Monday, December 23, 2013

Enhancing Coal Supply Security through imports: India’s prime requirement in achieving growth targets

Holistic development of any economy necessitates engagement of a variety of inputs in a perfectly harmonious way. This perfectly holds true for a growing country such as India for whom adequate availability of inputs like skilled manpower, resources and energy constitute key contributors affecting the level of synergy achieved in realizing growth targets. Hence, lack of any of the required inputs holds the potential of drastically derailing the growth plans of a country thereby affecting all of its populace in some or the other way. In India, legitimate concerns have started brewing since development figures, as indicated primarily through industrial growth numbers; have been nowhere near optimistic, especially during the first two quarters of FY14. However, a silver lining has been seen to be emerging with the electricity sector showing increasingly positive signals since June 2013.

                                        Source: Ministry of Statistics & Programme Implementation (Base Year: 2004-05)     

The manufacturing and mining sectors are on a path to gradual recovery from a severe growth drop observed during FY13, while there has been a substantial growth in the electricity sector. As another part of the story, the government has been repeatedly revising its economic growth rate estimates, always downwards. GDP figures, once targeted to be in the range of 7-8 percent, have been recently revised to about 5-5.5 percent only for FY14 while actual achievement during FY13 has been a decade low of 5 percent.
The key factor responsible for this decline has been the issue of “energy poverty”, especially in rural and semi-rural areas. Most of the countrymen have been haplessly witnessing power cuts ranging from 6-8 hours, and even more, which is also a serious factor hampering the industry growth targets of different states. This “energy poverty” exists on account of a variety of factors on both the generation as well as transmission and distribution front, which specifically constitute shortage of coal, degraded coal quality, transmission constraints and backing down/ shut down of power plants. According to CEA, in April-September 2013 period, Indian power generators observed a shortfall of 73.2 BU in power generation due to a variety of reasons of which coal & gas shortage was observed to be the most predominant one. While coal based power generation (which contributes about 57 percent to the total power generation) continues to be the major source of electricity, a shortfall in supply of coal is causing serious concerns for the whole electricity supply chain.
Coal India Limited, which achieved a production of 452.21 MT as against a revised target of 464 MT in FY13, has not been able to fully satisfy its FSAs with various customers, resulting in customers looking at an alternative supply option of coal imports. In the last five years, coal imports have seen a staggering rise of about 40 percent with coking coal imports increasing at a CAGR of about 11 percent and thermal coal imports increasing at a CAGR of about 17 percent over the last decade. With government estimates suggesting the coal demand-supply gap to reach 292 MT by the end of the 12th FYP, imports (which stood at about 97.23 MT for thermal coal and 32.2 MT for coking coal in FY13) are estimated to grow to about 200 MT by 2017.   
The inevitability of imported coal playing a major role in satisfying the country’s energy needs is well understood now and the government, along with the major customers of coal, has started strategizing to make the process more economically viable. The key concern in importing coal from nations like Australia, Indonesia and South Africa are the high prices, which are much higher than the domestic coal prices. The direct impact of these high prices falls on the primary consumer which, in India, is the power generation sector for steam coal and steel manufacturing sector for coking coal. For power generators, importing coal is a serious financial burden which cannot be easily transferred to the end consumers, given that the electricity sector is regulated such that inefficient supply of committed quantity attracts heavy penalties for generators. A ray of hope, however, lies in the recent evolution of spot power markets through which prices much higher than the contract prices of electricity can be availed by electricity generators based on real time demand-supply situation. This opportunity has provided them the option to invest in imported coal and has opened up a more reliable supply option of acquisition of coal mines in other coal bearing nations. Even for the steel sector, which imports majority of its coking coal requirements due to low availability of domestic high quality reserves, the option of acquiring coal mines abroad has increasingly become an attractive option to ensure continuous supply.

