Recharging the Power Sector Energy POV

KPMG GLOBAL ENERGY INSTITUTE

Recharging the Power Sector

How to turn around the power sector

by 2018

November 2013

kpmg.com/in

1 | Recharging the Power Sector - How to turn around the power sector by 2018

A look back at the last decade

1 CEA

2 As per CEA, private sector has added capacities of more than 54 GW between FY04 to FY13.

3 PFC report on performance on state power utilities for the years FY10 to FY12

4 In Sep 2012, Cabinet committee on economic affairs has approved restructuring of INR 1.9 lakh Crores of outstanding short term debt of state discoms as of Mar 2012.

5 As per the audited financial statements of major listed power generation companies, aggregate debt has increased from INR 30,251 crores (48%) in FY09 to INR 1,57,472 crores (73%) in FY13

6 Capacities which are commissioned and operating at less than 60% PLF in FY13 as per CEA.

7 Diesel generation capacity in India is estimated to be 30 GW and the cost of generation from diesel sources is estimated to be ~INR 15 per unit compared to INR 5 per unit for conventional sources, resulting in a differential loss of INR 43,800 Crores. Source: http://www.eenews.net/stories/1059975362

As we look into the last decade (2003-2013), it appears that history is repeating itself in the power sector. The financial stress in the sector is very high, this time it affects both the public sector discoms and the private sector gencos. There are stranded power assets and at the same time in many regions consumers are facing power shortages. There is no doubt that positive developments did occur in the last decade

for example, network losses did reduce (from 35 percent in FY02 to 27 percent in FY12)1, private investment in generation did come in substantially (more than INR 300,000 Crores in the last 10 years)2, the XIth Plan saw the maximum installed generation capacity addition (54 GW)1 and almost all states have gone for tariff revision in recent years to reduce the gap between cost of supply and retail tariffs (23 states and 5 union territories have gone for tariff revision in FY13 and 8 states have increased their tariffs as of August this year).

Yet, the following statistics show the crisis the sector faces today

Distribution sector financial losses stand at INR 67,000 Crores3 (FY12)

Bank exposure to the discoms in the form of short term loans (which largely represents deficit financing) stands at INR 1.9 lakh Crores4

The debt-equity ratio of private gencos has risen to 2.64 in FY13 from 0.91 in FY095

Commissioned but stranded power capacity stands at more than 33 GW6 (due to lack of coal & gas) which will result in non-performing assets with investments of over INR 1 lakh Crores

Cost of power deficit7 in the form of additional cost of diesel back-up generation is INR 43,800 crores annually.

Something has gone wrong. The key questions before us today are:

What are the immediate short term measures to revive the sector and get the investment cycle going?

What are the long term measures to ensure sustainability in the sector so that we dont see history repeating itself in this manner again?

In any industry, two types of forces are at work - a pull force which is a demand pull for goods and services from consumers, which in turn leads market forces to create capacity across the value chain and provide services efficiently. The second force is a push force, more often seen in regulated or controlled industries, where policy makers and central authorities decide the capacity creation needs and determine resource allocation. Examples of push controlled industries are nuclear power, defence and aerospace.

The power sector makes for an interesting combination of the two forces. Until the enactment of the Electricity Act 2003, it was highly push oriented. The Electricity Act, among other things, intended to bring in market forces to decide investment decisions. An example was introduction of open access where consumers could choose suppliers directly. This was the first step in the creation of a pull force in the industry. Consumer choice, merchant power generation, private licensees in transmission and provision for multiple distribution licenses in an area are some examples where the pull force was sought to be created.

The pull forces didnt work as expected and consumers are still suffering with poor quality of power and inadequate power; though many of them are willing to pay for good quality power! A classic case of market forces not being able to play their part. On the other hand, investors are struggling with stranded assets out of a total of 179 new announced projects with an aggregate capacity of 236 GW at the end of FY12, only 79 GW8 have got commissioned or are in advanced stages of construction. Many of these projects are stuck in various stages of development waiting for approvals and clearances.

