Distribution segment to lead reforms in power sector - Quoted in the Business Standard

India’s power sector reforms in 2013 would be led by the distribution segment, armed with the newly-announced debt restructuring package for state utilities. The Centre has backed the package with measures to ensure it does not meet the same fate as the one-time-settlement scheme of 2001. Also, most states have defeated political interference on revising retail rates, which will show in healthy balance sheets of financially-ill discoms.

The distribution sector reform, coupled with easing fuel supply constraints, duty measures for protection of the domestic equipment industry and the interest rate regime, will be the key factor affecting growth of the sector over the next year.

The new discom package not only provides for restructuring of loans but has provisions for incentives for state governments to cut distribution losses. There is also an elaborate legislative back up, in the form of the State Electricity Distribution responsibility Bill, to ensure that errant discoms fall in line and high-level committees to monitor progress of the discoms.

State discoms have accumulated losses of Rs 2.4 lakh crore, thanks to the gap between average revenue realised and the cost of supply. With rising fuel charges and stagnant rates, the gap rose to Rs 1.45 a unit (kilowatt per hour) in 2009-10 from 76 paise in 1998-99. The fresh reform initiative focuses on rate revisions, supplemented with earnings through reduced losses. Many Indian states suffer from aggregate technical and commercial (AT&C) losses as high as 30-35 per cent, compared with the world average of five-10 per cent.

Anil Sardana, managing director of the country’s largest private power company, Tata Power Co Ltd, believes the need to reduce of high level of AT&C losses in distribution and enable rationalisation of tariff for customers to help improve the financial health of the discoms were part of the policy hurdles highlighted in 2012. “Meanwhile, the growing focus on distributed power generation and trading of renewable energy certificate (REC) on exchanges are among the developments that can usher in positive changes in the energy scenario of the country going forward,” he told Business Standard.

Worst power blackout in 2012
He also listed severe fuel supply shortage and the worst power blackout (grid failure) in the country’s history, in July, as “turbulences” the sector faced last year. All that is set to change in the new year.

The significant improvement shown by state-owned Coal India Ltd (CIL) in output would ramp up coal supply for plants. While the coal problem was compounded in 2012 by the differences between power and coal ministries over the provisions of the new supply pacts, the two sides arrived at a consensus last week. New pacts are set to be signed for over 7,000 Mw capacity within a month.

Another reason for cheer in 2013 is that private industry, which has been complaining of policy hurdles, still seems bullish on fresh investments. The private sector added around 15,000 Mw of new capacity, 75 per cent of the total 20,500 Mw in the past year. Despite grappling with challenges, the level of determination exhibited by the private sector must be appreciated, Sardana says.

While the last year saw commissioning of all the three units of Tata Power’s Mundra ultra mega power project (UMPP) in Gujarat, the first of the nine such large-sized power plants being planned in India, the project ran into problems owing to a change in regulation in coal exporting nations making imported coal costlier.

The company is currently seeking a rate relief from the regulator. Meanwhile, the power ministry is confident of awarding a new UMPP in 2013, with revisions in the original bid document.

On equipment, the coming year will witness a surge in the share of domestic industry in the power gear market.

The government has already imposed a 21 per cent import duty on equipment to discourage allegedly low quality Chinese machines and benefit domestic manufacturers such as Bharat Heavy Electricals Ltd (BHEL) and Larsen and Toubro. However, the financing constraints faced by infrastructure companies may spoil the plan. BHEL is already seeing a slowdown in fresh orders.

Overall, the sector’s growth in 2013 would depend largely on how well the government is able to manage two key issues which had pulled down profitability of companies last year — fuel supply and high interest rates.

“It’s critical that the over 30,000 Mw of capacity, ready for commissioning and awaiting fuel supply, is supplied with fuel immediately. This applies for both coal and gas-based plants,” Banmali Agrawala, president and chief executive officer (CEO) of GE Energy (India), told Business Standard.
Agrawala also advocates focus on renewable power, which contributes to six per cent of the country’s power supply currently. The cost of renewable power has become competitive as wind power has achieved grid parity.

“This success has also set the base for a strong manufacturing sector. It is imperative that catalysts such as renewable power offtake obligation, RECs and generation-based incentive should be aggressively implemented,” he said.

Experts believe the biggest challenge in 2013 would be to minimise subsidies in power sales to bring the sector back on the reform path. “While the discom debt restructuring will increase affordability as financial load goes off the discoms’ back, it will return to their balance sheets if politicians continue to distribute free power,” Dipesh Dipu, partner at energy-focussed consulting firm Jenissi Management Consultant said.

