A perfect storm gathers for India’s airlines
The nascent recovery in India’s airline industry is under threat as rising costs and seat capacity combine with a crippling lack of airport infrastructure to hobble growth prospects. India’s carriers are likely to report combined losses of as much as $380 million to $450 million in the year to March, 2018, according to a recent estimate from the Center for Asia Pacific Aviation, a Sydney-based consultancy. Meanwhile, fleet expansion plans may be hit given the shortage of landing and parking slots at airports, say observers. That means airlines would be unable to take advantage of the robust growth in passenger traffic. “It will be difficult (for airports) to accommodate the newer planes. Most of the deliveries will be delayed,” said Jeet Ghosh, an analyst with Kolkata-based research firm Stewart and Mackertich. Less than a year ago, India’s airlines seemed on the verge of a turnaround as low fuel prices enabled steep discounts on fares, stirring a boom in passenger numbers and in revenue. Rayshawn Jenkins Authentic Jersey
No such thing as a perfect renewable energy contract
India’s 175 GW renewable energy (RE) targets by 2022 are ambitious, to say the least. Compared to RE targets in Europe, China, or California that require 4-5% growth in RE capacity annually, Indian targets require 25% growth. This translates to enormous capital investment (well over $100 billion), including from global investors. RE investors used to complain that dealing with India was like dealing with 30 countries; each state had its own norms. The model bidding document across states took care of that complaint. This is now being supplemented by model power purchase agreements (PPAs), drafts of which have been circulated to stakeholders. While this is a positive step, it ignores a fundamental challenge: A “perfect” contract is only on paper. What happens when things don’t go as planned? RE is overwhelmingly in the hands of the private sector. Even the Solar Energy Corporation of India Ltd (Seci), NTPC Ltd, and other quasi-governmental RE programmes involve private developers. While all power producers face counter-party (off-taker) risk, i.e., risks from struggling state utilities (distribution companies, or discoms), this challenge is particularly acute for RE, which is volatile and expensive for discoms in the short term, at least on a cash basis. What happens when utilities don’t buy the power as they promised, despite a PPA? Or, worse, take the power but don’t pay? If states don’t offtake power, can developers easily sell this power to third parties? Due to scheduling and grid reasons, this is neither automatic nor easy. Worse, the prices available may be lower than contracted in the PPA, especially considering the low power exchange (spot) prices in the last few years. Yet, one doesn’t often hear of developers declaring defaulters, because doing so effectively severs the relationship, leaving few alternatives for the power projects. It also has a negative impact on investor sentiment. Instead, projects muddle along, else risk becoming political or murky, potentially attracting palm-greasing. What violates a contract? RE contracts, like most contracts, have fine print. Even the upcoming model contracts have conditions under which a utility may refuse to offtake power, ostensibly under grid security norms. Even if required, all such backing down must be transparent, and ideally declared by an independent system operator (ISO). The affected party should not be the one unilaterally determining when a force majeure (unexpected events that prevent the fulfilment of a contract) equivalent clause applies. Otherwise, we risk a charade similar to how airlines get to absolve themselves of any delays under the guise of “weather”. The risks of not buying will only increase as RE grows from today’s approximately 6% of power consumed to over 10% in just a few years. Even if the price premium comes down, the operational impacts are non-trivial—RE often helps with energy requirements but not power capacity requirements, since India’s peak power demand is mostly in the evening. Just like Open Access (retail choice) was mandated under the Electricity Act, 2003 but overtly and covertly resisted by utilities (also often under grid security claims), who feared losing their paying customers and disliked the operational and planning headaches, such a “go slow” mentality towards RE by states represents one of the largest risks for scaling up RE. Transparency is the first requirement When one doesn’t trust the buyer (or seller), a common mechanism has been the use of escrow accounts. For RE projects, pooled mechanisms such as the Payment Security Mechanism envisaged by Seci—the special purpose vehicle for buying and bundling RE across projects—have limits on the power capacity they can cover. Any amount could, in theory, be covered, but at a cost, which today is being borne by the Central government. Even with an escrow, if drawn down, how is this to be replenished or prevented from becoming a moral hazard? Instead of focusing on risk management, why not improve risk avoidance? The Clean Energy