Centre adding to power sector stress instead of alleviating it
Effecting quantum changes in policy while maintaining continuity of incumbents is one of the challenges of governance. In all key infrastructure sectors, our country has grappled with this challenge as we have moved from one generation of policy to another. In one of the recent interviews, former revenue secretary NK Singh talked about how telecom policy was migrated to revenue share in the Atal Bihari Vajpayee government. While this would solve the issue of future telecom licences, the major issue was about migrating existing licences to the revenue-sharing regime. Singh talks how the then Attorney General and telecom minister were “morally” opposed to allow the existing licences to be migrated. PM Vajpayee, realising the magnitude of the problem, immediately ordered for the telecom minister to be changed and a new Cabinet Note to be put up. Needless to say, given the new facts and the implications of stalled telecom story—perhaps also the implication of not cooperating—the Attorney General was only too pleased to change his opinion and recommend revenue sharing. The rest, as they say, is history. All telecom licences were migrated to revenue-sharing model, and today we stand with over 1.2 billion telecom users and some of the cheapest tariffs on the planet. The above story is not just about how policy is to be adapted to incumbents, it is also about how national interest can sometimes be served by helping incumbents come out of stress and make investments in the future. The ministry of power perhaps need to learn an important lesson from such pivotal experiences in governance. There are far too many instances where policy stagnation has resulted in stress in the power sector, and many of the incumbents are not in a position to make any further investments in capacity addition. The implication of this could be grave, and the government needs to wake up to the threat of over 50,000 MW going the NPA way. A conventional thermal power project typically has three legs that needs to work in parallel for the plant to attain viability—coal, a power purchase agreement (PPA) and transmission. Given the breakneck capacity addition in 11th Five-Year Plan (2007-12), most of these linkages have not kept pace with the plant and these assets face the threat of turning NPA. For instance, there is a substantial capacity in the country that has a Coal India Ltd (CIL) coal linkage and a coal mine, but does not have access to a PPA. The capacity with a CIL coal linkage without a PPA is cumulatively about 26,300 MW, and the capacity with a coal mine but without a PPA is about 4,250 MW. Unfortunately, the prerequisite for availing linkage and coal mine coal is a long-term PPA, and states appear in no mood to call for PPAs for coal-based plants. In the past two years, only Andhra Pradesh and Kerala have completed bidding for an aggregate capacity of 3,250 MW. There is no visibility of any more long-term PPA in the near time-frame. If this situation is not corrected, these projects will turn into NPAs soon. It is ironical that Jharkhand, while reneging from PPAs signed with thermal plants citing lack of demand, called for over 2,000 MW of solar bids in the last three months alone. The power ministry has to create an enabling framework for states to procure stranded thermal power, else we are likely to see larger stockpiles of CIL coal and more plants turning NPAs. In the coal-based power sector, the Cabinet Committee on Economic Affairs approved a landmark list of 78,000 MW (scheduled for commissioning by March 2015) for obtaining coal linkage from CIL. But some of these plants have been delayed beyond their scheduled commissioning, and there are others that have been commissioned but were not a part of the original 78,000 MW. Total capacity, amounting to over 16,700 MW, is lying stranded, waiting for linkage coal to achieve operations. In addition to the two above categories, there is about 14,600 MW of power capacity that has a PPA but no long-term coal source. There is another 9,925 MW of power capacity that has been set up with neither a coal source nor a PPA in place. That this power capacity is becoming stranded comes in the backdrop of NTPC and state distribution companies being freely allowed to sell power from linkage coal in the spot market, and also being provided bridge linkages where their coal mine is taking time for commissioning. NTPC also enjoys the unique privilege of signing PPAs on a regulated tariff basis (without tender) with state-owned utilities long after the national tariff policy deadline of 2011 has expired. This unequal level-playing field for NTPC is the final nail in the coffin. The fundamental issue remains that the policy for a PPA requirement for coal linkages, or an approved restrictive list of coal linkages of 78,000 MW, was drafted in the context of a coal scarcity scenario. We are in an era of coal surpluses, and CIL seems to be contemplating exports. It is imperative that such policies change and ensure that coal, whenever and wherever available, be