Mining sector to gear up for overhaul - Quoted in the Business Standard

India's mining sector, mired in controversies for a large part of 2012, is set for a cleanup in 2013. While the controversies related to the allocation, production and pricing of minerals could cause minor delays in projects, experts feel the corrective measures underway will help boost investor confidence and spur growth in the sector.

Domestic industry is dependent on the mining sector for key raw materials such as coal and iron ore.

Among the initiatives the government has taken to cleanse the sector are the new norms for auctioning mining blocks aimed at ensuring transparency in allocation, the revised fuel supply agreements (FSAs) to ensure assured coal supply for fuel-starved power plants, and the shift in gross calorific value (GCV)-based grading of coal, which will align domestic prices with international benchmarks.

Union Coal Minister Sriprakash Jaiswal recently told Business Standard that all pending fuel supply pacts would be signed soon. "There will be no discrimination in the new agreements," he said.

Two crucial legislative changes, one for setting up a Coal Regulatory Authority and the other for amending the Mines and Minerals (Development and Regulation) Act, set to be passed in 2013, will further improve regulation.

The coal ministry has identified 54 blocks for auctioning and is currently framing the blueprint for auction. In the first round, the ministry is likely to put 12 explored blocks for bidding. The ministry is also considering a proposal to allow discounts on valuation of coal reserves for power companies, which will in turn keep power tariffs under check. The first round of bidding is expected to begin in a month's time.

Things are not rosy on the supply front, though. Talks between Coal India (CIL) and power companies have been inconclusive, primarily on the issue of who will bear the higher cost of imports. The only solace is that consensus is likely on another proposal, on "price pooling". In this, the higher costs will be shared by all users.

There will be more clarity on pricing once the regulatory authority is set up. The regulator is proposed to have the power to decide the methodology to fix prices, though the prices will be set by the CIL board. The arrangement will allow BSE-listed CIL to decide prices, allowing the extant government control on pricing decisions to continue.

The next year will ring in some clarity on the important issue of coal pricing, which led to a lot of consternation last year. In 2012, CIL's stakeholders opposed government intervention in coal pricing. Further, the government's decision to allocate reserves without pricing them led to the historic coal scam.

The coal allocation scam came to light in March 2012 after draft report of the Comptroller and Auditor General of India (CAG) was leaked to the media. According to the draft CAG report, the government had extended undue benefits to the tune of Rs 10.6 lakh crore to private companies by not auctioning coal reserves. In its final report tabled in Parliament in August, however, the CAG noted a notional loss of only Rs 1.86 lakh crore.

As the scam assumed gargantuan proportions due to intense media coverage, in which the names of many politicians with stakes in allocated coal blocks surfaced, Prime Minister Manmohan Singh had to issue a clarification in Parliament. The Central Bureau of Investigation, too, registered cases against several companies for grabbing blocks based on fraud documentations.

To improve its tarnished image, the government worked out a blueprint for auctioning of blocks. To correct the policy anomalies, the new policy would put a price to mining rights for even government-controlled CIL. The coal ministry would charge CIL a "reserve price" for the 116 coal blocks allotted to the state-owned miner. The coal allocation regime also requires captive mining companies to mandatorily participate in tariff-based bidding for power projects.

Meanwhile, a similar overhaul is underway in the iron ore sector, which is a key input in steel making. If the illegal mining controversy was limited to Karnataka in 2011, year 2012 saw it expanding to other states as well. Year 2013 may be better off, thanks to a Supreme Court's probe panel insisting on putting a rehabilitation scheme in place before mining is resumed. Already, Karnataka's mining mess has eased out after the apex court allowed auctioning of the ore to meet the immediate needs of the local steel makers.

Also, the illegalities that have brought down mining operations in Goa and Orissa are being curbed by the new mining Bill, which is likely to be approved by Parliament in 2013. All eyes are now on the mechanism the government will adopt for auctioning in 2013. While a higher floor price for bidding of reserves will drive away investors, a lower floor price will deprive the government of revenue and fuel allegations of corruption.

Experts, however, are of the view the real reform in the mining sector is unlikely soon. "We can have auctioning of coal blocks thinking it will bring transparency in the process, but bidding is not likely to be successful as most of the blocks are not explored. The situation of uncertainty will not improve until the coal sector is opened up for independent mining by the private sector," said Dipesh Dipu, partner at energy-focused consulting firm Jenissi Management Consultant.