Mint Power Report

8/8/2019 Mint Power Report

1/12

The current state of the Indian energy sector is a story that hasmany parts.On thepower side, it marksthe triumphof theprivatesectors tenacity to setup generationcapacitiesand reachout to an

enormousmarket sufferingunder outages and thirsting forelectricity.

Butits alsoabout thefailingsofthe Centreandthe statesto make thepower sector viable even after 10 years of reform initiatives. All thestakeholders are walking on thin ice. Will the reforms deliver resultsbefore there are casualties? These and other questions are covered inthefirst articlein this comprehensive Mint Reporton PowerbyBalaji Chandramouli.

While renewable energy is viewed as infirm power, its neverthelessgaining ground in India. The section on renewable energy explores theissues that govern its viability, the difficulties involved in setting targetsthat are too high, and the problems associated with harnessing the sunandthewind.

While oil and gas exploration initiatives were launched with highexpectations, India seems to be back at square one as far as thatendeavouris concerned,says thenext story.

In conclusion, the report looks at retailing, which has been marred bypopulism for decades. And though the government has become gener-ous with using the D-word (deregulation), there is little convictionbehind this. In the case of the gas distribution sector, the problem ofshortages has been compounded with the government deciding on its

pricingandallocation. Wefindoutwhatit meansand howit willplayout.([email protected])

Thedeteriorating healthof stateutilities hasnt put offprivatesectorpower producers >E02

CLOSINGTHE CIRCUIT

Goodintentionsare onething,but harnessingsolar and windpowerwill take some doing >E05

THE SUN, THE WIND

Indias experience withoil andgas explorationhas beenmixedsofar.Whatof thefuture? >E07

THE OIL, GAS HUNT

Political considerations havebyand largebeen responsiblefordictating fuelprices >E10

THE RIGHT RATE

G O I N G C R I T I C A L

KEEPING THE LIGHTSFROM GOING OUT

RAMESH PATHANIA/MINT


2/12

In late July, Prime MinisterManmohan Singh soundedan alarm for the power sec-tor. He cautioned that the state

utilities financial health wasdeteriorating, dragged downby the low tariffs for certainconsumer segments (read:farmers), losses in the supplyof power (transmission anddistribution, or T&D) and pay-ment of bills (commercial loss-es). It wasnt the first time sucha warning was being delivered.They are, in fact, voiced at reg-ular intervals but with little ef-fect. Electricity is a concurrentsubject, with the Centre havingno role in the distribution ofpower to consumers.

Moreover, i t can hardly claim the moral high groundon the ills of populism. In thepetroleum sector, where its oilcompanies control 95% ofsales, the Union governmentlast year provided subsidy sup-

port to the tune of around `1trillion, two-and-a-half timesthe losses that the states arelikely to notch up this year.There are, however, a few fun-damental differences. Oil com-panies are partially insulatedfrom this burden by way ofIOUs from the Union govern-ment that are tradable in themarket, for the issuer is finan-cially well off. However, thestates financial health canhardly support this profligacy;not now, or over the last threedecades that this has been per-petuated in terms of offeringfree power to farmers or starv-ing the utilities of funds for theupkeep of the distribution net-

work and for augmenting pow-er capacity. The resource

squeeze finally led to the statesinviting private companies toenter the generation businessin the 1990s.

Most of these could hardlymove forward, as the lendersbegan to apply the brakes fromearly 1999. They argued thatthe utilities charged tariffs thathardly met costs; they receivedpayments for only half thepower they sold, while the rest

were lost to theft or losses dueto the dilapidated distributionnetworks that required fundsfor restoration. For the reve-nues that were flowing in, ex-isting lenders such as Power

Finance Corp. Ltd (PFC) hadalready laid claim to it, in theevent of default on their loans.

The reticence to lend was asmuch about fear as the convic-tion that investments neededto be secured. By the end of2001, public sector financialinstitutions were in the middleof Union government-bro-kered negotiations that finallyled them to absorb losses onthe loans given to the belea-guered Dabhol power project

in Maharashtra.Around this time, the Union

government performed anoth-er bailout. It allowed a one-time settlement of hefty duesowed by the state utilities toCentral sector power compa-nies such as NTPC Ltd andNHPC Ltd. While past dues

were liquidated at a discount,future payments on the sale ofpower were secured with iron-clad guarantees, reflecting theprevailing sentimenta lack of

confidence in the state govern-ments, let alone their powersector. In the event of a de-fault, the deal allowed theCentral power companies tolay their hands not only on thestates Reserve Bank of Indiaaccount, but also claim firstrights on resources that de-

volved from the Centre to thestate. That it was never in-

voked is another matter, butNTPC did issue a few threats inthe initial years and they

worked. All this created momentum

for Union government inter- vention in state power sector

reforms. In 1998, Central legis-lation led the way for the statesand the Centre to set up regu-lators. This set the tone, for itallowed transparent tariff set-ting, key to restoring the finan-cial health of the utilities. In2002, Central funds beganflowing to states as part of the

Accelerated Power Develop-ment and Reform Programme(APDRP). Over the next five

years, around `14,000 crore oftaxpayer money went towardsimproving power distributioninfrastructure.

It helped. The governmentsaid country-wide averagelosses dropped from 38.86% to29.24% between 2002 and2007, but they were nowhereclose to the target of 15%. It

was only in 2007 that the Un-

ion government realized thingshad gone wrong. They hadgone about investing in thestates without any crediblebaseline data on the state of af-fairs in the distribution busi-nessdata that would havepinpointed the leakages in thesupply wires. To that extent,the investments werent direct-ed with precision. It isnt just amatter of data collection butalso that of reporting it, anarea of concern since the statepower agencies dont have agood record on this. Until theearly part of the decade, theypassed off theft as agriculturalconsumption, a practice that

was curbed only after the Elec-tricity Act, 2003, nudged themto unbundle the states elec-

tricity business into separateentities for generation, trans-mission and distribution.