Coal mine acquisitions by Indian players in countries like Australia, Indonesia, Mozambique etc. has caught up pace since 2005. Various private sector players like Adani, Essar, GMR, NTPC and even public sector players like Coal India & SAIL have aggressively acquired coal-rich mines in these nations. Unfortunately, most of the countries, in which Indian companies have shown interest, have issues similar to those in India, including that of inadequacy of infrastructure for transport and export. Generally, the cost of developing a supporting infrastructure has to be borne by the miner which requires huge investments creating an unfair burden on individual companies. Risks also exist related to political stability, law changes and frequency of tax changes in the nation. An investment can quickly turn unviable for a company with the slightest change in these factors. For example, in 2011, Indonesia’s move to change its mining laws and pricing methods resulted in coal becoming almost four times costlier giving a setback to key buyers. Other major exporting nations are also in the process of amending their laws which could seriously affect investors. Therefore, there’s a requirement of an exhaustive assessment of all the factors prior to investing in overseas assets.

Though the weightage to be assigned to each factor may vary from country to country, an assessment of top coal supplying countries on the basis of some of the major factors has been presented as follows:

South Africa
76.4 BT
5.5 BT
16 BT
30.2 BT
Mining Costs
High. Upgradation Requirement
Low. Needs heavy investments
Moderate. Inadequate Rail Infrastructure.
Tax Regime
Transparent.  Abolition of MRRT by July 2014 to bring relief to investors.
Frequent changes in mining laws. Favors domestic players.
Favorable to foreign investors with no such issues of local ownership.
No specific mining policy in place. Encourages local ownership of mines.
Political Stability
Proximity to Indian Ports
Takes about 18 days to India’s west coast and 14 days to east coast
Takes about 12 days to India’s west coast and 9 days to east coast
Takes about 10 days to India’s west coast and 12 days to east coast
Takes 12 days to India’s west coast and 14 days to east coast

As can be observed from the table, each country has a specific set of advantages and disadvantages which may make it attractive or unattractive to investors depending upon the weightage given to each factor. So it is entirely up to the investor to take the final call on whether or not to acquire a mining asset in the country.
Imports, overseas mine acquisitions or being completely dependent on Coal India for supplies, whatever might be the coal sourcing strategy of various consumers, the ground reality indicates that the demand for coal is growing. With no robust plans of the government for energy diversification, coal will continue to be the prime source of energy in the country for at least the next 30-40 years. Sourcing coal from outside sources has become more and more essential to meet the growing demand. The government has also realized this fact and is continuously working out mechanisms like price pooling of coal to make imported coal more economically viable for the buyers. The best possible strategy for the buyers under this scenario is to source coal from a variety of supply options so as to minimize supply shortage risks to as low level as possible.

This research emanates out of Mr. Puneet Paliwal’s contribution to an Infraline publication titled “Mapping Global Coal Assets”, and he can be contacted on in-case of any queries.

    Infraline Energy Metals & Mining Research Team


Monday, December 16, 2013

Energy Infrastructure in India

Energy has been the anchor as one of the most important link for sustainable economic growth and human development. The per capita energy consumption  is one of the key parameters used to assess the stage of economic and social development of any country. The  development of energy sector is an interplay of complex factors covering   policies and regulations, political and economic stability,  resources endowment, technology development and adoption, large capital investments on long gestation period projects, complex risk profiles, supporting goods and services sector, skilled and managerial manpower and various commercial and contractual aspects. Reaching energy to the end users need  development of huge supporting infrastructure covering railways and roadways, transmission and distribution grids, transmission and distribution pipelines, storages, marketing facilities among others. Growth of energy sector also ledas to extraction of natural resources and thus responsibilities for environment management and social aspects.

India is set to remain one of the top five energy consuming country as it continues with its economic growth programs, and its population of 1.24 billion strive to improve its standard of living. The question remains about the scale and speed at which India’s energy demand will expand. As per IEA, India is fourth largest energy consumer with over 4% of the world's total annual energy consumption and expected to be the third largest energy consumer by 2025 after USA and China with favorable economic and social developments.

The Twelfth Five Year Plan lays special emphasis on development of the infrastructure sector including energy, as the availability of quality infrastructure is important not only for sustaining high growth but also ensuring that the growth is inclusive.

Figure: India Global Ranking in terms of Energy Production and Consumption 

Source: IEA

India has a large energy sector which is growing rapidly. India is reasonably well endowed with primary and renewable energy resources. Coming years would witness huge investment in the energy sectors along the entire value chains and this will be led by public and private spending. Information and data on Indian energy sector is widely available from  large number of agencies however  India does not have any one agency , like EIA USA,  to issue comprehensive and authentic data on the sector .