Status of power projects at the end of

FY12*

Number of

Projects

Capacity

(GW)

Projects pending for environmental Clearances

78 103

Projects pending for water approval 45 62

Projects pending for fuel tie up 80 118

The cost of coping with deficits and poor quality of power is high - as evidenced by the extent of back up diesel power generation of more than 30 GW9. Why didnt the pull forces work? One key reason is the failure of retail open access to take off. The volume transacted is only 1-2 percent10 of the total generation. Due to power deficit, some states like Maharashtra, AP and Tamil Nadu eliminated cross subsidy surcharge (CSS) and encouraged open access. But this appears to be a short term measure to tide over immediate deficits. What is needed is longer term stability of cross-subsidy surcharge policy so that investors can take investment decisions.

Distribution utilities put barriers for fear of loss of cross-subsidy. Regulators were supposed to decide how to balance the interests of consumers, private generators and discoms, but most often tilted the balance in favour of discoms. This points to issues of regulatory independence and in many cases lack of ability to discern between reality and exaggerations. The result was a lose-lose situation - discoms had high deficits, yet consumers were not able to easily choose alternate suppliers.

Some of the interventions were indeed noteworthy with a strong positive intent. For example, introduction of competitive bidding for power procurement and the Ultra Mega Power Project (UMPP) initiative are good examples. Yet, both these initiatives had mixed success at best not all the instances were successful, those that were successful consumed a very long time and many of these will require restructuring or contract renegotiation to make them viable.

The following paragraphs give some reasons for the situation we see today.

The failure of intermediation Discoms were intermediaries between generators and consumers. They stymied open access and took upon themselves the task of procuring power for their consumers.

Understanding the last decade - A Push-Pull Analysis

8 KPMG analysis of power projects planned by private sector at the end of FY129 http://www.eenews.net/stories/105997536210 KPMG Estimate based on power exchange & bilateral sales data for 2012-13

Recharging the Power Sector - How to turn around the power sector by 2018 | 2

*Some projects are affected by more than one reason

Power came from 2 sources - the state & central gencos, and through competitive bidding (case 1 & 2). Both these forms of procurement had unsatisfactory outcomes - the main problem being the significant delays in completing the procurement process itself. Around 83 percent of long term Case-1 bids have been delayed during the period FY07 to FY1211. While the stipulated time for signing of PPA from the date of issue of RfP is 120 days, the actual average time taken is around 440 days12. The delay is primarily due to lack of process discipline by the utilities and indecisiveness regarding viability of the quoted tariff. A combination of poor planning and poor procurement processes led to delays and deficits. It is now also acknowledged that the model contracts had weaknesses related to fuel supply risk allocation. But the issue of lack of exercise of flexibility in the procurement process is also to be blamed. The framework provided for regulatory intervention to adapt the bid documents, but either these were not called upon or there was insufficient exercise of the same.

Poor Record of State GencosWhile at one end state discoms could not efficiently procure power, at the other end state Gencos also struggled in their role to add capacities due to poor planning and weak financials. There were regular slippages in the capacity additions from state sector and even the operating plants had low utilizations (average net PLF of less than 65 percent in the last five years). As a result some states have very high energy deficits.

The situation would have been much worse if it was not for the private sector, which added significant capacities in recent years and created viable alternative to state Gencos. Going forward, governments will need to relook at the role of state Gencos and strengthen them in terms of financials and operations if they have to compete with the private sector.

Lack of Fuel to Power the NationThis is only part of the story. The other big failure was the failure of a push factor - fuel availability! The fuel sector has been a controlled market. Allocations are done by the Government and bulk of the coal supply was still through Coal India (CIL). CIL provided letters of assurance to different producers - far exceeding its capability to produce. Ostensibly one reason for this was the past experience related to actual achievement of generation capacity against planned and the view that not all the Letter of Assurance (LOAs) would get called for supply. This is now manifesting in stranded capacities. The other reasons were internal structural difficulties to ramp up production. The record on private coal mines reaching production has also been very poor.