Finance Forum has suggested improved transparency for utilities as a key need, especially related to RE purchases. In fact, we don’t even have consistent, granular and timely data on RE production. For starters, stakeholders, especially developers, need to know quanta of backing down, along with a reason (if declared). Importantly, we need to have transparent data on payments made to RE (and all) power projects. Delays cannot be swept under the rug, masking under-performing assets that will also never be declared non-performing. The ultimate need for RE and other infrastructure is “patient capital”, which is low-interest-rate funding seeking modest yields over time, like a home rental, instead of capital willing to take on higher risks but expecting higher returns, like an equity developer interested in asset appreciation or resale. Patient capital is held by sovereign, pension and insurance funds, which seek governance, predictability, and then returns. The sooner we recognize that improved contracts are necessary but not sufficient, the sooner we can tackle risks not addressed by the contracts, either because they are outside the scope of the contract, or because the contracts only cover the risks in theory but not in practice. Chris Chelios Womens Jersey
Non-renewable power capacity addition slows down
Subdued demand coupled with surplus electricity availability has slowed down the addition of new capacity for generating power from conventional sources of energy such as coal and gas. The installed electricity generation capacity of non-renewable energy sources in Gujarat grew by just 0.7% in 2015-16. The growth was 6.2% and 5.2% in 2013-14 and 2014-15 respectively. According to data from the Union power ministry data, Gujarat’s installed power generation capacity from non-renewable energy sources stood at 20,765.82 MW in 2015-16 as against 20,611.30 MW in 2014-15, an annual addition of 154.52 MW. Power sector experts attribute the sluggish demand of power coupled with surplus electricity generation to slower growth in addition of new capacity for conventional power. “The power sector across the country is passing through tough times. Demand for power has not grown in proportion with new capacity added in the last few years. As a result, capacity addition has slowed down noticeably,” said K K Bajaj, a city-based energy expert. Industries and agriculture are among the major consumers of power in state. “If the manufacturing sector grows, demand for power picks up. However, reduced manufacturing activities has affected electricity demand. Gujarat ends up with around 1,500-2,000 MW of surplus power every day,” said a source who is closely monitoring the power scenario in the state. “Considering the current demand-supply situation, no new capacity is being planned and work on power projects already taken up is currently going on,” the source added. According to experts, increased usage of power efficient equipment in industries, agriculture and homes has also contributed to the rationalization of electricity consumption. “On the other hand, power from renewable energy sources, especially solar, is giving tough competition to conventional energy,” added Bajaj. Sluggish demand has prompted power generators to divert surplus power to the open market, which has further resulted in easing of power tariffs in the market. Matt Dumba Jersey
Capacity utilisation at coal-fired power plants touches 60 per cent
Capacity utilisation of coal-fired power plants has risen to 60.5 per cent in December from a low of 52 per cent in August, a significant growth after years of decline, official data shows Plants owned by states saw capacity utilisation jump almost 18.5 per cent during the same period in 2016 against a small 5.7 per cent growth in the corresponding previous period, data from the Central Electricity Authority showed. Analysts say power plants may find it difficult to repay debts if capacity utilisation falls below 60 per cent. Thermal capacity utilisation had fallen earlier in the year as good monsoon rainfall reduced agricultural demand and increased hydroelectric supply. “Hydel power is way cheaper than thermal power and distribution companies prefer hydel power since it reduces their costs,” said Rajesh K Mediratta, director-business development at Indian Energy Exchange. Spot prices had fallen to about Rs 2 per unit, he said. Santosh Kamath, partner at KPMG in India, said higher hydel generation hits power plants of states because they charge higher tariffs than central sector supply. “This monsoon, distribution companies bought more hydel power and drastically reduced state sector power intake. As monsoons ended, they restored their purchase from the state sector leading to the 18.5 per cent growth,” he said. “Nevertheless, a 60.5 per cent capacity utilisation for coal-fired plants may be comfortable in developed countries but it may not be so in India specially with plants that do not have longterm supply agreement with consumers,” he said. Howie Long Jersey
Electricity bills of industrial units likely to witness steep jump