The lack of credible baselinedata was one of the key rea-sons for the failure of the Oris-sa distribution privatizationprogramme. Launched in 1998,as a part of the countrys firststate reform programme, the

World Bank-funded initiativeassessed losses at a mere 35%,

while in reality they were ashigh as 47%. To that extent, thestate power regulator did notallow tariff revisions and end-

TURN TO PAGE E3

The health ofstate-owneddistribution utilities

is deteriorating, butthat hasnt discouragedprivate sector powerproducers. They arebetting on the future,hoping the state unitswill fix themselves

LEAP OF FAITH

MAKING THE CONNECT

Facing challenges: Cooling towersat NTPCs power station inDadri, Uttar Pradesh.

AHMED RAZA KHAN/MINT

BLOOMBERG


3/12

ed up choking private compa-nies, BSES Ltd and the US-based AES Corp., the second of

which quit in 2001.The correction in the Cen-

tres reform programme was fi-nally made in July 2008, with adecision to invest `10,000crore in automated informa-tion technology (IT) systems to

wire up the power networks intowns having a populationlarger than 30,000. The roll-outof this investment torch isexpected to commence onlytowards the end of this year.

However, even this delayedapproach by the Union gov-ernment may not be goodenough to stave off the crisisbrewing in the state power sec-tor. On the surface though,things look fine: State powerutilities arent defaulting onpayments to power producers.Not one but two power ex-changes have been set up andboth function smoothly withbuyers and sellers doing briskbusiness in short-term trades

without any defaults. And, private sector companies are

keenly responding to thestates request for large-vol-ume, long-term power pur-chase deals. A study by PrayasEnergy Group, a not-for-profitorganization, reveals as muchas 41,000MW of private poweris in the process of being con-tracted by states.

But theres enough rot underthis veneer for the policy man-darins at the Planning Com-mission and the power minis-try to wonder: Is India going tohave another bailout in thenext few years?

Consider this: Over the lastthree years, there have been

virtually no tariff hikes in mostof the states despite risingpower production costs. Theregulators have not allowed

hikes citing one reason or theother. This may have some-thing to do with the appoint-ment of regulators, which iscarried out by the politicalclass of the respective states.In Haryana, the regulator hasgone so far as to deny even areturn on equity for the distri-bution utilities on the groundsthat they have a negative assetbase, an inheritance of thedecades-old populist policiesof the state government.

Besides this, states forceutilities to avert tariff hikes byseeking to create regulatoryassets, a euphemism for bun-dling the additional revenuerequirement into a fictitiousasset that it expects to extin-guish over time. But the dam-age that does is evident.

Take thecase of WestBengal. In thelast seven

y ea rs , t hi sstate has vast-ly improved itsdistributionsystem. If in-centivesclaimed underthe APDRP area yardstick tomeasure the effort made byutilities to reform, then WestBengal ranks second only toGujarat. But the comparisonends there. The weight of regu-latory assets, accumulatedover the last few years, is of theorder of`3,000 crore. This haschoked the finances of the

West Bengal distribution com-pany to the point, where, forthe first time, in April, it had toraise a `120 crore loan to meet

working capital requirements. Where will it find the moneythen to improve the distribu-tion network?

The practice of evading tariffhikes by creating regulatoryassets has been on the rise.Tamil Nadu, a relatively well-run power utility, created as-sets worth around `7,000 crorein July this year, while theneighbouring state of Karnata-ka has sought to create assets

worth `2,550 crore this year.

FROM PAGE E2

There is no respite from thefarm segment either. As manyas three statesTamil Nadu,

Punjab and Karnatakagivefree power to farmers, whilethe tariff for farm power in

Andhra Pradesh is near zero.In 2008, on a countrywide ba-sis, utilities sold 28% of theirpower to the farm segment, inreturn for which they received6% of their total revenues. Ineffect, on an average, a utilityloses around a rupee for everyunit of power it sells. In other

words, the more power theutilities sell, the more theylose. This equation might nowbegin to hurt like never before.The Union government esti-mates that the country will addaround 43,000MW in the nexttwo years, as much as what hasbeen added in the last eight

years. What aggravates this sit-

uation further is the renewedpace of the Union govern-ments rural electrificationprogrammethe Rajiv GandhiGrameen Vidyutikaran Yojana,

which aims to energize thehomes of non-remunerativeconsumers. Meanwhile, theextent of the cross-subsidyburden borne by remunerativeconsumers, the industrial andcommercial sectors, leaves lit-tle room for any further raise.

Writ large in this poorly im-plemented, decade-long pow-er reform story is the lack ofpolitical will in the states to re-

vive the fortunes of the distri-bution utilities. The Uniongovernment says it plans tohold a meeting of chief minis-ters in the coming months tobuild momentum that will

help drive upfarm tari ffs.B ut t ha t w il lnot be easy, forall the statesmust bite thebullet. If eveno ne d es is ts ,competitivepopulism willspell doom forthe politicalf or tu ne s o f

whoever is running the neigh-bouring state.

However, dealing with farmpower is not just about wooingthe farmer with free power. Infact, in the desert state of Raja-sthan, in the early part of thisdecade, farmers made it clearthat they preferred to pay if the

quality of supply was right.Today there are two classesof farmersthose who pay afixed rate for unlimited powerbut are not assured of thequality, and those who are

willing to pay for quality powerthat gets metered. What is re-

vealing is that the power distri-bution utilities anticipate thatfarmers will make a steep mi-gration over the next four yearsto metered supply connec-tions.

The other noteworthy exam-ple is that of Gujarat, whichdoes not face riots in peaksummer when power shortag-

es soar. Its neighbour Mahar-ashtra, on the other hand, fac-es the wrath of the populace

despite the fact that overallpower shortages are lower.This is because Gujarat invest-ed in a separate feeder net-

work to supply farmers powerfor domestic use. As a result,Gujarats farmers dont flareup when the ambient tempera-ture rises. Besides, they getbetter quality farm powersince, given the separation, thefarm feeder is energized at a

higher voltage. The politicalyield on this technical invest-ment is significant, perhaps as

much as that gained by offer-ing free power to farmers.

