Why Tata Power may cease to have the lowest power tariff in Mumbai


By Somali K Chakrabarti



Tata Power claims to charge lowest tariff in Mumbai


The above article appeared in The Economic Times, on 27th Jan, 2014Here is an excerpt:

As the demand to reduce power tariff is gaining momentum in Maharashtra, private utility Tata Power today claimed that its tariff is the lowest in the metropolis.

The company, which has a residential consumer base of 4.5 lakh in the city, charges a tariff of Rs 2.13 per unit from customers consuming power up to 100 units with a fixed charge of Rs 40 and Rs 3.62 per unit and fixed charge of Rs 75 for up to 300 units, the Tata Power Company (TPC) said in a statement issued here today.

It said that while Reliance Infrastructure (RInfra) charges an average Rs 5.68 per unit within 250 units, BEST charges Rs 4.52.

Shortly after, Reliance Infrastructure (RInfra) also claimed that their customers can expect power bills to drop by 22% in the suburbs in the next 2 years.

Electricity made cheaper

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Bottlenecks plaguing the coal sector in India


Bottlenecks in the coal sector in indiaThe import of coal has been one of the significant factors contributing to the Current Account Deficit (CAD) in India that touched 4.8 per cent (approx USD 88 billion) of India’s Gross Domestic Product (GDP) in 2012-13 period. Rising imports, coupled with fall in value of rupee, resulted in a drain of foreign exchange from the country. It is surprising to note that although India has the fifth largest reserves of coal in the world totaling up to 235 BT in 2011, the gap between production and consumption of coal has been increasing over the years from 72 MT in 2009 to 82 MT in 2011.   India imported around 135 MT of coal in the 2012-2013 and is currently the second larger importer of coal after China.

Here we look at some of the issues pertaining to the coal sector in India.

Issues related to import of coal

India needs to import substantial amount of coal from countries like Australia, New Zealand, South Africa and Indonesia. Indonesian coal accounts for a bulk of India’s thermal coal imports, while steel-making coking coal is imported largely from Australia and South Africa. Owing to the increase in environmental concerns, coal exporting countries such as Indonesia imposed coal tax and Australia levied carbon tax in 2012.  The imposition of taxes increased the cost of coal for the plants in India that are especially designed to use imported coal, This resulted in power producing  companies such as Tata Power and Adani Power to demand for rate revision in their power purchase agreements (PPA). However the government upheld the PPA, while agreeing for a temporary upward revision in price in some cases.

Issues related to domestic production of coal

Domestic production of coal is beset with challenges both in terms of quality and quantity. Problem of quantity relates to environmental, rehabilitation and technological issues in opening up of new mines and in increasing recovery from currently operating mines. Sustainable solutions are needed to address the environmental and rehabilitation concerns. Since most of the coal deposits lie underneath forests and tribal regions, mining requires felling of forest and resettlement and rehabilitation of affected people. Mining in such areas, if left uncontrolled, can cause environmental and social havoc. Environmentally sustainable mining is costly which is bound to reflect on the cost of electricity. Increasing prices of electricity is as much a political decision as a business one.

By and large, domestically produced coal has problems associated with grade and ash content. The Indian coal mines produce coal that has higher ash content, and hence more impurities which increases the cost of cleaning. High ash content imposes a limitation to that coal being used in metallurgical processes. Around 70% of the coal in India is used to produce power and around 7% of the coal is used in the steel industry. Though the high ash coal can be used in power plants, but it produces substantial quantity of ash (both solid and fly), thus increasing the costs associated with cleaning and storing such ash. Additionally plants have to invest in capturing fly ash to adhere to flue-gas emission standards. Some older power plants also have limitations of space required for disposing ash. High ash content increases the cost of transportation per unit energy value of the fuel, further increasing the cost of production of electricity and metallurgical process. There are technological issues associated with plants which have been designed to work on lower ash content. Local coal needs to be blended with imported low ash content coal for use in such plants.

Coal India Ltd (CIL) is the only public sector company that mines and sells coal in the local market. In addition some companies like steel and power companies have their captive mines. Of late, due to supply constraints, CIL has not been able to fulfill the domestic requirement of power plants, after entering into Fuel Supply Agreements. Further, FSAs are waiting to be signed with many other power companies that are under development or have been awarded permission to set up new power plants. Domestic coal demand touched 772.84 million tonnes (MT) during 2012-13 period whereas production was at 557.60 MT. In the wake of the local shortages, coal imports have been increasing and are projected to increase further.