Spot market power is set to become costlier as state-owned power distribution companies have proposed a hefty increase in levies imposed on openmarket consumers in their tariff petitions for the coming year. Distribution companies (discoms) have proposed raising multifold cross-subsidy surcharges, network usage charges and imposing additional surcharges that could increase electricity bills of large consumers by upto 40 per cent. Experts say imposing high charges on spot market purchases will hurt growth of industries, rendering them uncompetitive and hurt the government’s Make In India campaign. State power discoms of Odisha have recommended raising network-wheeling charges on commercial consumers in FY18 to Rs 2.26 per unit from Rs 0.63 per unit. The cross-subsidy charges for large industrial consumers are proposped to be raised from Rs 1.91per unit to Rs 3.61per unit. The tariffs for large consumers in the state purchasing electricity from spot market are likely to rise by over 40 per cent. Karnataka power distribution companies propose to increase energy charges, wheeling charges and cross-subsidy charges on open market power consumers by close to 22 per cent. Power utilities of Madhya Pradesh seek to introduce an additional surcharge of Rs 1.2 per unit on the power procured form other sources, making such purchases costlier by about 24 per cent. Delhi discoms have proposed raising cross-subsidy charges but decreasing additional surcharges on open-market electricity deals, leading to a net increase of 30-40 paise per unit. The power distribution companies of Daman and Diu have proposed 36 paise increase in cross-subsidy charges and 11 paise increase in wheeling charges leading to a 12 per cent raise in cost of spot market power purchase by industrial and commercial consumers. Most states including Punjab, Maharashtra, Rajasthan and West Bengal already levy charges called ‘open access charges’ on their industrial and commercial consumers to deter them from buying from spot markets, and protect their power distribution companies. Open access is a reform announced in the Electricity Act 2003 that refers to enabling buyers to choose source of electricity and giving them right on transmission and distribution system for transfer of power. Stateowned power distribution companies fear losing their high-paying industrial consumers to spot markets though such transactions constitute only 1 per cent of the country’s total power consumption. The Economic Survey of 2016 had recommended that Indian industries should be relieved of the burden of subsidising electricity supply for agricultural and domestic consumers and allowed to procure power from the open market. India Energy Exchange director (business development) Rajesh K Mediratta said that in the long run, it is imporant for states to let the industries survive. “At this stage, it is not good to discourage open access if the country wants to encourage domestic manufacturing.” Electricity prices for industries in India are the highest in world as states offer free power to agricultural consumers and subsidised power to residential units. Adrian Clayborn Jersey
India looks to expand energy ties with Myanmar, sell refined crude
India plans to sell refined crude oil products to Myanmar as part of New Delhi’s efforts to deepen ties with its eastern neighbour, which is expected to see strong demand for fuels as it builds new roads, factories, utilities and airports. Indian oil minister Dharmendra Pradhan began a five-day trip to Myanmar on Monday, scouting for opportunities in oil exploration, refining and products retailing. Prime Minister Narendra Modi wants to expand ties with the country’s eastern neighbours including Myanmar to develop its landlocked northeastern states. Pradhan is also expected to discuss laying fuel and gas pipelines linking India’s northeastern states with Myanmar. The Indian oil minister’s trip comes months after Myanmar leader Aung San Suu Kyi visited New Delhi, courting investments in sectors left in disarray under nearly 50 years of a military dictatorship. A sweeping electoral victory for Suu Kyi’s party in 2015 paved the way for the lifting of US sanctions against Myanmar last year. Numaligarh refinery Ltd (NRL), a unit of India’s state-run Bharat Petroleum Corp, is looking at selling gas oil into northwest Myanmar, its managing director said. “Initially, it will be a small quantity. We will look for a long-term contract for diesel exports after expansion of our refinery, ” Padmanabhan told Reuters. NRL plans to treble its refining capacity to 180,000 barrels per day in four to five years. Myanmar’s refined fuels consumption is estimated to rise at an average annual rate of 6 percent over the next 10 years to 2026, BMI Research, a unit of credit ratings agency Fitch Group, said last month. “Demand for automotive fuels (gasoline, diesel) will grow particularly strongly, as rising consumer wealth and car ownership combine to rapidly expand the size of Myanmar’s vehicle fleet at a healthy clip of 18.6 percent per annum over the next five years,” it said. B Ashok, chairman of India’s top refiner Indian Oil Corp, earlier this month said his firm was looking for downstream opportunities and the sale of refined fuels to Myanmar. ONGC Videsh Ltd, a unit of Oil and Natural Gas Corp, last year said the firm was in exploratory talks with Gazprom for the supply of natural gas through a complex swap involving Russia, China and Myanmar. Steven Nelson Authentic Jersey