It is only now that states with large agriculture loadssuch as Andhra Pradesh, Pun-

jab, Haryana and Maharashtraare making large investmentsin the creation of separatefeeder lines. Taking a cue fromthis, the Union government isexploring the possibility offunding such programmes in

states as part of its reform ini-tiative, in which it expects tospend around `50,000 crore

during 2007-2012, which in-cludes the `10,000 crore ITprogrammethis is over threetimes what the Union govern-ment spent on state reforms inthe previous five years.

The supply fix While the reduction in dis-

tribution losses over the lastdecade is anything but impres-sive or accurate, the salutary

effect it has had on private sec-tor interest in the generationbusiness cannot be denied.

With the planning processworking in five-year cycles, thegovernment expects62,000MW of generation ca-pacity to be added in the 11thPlan period (2007-2012), thricethat added in the previousfive-year plans.

The ownerships profile ofthis fresh capacity shows asharp rise in private powergenerationfour times that inthe Ninth Plan, which has hadthe best performance sincepower was opened up to theprivate sector, and nine timesthe addition in the previousPlan period. Indeed, majorlenders such as PFC are bet-ting big on private generationprojects, not only now, but inthe future as well. In the cur-rent Plan period, the privatepower portfolio is expected tobe around 23% of their lend-ing; this is projected to vault toover 60% in the 12th Plan peri-od.

PFC has relaxed some of itsstrict terms since the two bail-outs in the early part of this de-

cadethe Dabhol buyout aswell as the settlement of duesowed by state distribution util-ities to Central generationcompanies. It no longer insistson state government guaran-tees on power sales. Whilethere are serious doubts aboutthe utilities quality of assets,be it the revenue stream pro-

TURN TO PAGE E4

The practice ofavoiding tariff

hikes by creatingregulatory assets

has been on the rise

Meeting demands: The Nava Bharat Ventures Ltd power plant at Palavancha in Kammam district of Andhra Pradesh.


4/12

MAKING THE CONNECTjected from the distribution ar-eas or their claimed invest-ments, or, for that matter, theaccounting practices, the lib-

eral lending approach does,however, alleviate the powershortage in the country. Witht he p ea k s ho rt ag e s ti ll a taround 13% of installed capac-ity, and the off-peak shortfallat around 10%, a robust capac-ity addition programme is es-sential to the growth and de-

velopment of the country. With aggressive lenders in

the game, promoters are notfar behind. They have less to

worry; for every`7 that thelender spends on the project,the promoter forks out only`3.Nevertheless, private compa-nies try to reduce the risk ofpayment default by the distri-bution utility by keeping a footin the short-term trading mar-ket where the prices are closeto twice long-term prices paid

by the utility. For example,Lanco Infratech Ltd has thefreedom to sell 100MW of itsupcoming 1,200MW project in

Anpara, Uttar Pradesh.Indiabulls, a group with in-

terests ranging from real estateto power projects, is setting upa 1,320MW coal-fired projectin Bhaiyathan, Chhattisgarh,of which it plans to sell 300MWin the open market, with therest locked up in a long-termpower sale agreement with thestate. What sets it apart fromthe rest of the projects is theextent of support it takes fromthe trading portfoliothelong-term tariff is as low as 81paise per unit, well below thecost of production even for aplant located at the mouth of

the mine.For that matter, it comparesfavourably even with the `1.19per unit winning bid by Reli-ance Energy Ltd f or t he4,000MW Sasan ultra megapower project (UMPP). Thatp ro je ct i s o ne o f t he f ou rawarded by the Union govern-ment as part of its UMPP poli-cy, an initiative to promote pri-

vate power generation.Under this policy, besides of-

fering a tax holiday on invest-ments, a Union governmentagency, PFC, obtains all the ap-provals including captive coalmining rights and auctions the

FROM PAGE E3 projects. The competition inthe Sasan project was intense;so much so, that it spurred a le-gal battle between the Anil

Ambani-controlled Reliance- Anil Dhirubhai Ambani Group

and the Tatas. Not only that:the Tata group, which rarelychallenges a government deci-sion, has done so over a bid in

which it did not even partici-pate. And, precisely for thisreason; it questioned the gov-ernments decision last year toallow Reliance Power Ltd touse excess coal from the cap-tive mine-based Sasan projectto fuel another greenfield proj-ect, and that too at a highertariff. The Tatas contend thathad they known about thespare coal, which comes totwice what the Sasan projectneeds, it would have partici-pated in the bid. Tata Powereventually won a UMPPtheimported coal-based Mundraproject in Gujarat.

With an incremental de-

mand of 100,000MW duringthe 12th Plan period, PFC iscurrently working on eightmore of such projects. The ca-pacity addition programmehas raised investor interest inthe equipment business: fournew players are setting up do-mestic production facilitiesLarsen and Toubro Ltd andMitsubishi Heavy IndustriesLtd to produce critical boilersand turbo generators (TGs),Bharat Forge Ltd and AlstomProjects India Ltd to produceTGs, ToshibaIndia Pvt.Ltd andJindal Steel Works Ltd for TGs,and Ansaldo STS India and GBEngineering Enterprises Pvt.Ltd for boilers.

The generation capacity ad-dition programme, however,

still suffers on one countin-adequate generation capacityto meet surges in demand dur-ing certain times of the day,also called peak power. This isa role that coal, the staplepower fuel in India, funda-mentally cannot fulfil since acoal plant takes six-eight hoursto start up. Technically, hydeland gas-based plants best fitthis role. Hydel is the preferredoption in the Indian contextgiven the potential in the northand north-eastern parts of thecountry and the lack of largegas finds in the country.

While the track record of the

Central public sector compa-nies is poorthe 11th Planprojections have been halvedprimarily due to themthestates hydel policies for pri-

vate investments are myopic to

the extent that they are skewedtowards promoting local de- velopment and shoring upstate revenues through largeallocations of unpaid powerfrom the projects. As a result,private capacity addition dur-ing the 11th Plan period thatconcludes in 2012 is expectedto be a mere 2,460MW.