Issues related to government policy on coal allocation

In 2012, the policy of the Government of India on allocation of coal blocks came under scanner due to allegations by the Comptroller and Auditor General of India (CAG) office, accusing the government of allocating coal blocks in an inefficient manner during the period 2004–2009. In spite of the government’s policy to open coal sector to private players, the coal allocation has been ineffective and has created a situation where coal is not available to power generators as and when required. On one hand few generators are occupying huge mines, whereas the newer ones are not able to start mining as they still haven’t got the mandatory clearances.

This has put the burden for supplying coal on CIL, the sole public sector coal producer. Current slowdown in the economy has adversely impacted the power producers as plant load factor (PLF) has reduced and short-term power rates are depressed. Rupee’s slide against the dollar has further driven up the cost of imported coal. The Indian buyers of coal are unwilling to shoulder the additional cost burden, and have cancelled contracts or sought to renegotiate contracts, causing coal cargoes to pile up at Indian ports. As nearly 60 % of country’s electricity generation is from coal-based plants, better power prices would have incentivized power producers to purchase costlier imported coal for generating more power.

All these factors have added to the increase in demand and supply gap, and have been deterrents in the country’s progress towards energy sufficiency.

 Related articles


  • India likely to be the largest coal importer in 3-5 years
  • Stop the Destruction of Indian Rainforests for Coal Mining (forcechange.com)
  • How sustainable is coal mining in India
  • Indonesia’s 25% tax plan on coal exports to hit Indian power firms

Changing Global Energy Landscape with US Shale Gas – Part II


In mid- 2012, Kinder Morgan’s acquisition of El Paso for $38 billion,  resulted in a combined company called Kinder Morgan, Inc which is the largest operator of natural gas pipelines in the U.S. with 22% of the U.S. natural gas pipeline network,  connecting almost every gas field and consuming market in the U.S. The expanded pipeline network resulting from the Kinder Morgan-El Paso deal is expected to be especially significant in supplying gas to higher-priced electricity markets such as New York and Florida. The expanded pipeline network will permit the natural gas “bubble” to move downstream, in enough abundance to stimulate new products and locations.

This deal was a game changer because thousands of wells drilled to produce the record-setting “bubble” now have a record-setting pipeline network to get to market. This transaction affirms the potential of the shale gas discoveries, while countering apprehensions regarding stability of the natural gas market.

Sasol has announced a $10-billion facility in Louisiana to manufacture diesel fuel from natural gas, thus creating a new market for Haynesville Shale gas. That’s not all. Dow has announced plans to build shale gas downstream capacities based on ethane and propane on the Gulf Coast, and Shell has also made known of their plans to build an ethylene cracker in Appalachia near the Marcellus Shale.

There are domestic and export implications for liquefied natural gas (LNG) as well. Last year, Cheniere Energy was the first company in 35 years to receive export approval for LNG from its Sabine Pass liquefaction facility and has signed an $8-billion contract with BG for supplying LNFG and another one with Spain’s Gas Natural Fenosa for a total 7 million tons/year of LNG over 20 years.

The LNG exports are likely to be directed primarily to Asia, where in addition to the strong demand for LNG, the prices being paid for LNG are four times as high as the prices in the U.S. This demand for LNG in Asia is dominated by Japan and South Korea . These two countries together imported 64 percent of global LNG. Japan is replacing nuclear electricity generation capacity lost as a result of the earthquake and tsunami with LNG. Additional demand comes from China and India. China’s import of LNG has increased considerably, driven by demand for electricity generation and air quality concerns. The oil companies of India &China have made significant investment in U.S. shale plays in an attempt to bring in supply to their own markets.

The tide has turned — the U.S. is on its way to being not only the supplier of the world’s LNG, but other fuels as well. The U.S. is already on course this year to be a net exporter of gasoline, diesel and other fuels for the first time since the post-World War II economy of 1949 — a prospect that was unimaginable even a few years ago.

