India's Power Industry caught in Coal Crisis – Revival through Shorter PPA, Fuel Cost Tariff Indexation

India’s Power Industry is in the most severe crisis since the sector was reformed and private power sector companies were allowed. India’s electricity companies which were considered as a great investment with fancied valuations have now found the going tough. A number of factors have converged to make the electricity industry go into the crisis mode. India faces a dark 2012 summer as the energy demand remains high and growing while power plants remain stuck due to absence of fuel and remunerative prices. With the Indian banks also looking at debt defaults, the government is trying to come up with a new plan.

This new plan has following features

1) Reduce the Power Purchasing Agreement Tenure to 5 years from 25 years.This would make it easy to change the prices of power purchased to reflect the changed realities

2) Some sort of fuel cost indexation for electricity tariffs .The reason is that prices of imported coal has risen dramatically which has made the large UMPP get stuck because the revenues don’t meet the costs.

This plan will take 6 months to be implemented as the government talks with stakeholders like states which are reluctant to change the power prices decided in the PPA with the earlier UMPP being built by Tata Power and Reliance Power in Gujarat and Andhra Pradesh.

What this policy is missing is that Coal with its Disadvantages should not become the backbone of India’s power sector.T he country has to reduce the reliance on this dirty fossil fuel and look to alternatives like Solar Power where costs have fallen dramatically in the recent past. More focus should be put on hydro energy as well as it has great benefits.China is looking to add 400 GW of hydro capacity in the next 10 years compared to India’s total current capacity of 182 GW.

Note I had warned about the dependence on coal as fuel earlier

Indian Privately Owned Power Utilities are furiously expanding their capacities as India looks to treble its Power Generation Capacity in the next decade.The major power companies like Adani Power and Reliance Power are giving Tata Power a tough fight for the position of the biggest private Indian Utility. While these companies cannot hope to overtake state owned giant NTPC in this decade,they may do so in the next one.Note some of these companies are expected to grow almost 20 times in the next 10 years.Here  are the main contenders

1. Tata Power is looking to double its capacity to around 6 GW from the 3 GW at present by March 2012
2. Reliance Power is also looking to add around 5 GW from its around 1 GW present.Reliance Power with its 3 UMPP Coal Plants has the biggest expansion planned near term
3. Lanco Power with around 2 GW has around 7 GW under construction
4. Adani Power seems to be executing best with around 6.6 GW to come under steam in the next year with 1 GW under operations.Adani’s Mundra Power Plant seems well ahead in the construction timeline.

Note most of the power plants being built in India are coal ones with the power providers aggressively buying up coal mines in Indonesia, Australia and South Africa to increase fuel security.However in case of any global disruptions, India remains very vulnerable.However India’s policymakers are sleeping on this issue. It makes more sense to concentrate on those sources whose fuel security is high such as solar and wind power. Coal also faces the prospect of high carbon taxation as global warming becomes acute. Environmental issues related topower plants has already resulted in some being halted as local citizens agitate against the thermal plant’s negative effects on livelihoods and health.

Tariff, purchasing pact revisions may help government meet power target

Fuel cost-based tariffs and shorter power-purchase pacts can help government resolve issues that have tripped its ambitious 1,00,000 crore plan to add 24,000-mw through large power projects, say experts.

The government is revising bidding documents and framing mechanism for local equipment sourcing for the large plants called ultra mega power projects (UMPPs), a senior power ministry official said. And this exercise could take over six months, another official said. India has awarded four UMPPs of the identified 16. Costly imported coal is threatening to make projects of companies such as Tata Power and Reliance Power unviable ever since prices began moving up after regulatory changes in Indonesian and Australian contract supplies last year.