However, over the last two-three years, besides the largestprivate hydro player, Jaipra-kash Hydro-Power Ltd, largeprivate companies such asGMR Infrastructure Ltd, GVKPower and Infrastructure Ltdand Reliance have entered thissegment aggressively and thecapacities are expected to becommissioned in the 12th Planperiod. As much as hydel pow-er offers stable inexpensive

tariffs, with free fuel (water),powering it, the projects arefraught with risks.

The construction risks owingto geological surprises inmountainous terrain are goodenough to inflate project costsconsiderably. The Union gov-ernment-prepared shoddyproject reports are partly toblame for thisit takes two

years to improve them andmake them reliable, otherwisecompanies are likely to end upovershooting initial capitalcosts. In one of the large pro-

jects (over 1,000MW capacity)currently under execution inthe North-East, the capital costhas soared from `4.2 crore permegawatt to more than `7.5crore per megawatt precisely

for this reason. With less thanmodest demand for power inthe North-East, these capaci-ties will need to find their mar-ket in other parts of the coun-try. This play, through spottrades as well as long-term bi-lateral agreements, is still inthe works.

Trading as an activity in thepower sector was born whenthe electricity laws were con-solidated, spruced up withsome provisions for reforms,and introduced in 2003. A keyprovision in the law that hashelped nurture this business isone that pushes states to allow

large consumers access to al-ternate power sources. Free-dom comes at a price. Theyneed to pay the state utility thecross-subsidy borne by themas well as the transmissioncharges involved in cartingpower from the new supplier.

Over the last few years, pow-er trading activity has risen toas much as 4% of the countrysannual generation. As much asthe trades help reduce short-ages and improve the produc-tivity of industry, they also re-

flect the stresses of the utili-ties. Till two years back, theprice of the power traded wasdetermined by a penalty leviedby the regulator for over-draw-ing power. Since power flowslike water, from a higher po-tential to a lower potential,and the states are all linked upthrough transmission high-

ways called the grid, any devi-ation from the utilities sched-ule of power drawal set theprevious day endangers thegrid. Rather than tighteningtheir belt during shortages,utilities under pressure fromtheir political masters over-

draw at the penalty price of`8.75 per unit, especially dur-ing the election season.

With the average tradingprice hovering around `5-6 perunit, i t is evident that thestates are feeling the pinch. Toensure that the delinking is ce-mented, the Central ElectricityR eg ul at or y C om mi ss io n(CERC) in May further raisedthe penalty to `12.25 per unit.Power-deficit states such asKarnataka, Andhra PradeshMaharashtra and Tamil Nadu

are resorting to invoking emer-gency powers under section 11of the Electricity Act to blockthe export of power from theirstate. The latest case is that ofKarnataka, which applied theban in April. One of the trig-gers was Jindal Steel Ltds dealto sell power to Tamil Nadu. Asa result, both the states went tothe Supreme Court before set-tling on a compromise.

The issue has far-reachingconsequences for the powersector; CERC, which regulatesthe inter-state sale of power,has argued that the instrumentcould hurt the power sector ir-

retrievably as states could wellend up using this provision tocurb power transfers frommulti-state UMPPs. For states,its not just a matter of maxi-mizing supply, but also keep-ing its paying consumers fromtaking flight to other powersources.

Tamil Nadu walks this thinline by allowing industry tobuy power from the two powerexchangesthe Indian Energy

Exchange and the Power Ex-change of Indiathat offer atariff for the power sale a dayahead, but no more. However,the markets have little to re-

joice about. The nature of in-tervention by the states toshore up supplies for theirconsumers has only deterio-rated; they now issue informalinstructions to power plants

with spare capacity not to gooutside and seek the highestprice for their power.

To escape the tyranny ofstate power utilities, industryhas, over the years, gone aheadand set up captive units. Theinstalled capacity as of 31March 2008 was 25,000MW,close to 15% of the installedgeneration capacity in thecountry. However, with large-

scale capacity additions expec-ted in the coming decade, theutilities will have less room tohold them to ransom.

Transmission With fuel resources located

in one region of the country,the coal belt in the east andhydro units in the north andNorth-East, a robust transmis-sion system holds the key toharnessing them and therebyensuring that consumers bene-fit from correctly priced power.Central to this theme is a ro-bust inter-state transmissionsystem. PowerGridCorp. ofIn-dia Ltd has a virtual monopolyin this business. The only pri-

vate participant is Tata PowerLtd in the Tala transmission

system that hauls power fromBhutan to the northern andwestern regions of the country.The transmission business is alow-risk game, insulated fromthe vagaries of the distributionbusiness. In the 11th Plan peri-od, the transmission capacityaddition is well below target70% in the case of high-voltagedirect current lines and 48%for 765 kV lines. The shortfallhas li ttle to do with PowerGrids failings, but while trans-mission systems dovetail intogeneration capacity, the tar-geted generation capacity hasfailed to materialize.

Peak deficit: The generation capacity addition programme still suffers on one countits not enough to meet surges in demand during certain times of the day.

HEMANT MISHRA/MINT

Nuclear power a seriouscontender after treaty

Atomicpowerbeganto beconsideredseriously asa source ofenergyinIndiain 2008,followingthe Indo-UScivilnuclearagreement. Itpaved the

wayfor accesstonuclearfuelfromtheworldmarket aftera gapof34 years.Untilthen,the industryneededto depend oncovertpurchasesfromfriendlycountriessuchas theerstwhileSovietUnion tofuel the4,000MW, or2 .5%,ofIndiasinstalled generationcapacity.

Withfuelaccessnow lookinglike its moreor lessinplace,the governmentisconsideringthe additionof 1,590MWin the12th Planperiod2012-2017.Toaccessthe global equipmentmarket,the government lastmonthput inplacelegislationthat capsthe liabilityof equipmentsuppliersin theeventof anaccident.Armedwiththis, thestateagency,Nuclear PowerCorp. of IndiaLtd(NPCIL),is intalks withprivate companiessuchas GeneralElectricCo.,HitachiLtd and AlstomSA forthe supply ofequipmentat fivesites.