Platts revamps Brent oil benchmark for first time in a decade
Oil pricing agency S&P Global Platts is making the first major overhaul of its Brent oil price assessment in a decade, to address falling supplies of the crude oil grades underpinning the benchmark that prices most of the world’s oil. A decline in supply from North Sea fields has led to concerns that physical volumes could become too thin and hence at times could be accumulated in the hands of just a few players, making the benchmark vulnerable to manipulation. Platts said on Monday it would add Norway’s Troll to the basket of four British and Norwegian crude grades which it already uses to assess dated Brent from Jan 1. 2018. This will join Brent, Forties, Oseberg and Ekofisk, or BFOE as they are known. “Overall we have had significant support for the addition of a new grade to the basket,” Jonty Rushforth, global editorial director for S&P Platts Global’s oil and shipping price group, said at an industry conference. “Far and away, Troll has received the most support.” Troll will add about 200,000 barrels per day, or 20 percent, to the basket of crude supplies underpinning the benchmark, Platts said. The move was in line with expectations after Platts said in December it was being considered. Brent is used to set the price of billions of dollars of daily oil trade though a forward market for BFOE crude cargoes, swaps markets, physical benchmark dated Brent and Brent crude futures. Troll, a light, sweet crude, is operated by Norwegian state producer Statoil, which also contributes to the Oseberg, Statfjord, Gullfaks, Grane and Asgard streams. Statoil on Monday said it supported the move. “We are pleased that Platts now has announced that Troll will be included,” Statoil spokeswoman Elin Isaksen said in an email. “Troll will produce both oil and gas for a long time yet,” she said in a separate email. OWNERSHIP STRUCTURE Platts announced the decision at its conference held a day before the start of the Energy Institute’s IP Week, an annual gathering of the oil trading industry in London. Some trade sources on Monday noted that Statoil’s share of the production used to set the benchmark will rise — a development Platts acknowledges. “There is of course interest from the market in the ownership structure of the basket,” Rushforth said at a media briefing. “It does mean that Statoil has a larger share than Shell and Total.” Even so, no single company would own more than a quarter of total production in the new basket, he said in a Platts video on the company’s website. Supply of the current four BFOE grades is normally around 1 million bpd, equal to just over 1 percent of world output. The last change to the dated Brent benchmark was in 2007 when Platts added Ekofisk, a light, sweet crude. Oseberg and Forties were added in 2002. In an earlier move to boost liquidity, Platts began to apply quality premiums to two better-quality crudes – Oseberg and Ekofisk – to encourage delivery of these into contracts. There are no plans yet to apply one to Troll, said Platts, which will be sticking with the BFOE name. Chris Hogan Womens Jersey
Debt pain of Indian energy giants eases as fuel reforms pay off
Lower oil prices and the scrapping of fuel subsidies have allowed India’s biggest energy companies to slash borrowings to the lowest in at least eight years. Total debt at Indian Oil Corp., the nation’s largest refiner, stood at 419 billion rupees ($6.2 billion) at the end of September, down from 863 billion rupees in March 2014, according to the most recent data from company filings. Liabilities at Hindustan Petroleum Corp., the third-biggest fuel retailer, shrunk 65 percent in the same period, the data show An improving credit profile is allowing refiners to raise long-term funds at cheaper rates to fund expansion in a nation that is overtaking Japan as the world’s third-largest oil user. Bharat Petroleum Corp.’s $600 million bond sale in January drew bids for three times the amount, helping the fuel retailer price the 10-year debt at the tightest spread over U.S. treasuries by any Indian company in a decade, according to data compiled by Bloomberg. “Any new bond sale by them will be lapped up,” said Raj Kothari, head of trading at Jay Capital Ltd. in London. “With leverage of these quasi-sovereign companies declining, their position to service debt has improved significantly. A lack of issuance by them has created a dearth of good-quality issuers from India.” Jay Capital holds Bharat Petroleum bonds, he said. Brent oil prices have fallen by half in the past three years, providing the government with a window to free up controls. Prime Minister Narendra Modi ended diesel subsidies in October 2014, completing a process started by his predecessor, Manmohan Singh, who got rid of gasoline subsidies in 2010. Refiners no longer have to sell the fuels below cost, which frees up cash to invest