provided to domestic plants to prevent them from turning NPAs. It is imperative that such policies change and ensure that coal, whenever and wherever available, be provided to domestic plants to prevent them from turning NPAs. The plight of gas-based power developers is no different. The policy for gas-based power projects (providing power system development fund support) was announced with great fanfare in 2015—subsidy was announced on imported LNG, provided states agreed to buy the power. An absurd stipulation of requiring the developers to commit to “zero” return on equity was also agreed to by the industry, and bids were called. However, after the bids were completed and the states consumed the power, and after submitting the due documentation by the developer to obtain the subsidy, the government failed to release the subsidy in time. Out of the blue, and after about four months of delay
GAIL may face loss on US contract owing to price mismatch
Shares of GAIL have increased by over 25 per cent in the past five months on hopes that the country’s largest gas transmission company will report better earnings in the future following an increase in pipeline tariffs. While this is true, investors also need to consider the possible loss that the company will bear on its US gas contracts if the current sharp mismatch between the contract price and the spot price of gas persists in the future. GAIL had signed two long-term contracts to procure total 5.8 million metric tonnes per annum (MMTPA) of gas with supply starting 2018. At the current level of Henry Hub price, a benchmark for the US gas price, the landed cost of the gas will be at 75 per cent premium to the spot gas rate. If this difference persists when the gas is delivered two years later, it will be difficult for GAIL to sell costlier gas to domestic clients because they may prefer to source cheaper gas from other suppliers. The final gas pricing will be a function of several factors including the difference between the benchmark price and spot rate as well as trend in crude oil price. However, the risk is high since GAIL has not secured customer tie-ups for US contracts. This is unlike its long-term contract with Qatar-based RasGas Company which is under back-to-back arrangement. The event may also offset the benefit of higher tariffs for the company’s five gas pipelines. In addition, Bloomberg reported that NTPC is seeking to terminate the long-term gas supply contract with GAIL due to higher price. It means there is a potential risk to GAIL’s earnings due to supply of high-priced gas contracts amid a glut in global LNG market. Analysts believe that Asia may become a major market for the oversupplied global LNG as the economics of selling to Europe does not work due to steep competition from Russian gas supplier Gazprom. Credit Suisse estimates that GAIL may have to take a haircut of $1/mmbtu to sell US LNG into Asia, resulting in a $300 million (about Rs 2,000 crore) annual loss. At Tuesday’s closing of Rs 379.5, the stock traded at 13.4 times FY18 earnings, which is higher than the longterm average and therefore, reflecting that the market is under-pricing the risk from the US gas contracts. John Miller Jersey
Odisha to revise power duty for commercial users
The Odisha cabinet on Monday decided to amend the Odisha Electricity (Duty) Act, 1961, through an Ordinance, revising electricity duty for commercial users. Emphasising that the hike in rates will not affect domestic users, chief secretary A P Padhi said the amendment of the Odisha Electricity (Duty) Act will help the government generate Rs 90 crore of additional revenue annually. As per the ordinance, the government has decided to enhance the upper limit of electricity duty to Rs 2 per unit in case of captive power plants and independent power producers and to a maximum of 15 per cent on ad valorem basis (value of the power and not quantity used) in other cases. At present, the state government levies duty at the rate of 2% for irrigation, 4% for domestic use and 5% for small scale industry. However, irrespective of the categories of consumers, the duty is subject to an upper ceiling of 40 paise a unit. Justifying the decision to bring in an ordinance, Padhi said by the time the assembly would have reconvened, the state government would have lost out on revenue and hence it was decided to amend the act. Though four months of the current fiscal have already passed, the Ordinance would still help the state garner Rs 60 crore out of the Rs 90 crore that had been initially projected, Padhi added. Notifying the Ordinance, a government statement said that considering the inflation and regular growth in energy charges by distribution companies and the need for infrastructure development in power sector, the revision was necessary. The cabinet also gave its nod to an ordinance to amend the Odisha Gram Panchayat Act, 1964, and enable the rotation of reservation of offices of the sarpanch after every term of election. As per the existing provision, the reservation is rotated after every two terms of election. Since the process for panchayat election has already started, an ordinance was necessary, the chief secretary said. Deatrich Wise Jr Womens Jersey
