Auctioning coal blocks to private sector companies is not a good idea as it will skew market dynamics, besides raising the price of fuel as well as power tariffs, feels Vinayak Chatterjee Chairman, Feedback Infra. He was speaking in a discussion on CNBC-TV18 on some of the proposals made by the Power Ministry yesterday.
“The government is concerned about the (problems) in the power sector and is trying hard to find an operational solution. Has an operation solution been found?the answer is no,” Chatterjee said, adding that the private sector was being treated unfairly.
Chatterjee does not see things in the power sector getting better anytime soon despite the reforms proposed by the government.
Speaking in the same discussion, Isaac George, Director Finance, GVK Power said the relief package proposed by the government will address only short terms. George said the proposed pooling of gas would be a big positive for the power sector and would help gas-based producers pare their losses. George believes a working tariff of Rs 5.50/kWh is possible.
Q: I want to discuss certain recommendations that were made by the power minister, one was a price pooling of imported and domestic gas. What is your analysis on how much it would make fuel affordable for the power plants if this comes through?
George: There have been guidelines laid down earlier and what the government was saying is that the price should not exceed Rs 5.5/Kilowatt (kW). All the stakeholders were to take a cut in whatever they were doing. For example, they said that Gas Authority of India, which is going to be the agency that is going to pool gas, would have to take a cut on their transportation margins and on the respective margins.
Apart from that, even the developers were supposed to limit their fixed charges to Rs 1.1/ kW. Plus, the government was coming forward and saying that they would ensure that there will be no taxes on the imported gas. So all the stakeholders were actually contributing to ensure that the price was kept to the lowest possible level.
It is time right now basically because if you see the spot prices of LNG now, through the media I have come to know that it has come down to as low as USD 10.5/mmbtu which is fairly positive. If you compare it with last years prices in October, I think it is almost about 45 percent down. So I think the government should do this, facilitate the standard assets to start generation once again. This will be a very positive step. Though the government is saying that we will supply you gas so that you can run at a plant load factor (PLF) of 40 percent that is good enough to begin with because it is not going to bring these gas projects into a profitable stage but then what will happen is that it will contribute to the fixed charges so that is very positive.
Q: Bulk of what the minister said yesterday appears to be financial. They have asked the finance ministry to tell the RBI to extend the commercial operation date by one year, to extend the repayment schedule, to extend the moratorium on principle repayment. It appears that they are just going to bankroll you a bit more. If only the financial package were to come, will it make any difference?
George: No. Honestly speaking, it might be helpful in the short-term but that is not a long-term solution. I think the government will have to have a two-pronged solution to this particular problem. One of course is to instruct the banks and the financial institutions to address the concerns of the developers like rescheduling of debt giving additional moratorium and things like that but the other bigger problem is to get these projects back on track by supplying them with the required amount of fuel through a pooling of cash.
Q: At a landed price of USD 10.5 per mmBtu, is the imported gas an option at all?
George: It should be an option. If we are restricting the cost to about 5.5, which I am confident that should be possible then I think it should help both the consumer as well as the developer because basically a domestic consumer like me today in Andhra Pradesh is paying something like Rs 8.5 per kilogram.
Q: If you have USD 10.5 per mmBtu landed price of gas, it becomes economical only if you pool, right? Not per se, not only with imports?
George: Absolutely. No, I am talking about pooling. Pooling will bring down cost because today we are talking about more than USD 6 for the domestic gas.
Q: What is your capacity utilisation now?
George: We have total of about 900 megawatt. Only 216 megawatt is operating at 55 percent PLF, the other two are not operating at all.
Q: I was just coming to that, both of your gas based power plants what is the exact PLF that both Jegurupadu2 (JP2) and Gautami operate at this point in time and if these recommendations are taken up, if pooling is done then how much do you think it could help in terms of an improvement?
George: As of now, JP2 and Gautami are not operating at all. This has the ability to operate at a minimum of 80-85 percent PLF if gas is available but the government today is only talking about giving 40 percent gas for operating these projects. I am not saying that this is good enough but then to begin with it is good enough because whatever these 40 percent operations will contribute to the fixed charges. So my losses will come down.
Q: What is the sense you got from the announcements so far and particularly the announcement yesterday? For me yesterday the announcements were skewed too much towards finance and too little about operations. This 40 percent PLF operations and pooling of gas from the very small part of the press conference if that some of them didn’t even appear, do you think we are any close to providing gas to the gas based companies?
Chatterjee: What I can see from yesterday’s press conference from the media is that the government is certainly extremely concerned and are trying hard to find operational solutions. But if you ask me, whether operational solutions have been found, announced and are ready to be implemented, the answer is no. So it is right now high, I would give full marks on the high level of interest and energy that the government has and its priority to solve the problem but has the solution emerged? No.
