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Indian Power Sector - the elephant in the room 

Excessive use of Diesel power

I read an article highlighting issues around coal allocation and the consequent problems faced by power producers who have invested in them. I would argue that the problem is just not limited to the issue of coal allocation and highlight three major factors.

The first one is the inflated outlay in the project costs of some projects which was fueled by the issue of allocation letters or LOI. These promoters had other objectives than building an asset and working it for returns over its life cycle of 30 plus years. Hence the focus on building quality, efficient plants at optimum costs and within a schedule was not the only factor. 

Second; the demand growth expected including the realization of the latent demand in the system is yet to happen in our country due to the perennial loss making performance of the distribution utilities.  These utilities can bankrupt a well functioning power plant in any given day by indiscriminately delaying the payment due to them. Even worse, is the load shedding which they resort to due to their inability to purchase power.

And the third and the elephant in the room is Diesel power. Diesel power usage is not monitored nor its costs analysed as it must be for an economy which is reliant so much on imported fuel. One can only guess the installed capacity under use and then may be extrapolate to arrive at the consumption. 

With 92 GW of diesel plant capacity (2015 number of 72 GW plus 5 GW per year) and most of it being used this diesel power is almost 25% of the installed capacity of the country. It is time that the electricity planners account this in more regular manner and work to eliminate or say minimise the usage. Call the king naked and go about clothing him. 

There is no reliable pan India statistic available on the hours clocked by these diesel plants or the energy generated. 

Diesel energy generation is highly polluting, inefficient and costly one at that. The reliability factor which is promised by these plants is the only attraction. To reduce the usage of these plant the distribution utility has to improve its performance and ensure reliable quality power. Usage of such terms as reliable and quality are shun when you buy power from a public utility in India. And imagine the situation when substantial part of industries and IT parks switch over completely to utility, the peak in the system will shoot up by 25% or more, calling for immediate running of most of the now idle plants.

Regulators are deliberately blind to this fact as the distribution utilities are not ready to correct themselves. It is time a clean up act is initiated to look at the issues that perpetuate encouragement of diesel power over public utility power and act on it. 

A long term solution to this problem is to start with total revision of tariff and create a true pass through facility of production costs of power to majority of consumers and eliminate the cross subsidies. Essential subsidy addressed to specific consumers must be done by DBT and not through tariff. This has to be followed up with bringing in fresh capital to revamp the infrastructure required for ensuring reliability.  I know all this is a tall order. But someone has to bite the bullet. Else the issue will linger on and more problems will add up.

BHEL Results

"Celebrating 50 years of Engineering Excellence" screams the caption over the unaudited Financial Results for the quarter ended 30th September 2015 of Bharat Heavy Electricals Limited.

Being a power sector professional I thought I will spend some time understanding what this '50 years of engineering excellence' has brought to the majority share holder. the average Indian citizen, you and me.

Here are the highlights:

1. In a Sales of Rs. 11596 Cr, BHEL has reported a loss of Rs. 292.89 Cr.
2. Trade receivables at the end of the quarter was Rs. 25868 Cr. To put it in perspective, last year sales was Rs. 29541 Cr (net of taxes). So 87 % of last year Sales is on credit.
3. Trade payables is Rs. 7944 Cr. 6 months cost of materials is Rs. 6953 Cr.
4. Employee expenses stands marginally higher at Rs. 1481 Cr ~ 25% of sales.

My take :

• Make In India was an actionable diktat in the first 20 years of independence. Later it became a  slogan. The current effort to resuscitate this proven remedy to many of our economies ills, hope succeeds.
• Administration of contracts and honouring of contractual commitments, on the whole and in particular in power sector is so lax that utilities can arbitrarily, function.
• Poor negotiating skills of central and state utilities,  with international funding agencies, have resulted in imports of capital goods, over decades, at the cost of local 'Engineering excellence'.
• Chasing a mirage of saving on initial capital costs and artificially driving for L1 bids across equipment and services, has resulted in under performance, under recovery of costs, eroding capital of major industries. 
• No planned hand holding of development of technology or solutions is practiced with equipment majors by even central utilities, leaving the country ever dependant on import of technology.

The collective failure of the central ministries, Power and Industries put together, hence by extension, the entire union cabinet has brought this behemoth to this state. Imagine what happens to other corporates driven and state funded industries in this sector. 

The current government has its task cutout to address this issue on an urgent basis.

PSUs ~ Current Models

PSUs have played a humongous role in building the infrastructure of our country. The model which some of the old timers (people around 50 plus today) are familiar with are the additional role they played in generation of employment, building of local infrastructure such as hospitals and schools. NLC is a standing example. Slowly they became tools in the hands of politicians to scurry favours starting from favouring their constituencies for the next capital investment to influencing employment etc.