The Policy and legislative framework impacting coal mining is still evolving. For example, the Mines and Minerals (Development and Regulation) bill is still in the works and the debate around go/no-go areas is still not completely resolved. Even the Scheduled Tribes and Other Traditional

Forest Dwellers (Recognition of Forest Rights) Act, 2006, its associated rules and amendments came quite late.

Developers were allocated blocks which were not adequately explored and with the uncertainties in policy and legislation13, mine development and production continues to stutter.

The other reason for delay in bringing to production the coal mines is the continuing lack of competence and bandwidth in the sector. Some of the critical gaps are the following: Shortfall in planning capacity with poor capacity in private

sector Shortfall in exploration & production capacity - Imminent

shortfall in skilled workers for statutory positions like surveyor, mining sardar, overman etc.

Reduced pool of experienced mining engineers and geologists due to recruitment freeze in mining companies and scaling down of batch sizes in mining institutes in late 1990s and early 2000s

The gas story has also been bleak and unfortunately has led to significant stranded generation capacities (more than 15,000 MW14). A poor policy framework on gas allocations is to blame

- priority was given to capacities which were ready and this led to capacity creation before gas allocation! The framework around dispute resolution in new exploration licensing policy (NELP) contracts also appears to be weak since it has taken a lot of time to resolve the issues related to cost recovery.

The only silver lining has been the rise of renewables. Wind was driven by a feed-in-tariff (FIT) regime and did not therefore need a procurement process thus saving itself from its perils, though solar power is procured through a tendering system and is currently suffering delays due to the slow process in various states and also at the Centre. The boost to renewables came from the emerging grid parity (as shown in the chart below) with conventional power15 and the short gestation periods to set up these capacities led many states to embrace them to meet their power shortages.

The generation based incentives to wind power also provided impetus to new development by augmenting developers returns thus helping move the wind sector from a tax incentive driven sector to a core generating sector.

11 KPMG analysis of Case 1 bid processes conducted between FY07 to FY1212 Average time taken for Case I process in states Haryana, M.P, Maharashtra,

Rajasthan, Gujarat, Karnataka, Bihar, Delhi, Mumbai, U.P and A.P13 CEA monthly reports14 Gas capacity that is operating below 60% PLF

15 Based on KPMG analysis. Tariffs are for supply to Rajasthan from captive coal based power project in Chhattisgarh, hydro power project in Sikkim, domestic coal linkage pit head plant in Chhattisgarh, wind power plant in Rajasthan, imported coal plant in Gujarat and solar power plant in Rajasthan. Tariffs include inter and intra-state transmission charges at 132 kV and above, however solar plant is considered to be connected at 33kV.

Tariff (INR/kwh from various generation sources for supply to a load centre at 33 kV15


Domestic captive coal mine based power plant

3.42 3.904.72 4.76 5.44

6.64

Hydro power plant

Domestic linkage

coal based pithead

power plant

Wind power plant

Imported coal based power plant

Solar power plant

What have we learnt & what is the way forward?

Addressing the immediate crisis to get a positive investment cycleThe following measures should be taken up immediately within the next one year:

1. Quick implementation of the Government decision to allow coal pass-through for stranded projects: Currently, capacity of ~33GW in an advanced stage of readiness is either tied-up or under negotiations for supply based on competitive bidding. Many of these projects will turn into NPAs for banks because of non-availability of fuel. For projects which have entered into Power Purchase Agreement (PPAs) under existing competitive bidding guidelines, the Government should allow import of coal for the quantity equivalent to shortfall in domestic coal supply as per the signed Fuel Supply Agreements (FSA). The Cabinet decision in respect of select projects is welcome. What is now needed is a quick implementation of the same. The Central Government should formulate a guideline on how this can be implemented quickly. This can be through a simple formula that identifies a set of coal indices and normative transportation cost (say, INR /ton-km) which can be applied easily by the regulator. Coal India Limited (CIL) can issue a certificate for the shortfall quantity and the cost of imported coal procured against this approved quantum can be made a pass through by the regulator based on the guideline. A speedy implementation of this decision will go a long way in reviving sentiment and the investment cycle.