Q: Wanted to take that point forward that you said that if these issues are taken up then it will help bring down your losses quite a bit, can you give us an indication of how much do you think it could give you in terms of relief?
George: If you ask me, today JP2 and Gautami if they were to operate at around 60 percent PLF then we would breakeven.
Q: But you are only getting 40 percent.
George: But then what will happen is that today I am reporting losses in JP2 and Gautami because of the fixed charges, interest cost etc. That will dramatically come down.
Q: But you breakeven only at 60 percent.
George: We breakeven today at 60 percent.
Q: What is the timeline that you would give since the intent is there, if this continues do you think that Issac Geoge would be getting 40 percent of the plant operational in one years time or six months time?
Chatterjee: I cannot give you a timeline on behalf of the government.
Q: But you are not seeing any concrete efforts at all towards resolution of the operational problems?
Chatterjee: You have got me wrong. I am seeing concrete efforts, what I am not seeing is concrete solutions and results. There is no denying concrete effort.
Q: There are also some measures that suggest that pipeline operators like GAIL should reduce their transportation tariff by 20 percent and also companies like GAIL should halve their marketing margins on supplies made for power generation, how much do you think that would help a company like yours?
George: It will certainly help because it reduces the landed cost to that extent and certainly cost of generation also comes down to that extent. Every little contribution from each of the stakeholders will contribute to a lower cost of generation so that will be positive as far as we are concerned and ultimately benefit the consumers at large.
Q: What is your sense about the coal based projects? We are just seeing a disentangling of the mess, we have not seen extra coal coming to the market, do you think however a year down the line, you are going to see the supply of coal not be an issue?
Chatterjee: I am asking you a reverse question. You stated that you are seeing a disentangling, is that right? You are seeing it not being straightened out?
Q: Yes, one – that the coal mines are going to be re-auctioned and at a price it will be available to the power producers before March 31. We also had a fairly confident Anil Swarup and the minister saying that they are going to double Coal India ’s output in five years. That is a tall ask because Coal India has been raising its output at 3 percent and 5 percent every year. But the secretary was very confident that in a month’s time he is going to give us something very concrete in the first year, so assuming Coal India is going to even increase output by 10 percent, won’t that improve the situation.
Chatterjee: If Coal India increases its output by 10 percent, if the country doubles its output for coal in five years time, we are all in a happy situation. I suspect there is very little to discuss there. So we should wait for the outcomes of five years in five years time but I suspect your question which you didn’t ask is to do with the current situation on coal auctions. Am I right?
Q: Are you sceptical about their entire coal auction process?
Chatterjee: No, I am not sceptical it is only that if you have seen the various reactions from commentators, experts, private sectors, media there seems to be a lot of questions that are being raised about the philosophical underpinnings of the coal auction.
The first major philosophical underpinning that we are unable to understand is that we thought that the SC judgement at one stroke swept away the broom, swept away the dust of socialism history in saying that we are going to move – hopefully, that was our expectation from allocation economics to market economics. That was the broad philosophical understanding all of us had when the Supreme Court judgement came in. Therefore, the broad sweep of action was one market method to move towards the market-based economy for India’s largest fuel that is coal.
However, increasingly we find that the caste system that has prevailed historically in this country that is that public sector gets coal allocated and private sector has to bid for it is continuing. So we are a little surprised to see under what philosophical guideline or economic guideline or conceptual guideline is this structure, which we understand is being worked out that large chunks of coal blocks are going to be once again just allocated to state-run entities, which are obviously different from the private sector.
As far as private sector is concerned, not only does it have to pay the fines from this governance and the executive in the past, it has to pay a fine and then it has to have an auction for the coal that it needs. We are once again creating a caste system where a commodity, which has a certain price is going to be made freely available to the state-run sector and has to be auctioned in market economics to the private sector. To my mind, this is once again a distortion of market economics and I have this simple question that is aviation turbine fuel (ATF) allocated to Air India or does Air India have to pay for it?
Q: There can be a lot of question in a manner in which it has been done but at the end of the day are you going to find the power sector the better off at the end of a quarter or two quarters?
Chatterjee: When you talk about power sector, it is very difficult to answer your question. Power sector is a long chain of activities. It starts from fuels that are coal and gas, it goes to generation, it goes to transmission then it goes to distribution and then it goes to last mile. So, if your question is a holistic question am I going to see the power sector better off, I am not going to see the power sector better off because the cost of the auctions is that it is going to raise the price of the fuel.
There is a huge uncertainty with the nature in which the regulators will allow pass through of that increased coal price to private operators. There is still a whole lot of grey area on open access, transmission things etc and finally we have really not seen any salvation on the most of the discounts, and some discounts were doing very well.
However, we haven’t seen any light at the end of the tunnel so far as the rapid reform which was expected from the discount sector. So if your question is am I suddenly going to see the power sector brightening up? The answer in no.