Slowly the PSU transformed to behemoths and became a sink which draining the public exchequer.  So we saw action taken to wound down some of them.

We also witnessed in the utilities sector emergence of some central utilities like NTPC, PGCIL, NHPC, NHAI and so on so forth. These PSUs are different in as much as they were incorporated by the centre, but as per the concurrent list their main functions fell in the domain of the states. So here we have central utilities built with the cost of equity paid by the state and still not receive any return on the equity, while paying for the services at market determined rates, linked to international bench mark! Over the years, these central utilities have become behemoths and now a need is felt to encourage Private sector.

So we witnessed a burst of growth in private sector investments especially in two sectors Power Generation and Roads. But that has come down to a trickle owing to various factors. Now efforts are being taken  to entice the corporate back and hope their appetite will emerge.

In the process, some of the initial roles of PSUs and prime responsibilities got hijacked and we saw unparalleled imports, which has built some of the huge global brands in South Korea and China. This made the Indian corporate to attach themselves to some of these corporations for sustenance. Services rendered by Indian corporates, their accountability to the Indian corporate tax structure never figured in the factors, which weighed in the awards of contracts and investments. Chasing foreign borrowed capital, we threw some of our main strengths ~ namely the size and the strength it offers to negotiate a deal which would benefit the large mass of Indian citizens. 'Made in India' was given the go by. Thankfully once again we hear many nosies about the theme 'Made in India'.

What else can be done to correct, and bring back the focus the roles PSUs must play:

• Any capital project constructed in Indian soil shall be done by a Firm registered in India and hence are assessed under the Indian Tax structure. 
• Open siphoning of margins through 'High Sea Sale' contracts and 'Divisible Contracts' should be done away with.(Any way some of the projects are assigned the exalted status and claim exemption). 
• Each major infrastructure project generates employment, in the manufacturing sector, services sector and construction sector. PSUs are aware and actively encourage, under the garb of 'L1' bid, firms to work and optimise the cost of engagement of labour. There must be mechanisms which ensure that 'Direct' employees are employed and even 'Contract' labour are eligible for all the benefits. Open recognition of the cost of engaging 'Direct Labour' shall be factored for evaluation of a bid. They shall ensure that the employees who build the project, including the unskilled work force derive all the benefits starting from wages. These should be budgeted and expenditure monitored and shall become reportable in the statements of PSUs. 
• Cost benefit analysis should include factors like long term benefits to the Economy. Amounts spent in local area development including providing public health services attached to a Power Generation project of a PSU for instance, must be able to access cheap credit from the special schemes of the centre or grants. 

PSUs have become more important for their ability to raise capital and the other more important factors are being ignored. It is time a major structural reengineering is done and their role is substantially modified.

Power up Trading

Power sector being in the concurrent list has developed through the years with a state level bias and hence the developments vary significantly across the geography of the country. While the need for national level attention and need to frame policies from a national perspective was understood and action was taken as early as the late seventies, it was confined to Power Generation and Transmission of such power generated by these central plants. Only a few years ago, centre has provided funds and intervened directly for implementation of schemes at the distribution level.

This skewed thinking severely affected the Power market developing as a national one till the enactment of Electricity act 2003. The national policy and act of 2003 is an excellent guide and clearly envisages an integrated network where all key players have a choice which is the fundamental for any market driven approach to creation of a national asset.

It is now for the implementing agencies to come out in full force and provide the linkages which will help in interconnecting the grids and develop a national market for Power so that Power Traders can play a more active role.

However these linkages, as is now the practice, terminate at state level power injection / delivery points and from then on, it is the local network that provides the last mile connectivity even for large power consumers / demand centers. To free the market and Power up trading, it is this last mile connectivity which needs to be freed as envisaged under "Open Access".

To attract investments in this sector, the government has provided one major comfort namely a tariff based approach to guarantee investments, backed by a strong regulatory mechanism. There are severe execution risks posed by issues caused by non availability of right of way to environmental issues, which the promoters should grapple with. Such issues delay the project execution and increase the capital costs. These are beyond the reasonable control of the investor. Providing the incentive of long term cheap funds is one way of balancing these risks.

It is therefore essential that to increase cross regional power transfer capacity significantly together with last mile connectivity, government should identify sources of Long term cheap funds. It could be done by way of providing access to these investors to low cost Long term loans through the Infrastructure Funds being created with our foreign exchange reserves so as to reduce the capital costs of these projects.

The government, should do well to take these steps for bringing in the much needed integration of the grid and making the dreams of Electricity act 2003 a reality.