2. Procurement through a well designed centralized competitive process at regular intervals: More than 30 GW of 79 GW of private thermal and hydro generation capacity planned by FY17 is waiting to get tied

up under long term power purchase agreement (PPA). Many of these will again turn into non-performing assets (NPAs) if they do not enter into bankable PPAs by the commissioning date. The Government can consider setting up a centralized procurement agency on behalf of the state utilities which could procure on behalf of the state utilities based on common bidding guidelines. The contracts could be made back-to-back with state utilities to address issues related to payments and creditworthiness. A well designed centralized process will help in reducing delays in procurement and also enable generators to contract untied capacity in a planned manner.

3. Implement the loan restructuring package of the discoms in a time bound manner:

The following seven states are the major states which contribute to more than 60 percent of short term loans16.

16 Ministry of Power and secondary research reports.


Total in INR Crores

Rajasthan

Uttar Pradesh

Tamil Nadu

Haryana

Punjab

Andhra Pradesh

Madhya Pradesh

Short term loans of key states16

190,000

39,710

25,934

19,146

15,718

11,646

6,302

1,170

17 Listed companies data - Aggregate debt-equity ratio and sum total cash losses of listed private power generation companies

18 Planning Commission. This includes renewable capacity of 18.6 GW

19 As per Planning Commission private sector contribution is estimated to be 60 GW out of 93 GW in XII plan and its share is expected to only increase in XIII plan.

Out of these, only Rajasthan and Tamil Nadu have so far issued bonds that are backed by state government guarantee as per the formula suggested by the cabinet committee after the Central Government approved the financial reform package in September 2012. Uttar Pradesh, Haryana and Andhra Pradesh are expected to issue bonds soon. Punjab and Madhya Pradesh have opted out of the scheme. Central and state governments have to agree on a time bound plan and implement the financial reform package.

4. Address financing issues by enabling strategic and financial investors to come in and by easing the lending logjam: In the last two years, we have seen international strategic investors (power utility companies) showing an interest in the Indian power sector. Their entry is much needed, not least because of operational capabilities, but also to bring in the much needed equity financing into the sector. One of the bigger concerns today is a lack of new pipeline of projects since most of the existing set of players are stressed (aggregate debt-equity of 2.64 and cash losses of INR 124 Crores17) and would not be in a position to bring much equity. The capacity addition target for 13th plan is 100 GW18 and private sector is expected to contribute at least 64 GW19. This will require equity capital of~ INR 1,27,050 Crores.

To enable strategic and other large financial investors like pension funds, to view the sector favourably, the Government should quickly resolve various uncertainties such as position on coal block allocation, implementation of imported coal pass-through, policy on M&A related to allocated mines and have a war-room approach to resolving issues related to some stuck up projects. A longer term clarity on some of the above issues will also bring in more confidence for investors looking to acquire operational projects and running them for cash flow yields. Further, the domestic lending community is precariously poised towards the sector due to potential NPAs on account of various projects that have got delayed or have been unable to achieve COD due to fuel or PPA related issues. What is needed is a special dispensation liberating provisioning norms for such loans to avoid them getting classified as NPAs. This could be done only for those projects which are facing loan restructuring on account of uncontrollable factors such as coal supply related issues and issues related to environment or forest clearances. This will help unlock the financing logjam and enable a positive investment cycle to commence. Further, the Government should enable takeout financing for banks by strengthening institutions such as IIFCL to undertake the same. This will help partially address the sectoral exposure caps that banks would otherwise be constrained by.