Whileprivateownership isnot onthe cardsas yet,the governmentislook-ingat optionsincludingthatof floatinga newcompanyunderthe departmentofatomicenergywhereit sells49% equityor divestsa stakeinNPCIL.

Whathas madenuclearpowerattractiveis thatit laststwiceasmuch ascoal-firedplants, hasecologicalmeritsinceit doesnotemit greenhousegases,andoffersa stablecompetitivetariff,drawing fromlowuraniumcostsas wellasthe chargeto convertthe commodityto fuelgrade.However, withthe Westembracingnuclearpowersinceit isthe cheapestrouteto greenhousegasesmitigation,the priceof uraniumore hasshot upin thelast fewyears,risingashighas $140(around`6,400today)perpound in2007. Thepricetoday is

around $47.Whiletheabovestrategyisone legof thegovernmentciviliannuclearpro-

grammeinvolving conventionalreactors,it isalso movingahead withfast-breederreactorsand eventually thorium-basedreactors. Thisstrategyis builtaround thefact thatIndiahas largereservesof thorium.


5/12

HOLDING PROMISE

THE SUN AND THE WIND

Huge potential: Wind turbines in Rajasthan. Wind energy is thelargest component of renewable energy capacity in the country.

Belladonna, also knownas nightshade, is a plant

with bell-shaped flow-ers and shiny black berriesthats been of use to human forcenturies. In large doses, it is apoison that can kill; in lesserdosages, it has a hallucinogen-ic effect that made it a thing ofgreat utility in witchcraft anddevil-worship in medieval Eu-rope. Highly diluted, it servesas a homeopathic drug to rem-edy headaches and fever.

Solar energy in the Indiancontext is a bit like nightshade.E ne rg y from the sun costsaround `13 per unit, over fivetimes that of conventionalpower. In large doses, it willdrown the financially fragilestate power utilities that arereeling under heavy losses ofat least `40,000 crore per year.

Yet, its virtues cannot be dis-missed, nor can its backers. Onthe eve of the inter-govern-mental climate change confer-ence in Copenhagen in De-cember 2009, the Indian gov-ernment launched its pro-gramme, Solar India, to boostsolar generation capacity to20,000MW by 2020. The gran-diose plan has been started

with a modest first phase of1,000MW in the first year. Thegovernment has invited bidsfor 650MW as a start.

Of this, 150MW of capacity isto be based on solar photovol-taic panels, with each player

TURN TO PAGE E6

Theres no doubt that

renewable energyneeds to be a keypower source in thefuture. But harnessingthe sun and the windefficiently is going totake some doing

TIBOR BOGNAR/AFP


6/12

THE SUN AND THE WINDallowed to apply for 5MW ca-pacity. In the case of the moreconventional solar thermaltechnology, the government is

bidding out 500MW, with asingle player allowed up to100MW.

This homeopathic dose isunlikely to hurt the utilitiessince it will be diluted withinexpensive coal-fired powerbelonging to state-ownedNTPC Ltd and sold by its trad-ing arm, NTPC Vidyut VyaparNigam Ltd (NVVN), which isalso undertaking the biddingprocess.

If the response to the pre-bid conference held on 28 Au-gust is any indicatoraround300 companies came forwardfor a mere 650MW, with sever-al of them making their firstpitch in the power sectoritappears to be a gold rush. Per-haps, thats not far from thetruththe solar companies

are insulated from the risk ofdirectly selling power to thedistribution utilities. Besides,the Central Electricity Regula-tory Commission (CERC), thepower sector regulator, hasapproved a very generous tar-iff cap of over `19 per unit.The bidding process is expec-ted to bring about a more so-ber tariff.

Nevertheless, the entry ofsolar power is today groundedin subsidies. In this case, theburden will be borne by NTPC,a state-owned company listedon the stock exchanges. Goingforward, the solar mission isrelying on two factors to cata-lyse the growth of solar powerin the country. First, a reduc-tion in the price of equipment

and second, a stiff dose of reg-ulation to support forced pur-chases by the utility until solarfares favourably against coal, apoint that the solar missionhopes will be achieved by2022.

Regulation in this directionis already in operation. Powerregulators in as many as 16states have specified renew-able purchase obligations(RPO) on the utilitiesthisleaves the choice of renewableenergy to the utility. The solarmission is seeking to carve outa separate 0.25% RPO for solarprojects in the initial years go-

FROM PAGE E5

ing up to 3% in 2022.T he p ri va te s ec to r h as

evinced a fair amount of inter-est in the solar business owingnot only to the renewable RPOregulations, but also strong fis-cal incentives such as acceler-ated depreciation.

Furthermore, the Centralgovernment is working on a

system to create RenewableEnergy Certificates (REC). TheREC system that is currentlybeing developed allows for re-newable energy to be sold intwo componentsa green at-tribute and the electrical ener-gy. For instance, while a statesuch as Tamil Nadu has huge

wind resources, Delhi doesnot. So, once the REC system isin place, Delhi can buy thegreen attribute certificate ofrenewable plants located inTamil Nadu to meet its RPOobligations.

Wind energy is the largestcomponent of renewable ener-gy capacity in the country. Itsgrowth has come about, to alarge extent, because of thepreferentially higher tariff that

regulators have allowed it. In-dustry too has embraced it.Kalyani Forge Ltd, an engi-neering firm that is energy in-tensive, has wind farmswhilethe tariff is more than the aver-age cost of purchase for a utili-ty, i t is sti ll lower than thehigher tariff charged by theutility from industrial andcommercial consumers.

Wind energy has one majordrawbackit is not reliable. InSpain, where wind accountsfor close to 40% of capacity,forecasts mitigate this risk. Thepotential for wind energy inIndia, however, cannot be ig-

nored. States such as Karnata-ka, Gujarat, Andhra Pradeshand Rajasthan have immenseuntapped potential. And un-like solar power, which boastsof higher potential but is still adistance away from the mar-ket, wind has made the cut. Inthe 11th Plan period, wind en-ergy is expected to record a ca-

pacity addition of 9,000MW ofthe total renewable kitty of11,829MW.