Reliance Power IPO fiasco

PO lessons

After the debacle of Reliance Power at the bourses, the way price discovery has been done through the book-building process will henceforth be questioned by retail investors who are typically not used to booking losses, and that too from the house of Ambanis, who, they believe, will never let them down.

The quota fixation for the QIB, which is believed to bring in a sense of measured valuation for new issues in an increasingly globalising economy, has been belied. QIBs, by their recent actions, have proved that they are not long-term investors but in for a quick buck.

The rating agency which gave the Reliance Power issue a Grade of 5 has derated itself.

The phenomenal over-subscription at the IPO counter quickly dried out and evaporated.

No demand was seen for the scrip on listing. The grey market which is functional has added to the distortion.

As reported in some sections of the press, this market was till recently competing with the registered exchanges! It is now apparent to the naive investors, how uncertain the entire process of IPO issue can be and that the gullible can easily be led down the garden path. It was a hasty exit for the member of the Ambani family at the listing quickly followed by the who is who of investment bankers.

On price issue, Reliance Power pales in comparison with its peer NTPC. Having said that, one cannot, of course, wish away the phenomenal clout and competence of the ADAG group to bring in value to the shareholder, and quickly.

Whether they bring it in by aggressive and open means, such as extending support to their stock or through innovative demerger, or merger of assets they hold amongst their various holdings including that of Reliance Capital remains to be seen.

For the sake of the retail investor and the public at large, it is hoped ADAG group acts quickly.

TNEB through the Years

Tamilnadu Electricity Board (TNEB) , from the days of independence has always been at the fore front of managing the state's Power requirements fairly well. Especially so, when compared with like enabled boards and organizations, who also operate in similar regulatory environment. There are interesting lessons available in the recent initiatives of the board for those who are propagating the PPP, Public Private Participatory model.

Till the late eighties, the entire investment plans for the Power network, be it Generation or Transmission & Distribution (T&D) was fully managed by the state entity. Given the socialistic approach then practiced that limited the return to just 6% on your investment, the planners, realised the need to bring in robust billing and collection systems. This ensured that billing is done for the services used and what is billed is collected. Default in payment resulted in punitive action of disconnection, which has been practiced over the years. This helped build a good culture, where the consumers built a healthy habit of paying electricity bills. This is similar to the situation where no one questions, why one should buy a ticket when you board a bus.

Having built a system for strong revenue collection, the board could go about the task of implementing capacity additions to the generation and distribution network. Here again the planners understanding of the requirements and deciding on technical merits is there for all to appreciate.

There are Hydel stations, Thermal (coal & lignite) based stations, Nuclear stations, eco friendly Wind mills and sugar mills based co generation plants. These are spread across the geography of the state to assist in overall development of the state. The selection of Mettur which is land locked thermal station based on Indian coal is a case in point. There are coastal plants as well, which are not hampered by the conditions of local availability of coal. In the early seventies, it would have been unthinkable for any one to plan for import of coal given the impression of abundant availability of local coal and the controlled Export - import regime then prevailing.

Similarly the T & D network is built to deliver the generated power across the state. There are no un electrified villages in the state and there are not many instances of power connection being denied for protracted periods of time in the state.

During the Enron era of the nineties, the state also jumped in to the band wagon of liquid fuel power stations. The move was mainly due to the collective hype around these stations and Tamilnadu was not wanting to be left behind. Like other boards, TNEB also suffered. But here again, the board has distinguished itself from others by at least partly putting to use the majority of these plants.

Around this time the concept of Private enterprise building Utility assets was gaining momentum and TNEB adopted it. The main reason being the perceived in capability of the state government to fund capital expenditure of the board. But the board realised that it was being asked to explain their business model to the investor who was looking to maximise the returns on their investment with minimum risk. But the entire exercise has left the board poorer, but richer by experience.

When the signs of economic growth was visible in the mid 2000 and the board started seeing significant demand growth (over 14% in some pockets), they decided to look at alternate models for finding the investment. They have gone about the task in a very commendable manner and have also prepared a scheme for other states to emulate. They have encouraged Wind Power, reactivated dormant schemes and have signed joint development scheme with central organizations. Given the experience of the nineties, the board has this time placed its bets on Public sector entities rather than private enterprises. Plans are in place to double the installed generation capacity through these efforts in the next 8 years.

One awaits a similar approach to increase investments in the T & D Segment. New models, be it the franchise model of PPP (Public Private Partnership) or transfer of assets to joint venture, have to be put in place quickly to fully deliver the large quantum of Power that will be generated in the state. Otherwise one runs the risk of exporting this power to neighbouring states to earn short term profits.