5. Implementation of operations excellence initiatives in mining companies focused on throughput improvements: The public sector coal companies need to immediately undertake large scale operations excellence initiatives. Some examples of such initiatives are Vale

Production System (VPS) of Vale, Improving Performance Together program of Rio-Tinto, One Anglo program of Anglo American etc. Some ideas with regard to how these themes can be adopted in the context of India are enumerated below:

Development of pit-head infrastructure: For specific mines identified by Central Mine Planning and Design Institute (CMPDI), immediate action needs to be taken to bridge the gap between production capacity and first mile transportation capacity to nearest siding by ramp up of coal handling plant/automatic wagon loading system infrastructure and improvement of road conditions.

Improvement in mining process and technology: There is a strong case for initiating a Continuous Improvement Program (CIP) aimed at addressing issues such as equipment break-downs, computerized operational planning etc. all of which have an impact on mine through-put

Quick adoption of technology to develop underground mines: Tenders need to be quickly finalized for the underground (UG) mines for which technology identification is already done by CIL and contract terms need to be equitable in line with the model contract agreement for mine development operator (MDO) contract being framed by the Planning Commission

Long-term measures to ensure sustainabilityThe following measures need to be undertaken in the next 1 to 3 years to ensure long term sustainability:

1. Disintermediate the discoms to activate the pull forces of demand: Introduce the concept of retail supplier who will contract between the consumers and the generators. He will respond to market forces created by deficits and high coping costs. He will contract with generators flexibly and not be bound by standard bidding documents, coal indexation constraints etc. In short, we can overcome the constraints of centralized regulated procurement. This can be done through a legislative change to introduce a new license category - the retail supply license. Further, provisions related to cross-subsidy surcharges and other measures acting as barriers need to be defined in a more definitive manner so that it is binding on regulators and does not become a hindrance to open access as seen today.

While the Cross subsidy surcharge computed under the National Tariff Policy (NTP) is a step in the right direction, it is being distorted due to non-uniform methodologies adopted by State Electricity Regulatory Commission (SERCs) and considering bilateral / short term (ST) sources in marginal power purchase cost. Short term sources would tend to have volatile prices thus preventing a stable cross-subsidy surcharge regime. Therefore, we suggest that cross subsidy surcharge should be computed excluding ST sources to reflect true cross subsidy available in the system over long term.


The table below shows cross subsidy surcharge (without ST purchases) in key states.

Cross-subsidy surcharge for Industrial Consumers at 132kV

Description CSS for HT Industrial -132 kV (Rs/Kwh)

Madhya Pradesh

Maharashtra Andhra Pradesh

Cross subsidy surcharge (As per NTP but excluding short term purchases)

1.58 0.94 0.73

As can be seen from the below graph, total landed cost for replacement of base load requirement of a typical industrial consumer from private sources can be competitive after considering power generation cost, a fair level of cross subsidy surcharge (CSS), transmission charges and losses. Currently, the play available is in the range of INR 1.5 to 2.85 / kWh, suggesting that a win-win situation can be created.

To encourage competition under such circumstances, we recommend the following: A stable cross-subsidy surcharge regime that gives

predictability for investors. This should be combined with an equitable balancing and settlement system for handling deviations and providing grid support.

Well designed guidelines for switching over of consumers from incumbent licensee to new retail supply licensee.

A scheme which enables consumers to continue availing supply from alternate sources during periods of deficit. Such schemes have been adopted in states like Tamil Nadu and Andhra Pradesh during 2012-13 and work by providing load restriction through commercial tariff signals for exceeding a given quota of power rather than load restriction through physical disconnection of feeders.

2. Expedite the coal allocation process through competitive bidding to support the push factor: The Ministry of Coal should create a roadmap for regularizing the non-controversial coal blocks that are faced with the risk of summary de-allocation on the back of the Public Interest Litigation (PIL) filed in the Supreme Court. The Government can determine the reserve price for these blocks based on the methodology adopted for upcoming allocations as well as apply normative project financial benchmarks based on approved mine plans and accordingly charge a suitable allocation fee from the allottees. The schedule of payment should be designed in a way that it does not adversely impact the output power prices.

