Qantas Airways and Germany’s Lufthansa.

With the economic lull in key markets such as Europe, Asia and the US, companies too are finding that they can ill afford to justify splashing out on first class travel, especially when the price is hard to justify.

Economy only In India, the move away from business class travel is also in keeping with the predominance of low-cost airlines.

IndiGo, the largest domestic carrier by market share, flies only no-frills.

SpiceJet and GoAir are low-cost carriers. Kingfisher is grounded. Ailing Air India has lowered the number of business class in a substantial number of its aircraft while Jet Airways plans to increase domestic low-fare capacity from the present 75 per cent to 85 per cent of its fleet.

This sounds strange in a nation where luxury car sales are expected to double in 2012 to 30,000 as compared to 2011 and where there are an estimated eight million people who have the ability to purchase a luxury car worth anywhere between `25 lakh and `1.5 crore.

But the reason behind the sudden disappearance of business class seats

on domestic routes is dwindling demand among passengers for premium priced seats. “Demand for business class has evaporated, especially within the business community,” says the

The fall in demand for premium seats in India is in keeping with the global trend--airlines around the world are curbing their luxury offering as a result of the global downturn.

The International Air Transport Association (IATA) has also forecast that global industry profits will be around $3billion this year, down from a peak of $15.8 billion in 2010.

chief executive of a top airline. “Much of the domestic demand pool in India has ebbed towards low-cost airlines such as SpiceJet and IndiGo,” says Saj Ahmad, a London-based aviation analyst. Low-cost carriers command a market share of over 60 per cent and it is growing rapidly. “Customers here look for convenience, cost and timing.

They won’t pay extra for legroom.

They want to get from A-to-B quickly, and that’s why Jet Airways has been forced to increase economy seats to tap into that portion of the market which is vibrant and actually growing,” he says.

Domestic airlines provide a little over 2 lakh seats a day. Around 10 per cent of the inventory, down from 15 per cent last year, is business class. “A lot of times airlines are not able to sell those seats and business class tends to take up a lot of space… I think we are going to see more customers doing that,” said an Air India official.

There’s no point, says Ahmad, having a service that no one wants and when you consider that less than one per cent of the Indian population uses air travel in the first place, the figures for business class demand and usage are finite and very price elastic.

Aviation consultancy firm, Centre of Asia Pacific Aviation (CAPA) expects business class traffic in India to be limited to metros. “We expect ‘business class’ to be converted into premium economy in the near term

by Indian full-service carriers (FSCs).

The business class offered by Indian FSCs to is no longer feasible. Indian

Air India is reducing business class seats in 57 out of 62 aircraft of the Airbus 320 family

Economy is in, business is out. Photo courtesy: pixmule.com

“Demand for business class has evaporated, especially within the business community,” says the chief executive of a top airline. “Much of the domestic demand pool in India has ebbed towards low-cost airlines such as SpiceJet and IndiGo,” says Saj Ahmad, a London-based aviation analyst.

Passengers say no to business • Business class traffic in the first half of 2012-13 was about 1700-1800 passengers per day compared to about 3200-3300 passengers per day in the same period last year.

• Overall, business class fares in the first half of 2012-13 averaged about `20,000 for a one-way ticket compared to `11,000-12,000 in the same period last year.

• On sectors such as Delhi-Mumbai, roughly 210-220 passengers travelled one way every day in the fist half of the current financial year compared to about 280-290 passengers one way per day in the same period last year.

• On Delhi-Bangalore sector this year only about 30 passengers travelled one way per day compared to 100-110 passengers last year.

• Fares this year are up by over 40 per cent compared to last year. corporate sector executives, travelling business class, are increasingly travelling by Indian LCCs especially IndiGo,” Kapil Kaul, South Asia CEO of CAPA said.

There is, however, a flip side to the no-business-class story. Analysts feel Air India’s move to decrease the business class inventory won’t help the

airline as it would impact its revenue-revenue from two business class seats matches the revenue from 10 of economy class. In such a scenario how will airlines strike the right balance between functional and luxurious remains to be seen.

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

January 2013 www.InfralinePlus.com

PhotoEssay

Value-addition through sun SunEdison is a division of MEMC Electronic Materials Inc., a 50 year old company dealing in poly-silicon and silicon manufacturing, is considered among the top three global players in solar energy space. The company has over 950 solar power plants worldwide and has achieved installed capacity of over 1,000 mw across more than 21 countries.

The story of SunEdison in India is just three years old but it has made significant gains even in such a short span of time. It has commissioned projects

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of up to 55 mw in various states such as Gujarat, Rajasthan, Uttar Pradesh and Tamil Nadu. Its 1 mw plant on Narmada canal in Gujarat is a first-of-its-kind in the world as it saves on land and potable water while generating clean energy for nearby villages.

A 2.5 mw plant, spread over 80 roofs, under construction in Gandhinagar, Gujarat, is part of the first rooftop feed-in tariff program in India. The company pioneered the first commercial rooftop power purchase agreement in the country with 100 kW of roof-top

power plant commissioned at Standard Chartered Bank, Chennai. It deployed 100 kW roof-top power plants at education institutes–Shivalik Public School in Chandigarh and Punjab Agricultural University in Ludhiana. It implemented a fully isolated micro-grid based rural electrification project in Meerwada bringing light to the lives of 400 villagers. SunEdison has also installed solar pumps in Pollachi and Anaimalai district of Tamil Nadu.

For suggestions email at feedback@infraline.com

January 2013 www.InfralinePlus.com

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January 2013 www.InfralinePlus.com

PhotoEssay

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1. A 16.6 mw plant at Sri Sa Ket, Thailand 2. A 100 kW rooftop plant in Lucknow 3. Solar pumping solution 4. Bringing light in an unelectrified remote village of 400 people at Meerwada 5. A 9.5 mw plant in Saraburi, Thailand 6. Charankha village in Gujarat where a solar park of 25 mw has been set up under Gujarat State Solar Programme

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