PGCIL share allotment

A preliminary study of the Demand & Basis of Allotment of PGCIL shares makes an interesting case study from the view of the Basis of allotment of employees quota.

Here is a case of over subscription of the employee quota by 3,18 times and some of the employees have been denied FIRM allotment even though they have subscribed to the reserved quota. The shares available for allotment under the employees quota totals up to Rs. 72. 68 crores which has been subscribed for Rs.231.78 Crores. Given the fact that the EMPLOYEE quota no longer has the restriction of Lock in period, the overwhelming response needs to be discounted for the possibility of proxy subscription.

Under such circumstances, is the basis of allotment justified, in as much as it has denied original allotment to some genuine employees, while making allotment on a proportionate basis to the level of interest shown. It is a different factor that such employees can now definitely buy these shares from the market at a premium(more than 75% as per Grey market indications).

In my opinion this basis of allotment is flawed as it ignores the fact that all employees are to be treated equal. We need to therefore ensure that

• Minimum shares based on market lot considerations need to be allotted to all those who have applied for under the quota and
  
• Full allotment of the applied shares are alloted to the maximum number of persons with out denying anybody allotment.

Such defined steps need to be followed to ensure a fair distribution. While, one does not see any foul play, it will be necessary for the management representatives (who are likely to be the main beneficiaries of this largesse) to be more proactive and ensure that the lower rung employees are not denied their chance of securing rightful ownership.

Power to Unlock

There are significant pointers available to the policy makers in the phenomenal success of the PGCIL IPO, both at the state and central levels.

First and foremost, it is important to establish through policies, regulations and the administrative machinery, a viable business model. When established systems are unbundled or restructured, it is necessary to keep in mind the possible future options and decide on the policy frame work.

The second important pointer is that of the organisational culture and capabilities of the public sector entity, to benefit from the enabling environment. PGCIL through its employees, have established a bench mark in performance, which is comparable to its peers abroad.

Market is also rating the NTPC Scrip (another major player in the Power sector) with lots of expectations. NTPC has also benefited from similar policy initiatives and is a well manged and run organisation with committed employees. All these augurs well for the sector as a whole. The prevailing sentiment should be capitalised to bring in part of the enormous funds required to make power for all by 2012.

Forward looking state governments should be encouraged to corporatise packets of distribution network, along with or as a separate entity the transmission systems and approach the market for equity. Every state through the Electricity act have put in place a regulator who is guiding the policy issues. In the case of Tamilnadu for instance, aggregate commercial losses on a grossed basis may look marginally higher compared to what the market would like to see. But one can look at significant pockets(geographical areas) which can be spun off into separate companies and corporatised.

Tamilnadu should take the lead to bring in the much needed funds to improve the balance network with out loosing government's control.

Wired Broad band in India

Wired broad band is one of the most cost effective of building the backbone to deliver high speed connectivity to Tier II, Tier III cities and rural India. While providing "Open Access" on the existing fiber and copper is one of the best ways there are other interesting possibilities as well waiting to be exploited.

And that is the Optic Fiber run on Transmission Lines. Composite Optic Power Ground wire, which is run on existing Transmission Lines serve two distinct purposes. It acts as earth wire for the Line(shielding) and also provide Optic fiber (up to 24 fibers as a standard).

With the Electrical utilities, already having a ready made "Right of Way" , these Optic Fibers which are run on thees lines with the end equipments housed in various stations provide the opportunity to take Fiber along all the main state trunk routes. It also saves enormous costs for the utilities who are increasingly going on for Automation of billing, etc for which they are currently hiring broad band from ISPs.

With the enormous reach of the Electrical utility in the state and their established mechanism to provide O&M services, the Optic fiber once laid will provide additional revenue streams. It is also easy to break the fiber at intermediate Substations and add signals, This facilitates additions of intermediate stations which are other wise unattractive locations from the revenue point of view of Service Providers. One can also look at the possibility of leasing out space for the Mobile operators in the substations, along with back bone connectivity to provide wireless signals for the last mile.

For the utilities this provide a new stream of revenue and the government a cost effective solution.

Once the Optic fiber is in place connected, the Government can lease some of the fibers for its educational services, Telemedicine and e Governance. The surplus fiber can be either leased out as "Dark Fiber " or the utility can provide bandwidth as well.

TRAI shall take the decision to provide "Automatic" state level Service Provider's Licence to the Electric public utility as a starter.

PGCIL has already laid the fiber and is generating revenues. Some of the forward looking electricity boards are already working on it and has commenced the work. The time is right to take a decisive move on this initiative.

Accounting for Power

Minimizing the human effort at the stage of collection and assimilation of consumption data through IT enabled environment will bring in the much needed transparencies and accountability to the Power Sector. Data accuracy will improve and so will the revenue. Efforts are needed to bring in this change across all levels of consumption.