in infrastructure for faster growth. “Our debt-equity position and profitability has improved, thereby scaling up the company’s standing in the market,” P. Balasubramanian, finance director at BPCL, said by phone. “We definitely get better deals now.” Hindustan Petroleum plans to spend $8 billion over the next five years to help expand and upgrade its 60-year-old refineries as the International Energy Agency sees energy demand in India doubling by 2040. Indian Oil plans to invest about $6 billion in six years to boost capacity. Shares of the two refiners climbed for a third session at 9:29 a.m. in Mumbai. “The refiners may have an advantage in terms of the quantum of money they have access to today, and incrementally to pursue projects related to domestic refining or inorganic opportunities,” said Ashwini Agarwal, a Mumbai-based portfolio manager at Ashmore Investment Management India LLP. “Their profitability has improved significantly.” Tom Barrasso Womens Jersey
IOC threatens relook at Rs 52K cr Odisha investment
State-owned IOC has threatened to reconsider plans to invest Rs 52,000 crore on expansion of Paradip refinery in Odisha and setting up a petrochem project as the state government is withdrawing tax sops. Indian Oil Corporation (IOC) plans to expand the 15 million tonne a year Paradip refinery by 5 MT as well as set up a Polypropylene Plant and a monoethylene glycol production facility at the site of the one-year old refinery. Following BJD-led state government decision to roll back tax sops because the project was delayed by six years, the company is now threatening to reconsider future investment plans, sources privy to the development said. The project is caught in a political cross-fire as Oil Minister Dharmendra Pradhan, who hails from the Odisha, and the state government are involved in a high pitched political battle. BJP is looking to capture power in state in 2019 assembly elections. Sources said IOC is telling the Odisha government that it is reconsidering its investment plans because of the withdrawal of 11-year deferral of VAT on petroleum products sold in the state. Investment plans also included projects to improve petrol and diesel quality to Euro-VI standards by 2020. If the investment does not take place, IOC will have to look for a market for fuel outside India as no petrol and diesel of lower quality can be sold within the country. Also, the Rs 3,500 crore polypropylene plant is already under construction with September 2017 as the target date for commissioning. It remains to be seen if IOC can stop the project midway. In the December 29, 2016 notice, Odisha government has asked why the fiscal incentives like 11-year deferment of sales tax on petroleum products sold in the state should not be withdrawn considering that the Rs 34,555 crore refinery was delayed by over six years. Sources said the state government had in February 2004 signed an agreement with IOC to give fiscal incentives for setting up a 9 million tonnes a year oil refinery at Paradip by 2009-10. However, the project was delayed and started only in early 2016. The delay is now being cited by Odisha to seek withdrawal of the incentives, sources said, adding that the state government feels the delay has pushed back the payback time of deferred taxes by few years. Also, the state government says that the refinery was originally planned for a 9 million tonnes per annum capacity but the actual size commissioned was 15 million tonnes. Withdrawal of VAT deferment would mean an annual payout of about Rs 2,000 crore on 2 million tonnes of petroleum products sold in the state. Sources said IOC has replied to the showcause notice saying the size of the refinery should not matter as VAT deferment is limited to 2 million tonnes of products sold in the state. On delay in commissioning of the refinery, IOC says the Odisha government made clear its intentions of withdrawing the incentives in 2010 or 2011 itself to enable the company to redraw its plans. More importantly, even if the refinery was commissioned in 2009-10, the VAT deferment would have been in operation till 2020-21 and there is no case for it ending in 2016-17. The company said the state government will not suffer any revenue loss as it will pay back the taxes after 11 years albeit without interest on it. IOC said its board had approved investments only in 2009 and the withdrawal of the VAT concession will reduce by 2 per cent the rate of return it considered for working out the investment. Sources said the state government was of the opinion that the refinery no longer needs incentives as its profitability had increased due to a higher capacity and low global oil prices. IOC said Paradip refinery is yet to achieve profitability on a standalone basis and that its investment in higher capacity and downstream petrochemical plants will only lead to higher economic activity and employment in the state. Higher capacity was needed for setting up two petrochem units at an additional cost of Rs 7,250 crore. Originally, the foundation stone of the Paradip refinery was laid by the then Prime Minister Atal Bihari Vajpayee on May 24, 2000. Bradley McDougald Jersey