Electricity in 18k villages in 1000 days: PM
Prime Minister Narendra Modi said on Tuesday that his government has set a target to provide electricity connection in 18,000 villages across the country in just 1,000 days. He said he was appalled to see that even after 70 years of Independence, people were forced to lead the life of 18th century in the 21st century. He also lauded the Jammu and Kashmir government for launching a solar energy campaign from Ladakh. At an event to mark the 75th anniversary of the Quit India Movement at the birthplace of revolutionary leader Chandrashekhar Azad here, the Prime Minister recalled those who laid down their lives for the country and said that today people don’t have to die for the nation but have to work for its development. He called upon the people to take a pledge for taking the country forward and referred to the passage of the Bill on the Goods and Services Tax (GST) in Parliament in this regard. Madhya Pradesh Chief Minister Shivraj Singh Chouhan also addressed the function. Kenny Moore Authentic Jersey
Surplus power may cause Rs 8,000 crore loss to discoms in FY17
State power distribution companies (discoms) are staring at a net loss of Rs 8,000 crore in the current fiscal owing to purchase agreements in excess of power demand, according to India Ratings and Research (Ind-Ra). Ind-Ra’s expectation is based on the assumption that discoms will surrender the power purchase agreements (PPAs) with the highest variable cost by paying the fixed costs based on the agreement, it said in a statement. According to the statement, 18 out of 36 states/UTs are expected to be power surplus in FY2016-17, as per the Central Electricity Authority’s (CEA) Load Generation Balance Report 2016-17. It said that these discoms are likely to surrender some of the excess power they have tied-up in past five to seven years at a loss, thereby further weakening their financial position. The discoms in the western and southern regions are expected to be the worst hit due to PPA tie-ups in excess of the power demand in the region. Ind-Ra estimates losses of around Rs 4,000 crore by discoms in the western region and Rs 2,450 crore in the southern region due to the maximum amount of long term PPA with a provision of fixed tariff in the past. The long-term commitments at a fixed cost in PPAs are preventing some state power distribution companies (discoms) from procuring low cost merchant power traded on the power exchanges. The Punjab State Electricity Regulatory Commission has recently revealed that the losses due to the surrendering of excess power for FY2016-17 is expected at Rs 2,075 crore. The commission has directed the Punjab State Power Corporation Ltd to look at ways to reduce this fiscal burden by selling surplus power outside the state. The Karnataka Electricity Regulatory Commission (KERC) also recently ended the earlier rule of the state government that power producers must generate at 100 per cent capacity and supply only within the state. Generators can now apply for a no objection certificate from the KERC to sell their surplus power outside the state, it said. Many of the long term PPAs have provisioned for Rs 1.25 to Rs 1.75 fixed prices per unit of electricity compared to an all-inclusive cost of around Rs 2.5 per unit (based on actual power rates on power exchanges for FY2015-16). Ind-Ra estimates that spot power tariffs on the exchanges are unlikely to increase beyond the current range of Rs 2.0 to Rs 2.5 per unit over the medium term, which is in line with the CEA’s projections of 1.1 per cent energy surplus and 2.6 per cent peak load surplus during FY2016-17 across India. Tyler Wong Jersey
Reliance Industries eyes LPG customers who have surrendered subsidy
Reliance Industries (RIL) is looking to lure away many of the one crore cooking gas consumers who have surrendered subsidy from state oil companies in a bid to challenge the neartotal dominance of state firms in cooking gas distribution. “They are a potential for us,” a senior executive at Reliance Industries said, referring to customers who don’t want subsidy but could be lured away with better service. The executive requested not to be named. Reliance currently has a minuscule consumer base for cooking gas, or liquefied petroleum gas (LPG), mainly because the government currently provides subsidy only to customers of state firms such as Indian Oil, Bharat Petroleum and Hindustan Petroleum. The government has been encouraging well-off people to give up cooking gas subsidy, resulting in about 1.04 crore consumers giving up their subsidy claim in a little more than a year. More people are expected to opt for this. India has about 17 crore cooking gas consumers, mostly being served by state-run distributors. Reliance currently distributes 15-kg LPG cylinders to 10 lakh domestic customers mostly in Gujarat and Maharashtra, and also in Madhya Pradesh and Rajasthan, the executive said. The subsidy most cooking gas