Under the Accelerated Power Development and Reforms programme (APDRP) an effort to bring in energy accounting system was launched. This failed to take off, for the consumers did not see the benefit from this. The consumers were not educated on the likely benefits which accrue to them due to the possible reduction of commercial losses. A lesson is available for all, to therefore not repeat the same mistake when we grapple with new technologies and initiatives.

To bring in IT enabled accounting system, as your leader suggests, should be done with innovative tariff mechanism with inbuilt incentives for the consumer. A classic instance is that of the group accounting system. Each of our multi storied apartments has a dedicated transformer (if not more). Each of these transformers shall be metered and reconciled with the energy consumed as measured through the individual meter recordings to record the losses. Allowing for technical losses, the rest of the losses shall be recovered from all the consumers at a flat rate. This brings in a collective responsibility to the consumers in that apartment block as they see immediate benefit to themselves. The same model can be replicated across a commercial street where the losses could be substantial because of influential elements interests. Villages, with the promise of continued supply will also join the effort if for instance a scheme is drawn up where say for the "day and peak power" the villagers pay and the "night power" it is free.

Today technology (read IT) is available to make this whole effort automatic and with minimum human interface. Once the system is established the housing society's representative (or the local representative of the commercial street) can themselves tally and zero in on the reasons for losses. To start this entire exercise we need to prepare simple and easily understandable tariff models.

Today the tariff for say, TNEB is uniform across the state for identified slabs and has factored in it the aggregate commercial and technical losses as allowed by the Regulator. As and when we move to collective accountability system the new tariff called "Group Tariff" which shall not have any losses loaded in the base tariff (Losses as applicable for the appropriate voltage levels) but will have provision to load at actuals arrived at every reading.The recovery for the cost of providing this IT enabled environment should be spread over say a 5 year period, through BOT models for which I am sure we can find dedicated and competent firms.

One should put in special efforts to educate the consumer after launching such an incentivized scheme, so that popular will supports the implementation and minor vested interests are not allowed to derail the effort. Data generated through such dedicated IT enabled metering system could be used for planning, monitoring and establishing the performance of equipments and systems, so on & so forth.

Disinvestment a different Perspective

All the assets which are currently considered as Navaratnas have reached that status due to the protection they enjoyed during the start up stage through various tariff protection measures and in some cases by denial of permission to create additional competing capacities by governments diktat. It is therefore not wrong to say that these assets are created through Regulation efforts and not necessarily through the enterprise efforts of the government. Such being the case, it is but obvious that the ownership will have to be transferred to the public who has basically suffered to create this asset. One cannot wait generations to reap the benefit.

It will be therefore appropriate to offload the Navartna equity to individual citizens who have suffered to build these capacities and have the first moral lien on these assets. So the return of the equity to the public cannot be considered as "Dis Investment". By this process funds are garnered for creating similar assets, which over a period of time can again be returned to citizens thereby creating a value creation. In appropriate naming has vitiated the entire process of returning the assets to the true holders.

Automatic Meter Reading Solutions

The caption is misleading as the author is actually in favour of locating Mega Power Projects along coastal basis. His main concern is water and hence he prefers coastal based power plants.

Given the current Power deficit in India we need to have many more of these Mega Power Projects to provide even a single lamp connection to many of our citizens' households. While the Distributed generation modules will survive in a grid backed up by good base load generating capacity, the model will fail miserably in our country where we have severe shortages.

Mega projects bring with it scale of operation and high level of automation and latest technology. If we have to achieve 4000 MW of generating capacity even by 3 to 4 plants as suggested by the author we will add up a minimum of 3 times the labour force required to operate a 4000 MW power plant. And that is sheer waste and even in a populous country like ours we are running short of qualified staff today.

It is therefore in the interest of the nation that power professionals appreciate the need to bridge the gap quickly and work for it.

Ultra Mega Power Projects - A great Idea for the Indian Power Sector

The caption is misleading as the author is actually in favour of locating Mega Power Projects along coastal basis. His main concern is water and hence he prefers coastal based power plants.

Given the current Power deficit in India we need to have many more of these Mega Power Projects to provide even a single lamp connection to many of our citizens' households. While the Distributed generation modules will survive in a grid backed up by good base load generating capacity, the model will fail miserably in our country where we have severe shortages.

Mega projects bring with it scale of operation and high level of automation and latest technology. If we have to achieve 4000 MW of generating capacity even by 3 to 4 plants as suggested by the author we will add up a minimum of 3 times the labour force required to operate a 4000 MW power plant. And that is sheer waste and even in a populous country like ours we are running short of qualified staff today.