-Guest Post

Changing Global Energy Landscape with US Shale Gas – Part I


In the year 2009, United States surpassed Russia to become the world’s leader in natural gas production, with production continuing to increase to 80 billion cubic feet/day in 2012. U.S. natural gas reserves are at their highest point since 1971, and year-on-year reserve additions doubled from 2010 to 2011, as a result of shale production. Shale gas, a natural gas found trapped in sedimentary rocks, made up only 1 % of U.S. natural gas production in 2000. It now amounts to 25 % of U.S. natural gas production and is expected to increase to nearly 50 % by 2035.

Natural gas, cost-competitive with coal at half the carbon emissions, is becoming the fuel of choice for electricity generation. New EPA regulations on particulates, mercury, and other toxic emissions are forcing the closure or retirement of 28 GW or more of coal-burning capacity, or about 8.9 percent of total U.S. coal-burning capacity. Recent increases in coal transportation costs are also problematic for coal. In addition, demand for electricity is forecast to exhibit slow but steady growth over the next few decades. These factors, taken together, are expected to be the primary driver of demand for natural gas in electricity generation over the next several decades. Utilities and end users are choosing the lower emissions and lower capital requirements of natural gas-fired facilities over other fuels, sending the clear message that the risk of natural gas price volatility is a risk worth taking in the current difficult policy environment for coal.

The U.S. Energy Information Administration (EIA) estimates that 223 GW of new generation capacity will be needed between now and 2035, and that at least 60 percent of capacity additions are expected to be natural-gas-powered. However recently EIA has conceded that “the shale oil and shale gas resource estimates are highly uncertain and will remain so until they are extensively tested with production wells”, thus raising concerns the prospects of shale gas. Industry consultants and federal energy experts have privatelyvoiced scepticism about shale gas prospects. 

Scepticism also arises mainly due to the lack of marketability that has not only kept the natural gas price below $4/MMBTU, it has even resulted in the flaring of more than one-third of produced natural gas in 2011 in North Dakota. Without a pipeline, natural gas is not marketable. It’s immobile, “stuck” near the production site. Pipelines are long-term investments that generate low returns. Revenue to the pipeline operators is generated by transmission fees on long-term contracts, insulating the operators from fluctuations in the natural gas commodity price.

Notwithstanding the cynicism,  shale resources and other upstream assets continue to drive U.S. merger and acquisition activity, attracting foreign investors in the process.  In the next part we will look into some deals that validate that the potential of the shale gas discoveries.
– Guest Post.



Challenges facing India’s Infrastructure Sector – Part II


In my last post, I had written about the challenges faced by infrastructure sector in India. If we were to look into the reasons behind the challenges in India’s Infrastructure sector, we see that the problems can be broadly categorized into structural or procedural in nature.

Structural reasons:
  1. Faulty incentives: Government organizations as well as the concessionaire are wrongly incentivized while implementing the infrastructural projects. Government contracts are generally awarded on the basis of lowest price and this encourages private players to undercut each other in prices for winning the contracts, thus resulting in poor quality bids and shifts the focus from long term viability of the project to short term gains, while transferring the risk to debt owners or the tax-payers.
  2. Oligopoly of project proponents:  Infrastructure projects require very high capital contribution and bank funding. Since India is still young in terms of numbers and complexity of infrastructure projects executed, at present we find only a handful of companies bidding and being awarded with projects in the country leading to a situation of “managed competition” where projects theoretically can be “distributed or shared”.
  3. High cost of funding : High cost of borrowing both from bank loans and bonds, has off late increased reliance of companies on ECB to reduce cost, which exposes the project to currency volatility, underestimates cost over the project period and increases the risk of correctly forecasting cost of borrowing subsequently when refinancing.

Procedural reasons:

  1. Underassessment of risks: The quality of data/ information on which key assumptions are based have a great role to play on the integrity of the project. Underassessment of risks due to faulty assumptions, allows the bidder to quote low price for end users charges, which after a while may not be sustainable as can be seen in the cases mentioned in my last article, leading to situations where the concessionaires attempt to re-negotiate contract, citing some excuse, often soon after being awarded the project. Government agencies with the responsibility of evaluating the bids, need to take a objective view of the nature and severity of risk involved. On solution could be that the Government agency entrusted with the implementation of the project could fix boundaries for various parameters including end user charges, so that bids are within band in which bidders compete on the basis of better understanding and forecasting of risks, efficient use of resources and quality of management, rather than reckless gambling.
  2. Reduction of promotor’s stake in risk and reward:  As is the international practice, in project finance/ PPP projects, some of the consortium members and equity contributors are also providers of goods and services for execution of the project. Such companies always have some room to recover their investment through innovative pricings of sub-contracts much before the cash waterfall would allow payback to equity providers. If such a thing does happen, it leaves the founder companies with virtually no risk and creates ground for them to be opportunistic during subsequent bargaining for revision of prices.
  3. Delay in fixing accountability: The slow judicial system in the country causes delays in enforcing liabilities in case of mistakes committed by companies or when companies try to put themselves at an advantageous position vis a vis other stakeholders. Delays can cause erring parties to get away with playing around in the grey zones of the contractual agreement and passing on the burden to the end users and tax payers
All these factors point to the need for a more favorable environment, with institutions, mechanisms and improved governance standards to bring in the required efficiencies for allowing PPP to evolve and mature.

