Rs 100,000 crore may get locked up in stalled power projects

12TH
 Plan electricity capacity addition targets may go awry as fuel availability and poor financial health of
utilities may play spoilsport: FICCI-ICF Paper
NEW DELHI, October 8, 2011. Capacity addition in India’s electricity sector in the 12
th
 Plan (2012-17) runs the
risk of getting derailed because of uncertain domestic availability and volatile international process of coal,
unless immediate reforms are undertaken to augment  domestic coal supply, says a  FICCI-ICF International
paper on “Future of India’s Power Sector’.
The FICCI-ICF paper, to be presented at ‘India Electricity-2011’ the 6
th
 International Exhibition & Conference
on Power Sector, recommends a three-pronged approach to fast track the augmentation coal supplies.
This reform agenda includes:
• Allowing captive mines to sell surplus coal at market prices (e-auction, linkage to imported coal,
domestic bidding) which will incentivize additional production
• Allowing commercial mining at market prices which CIL can off take and supply in the domestic
market
• Full-scale commercial mining at market prices through amendment in the MMRD Act
To meet its growing demand, the Twelfth Plan targets to set up 100 GW of capacity. To achieve this desired
growth, however, the sector needs to respond quickly and definitively to a number of challenges. The
challenges continue to be both soft - linked to policy as well as hard - linked to project implementation.
However, some challenges have emerged as the most critical, requiring immediate resolution. These are  the
domestic fuel shortages, financially precarious condition of distribution utilities and the issues around
competitive power procurement process.
The issue of adequate coal linkage to power projects has assumed critical importance as nearly 25000 MW of
thermal power capacity is presently stranded. This implies a locking up of Rs.  100,000 crore in stalled power
projects.
Says Dr. Rajiv Kumar, Secretary General, FICCI, “It is heartening to note that the 12th Plan envisions about
50% share from private sector in capacity addition. However, unless fuel sector reforms keep pace with power
sector reforms, India’s growth story could be jeopardized. The coal sector needs to provide an environment
conducive to private sector participation which can possibly bring new technology and increase process
efficiency. Coal-to-coal competition for domestic coal supply may be the way forward to improve supply
security at affordable prices. In the long run, however, India needs to increase the share of its renewable
energy portfolio in its energy basket”.
Today, coal sector faces the issues of land acquisition and environmental clearances like any other
infrastructure sector. There are transportation bottlenecks in evacuation of coal from key mining areas to
demand centers. As the coal mines are located in the naxalite affected areas, the challenge of mining  coal
further increases. Induction of latest technology and mining methods has been slow leading to low
productivity. These issues need to be holistically  looked at by all concerned agencies including CIL and
Railways. In last few years, the captive mines have been allocated to private players. However, the pace of
development of these mines still remains wanting for many reasons. Clearly, the traditional coal producers -
CIL and its subsidiaries along with SCCL alone will not be able to meet the increasing coal requirement of
power sector during the Twelfth plan.
The shortage in domestic coal production has led to a sharp increase in the imported coal. From a mere 43
MTPA at the end of Tenth plan, the coal import is expected to touch ~100 MTPA by the end of the Eleventh
plan. However, in the current scenario, Indian coal demand has only pushed the coal prices up in the international markets. Taking cognizance of this shortage situation, some exporting countries have changed
rules/regulations which will lead to further tightening of supply.
According to Mr. Nitin Zamre, Managing Director, ICF International, India, “The financial health of utilities and
domestic fuel availability have emerged as the two  most critical issues for the Indian power sector today.
Immediate resolution of these issues with an eye on long term benefits is the need of the hour if we are able
to realize India’s growth potential in the 12
th
 Plan. Immediate steps need to be taken to move towards
commercially operating utilities and a competitive domestic fuel market.”
As regards, gas availability for the power sector, the FICCI-ICF paper points out that  domestic gas supply has
witnessed a significant increase in the Eleventh plan period with the commencement of production from KGD6 block. With a number of new discoveries expected to start production, the domestic supply could reach 195
MMSCMD by 2016 from the current level of 130 MMSCMD. LNG import capacity can increase to65 MMSCMD
from the current level of 50 MMSCMD during the same period with the commissioning of new terminals on
both East and West coast.
However, there are a number of issues in the availability of domestic gas for the power sector. There is no
clarity on gas availability and production beyond 2016 given the slow pace of exploration & production.
Limited interest has been observed in the recent NELP rounds primarily because of the gas pricing issue and
the gas utilization policy. This has led to uncertainty in the development of gas based generation capacity in
the Twelfth Five Year Plan.
LNG is definitely available but its high price would always remain an issue. It could be best used for peaking
power plants for which a separate set of regulations are required.
The long term power markets today face new challenges that are mainly linked to the implementation issues.
Some of the issues that need require immediate attention are –
• Uncertainty over fuel prices and the mechanism of the pass through of fuel cost to the distribution
companies is causing delays in implementation of successful bids. Generators have limited ability to
absorb the complete risk of steep escalation in fuel prices.
• Bidding process has been found lacking transparency in some cases, with cases of post-bid changes in
bids coming up, creating need of deeper/stronger regulatory oversight
• A few cases have also been observed where a few project developers have tried not to fulfill
obligations of signed PPAs due to unfavorable market movements. These need to be carefully
monitored and penalized to set precedence
The paper observes that the financial health of distribution sector is the key area of concern in the electricity
delivery chain. The aggregate financial losses of distribution utilities have increased rapidly with reported
cumulative losses of Rs 70,000 crore in 2010-11. Increasing gap between the tariff realization and the cost of
supply as well as the high ATC losses are key causes of these losses.
Some of the suggestions that need to be considered by the utilities, regulators and planners are:
• Consumer tariffs need to be revised annually by all the states. Increase in fuel cost should be
transferred to the consumers regularly (preferably  every quarter) across all states. Also, the tariff
structure need to be rationalized to phase out the cross subsidies.
• SERCs need to be consistent in tariff review process and should specify reasonable and achievable
performance targets specially linked to loss trajectory. Non achievement of unrealistic targets should
not become the reason for not revising the consumer tariffs. • Utilities need to be made accountable for their financial performance through a comprehensive rating
system which may be linked to their ability to raise concessional debt
• Minimum supply obligation should be imposed on Discoms. Utilities should accordingly plan their
power procurement with well defined policy of purchasing power from long term as well as short
term markets
• Utilities should be incentivized to take up Demand  Side management (DSM) and various energy
efficiency measures.
• Implementation of open access should be hastened to introduce competition in the distribution
sector