It is therefore in the interest of the nation that power professionals appreciate the need to bridge the gap quickly and work for it.

NTPC as an Investor in TELK

It is heartening to note that NTPC is considering picking up 49% of the equity in TELK. For all professionals in the Power Sector this is good news, for we are at least sure that TELK will definitely not go the NGEF way.

The report also hints at TELK facility being used for repairing the failed Transformers and other equipment of NTPC . This adds a jarring note. As an investor one can not fault NTPC for negotiating a deal most suited for their needs. But one would expect a more proactive role from NTPC, in the interest of their own share holders.

TELK, as a manufacturer of Generator Transformers has a unique position in the country. On last count their Transformers were supporting more than 25000 MW of generating capacity in the country be it Nuclear or Thermal or Hydro Electric Projects. The performance of their units have also been by and large satisfactory. Given this back ground and the current boom in the market with so much of accelerated investment flowing in the Generation and Transmission segment, NTPC as an investor should immediately ensure maximisation of the capacity utilisation by providing working capital funds. Price realisations in the Transformer industry has gone up with existing capacities being utilised fully. Even Chinese vendors are picking up orders in the Indian market.

Today when multinational Power companies such as Siemens, ABB & AREVA are investing in the India for establishment of green field capacity or expansion of their existing capacity, it will be indeed sad, if the existing capacity of a leading indigenous manufacturer is turned in to repair facility.

NTPC's Merchant Power Plants

It is heartening to note that NTPC plans to quickly strengthen their balance sheet using the Merchant Plant route. These plants when they come on to the Grid, a National Power Exchange will be functional as envisaged by CERC. In the Draft paper on Power exchange published by CERC, the Prices are to be discovered using the Double side Bidding process where, the aggregated demand at different prices is matched with Supply Prices quoted by Power Producers, for different quantum. Such a system as the paper very correctly points out, will minimise market manipulations, by providing equal say to both the Buyers and Sellers. It is therefore expected that the tariff of the Merchant Plants of NTPC will be discovered through such transparent Double Side bidding process and not determined by the penal rates of Unscheduled Interchange which it seems is their current expectation.

Another factor which one needs to keep in mind is that these Merchant Plants are planned on the balance sheet of NTPC and NTPC assets are built by all the Distribution companies and the erstwhile electricity Boards. It is but natural that the Distribution licensee (or Electricity Boards) while willing to accommodate certain level of competition(read higher prices), expect that the prices are either discovered through the Power Exchange in a transparent manner or guided by the well founded tariff setting principles, including the competitive route. This is especially applicable for the large Hydro stations which are being named as Merchant Plants, where the benefit of lower tariff should not be blocked to all the stake holders, in the interest of one company.

Increasing appetitie for Investments in Indian Power Sector

With the "Electrifying Start" achieved in the implementation of Ultra Mega Power Projects, it is clear that the present policy initiatives has met with more than anticipated response. This is a land mark event in the country and will clearly be remembered for times to come.

Two significant changes have been heralded in this start. One; it is now clear that there is an enormous appetite for investments in the Power Generation Segment. Given the mind set of some in the government who still complain of lack of response of the Private sector in participating in the addition of more than 120,000 MW of Power Generation, the current response of Indian Companies with the support of the international equipment manufacturers and investment agencies, should be satisfying.

Power sector is unique with its own typical issues. It cannot be compared to Automobile Industry (as done by a senior government official in a conference recently) for the Dealers in the Power Sector decide what the consumers get and not the Consumers or the Producers.. The freedom the consumer enjoys in choosing the Automobile he wants, whether it is the class or brand, it comes to Power, the same consumers do not have the luxury of choosing between a Maruti or Tata or Honda, even for a given segment. He has to live with the dealer with whom he is connected or generate on his own. In the other industry Dealers have a limited role and the market is governed by consumer demands and the Suppliers capabilities. To add to the trouble, in India the "Power Dealer" (Distribution Licensee / Board) can simply report that he has lost 60% of the goods delivered to him! Can a dealer in Cement or Automobile report a similar loss and still continue to be in Business?

Given this scenario where the Producers cannot choose consumers, it is necessary for the government intervention to guarantee returns on investment or provide policy initiatives where the investor will be able to recover his investments and see guaranteed returns. When such micro management takes place, then the prices are artificial and are not typically governed by Free market dynamics. And the prices tend to be higher when the Public sector takes the major role as being in house, the Prices are not put through hard negotiation. It is therefore to the Credit of the persons at the helm of Ministry of Power (MoP) for introducing a high degree of competition and bringing in an era of Ultra Low Prices.