consumers in the country receive from the government has prevented private cooking gas distributors from building any significant presence. But the expanding base of non-subsidised consumers as well as fast shrinking subsidy amount, which is down to Rs 64 per 14-kg cylinder from Rs 168 in just a year, have boosted private players’ chance. Instead of selling the LPG its produces at its Gujarat refinery to state companies, Reliance would like to distribute it directly to consumers. The company has also recently sought the government support for distributing subsidised cooking gas. “We are saying that why should you deny our customers the subsidy. You can directly give subsidy, you don’t even have to involve us. Those consumers deserve as much as the consumers of the public sector companies do,” the company executive said. “Until such time they (government) actually start a direct disbursal, directly into (customers’) bank accounts, and not through oil companies, it will be difficult for them to do it; that’s what they (government) are saying,” the executive said. The government is evaluating Reliance’s proposal, oil ministry officials said. At present, the state companies first recover full price for the cooking gas from consumers and then within days transfer the subsidy amount to the customers’ bank account. Within a month, the government reimburses companies for the total subsidy transferred. Meanwhile, the government is also squeezing the LPG subsidy by allowing state companies to raise the price by Rs 2 per cylinder every month for the past two months. Besides, the government is also working on a plan to enhance private sector’s presence in LPG bottling from which state players can source refills as the country aims to add 10 crore new LPG consumers in three years. Tennessee Titans Authentic Jersey
India’s oil exploration regime received thumbs up from industry, shows survey
India’s oil exploration regime has received overwhelming support from the industry, a high profile survey has shown. Over 95% of Indian hydrocarbon industry leaders consider the recent policy changes in the sector to be pro-business and transparent, and over 80% rated the present investment conditions in India’s hydrocarbon market to be quite positive. A survey done by EyeOn consultancy and PetroFed, 214 respondents from public and private sector across the hydrocarbon industry supply valuechain, put forward an optimistic view of the future of the Indian hydrocarbon sector, with 93.5% expecting significant to moderate growth over the next five years. On the policy front, a third of the respondents preferred boosting private investments in the domestic exploration and production (E&P) sectors and increasing India’s E&P portfolio and investments abroad to reduce hydrocarbon import dependency by 10%,a target set by the Union oil minister a couple of months ago. The Hydrocarbon Exploration Licensing Policy (HELP) has been highlighted in the survey, with about 65% respondents welcoming the shift from production/profit-sharing to revenue-sharing contracts and introduction of open acreage policy and more than 64% expecting a successful rounds of bidding for the discovered small fields. 77.3% of the survey sample recommended encouraging transition to a gas-based economy and increasing the use of biofuels, in the context of global concern for reducing CO2 emissions. However, 63.6% sought development of relevant infrastructure as the key to accelerate gas usage and increase the share of gas in India’s energy mix. Josh Norman Authentic Jersey
Swiber appeals Bombay High Court to stop ONGC from invoking Rs 7 billion bank guarantee
Swiber Offshore India has appealed to the Bombay High Court to stop state-run Oil and Natural Gas Corporation from invoking a bank guarantee of $105 million (about Rs 7 billion) after the offshore construction and support services provider’s Singapore-based parent ran into financial troubles. The Indian subsidiary of Swiber Holding Ltd had furnished the bank guarantee last year after bagging a construction, maintenance and service contract from ONGC. The genesis of the dispute lies in a liquidation application filed by Swiber Holding Ltd and Swiber Construction Pte in a Singapore court and approval sought to appoint judicial managers to help the company reorganise its business. Judicial management is an equivalent of the Board for Industrial and Financial Reconstruction (BIFR), which helps sick industrial units revive in India. The state run Indian oil and gas company said that it is entitled to invoke the bank guarantee as per the agreement with Swiber Offshore India since the latter had filed for judicial management. However, Swiber Offshore India argued in the high court that it is very much in a position to fulfil its contractual obligations of work and said that invocation of the bank guarantee will hurt the company. It has assured the court that it will obtain suitable court orders from the Singapore Court so that ONGC’s projects do not suffer. The company said that its quantum of work for ONGC, including both ongoing and executed projects, stands at about $800 million (about Rs 53 billion). Justice SJ Kathawala posted the matter for further hearing on August 11 and directed the lenders who have issued the bank guarantees that they will have to abide by the orders passed by the Indian courts. Nishith Dhruva, managing partner of law firm MDP Partners, which is representing ONGC in the matter, confirmed the development but declined to divulge more since the matter is sub judice. Raj Panchmatia, partner at Khaitan & Co, which is representing Swiber Offshore India in the matter, and Huzefa Nasikwala, founder of Nasikwala Law Office, which is representing DBS, a bank that had issued the bank guarantee, refused to comment on the matter. Max Scherzer Womens Jersey
