Let there be light

Summer exacerbates the electricity outages in India and relief is not around the corner. Not only is capacity addition in India slowing (13,594.8 MW during April 2012-February 2013 vs 26,000 MW in 2011-2012), but also the Central Electricity Authority data show coal-fired power plants operating at around 70 per cent capacity utilisation, while output at gas-fired units hit a new low of 27.63 per cent in February 2013. The grim picture seems all set to get worse for consumers.

India faced an average power deficit of 8.8 per cent for the 11 months ending February 2013. Demand notwithstanding, the sector has consistently missed its capacity addition targets. Yet power producers reliant on imported coal are bleeding.

Simplify bid structures

To reverse the flow of falling private sector investments in electricity generation, the Central government has decided to revise the standard bidding documents. The aim is simple; get the tenth of India that is now in darkness out into light by boosting generation. If successful, we could improve our rank as the world’s fifth largest generator of electricity. Unfortunately, the new standard bidding documents threaten the bankability of new power projects, as pointed out by the Association of Power Producers.

We need to simplify bid structures to catalyse greater private sector investment and alleviate pressure on limited government resources. Risks can be segregated into two broad buckets: fixed cost-related ones and variable cost-related ones. Ensuring project completion on time and in budget, financing of the project in the most optimal manner and ensuring that fixed costs are controlled in an appropriate manner are risks that should be entirely borne by the proposed project developers.

A competitive market for power tariffs can be ensured by asking developers to bid on the variable cost component of the tariff. The developer who promises to convert the fuel most efficiently into power at the cheapest costs, would bag a project. However, unlike the present scenario where the levelised tariff for a project is fixed for the life of the power purchase agreement, the tariff would move up or down based on the movements in the fuel price index, the rupee dollar parity and freight costs based on a specified index such as the Baltic Dry Bulk, for example.

Encourage competition

Fuel security must be ensured in a country blessed with one of the world’s largest resources of coal. But Coal India — the world’s largest coal miner — cannot meet the entire requirement of fuel for domestic power producers. Enhancing the availability of domestically mined coal can be best achieved by the government allocating coal blocks with in-principle environmental and forest approval and clear land title and possession, to power project developers.

The experience of imported coal fired power plants shows that generators have been unable to manage the risk of price fluctuations . Let alone globally, even in India, CIL would be unwilling to settle on a fixed-price, 25-year contract, which is the typical life of a power plant.

Attempts to purchase mines in source countries to hedge price risks have been rendered infructuous due to rules promulgated by local governments there, linking export prices to international benchmarks. The fuel price risk for imported coal-based projects, therefore, will have to be borne completely by consumers.

A simple, transparent structure is what we need.

(The author is Vice-Chairman, JSW Energy Ltd)

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