The Second important change that this Start will bring in is a significant improvement in Public Sector Operations in this sector. With this policy initiative the Generator is given the option of integrating two distinct elements in the value chain namely mining and Power Generation. The price now received is stripped of the high cost on both these counts. NTPC which had teamed up with BHEL for equipments has quoted a price in excess of Rs.2.00 per unit while three Private sector Companies have submitted offer less than Rs.1.40. To understand the magnitude of the impact one needs to work out the additional cash flow which NTPC tariff would have generated in the 25 year life cycle of the plant. Taking an average PLF(Plant Load Factor) of 80% with 8000 hrs of annual operation, the amount is Rs 45000 Crores for 4000MW. Some would argue that "that is the kind of inefficiency which the country is bearing today".

The equipment maker BHEL has to review the cost of his operations as he is no longer operating in a protected environment. NTPC, should sharpen its skills on mining and also negotiate finer rates of finance. I am sure there will be lots of introspection in these companies and there future actions will factor in these market dynamics.

All of this euphoria will quickly disappear if the planned evacuation arrangement (over which the Generating companies do not have any control) do not come up in time. With the MoP planning to do a similar act in the Transmission segment, part of this issue will be addressed. Focused initiatives are needed to strengthen the sub transmission segment as well.

The MoP literally talked down the Prices in this bidding round, when they indicated that their expectation of the Price for Sasan power should be in the region of Rs.1.50 to Rs. 1.60 per unit; a reserve price of sort. Any serious player would not have quoted more than that and the results bear this out. It is of course another thing that the government corporations which derive the maximum support from the MoP do not seem to concur with this view!

With such significant changes the Indian consumer can clearly look forward to an illuminated future.

Merchant Power

As envisaged by the Power Ministry 15000 MW of Generation capacity is expected to be added to the grid through the Merchant Power Plant route. This is a bold new concept to channelise private investment in to the sector.

The Indian Power sector needs lots of reforms and each step has its own detractors. 40 to 50 % of the Power injected in to the system is not billed in some states and hence substantial costs are not recovered In a such a scenario, the utilities obviously manage load peaks by severe load shedding, which is accepted as a norm. The industries are therefore forced to have their own stand by generators which are in some cases operated as base stations. This brings a very high cost to the industries. So over the years major power consumers have been forced to invest in Captive Power plants that is base stations planned on coal instead of relying on grid power.

Under these circumstances, one can definitely expect good response to the scheme for setting up of Merchant Power Plants. A lot remains to be done to make this a success. As the author has correctly pointed out Transmission network needs to be strengthened and more private or public investment made in this segment. Existing large Private Power utilities like Tata Power and Reliance Energy will definitely utilise this opportunity as the tariff of the power generated through the Merchant Plant route is not regulated. Both the pit head plant with the Coal Block allocated to it and the plant with the coal linkages will be keenly contested as the industry today is generating cash surpluses to have its power requirements met through its own investment.

Power Sector

At the core of the beleaguered Power sector is the ownership issue. Are state governments responsible to the public or is it the central government's role? Governments at centre and states have conveniently not addressed this issue as it affects their vote banks. No sector invites Private capital with assured returns with most of the cost variables being pass through. In spite of it we have not seen capital coming in to this sector.

It is therefore clear that what is needed is enabling provisions, which allow for a sensible business plan to implemented by competent organisations and achieve their returns. Enabling provisions will include interference free "disconnection" of Power Supply in the event of default, recovery of dues with Penalties and above all a free environment where an organisation can perform with out the elected representatives having their say on day to day matters.

While we have made such major strides in new technology areas, it is disheartening to see that we are not able to get our act together on providing this basic infrastructure. We have already tackled the communication issue and are on our way in the transportation segment with the giant railways achieving world class performance.

Policy makers should quickly address this and come up with working models which will invite talent and capital. In the absence of bold initiatives, dark nights and idle hot days are ahead!

Power Plans

Country's Power Plans have gone hay wire and the entire administration at Central & State levels show to be agitated about it. But at ground level very little action is seen. Industries who are operating at close to their installed capcities have their own captive generation units and have self electric generation as a basic assumption when they draft their business plans, be it the domestic or export market.

On the other hand farmers and residential consumers are left to fend for themselves. Unfortunately our rulers believe that they can continue to get away with the euphemism of providing free power for ever and continuously increase the numbers who become eligible for it as well. It is time that responsible leaders take the trouble of impressing up on one and all the fallacy behind this whole effort.

An complete overhaul of the system of directing the subsidies to the targeted, to decentralisation of activities, breaking up the Goliath organisations to manageable and accountable entities is the need of the hour. As you have argued correctly in your leader, any efforts to derail this effort should be discouraged.