3. Invite international players who can bring modern technology especially into underground coal mining and increase coal production: India needs modern technologies for de-pillaring and technologies to access the coal in deep seams through open cast (OC) and underground (UG) methods. With increasing challenge of environmental clearance and land acquisition, it is necessary to apply these methods to fully exploit the potential of mines already in possession of the coal mining companies.

Over the years, the contribution of underground mining has infact reduced.20 Given that the limited shallow depth reserves amenable to opencast mining are likely to be exhausted in foreseeable future (may be after 25-30 years) and the production from opencast coal mines in CIL may reach a plateau, it becomes essential to start developing underground mines in earnest. Further, large scale ramp up of underground projects takes time and hence the need to start early and introduce bulk production technologies. It is in this area that we need to invite international players in earnest.

20 Article written by A K Debnath and S K Dubey on Strategy for stepping up coal production in CIL

Source: indiaenergyforum.org/4th-coal-summit/presentations/.../ak-debnath.doc

Average realization is computed at 85% LF considering that base load getting shifted to private players - Average of express and non-express feeder for Maharashtra and Extra High Tension (EHT) for AP.


Viability of Open Access with Reasonable Cross-subsidy Surcharges

Coal production by CIL during X and XI plan20

PP Cost (Case 1 tariff) Transmission cost & Losses (Rs/kWh) CSS (Rs/kWh)

HT 132 kV Tariff Total Cost (Rs./kWh)

7

6

5

4

3

2

1

0

Tota

l Lan

ded

cost

for

pri

vate

pla

yer

/

Avg

. EH

T Ta

riff

(R

s/kW

h)

4.724.73

6.98

4.05

5.47

3.961.58

0.31

2.83 2.63

0.47

0.94

3.01

0.220.73

Madhya Pradesh Maharashtra Andhra Pradesh

600

400

200

0

Prod

ucti

on in

MT

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

242259 277

298318

336360

388 391 397

38404344444346474748

Opencast mining Underground mining

21 Delay in production beyond 54 months, which is the maximum permitted development timeline as per Ministry of Coal, is considered for all the allotted blocks

22 Loss on account of higher procurement cost for imported coal of more than 200 MT procured in last 3 years and loss of generation equivalent to 194 MT of coal.

Following are some actions that will enable participation from international companies:

Design the right Public Private Partnership (PPP) framework for MDO participation treating technologically complex projects differently from socio-environmentally complex projects. As we have seen in many sectors in the past, a proper risk sharing framework and transparent processes are necessary to attract internationally competent bidders.

Provide the right pricing framework for Underground Mining: The Government should provide pricing signals for increasing underground coal mine production which may be at a higher cost and not profitable at current prices. Options include allowing a certain level of merchant sale through e-auction route and providing import-parity price for underground mines. Given the demand for imported coal, higher prices can be absorbed by power generation companies.

4. Strengthen regulatory institutions: This is perhaps the single most important institutional change that is needed. The power regulators are supposed to be independent and autonomous. Yet, in many states, that does not appear to be the case. The key issues relate to a) process of appointments b) competence of regulatory staff and regulators, c) lack of an accountability framework and d) indirect interference from the state government. Today non-performance of regulators has no punitive implications. Following are some of the measures that GOI must consider to strengthen regulatory institutions

At least one of the members of the Commission to be from private sector to reduce government interference

Default annual tariff increase linked to certain index (it may be a combination of Wholesale Price Index (WPI), fuel index etc.) should be mandated and correction, if any, should be carried out by the respective regulators to adjust revenue surplus/ deficit. This will safeguard the financial interest of the utilities in case of undue political interference.

Performance of SERC should be measured with designated Key Performance Indicators (KPI) either by the Central Govt. or Appellate Tribunal for Electricity (ATE). The KPIs should include performance related to issue of orders within stipulated timelines and adherence to provisions of Electricity Act (for example, enforcement of Renewable Purchase Obligations). Based on the report of the performance reviewer, state government or the regulator, as the case may be, has to take appropriate action to correct the short comings.