Infraline has taken the first small step and is set to come out with first of its kind “Energy Infrastructure in India: A Reference Book”, covering Coal, Oil & Gas, Power and Renewable Sectors. The compendium mainly  includes maps, diagrams, and associated key statistics with minimal text. The compendium has been designed to act as a reference document for vast array of stakeholders to have high value first hand information on the setting of Indian energy sector. 

                       Infraline Energy Oil & Gas Research Team

Thursday, December 12, 2013

Evolution of Indian Power Market & Future Prospects

The Power sector in India has undergone fundamental transformation of its institutional structure after the enactment of Electricity 2003. One of the most important transformations has been the introduction of Open Access in Indian power sector and further creation of Power Market. This brought a chunk of advantages to the power industry which was primarily vertically integrated; controlled by monopolistic state electricity boards.

Evolution of Power Exchange 
Open Access in inter-state transmission was introduced in May 2004 which facilitated the development of the bilateral market in the country which opened up very encouraging results. However, in order to further streamline the bilateral transactions and to facilitate the implementation of trade of Power in India, Central Electricity Regulatory Commission (CERC) took several significant initiatives. In July 2006, the commission took a giant leap forward in developing the electricity market in the country and floated a discussion paper on “Development a Common Platform for Electricity Trading”.
As Open Access in Inter State Transmission Regulation 2004 provided only for the bilateral transaction, the transactions discovered through anonymous bidding on a Power Exchange were not envisaged. The system of application of transmission charges was in Rs/Megawatt/day. A single regional postage stamp was applied in case of intra-regional transactions for transmission charges and losses. These methodologies for transmission charges & losses were not conducive to the operation of a common platform for electricity trading or Power Exchange.
In view of above shortcomings, CERC revised the Regulation for Open Access in Inter-State Transmission” to include collective transactions discovered on a power exchange and the new regulation became effective on 1st April 2008.
With the above provisions in place, Indian Energy Exchange (IEX), the country’s first Power Exchange, made an application for grant of permission to setup a Power Exchange in March 2007 and an in-principle approval was accorded by the CERC on 31st August 2007. IEX commenced operations from the 27th June 2008 after the Rules and Bye Laws were approved by CERC and permission was granted to commence operations. The second Power Exchange, Power Exchange of India (PXIL), was granted in-principle approval on 27th May 2008. PXIL went through a process of Regulatory approval similar to IEX and commenced operations on 22nd October 2008.

Power Exchange: Changes that Followed
Introduction of power exchanges has acted as a catalyst for the short term power market in India. Short term market which is being constituted by bilateral transactions, power exchange transaction and UI transactions has witnessed a CAGR of 23.60 percent since 2008-09. Share of short term transaction as a percentage of total power generation in the country, has also increased from 6 percent in 2008-09 to around 11 percent in 2012-13. The chronology of short term power trade vis-à-vis total electricity generation in the country has been represented in figure 2.

Among the various transactions driving the growth of short term market in India, it is found that those associated with power exchange have played a major role in development of short term power market in India. Out of an overall growth of 23.60 percent, since 2008-09, power exchange transaction have grown with a rate of 71 percent, while bilateral and UI transactions have grown with their respective share of 19 and 15 percent. Transaction wise details of short term power market have been represented in figure 3.

It is also evident from above figure that since 2008-09, overall quantum of bilateral and UI transaction is higher in comparison to the power exchange transactions. However, in last two years it has been seen that the transactions under the UI and Bilateral have witness a significant dip, while transactions in power exchanges are on continuous rise.
Huge surge in power exchange transactions owes to the fact that, the exchange provides a transparent mechanism, which is completely driven by demand and supply of electricity, thereby promoting competition in mechanism of power trading. Due to competition, electricity prices in short term market has also witnessed a significant dip, which is driving beneficiaries to schedule more and more power from exchange rather than drawing through UI mechanism, resulting dip in UI transactions. With low UI transactions share in power trading, more disciplined grid operations can be expected. Therefore, it can be anticipated that, power exchanges are not only promoting competition, but they are also bringing more discipline into electricity grid.