Policy makers can look at alternatives and they need to provide special incentives to performing organisations. But having decided on a direction and the pace at which they will move forward, any dithering in way will put the hapless millions in to further misery.

Neyveli Disinvestment

NLC Disinvestment – Way Forward – A Model


A performing Prime Minister and person responsible for spearheading India’s resurgence in the new millennium, is ready to move away from active governance; a Dravidian party which has just come back to Power and has a very grand agenda for decimating its only opponent including smooth transfer of power to the next in command is ready to put at stake its entire plan on this issue – NLC disinvestment. Such is the power of this issue that it requires a thorough analysis of the issues involved, a possible solution and its impact on the entire reform process.

To start from the origin, the NLC web page takes you back to as early as 1828 when the first traces of “Low Calorific value of Coal” deposits was found. It took years of investigation and policy making for the birth of a commercial enterprise to exploit these “traces” which by now had been identified as “2000 Million Tonnes” of Lignite reserves. So in 1956 Neyveli Lignite Corporation was born with Mr.T.M.S.Mani as the chief executive of the project. It stands today with an installed generating capacity of 2490 MW supporting the southern grid with its steady and sustained performance of XX % PLF.

Lignite is a soft brown mined fuel found in distinct areas through out the globe. Its characteristics in terms of composition and calorific value is between “Coal” and “Peat”- a state of the rotten vegetable mass buried over many years. The calorific value of Lignite is 2450 Kcal/ Kg as against 6500 Kcal /Kg for high calorific Coal. But the moisture content in Lignite is very high -53% which is one of the major issues in burning it. It however ahs the advantage of being “Free Burning” with low ash content. Once the high moisture content is addressed (through Air Drying) lignite is suited for direct burning. With the identified reserves in our country of lignite and the growing appetite for energy in our country “Lignite” as one of the primary sources of Power Plant fuel is undisputed.

With the union government’s plan to proud power for every one by year 2012, every source of power which is owned by us and not dependant on imported fuels needs to be exploited. It is therefore necessary to leverage the fast technical expertise available with NLC in the areas of Open cast mining, handling of Lignite, dealing with sub terrain water tables, consistent Power generation over the years with this high moisture fuel and last but not the least managing & minimizing the environmental impact of the entire cycle of mining to Power generation. One must also not underestimate the cash surpluses that are generated (which can no doubt be maximized by further improved performance and financial reengineering), which can be utilized to build new capacities.

The government is therefore correct in wanting to do something about it; but has not quite approached the subject. As Sri. N.Ravi in his recent article “Half Done” pointed out, the political class is correct in implementing the reforms but are not convinced that it will bring the votes which they badly need. On the contrary they are mislead with the scare that these reforms are driving their voters away from them. The reforms therefore “need to be packaged”.

How does one go about “packaging” the disinvestment plan? The main issues the political class are confronted with today are

· Family silver is sold cheap
· Not sure about future as ownership change may alter the basic character of the institution and hence
· Employees stand to loose their jobs; if not jobs at least they may loose the benefits which other wise they enjoy.
To address both these issues, we can look at how another great professional orgainsation addressed the similar dilemma and has come out successful. – L&T. Because of its performance and lack of ownership clout L&T was always a target for corporate raiders till the present management decided to pool their own strengths and that of the the majority shareholder Financial Institutions to make an enterprise which all of us are proud of. The management reviewed the asset base of the organisation and created value by demerger of divisions, which was pooled in to the shareholder’s wealth. Employees benefits were ensured for posterity through the L&T employee welfare trust.

To replicate the same model for NLC(or any such PSU), the following steps can be an option:
· Create 4 subsidiary companies de merging the main assets as under
o Mines
o Power Stations under two distinct groups – TS II and IA and TS I
o Package the large land available under a different company and create a dedicated industrial estate
o Future projects.
· Sell of the majority stake in two of the existing entities and plough back the proceeds as equity capital for the future projects. In the process you have a lean organization with a low equity base but large cash to spearhead investments in the booming power sector. In addition to the already identified future expansion plans the much talked about Jayamkondam Project, Srimushnam Project and similar such projects can be started immediately.
· Allow the personnel to choose and incentivise their cntinunace by providing schemes through the welfare trust.

Based on the current PEs enjoyed by similar companies and the real estate values, NLC will be able to generate much more than the required equity component for all their future projects. This unlocks the hidden value and provides the benefits to the rightful owner the “Employee” and the Government. It is also acceptable to the political class as they will launching new projects in the Public sector which will generate much more employment and overall growth which is their main concerns. Reformist economist Sri. Manmohan Singh is also happy as he is able to provide funds for development with out burdening the Revenue budget.