Permanent staff should be appointed to strengthen the commission. Staff on deputation should be restricted to 25 percent of the total staff.

5. Carry out a process re-engineering of the environment and forest permitting processes: Power capacity of more than 103 GW and coal mines of more than 726 MTPA capacity are pending for environmental and forest clearances. There was loss in production of domestic coal from private sector to the extent of 394 MT21 of coal in the last 5 years because of delay in development of captive coal blocks allocated for power. This has lead to higher imports and stranded capacities with an impact of more than INR 1,46,157 Crores22. While these processes are much needed and value-adding, the outcomes can be achieved with much lesser time and cost. Some of the measures in this regard include the following:

Bring in accountability for timely decisions on clearances by identifying single point responsibility for different projects. Project officers for all projects above a certain threshold size should be identified. They would be accountable for timely processing of applications after co-ordinating with various entities.

Identify a charter which defines timelines for various activities in the permitting process. This should be monitored at the highest level. As we have shown the loss on account delays can be astronomically high.

Develop a parallel processing system where information is processed in parallel by various entities. Use of information technology to enable speedy processing should be done and further bottlenecks either due to certain skills, manpower or information flows should be resolved.

6. Separate the problem of subsidized sectors such as agriculture supply from the problems of the discoms: While there are provisions in the Act to provide discoms with the required subsidy, there are many problems related to measurement and actual delivery of the subsidy. A system of direct cash transfers, now seen in other areas, needs to be urgently considered here. Alternatively, the stakeholder for this category should be the Department of Agriculture or Irrigation and not the discoms. The agriculture department could consider disbursement to each division based on agricultural consumption at Distribution Transformer (DTR) level. This approach will help rejuvenate the finances of the discoms and help them to be more commercially sound.

7. Railways & CMPDI should make an evacuation master plan: Railways and CMPDI should work on coal field master plan on the lines of Chhattisgarh model by working closely with state governments. There is a need to expedite large scale construction to enhance rail capacity for key coal fields, including last mile connectivity to sidings attached to the mines.


A recommended roadmap for a vibrant power sector by 2018

The following is a recommended near term roadmap to recharge the sector:

1. Introduce retail supplier license in the Electricity Act by 2014. This can free up stranded operational capacity of 19 GW23 which have no bankable PPAs and the incremental supply can partly bridge the peak power deficits of around 12 GW24. This will also ensure that the upcoming capacity is contracted through open access (pull forces) and is not stranded waiting for utilities to procure power.

2. Immediate implementation of fuel cost pass-through can improve the PLF of coal based power plants to 85 percent, resulting in efficient utilization and financial turnaround of upcoming coal based capacity of 62 GW25 in XII plan period and commissioned capacity of 40 GW in XI plan. A special dispensation should be made to prevent provisioning of bank loans in respect of such projects so that the financing logjam can be eased and a positive investment cycle returns.

3. Allocate new coal blocks to private sector and utilities under the proposed competitive bidding process by FY14. Coal blocks with reserves of ~8 BT are identified for power sector which can produce ~195 MTPA at peak production. At least 25 percent of this, i.e. ~50 MTPA should be made possible by FY20.

4. Resolve the litigations around existing coal allocations immediately and carry out process reengineering for environmental and forest clearances (EC & FC) in next 12 months. If clearances can be granted for pending projects of 726 MTPA26 of coal mines in next 2 years and if at least two-thirds27 of these blocks are developed by the end of FY17, production in FY18 can be ~240 MTPA going up to peak production of 480 MTPA by FY20.

5. Develop a framework for capacity enhancement in mining by CIL in next 1-3 years. This should help CIL ramp up the production and meet the optimistic scenario target of 615 MTPA28 at the end XII plan against business as usual scenario of 556 MTPA. Also with FDI in mining and adoption of modern technology, CIL should be able to ramp up the underground mine production from the estimated 54 MT to 64 MT29 by FY18.