Indeed, regulation drives re-newable energy business likefew others. However, the busi-ness of creating new capacitycould well prove to be as re-munerative as saving it. Thegovernment is working on amechanism to create a marketfor energy efficiency calledperform, achieve and trade(PAT). The agency which is de-

veloping this mechanism, theNational Mission for EnhancedEnergy Efficiency (NMEEE),shares a common parent withthe solar mission, the National

Ac ti on P la n o n C li ma teChange (NAPCC), which wasunveiled by the government in

2008.PAT is expected to be imple-mented sometime in June andindustries will be given timeti ll 2014 to implement thestandards set by the Bureau ofEnergy Efficiency, the imple-menting organization. If theyexceed the benchmarks, theyare rewarded with energy sav-ing certificates, and, if theydont, they need to buy themfrom the two energy exchang-es, the Indian Energy Ex-change and the Power Ex-c ha ng e I nd ia L td ( PX IL ),

where the high achievers cansell their units.

Bright future: (top) Engineers optimizing the solar panel configurationat GEs Green Lab; (above) Suzlon windmill power generation plant inJaisalmer, Rajasthan.

HARIKRISHNA KATRAGADDA/MINT

HEMANT MISHRA/MINT



7/12

ON THE BLOCK

THE HUNT FOR OIL AND GAS

The story of enterpriseand entrepreneurship inthe Indian oil and gas

business begins with the eco-nomic crisis of 1991, when In-dia hardly had enough foreignexchange to pay for threemonths of imports. Nudged bythe World Bank, a key lenderduring this troubled period,the government acceleratedthe pace of private participa-tion in the oil exploration busi-ness. As a result, producing oiland gas fields owned by state-owned Oil and Natural GasCorp. Ltd (ONGC) were farmedout to private companies. Eventhough private companies hadbeen invited to develop oil andgas fields in India since 1982,this was the first time that In-dian companies could actually

enter the sector.While Videocon Industries

Ltd, a company founded only afew years before, in 1987,

joined hands with CommandPetroleum Ltd, an Australianexploration company, andbought 25% equity in the Rav-

va field in 1993, a consortiumof Reliance Industries Ltd and

TURN TO PAGE E8

Indias experience withoil and gas explorationhas been mixed thusfar. The country is stillon the learning curve

Building infrastructure: Twoworkmen walk from an oilplatform under construction forONGC at a Larsen and Toubroyard at Hazira, Gujarat.

SANTOSH VERMA/BLOOMBERG


8/12


9/12

However, the failures dwarf alarger problem that it createdas a consequence of its partici-pation in the Nelp auctionsone of reckless bidding thatturned away several foreigncompanies. The Confederationof Indian Industry (CII), a lob-by group, has raised this issue

with the government on severaloccasions in a veiled man-nerit has sought a cap on thenumber of blocks that publicsector companies can bid for.Even V.K. Sibal, a former headof the Directorate General ofHydrocarbons, the petroleumministrys technical arm, madethe same point.

There were other issues aswell. Towards the middle of thedecade, ONGC complainedthat the blocks were not bigenough to hold its interest.

While initial blocks such as Re-liances KG-D6 block were over6,000 sq. km in size, area fell

with the passage of every Nelpround. Moreover, the pace ofseismic studies offering credi-ble data needed by explorationcompanies to help make their

bets was lethargic.Amid all this, foreign compa-

nies also saw a major hurdlethat clouded their outlook onthe Indian exploration busi-ness. The fight between the

Ambani brothers over gas fromthe D6 block spilled over intogovernment policy, giving birthto a gas utilization policy in2008 that implicitly limited thefree pricing of gas discovered

FROM PAGE E8 by explorers. The policy listedcritical sectors of the economythat enjoyed supply preferenceover others, such as fertilizersand power.

What hurt investor sentimentmore was the finance minis-trys decision in the 2008 bud-get to decision to clarify andretrospectively take away theseven-year tax break given toexploration companies whenthe Nelp policy was formulatedin 1998. Foreign companies in-cluding BP protested to thegovernment while the Nelp 7round was delayed thrice onthis count. Queering the pitchfurther was the delayed rigmoratorium policy withcrude oil prices rocketing wellabove the three-figure mark, ashortage of drilling rigs grippedthe international market, af-fecting work programme com-mitments that were given bycontractors. A delayed policysaw three leading players turntheir backs on the Indian mar-ketPetroleo Brasileiro SA(Petrobras), Statoil ASA andENI SpA, Italy.

Despite this, the Nelp 7 re-sults were only marginally low-

er in outcome than the Nelp 6round in terms of bids perblock. This was primarily be-cause the government offeredS-type blocks that were locat-ed in discovered areas and

which saw very high investorinterest.

The Nelp 8 rounds held last year were a disaster. However,the government has chosen toblame the recessionary envi-

r on me nt f or t he p oo r r e-sponseout of 70 oil and gasblocks and 10 coal bed meth-ane blocks on auction, the gov-ernment received bids for only44 blocks. It argued that de-spite this, the minimum invest-ment in Nelp 8 at $1.34 billion(`6,164 crore today) surpassedNelp 7 at $1.36 billion.

The recession did its bit, butthe poor investment environ-ment played havoc as well.Things may not have changedmuch.

Regarding Ved an ta Re-source Plcs plans to buy acontrolling stake in Cairn Indiafor $9.6 billion, petroleum min-ister Murli Deoras initial re-sponse was that the London-based company did not haveany prior experience in the oiland gas sector, an argumentthat could have been usedagainst other companies as

well. While the government is

drawing comfort from the ris-ing financial commitment ofbidders in the Nelp rounds,

what is more relevant to stri-king oil and gas is an environ-ment that fosters entrepreneur-

ial abilities of the kind demon-strated by Reliance and Cairnin the early part of the last de-cade.