Public Private Participation in India – Issues & Challenges


Infrastructure development had been identified as a critical prerequisite for sustaining the growth momentum of the Indian economy. Given the huge infrastructure deficit that India is facing, government has increased the target for infrastructure outlay during the twelfth plan period (2012 – 2017) to one trillion dollars, about half of which is envisaged to come from the private sector, including an annual $30 billion in foreign direct investment (FDI) inflows. Attracting such astronomical sum of investments will require the government to create a conducive environment with robust institutions and improved governance standards to ensure consistency and predictability of returns for the investors and to mitigate the risks of financing. Ensuring improved governance standards has so far emerged as the main challenge in meeting the country’s infrastructure shortages.

The infrastructure projects, though significant for the economic development, are highly capital intensive, require investments with a long time frame and hence are fraught with uncertainty. So Public Private Participation (PPP) are being seen as an efficient way to bridge the country’s infrastructure deficit, by engaging both the public and private sector and thereby distributing the associated risks.  PPP projects are basically implemented in Project Finance mode where the liabilities of the company are non-recourse. The projects are usually undertaken by a consortium of developers who execute the project and a consortium of lenders who provide debt. Such projects may require a number of rounds of financing during its life time. The greatest challenge in PPP projects is to understand the risks and adequately distribute and manage them to make it beneficial for all the key stakeholders involved in it.

A series of events bring out the flaws in execution of PPP projects in India.

  1.  Independent Power Producers/ Ultra Mega Power Producers including those promoted by powerhouse like Tatas and ADAG have appealed for upward revision of power off take price much before the contracts are due for renewal. The steep increase in tax introduced by major coal exporters like Australia and Indonesia, have severely impacted the cost of operations of the power plants using imported coal. It is apparent that the project developers had failed to reasonably assess this risk at the time of submission of their proposals.
  2. There have been reports of violation of Concession agreements in toll road projects including few cases where the concession agreements were terminated. Many such cases have gone into litigation. In highway development, most of the disputes have arisen due to controversies in payment and collection of toll for finished projects and rolling of credit and interim payments as concessionaires missed completion deadlines in projects under execution. According to the National Highways Authority of India (NHAI), the Gurgaon Expressway Project, that was supposed to be the showcase for tolled highways in India has everything going wrong with it — corruption in toll collection, substandard construction and maintenance, chaotic traffic management and unsafe ride.
  3. The Airports Economic Regulatory Authority (AERA) approved an increase of 346 per cent in airport charges by Delhi International Airport Limited (DIAL), to help them recover the cost of operating the airport. This has adversely impacted thousands of passengers and resulted in Delhi being the most expensive airport in the Asia-Pacific region. Both domestic as well as major international airlines operating out of India have challenged the steep increase in airport charges and dragged DIAL to court.
  4. Airport Metro Line in Delhi, used by over 15,000 commuters daily, was suspended after safety concerns of the elevated tracks were raised by Reliance Infrastructure-led consortium, which operates the line. As a public-private project, Delhi Metro Rail Corporation (DMRC) has built the civil structure on the Line and Reliance Infrastructure is responsible for operations and maintenance. There operations have been incurring losses; this has led to the speculation if financial losses are the reason for suspension of services. .

While the concerned parties do have a right to protect their interest, repeated disagreements and litigations point to basic faults in the way PPP is being implemented in the country. So one would obviously ask- why the project developing consortiums were unable to predict the turn of events and did not provide for it in their bids and why did the Government accept their overtly ambitious and faulty bids.

In the next section, we will further analyze the issues facing the infrastructure sector in India.

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