To unshackle coal supply, whether from CIL/ SCCL (Singareni Collieries Company Ltd.) or captive blocks, there is a need to step back and relook fundamentally at our legislations like the Coal Mines Nationalization Act, Contract Labour Regulations and Abolition Act etc. Otherwise initiatives like revenue-sharing model for difficult-geology mines and large scale private sector participation in capacity enhancement of the sector will not take off as expected.

23 Part of this capacity is currently sold under merchant route, but is subject to coal availability.

24 CEA

25 Planning Commission estimates coal based capacity addition of 62 GW in XII plan. This is in line with our analysis of upcoming coal based power plants which are under construction

26 This includes CIL coal mines with a capacity of 116 MTPA which are pending for EC and FC.

27 There can be multiple issues other than environmental and forest clearances, like land acquisition, which are resulting in delays in production. It is not realistic to assume all the blocks will achieve production in 2-4 years time.

28 Supply to power projects is around 80% of the total coal production by CIL

29 20% of proved reserves are below a depth of 300 meters and account to 28 billion tons. This translates to more than 600 MTPA even if we consider mineable reserves to be only 60% of the proved reserves.


If we can achieve the above, we will have incremental coal production of 394 MT in XII plan from CIL mines, captive coal mines, Singareni coal mines and increased underground mine production30. This can support ~80 GW of coal based capacity additions. Considering capacity additions from other sources as per Planning Commissions target31, we will have an aggregate energy supply of 1638 BU32. This will be sufficient to meet 100 percent of energy demand projection of 1462 BU in FY18 as per Electric Power Survey33. Further, these measures will revive the investment cycle, bring in new investors including strategic players and help bring the much needed equity for new projects. Timebound implementation of Financial Restructuring Plan (FRP) for discoms will also help improve viability of the distribution sector.

It is important that all stakeholders participate in this resurrection of the power sector. This includes the Central Government and its various ministries such as those of coal,

power, environment, railways; the State Governments, the lending community through a change in mindset towards lending, the power utilities (discoms) through efficiency in procurement and allowing a level-playing field for competition through open access, the Electricity Regulators through efficiency and adherence to the spirit of the Electricity Act and importantly the private sector through being reasonable in their expectations and having to make suitable sacrifices to come out of the current situation. In the ultimate analysis it is the power consumer, whether it is the urban or rural, industrial or agricultural, who bears the brunt of the situation. We owe the consumer a much better power situation - a vibrant, competitive and reliable power sector, one that allows industry to compete in the rest of the world and gives all other consumers a quality of life they deserve. For this, we need to recharge the power sector and do so urgently.

30 Incremental production by SCCL is 6MTPA by FY17 and 80% of this quantity is expected to be supplied to power plants31 Planning Commission targets estimate capacity addition of 2.8 GW, 9 GW and 18.5 GW from nuclear, hydro and renewable sources32 PLFs for coal, nuclear, hydro and renewable sources are taken as 85%, 70%, 40% and 20% respectively33 Electric Power Survey projection for energy demand in FY17 is 1354 BU and is expected to grow at a CAGR of 7.93% between FY17 to FY22.


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Recharging the Power Sector

How to turn around the power sector

by 2018

November 2013

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Key Infrastructure, Government & Energy (IG&E) sector contacts

Arvind Mahajan Partner and Head Infrastructure, Government & Energy sector T: +91 22 3090 1740 E: [email protected]

Santosh Kamath Partner Management Consulting T: +91 22 3090 2527 E: [email protected]

Bhavik Damodar Partner Transaction and Restructuring T: +91 22 3090 2126 E: [email protected]

Manish Aggarwal Partner Corporate Finance T: +91 22 3989 2625 E: [email protected]

Nabin Ballodia Partner International Tax T: +91 124 3074 321 E: [email protected]

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Other contact

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Recharging the Power Sector Energy POV

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