In the Ambani gas row case,the courts have endorsed thegovernment decision to ap-prove price and allocate gas, adecision that may not go down

well with investors who willparticipate in the forthcomingNelp round.

Acquisition spree: A control and raiser platform atReliances field in the Krishna-Godavari basin.

The search for hydrocarbon assets abroad

Withglobalcrude oilpricesrisingsince2001,the hunttoacquireoil andgas acreagehas intensifiedlikenever before.In thisdomain,onlyOiland NaturalGasCorp.Ltd (ONGC) and RelianceIndustriesLtd havebeenactive.

ONGChas mainly shoppedfor discoveredassets,hopingthegainswill comefromthe operatorfindingnewdiscoveriesin theasset,or thelure ofa discountowingto

thedisturbed politicalenvironmentasin Sudan,in 2002,where theassetwas boughtfroma US-registeredexplorerwhofoundthe risktoohigh. TheSudan propertywasoneoftwo assets(the otheronebeing inSakhalin,Russia)bought before crudeoilpricesfirmedup.

ItsrecentacquisitionofImperial EnergyCorp.Plc, aUK-basedcompanythathad assetsin Russiaworth $2.58billion(`11,868crore today)in 2009,has attractedmuchcriticismitis coming totermswith thelowerestimatesandthe stiflingregulatoryenvironmentin Russiathatforbidsa market priceforgas. Moreover, thedeal wasnegotiatedwhencrudeoil priceswere hoveringaroundthe$140mark, butfinallyconsummatedat thesamevaluationwhenpriceswerearound$50 perbarrel.ONGCiscurrentlylookingto acquire BPPlcsassetsin Vietnamin a

joint venturewith Vietnam Oiland GasGroup(Petrovietnam).

Thedecade-longinvestmentin overseasoil acreageshasearnedit 9.5milliontonnes(mt)of oilequivalentofwhicha goodpartis soldin theinternationalmarkets.

Reliance,on theotherhand, hasshoppedforundiscoveredoil andgas properties, where theyield

investment isthe highestwhen discoveries aremade.Ithas,however,not metwith muchsuccess inits overseasventures.Recently,it bought intothreeshalegascompaniesin US,a marked departurefromits earlierapproach.Thoughat a nascentstage,the explorationofshalegasis a high-technologybusinesssinceit seeks tosuckout gasthat iswelldispersed.That said,thisfrontiertechnologygameis asseriousa businessas findingoil andgasinthedeepwatersofthe ocean.

Ata broaderenergylevel,Indiancompanies havebeenscoutingfor coalminesoverseasfor quitesometime.

State-ownedNTPCLtd,the largestpowerproducerin the

country,expectstoimportaround 15mt ofcoal thisyear,enoughto fuelaround4,000MWofits installedcoal-firedcapacityof around 32,000MW. NTPCfailedto buyout anycoalcompanydespitetrying inseveralAfricancountriesaswellas Indonesia.

Meanwhile,AdaniEnterprisesLtd, thecountrys largestimporterof coal,madeits secondacquisitionin August thisyear, whenit purchasedthe coalassetsofLincEnergyLtd,an Australianfirm, for$2.7 billion.With this,Adanihopestofuel13,000MW ofcapacitythat itis currentlyimplementingin India.


10/12

Regulatory hurdles: Though retailing gas is a very lucrative business, the allocation policy curbs the entrepreneurs intent to pursue this business or any other that offers higher returns.

FUEL RETAILING

GETTING THE PRICE RIGHT

E lection manifestos offeran invisible subtext tothose who come to pow-er and plan to hold on to theirpositions. Petroleum ministerMurli Deora understands this

well. When his officials prompthim to push for fuel price hikesto stem the financial bleedingthat oil marketing companiessuffer, he goes on the defen-sive and quotes the Congressmanifesto, which promises en-ergy supply to poor families ataffordable prices. His directefforts to reduce prices are re-stricted to letters to state gov-ernments, asking them to re-

duce the incidence of taxation, which adds up to as high as20%.

He prefers to foist such sen-sitive decisions on a group ofministers. On 25 June, an em-powered group of ministers(eGoM) met. The debate was alarger one: decontrol of trans-

portation fuelspetrol anddiesel. The political class

would not let go of the controls.Nevertheless, public sector

oil companies that control 95%of the market, were allowed toraise prices of fuels; in the caseof petrol, it came close to whatit would otherwise cost to im-port the fuel, or the import par-ity price. For sure, this raisesthe hopes of the only two pri-

vate retailers, Reliance Indus-tries Ltd (RIL) and Essar OilLtd, that are interested in thedomestic retail market. Thethird, Shell, is looking to sell itsoutlets. RIL and Essar, which

have large refineries and astrong foothold in a healthydomestic market would like toimprove their profits. They pre-fer the domestic market to ex-ports provided the state-ownedretailers are not forced to sellat subsidized prices.

Despite the rigours of the

marketplace, the two firms ha- vent been fence sitters, exceptduring very stressful periods.This includes 2008, whencrude prices soared above thethree-digit mark. If anything,they got the public sector re-tailers to pull their socks in thefirst two years of operations,

with RIL notching up a dieselmarket share of more than10%. Not only that, the adul-teration of fuels sold by thestate-owned companies de-clined and the service im-provedwith the gas stationattendants donning uniformsin some instances for the first

time and greeting customers.Essar and RIL, however,

went about the business differ-ently. RIL spent a good sum ofmoney, spruced up its outletsthat flanked the national high-

ways and linked up the sta-tions with technology that al-lowed online monitoring of

supplies. It cut deals withtrucking companies to offerthem competitive prices onbulk purchases, well below

what the state-owned oil-mar-keting companies charged.

Essar on the other hand,preferred a low-cost fill andfly model which served small-er cities and towns across In-dia. This meant no-frill gas sta-tions unlike the full-featuredoutlets that RIL set up to pullin customers.