Opportunities growing forward

Power exchanges have offered a dynamic environment to operate the sector through market forces of demand and supply. Nonetheless, there is a lot of ground yet to be covered, which includes improving and enhancing the reliability and security of the power system through ancillary services and implementation of regional power trade in SAARC countries (similar to one in Nord Pool).

In April, 2013, CERC has introduced the staff paper on “Introduction of Ancillary Services in Indian Electricity Market”. Under this, the commission has sought to introduce three types of ancillary services, mainly Frequency Support Ancillary Services (FSAS), Voltage Control Ancillary Services (VCAS) and Black Start Ancillary Services (BSAS) for enhancing the reliability and security of Indian power market. In this overall framework, the commission has assigned a significant role to power exchanges in modalities of ancillary services. The commission has envisaged the implementation of ancillary services would be facilitated through bidding in the power exchanges. Further, it also contemplates that a separate product could be constituted for this purpose, comprising of sellers interested in participating in the ancillary service market.
Besides this, there still exists the need to learn lessons from the experience  of already developed power markets, such as Nordic Power Market – the world’s first international commodity for electrical power, in organizing trade with standard physical and financial power contracts both in spot and derivative markets. Similar to Nordic Power Market, there are huge prospects for integration of SAARC region for regional power trade. On this front, the Planning Commission of India through Integrated Energy Policy has already indicated the import of hydro power from Nepal and Bhutan (eliciting the combined potential of about 55000 MW) as possibly the major source of energy security for India.
With integration of SAARC regional power market, there would be a significant market for financial power contracts in future, which would allow power exchanges to capitalize on these financial contracts.
        Infraline Energy Power Research Team

Monday, December 2, 2013

“Much Awaited” Road Regulator in India

       In the recent past road sector has experienced a significant slowdown, primarily due to the lack of participation of the private sector and the fact that lenders are staying away from these projects. This very dispute-heavy sector has seen an increased no. of disputes till date between the stakeholders. According to Analyst a third party can be looked upon to resolve them in the form of Independent regulator and act as a dispute settlement mechanism. To address this long felt need, Finance minister P. Chidambaram had announced the government’s decision to constitute an independent regulatory authority for the road sector in his national budget 2013-14.

The ministry has proposed that the roads regulator will have an adjudicatory role for contract dispute resolution, renegotiation of future contracts and enforcement of contractual obligations between the government, developers, lender and especially the users. Also, it is proposed to have control on national highways and other roads under the directorial control of the ministry of road transport and highways.

According to the Draft Regulatory Bill, there would be three to nine full time working members including the chairperson on board that will constitute the authority. The draft also clearly indicates that all contracts whether it is a PPP or a public funded one will have to be mandatorily get registered by the parties involved in the contract by paying a specific fee for it. It is pragmatic that the contracts on EPC basis faces even more disputes and challenges as compared to the other modes of delivery as they have cost and valuation based issues which may differ at times.

It is evident from the discussions being made over the proposed regulator, that it will not only act as a watchdog but will also play a role of peace maker among different stakeholders at various stages of the contract. As the investment in the highway sector is fading and several other constraints like that of toll, project cost and cost escalations owing to delayed clearances have led to pullouts. Exit of GMR and GVK from big ticket projects are the major hold back we can count upon. For overcoming such issues, setting up of regulator is the need of an hour that will bring transparency on the entry and exit policy and other regulatory policies which are currently functional.

As per the government sources the much awaited decision of the Ministry of Road Transport and Highways to set up a road regulator is likely to be before the Union Budget 2014-15.  According to Analysts if all strings are attached in a structured way it is going to resolve all concerned challenges associated with the sector.

Everyone is keeping a close eye and faith in the Ministry’s decision for setting up of the Independent regulator that could track and handle the growing uncertainties and externalities in the sector. Though despite being criticized by the various authorities, initially the planning commission opposed the decision, certainly setting up a regulator is moving on tracks. This very government’s decision portrays a great potential to grip the number of problems acting as a road block in the India’s Highway development process.                                 
    Infraline Energy Roads Research Team