News Detail

• In an interview to CNBC-TV18, Suhas Harinarayanan, Co-Head of Research, Religare Capital Markets and Ashok Kumar Khurana, Director General, Association of Power Producers talk about the outcome of yesterday's power meet which saw eight industrialists have a pow-wow with the principal secretary in PMO Pulok Chatterji.Fearing that Coal India would substantially raise its costs of production over coal imports had the businessmen demanding higher tariff for their power plants.Harinarayanan says that the biggest challenge will be for CIL to ramp up production as per the Fuel Supply Agreement's (FSA) requirements. But first, Coal India has to sign the dotted line on the agreement. Both experts agree that importing and the blending pricing for coal will not impact the price of power majorly.
• Q: What have you read of the newsflow so far? How do you think it may impact some of these private power players?
• Harinarayanan: These meetings should have happened almost six or seven months back. It's good that its happening now but we could have done away with a lot of pain over the last six to seven months. To that extent some of these private power companies were probably pricing in steep discounts or even bankruptcy issues. So it has been a big positive for them. In terms of implementation as to how far this will take, etc there are clearly some easy steps and there are some difficult steps.
• The easier ones should be getting Coal India to sign a fuel supply agreement plus taking some loss to ensure some pass-through of some higher imported coal extra. Those will be the easier ones. But of course the tougher ones will be going forward as to how to ensure that Coal India is actually able to meet those volumes. Probably the most difficult one going ahead is going to be how to change the working of the State Electricity Board (SEB) to ensure that they actually are at least able to make cash profits or stop making cash losses.
• Some of these things are just going to take a lot of time and by then we probably enter into FY14 into the next round of elections when again people begin buying power at crazy prices and again SEB losses are going to spiral. We do have a small window of at least over the next 12-18 months where a lot of steps can be taken given that the next noise around general elections are still 12-18 months away which should at least stabilise the system. But fundamentally, from a five-year perspective, do you think private IPP would make a lot of money? I wouldn't bet my money on that.
• Q: A word on this 80% FSA that was decided the last time around. In this meeting, was there any headway in terms of the doability of it and whether or not there were going to be some hurdles on how Coal India could actually source that much of Coal, whether importing it would actually raise prices for power companies?
• Khurana: My idea is, Coal India will meet this directive of the PMO by augmenting the domestic coal base and by importing. The government is already considering taking extra coal from state governments' and central government mines and also asking Coal India to increase their production. We suggested that any private mines where they have excess coal, and we have mismatched between the power project and the mine development.
• The issue was stuck only on the pricing issue as to what price would coal be transferred. In this meeting, looking at the pricing issue, we have suggested a new concept of coal banking because that developer in any way would need that coal in future for conversion to power.
• So as in power, we have suggested that the entire coal which we can produce in the 12th plan and which is not needed can be taken by CIL, give it to those who have a deficit of coal and when we, as a developer, who have given coal, need the coal, it is given back to him. That needs fixing any price and any controversy around that issue.
• Q: What specifically got covered at yesterdays meet because the issue on coal pricing was discussed as also introducing differential tariff rates? Any rough decision in that?
• Khurana: There couldn't have been a decision in that meeting. That meeting was meant to discuss, put forward our views and hear their views. The decision making process in any government system, follows a process which takes time. But the fact that we were heard and we were told the suggestions we have made are practical and will be considered seriously was enough.
• Having seen the earlier action of the government signing the FSA which was pending for the last two years we are sure that these issues can be resolved because they are not very difficult. If the imported coal is not going to be more than 8-10% of the entire base over there, if you distribute that cost into the entire base, the differential is not very significant on the power pricing. However, if this is limited to only those projects which were using imported coal then the differential would be significant.
• Q: How doable does it seem to implement any such suggestion on differential tariff during peak hours because this quarter many power companies had pretty poor results to show for themselves and it wasn't just about raw material pressures?
• Harinarayanan: Discounting the result for whatever reasons showed those results, some of it was clearly negative surprise. Implementing the FSA is clearly the easier part and we were also positively surprised by the outcome of that meeting. The challenge is going to be how to get Coal India to increase coal production because based on whatever checks we have done it looks like quite a difficult task to even go from this 430-440 million tonne of production next year.
• From a pricing perspective, 8-10% lending of imports with local coal is not going to significantly increase your tariff or its not going to increase your fuel cost material. I don't think that's a problem. It will be more about how does Coal India handle the whole logistics of importing. It's not an easy task, different people will need different blending levels and that's the whole logistics and more difficult part of it but blending 10% and blending with 90% domestic coal, I don't think the pricing and cost pressures are going to be significant.
• Q: Some analysts have pointed out that this is creating uneven ground private players versus what's happening with the public players. For instance, NTPC is forced to sell at a capped rate whereas things are being made easier now for some of the private power players. Would you say that this imbalance maybe brewing?
• A: You can see it in the results. I don't think NTPC is going to make a cash loss or is going to return which is less than the cost of equity. I think their ROE for new projects is going to be 15.5% plus while for private players the ROE can be anything. So I don't think there is an uneven field because even with the FSA agreement, at least I didn't see it anywhere in the PMO directive that the FSA's are going to be signed only for private players.
• It says FSA's will be signed for all those who have Letters of Assurance and NTPC is the largest holder of Letter of Assurance from Coal India. I don't think it has created an uneven playing field at all. When I look through the next few years, NTPC's competitive personal just improved significantly given the state of financial distress that the private operators are in. I don't think the private operator will have the confidence and the financial ability and I am talking about a majority of them.
• I am sure there must be one or two like Jindal Steel & Power and Tata Power who can still go ahead and put up new power plants but a lot of the other private players are unlikely to have the financial muscle to go and invest in another 3000MW of power plants. But for NTPC, over the ROE you could argue that theoretically come a little bit but its ability to add new generation capacity just increased significantly.
• Q: I believe the APP also yesterday recommended that there be preferential gas allocation to power projects that were recommended by the power ministry themselves and there is an EGoM on gas allocation scheduled tomorrow. Are you hopeful of a positive resolution or will the government choose to lean towards the power companies on that issue?
• Khurana: There is a complete misconception that the present directive only benefits the private sector. Private parties are only small part of it. In fact NTPC is the biggest gainer of this directive of new FSA signatures.
• It has already been decided that the gas from the non-core sector be diverted to the core sector. We have approximately 9000MW of gas based generation coming up in the next six months over there of which 4000MW will come by March-end. These projects have clearly come up because they have been assured that they will be given gas. Now we are going back to the government to ask for that gas.
• A simple way is about 18 cubic meter of gas per day went to the non-core sector which can be diverted to the power sector over there. In future, all the new gas productions should be first given to the power because power and fertilizer as per the utilization policy are in the core sector over there. I think the EGoM will take a final call on these issues day after.
• Q: Part of the discussions yesterday were also around the fact that power companies felt import duty must not be implemented on power equipment. What is the primary concern there?
• Khurana: The basic concern is increasing the cost of power. This recommendation came way back in February 2010 when the rupee was about 45 to the dollar. Today with rupee depreciation you already have an implied duty of about 15%. So act with the 19% you actually taking the impact to 30%. Now this will increase the capital cost of projects thereby increasing the cost of power which would be passed on to the consumer. Today also, the Discoms are unable to buy power because they find power expensive. So we are basically adding to more loss and giving consumer expensive power. Our effort has to be to make power as affordable as possible.

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