All this worked fine till crudeoil prices began their climb,r ea ch in g a s h ig h a s $ 14 8(around `6,882 today) per bar-

rel. The retail outlets only re-opened early last year, whencrude prices softened. Essarclaims that its low-cost ap-proach helped them quicklyrestart their operations in lessthan a month and gain fromthe higher retailing prices thatthe state-owned oil-marketingcompanies were charging, be-ing slow to correct them in line

with the falling market. As a result, they could re-

claim 60% of losses. Such talesof minor gains in times of tran-sition, however, pale beforethe larger policy issue of thederegulation of the price of themass transportation fuels thatpetrol and diesel are.

While the companies arechanting the deregulation

mantra, the hard reality is that with diesel accounting for 40%of petroleum products sold inthe country, there is little roomto allow it a free float, especial-ly given its knock-on effect oninflation, among other aspects.Of the total volume of dieselconsumed in the country,trucks account for 40%, follow-ed by passenger cars at 15%,buses and agriculture at 12%each. And if the governmenthas to gather its courage andbite the bullet on this issue, ithas limited time. Another yeardown the line, the govern-ments tenure will go past the

half-way mark, giving it lessroom to take hard decisions.

However, deregulation inthe only transportation fuel,aviation turbine fuel, has donelittle to improve competition.In a recent bid for aviation fuelat the privatized Delhi airport,all the firms, Hindustan Petro-leum Corp. Ltd, Bharat Petro-leum Corp. Ltd and Indian OilCorp. Ltd, quoted the same fig-ure, provoking the Competi-tion Commission of India to is-sue the firms a notice.

Ironically, the cooperationstops there and not where itought to be. The petroleum

ministry is visiting issues in- volving sharing of the oil com-panies infrastructure such astankages, for in several cases,they share the same boundary

wall. This is symptomatic of alarger malaise where the gov-ernment, in the first place, hasnot let these companies func-tion freely and has treatedthem as a subsidy sharing in-strument.

In the case of the gas sector,until RIL commenced com-mercial gas supplies last year,the shortages were severe. Re-tailing of city gas was drivenlargely by the judiciary whichinsisted that public transportin large cities such as Delhiand Mumbai should operateon compressed natural gas

(CNG) to reduce pollution.Currently, even with RILs 60mscmd gas supplies, the sup-ply at 142 mscmd is well shortof the demand of 225 mscmd.But while retailing gas is a verylucrative business, the alloca-tion policy curbs the entrepre-neurs intent to pursue thisbusiness or any other that of-fers higher returns. RIL, whichhas pursued a three-decadelong policy of backward inte-gration, wherein it travels thechains of input materials, hadto contend with less than 3

TURN TO PAGE E11

Political considerationshad by and largedictated fuel pricinguntil recently whenpetrol was decontrolled.Diesel, however, is adifferent proposition

ANKIT AGRAWAL/MINT

Freeing markets: A file photo of people queuing up at a petrol pump in New Delhi. The Union government deregulated the price of petrol recently.

RAMESH PATHANIA/MINT


11/12

mscmd of gas against its re-quirement of 20 mscmd, eventhough it produces the gas.

Till July this year, regulation

too stood in the way of growthin the pipelinebusiness. Al-though set upi n 2 00 6, t hegovernmenta ll ow ed t hePetroleum andNatural GasRegulatoryBoard, the pe-troleum regu-lator, to issuelicences onlyin July.

The larger question beforethe government is that of al-locating gas in the future. Theproduction estimates are fairlyreliable on a five-year horizon,the time it takes for an explorerto get into a block, make a dis-

covery and bring the hydrocar-bon molecules to the surfacefor commercial sale.

FROM PAGE E10 The projection paints a rath-er dismal pictureafter RILsD6 find in the Krishna-Goda-

vari basin, there have been nolarge discoveries. Not onlythat, the largest addition in the

next five years will again comef ro m t he D 6block where,Reliance is ex-pected to in-crease produc-t io n f ro m 6 0mscmd to 80mscmd in thenext two years.B es id e t hi s,Gujarat state-owned GSPC

will be chip-ping in with around 8 mscmdof gas from its block adjacentto that of RIL in the KG basin.

The challenge for the gov-ernment now lies in allocatingthe additional gas withoutseeming to be partisan. Therumblings are already being

felt. Anil Ambani is also in thequeue for the resource. Thepower ministry wrote to the

petroleum ministry as late asJuly this year, forwarding Anil

Ambanis application for morethan 26 mscmd of gas, enoughto generate 6,000MW of power.The eGoM on gas allocation,

which met in late August, de-cided to put in place a formalframework for applicationsand utilization. It has askedthe petroleum ministry to in-form the fertilizer and powerministries of the gas availablein the coming years and forthe consumer ministries to setout their priorities. The finaldecision will be taken by theeGoM.

However, there is a largerimpending issue that is facingthe government, which is akinto whats happening in thepower sector. The govern-ments rural electrificationp ro gr am me i s d ou bl e-edgedit raises the aspira-tions of rural India when itcomes to power supplies, the

absence of which will triggerserious discontent. A similar situation is brew-

ing in the petroleum sector.The government expects a slewof pipelines to be commis-sioned that will result in con-necting states that have hadlittle or no gas supplies so

farTamil Nadu, Kerala, Kar-nataka, Punjab, Haryana, Raja-sthan, Orissa, West Bengal, Bi-har and Jharkhand.

Meanwhile, with new gasdiscoveries, though less mod-est than the Reliance D6, likelyto take place in the coming

years, the government is plan-ning to frame a mechanismthat insulates consumers fromthe shocks of fresh pricing.

At the end of the day, giventhat a fuel such as natural gascan replace the liquefied pe-troleum gas (LPG) cylinders inhomes, the issue of being ableto substitute one fuel for an-other comes down to its pric-ing, which, in turn, depends onthe subsidy and the taxes thatthe government levies. But

these are just the two thingsthat the government seems tohave little control over.

Discovery programme: After RILs D6 find, there have been no large discoveries. Also, the largest addition in the next five years will come from D6.


PRADEEP GAUR/MINT

The largerquestion before the

government isthat of allocatinggas in the future


12/12

Documents

Mint Power Report