Lower gas price to help government save on fertilizer subsidy
The sharp decline in the price of domestic natural gas in the first half of the current fiscal is likely to lead to a saving in the government’s subsidy outgo on urea, the most commonly used fertilizer, by up to Rs.90 billion in 2016-17. According to official estimates, the 20% price cut on domestically produced gas to $3.06 per million metric British thermal unit (mmBtu) for the April-September period and the renegotiated price of imported liquefied natural gas (LNG) from Qatar’s RasGas Co. Ltd has reduced the price of pooled gas available to fertilizer factories by nearly a third to $6.2 a unit from a year ago. In 2015-16, the pooled price of gas for fertilizer companies was about $9 per unit. Factories are given gas at a pooled price (of domestic and imported gas) from 1 July 2015 so that no factory is at a disadvantage. The idea is to ensure a level-playing field in fuel price as the government does not want the less advantaged factories to shut down leading to higher import dependence. A further reduction expected in gas price for the second half of the fiscal could enhance the savings on subsidy for the domestically produced urea estimated for 2016-17 at Rs.380 billion. Natural gas price has a direct impact on the subsidy outgo as fuel cost accounts for 80% of the urea production cost. “A reduction in gas price by $1 per mmBtu lowers the cost of urea production by $26 per ton,” said Birinder Singh, executive director, Indian Farmers Fertilizer Cooperative Ltd. However, any change in the quantum of fertilizer used by farmers and exchange rate movements could also impact the actual subsidy outgo. India produces 21 million ton of urea and imports about six million tons. In the wake of the prevailing low gas price in world markets, finance minister Arun Jaitley had in 2016-17 budget lowered the subsidy for imported urea to Rs.110 billion from Rs.12,300 for the last fiscal. Companies sell the commodity at government set prices and get the subsidy based on their sales figures. Subsidy on fertilizers, petroleum and food estimated at Rs.2.5 trillion for the current year account for about 12% of the government’s total expenditure and has a bearing on its fiscal consolidation performance. Jaitley proposes to limit government’s fiscal deficit—the gap between receipts and spending usually met through borrowings-to 3.5% of GDP this fiscal, down from 3.9% last year. The prevailing low crude oil price in world markets has helped the finance minister to keep petrol and diesel out of price control, raise taxes on these fuels without increasing the burden on the consumer and focus on directly transferring subsidy on cooking fuel (liquefied petroleum gas) to the consumer’s bank account. An experiment to transfer kerosene subsidy directly to the consumer’s accounts in 26 districts across eight states are underway. Being a net importer of energy, India is one of the economies that has benefited from the low price of fossil fuels in world markets, although the stress on oil producing economies has impacted its foreign exchange remittances. Jim McMahon Jersey
Nixed H-Energy pipeline project leaves Bengal out of gas
The Petroleum and Natural Gas Regulatory Board (PNGRB) has scrapped the tender for a trunk pipeline for evacuation of gas from the proposed floating LNG terminal (FRSU) of Hiranandani Group near Contai in West Bengal. The terminal, scheduled to become operational in March 2020, with its pipeline network is designed to cater to the demands of both India and Bangladesh. Hiranandani group outfit H-Energy Private Ltd (HEPL) emerged the lowest bidder for the 705-km pipeline project on May 12. On July 15, the tender was annulled, citing ‘viability’ concerns. “This is the first instance where the board has received such a type of bid in respect of a natural gas pipeline. Since current regulations have no checks to avoid such bid outcomes, a review of the regulation and the bid document shall be undertaken to facilitate rebidding of the pipeline,” the order said. The plan was that one arm of the pipeline snaking through Bengal and after meeting the local demand, would extend up to Bangladesh. The other arm would reach Paradip connecting industrial hubs in Odisha and the Dhamra port, where the Adani Group is setting up an LNG terminal. Adani and the State-owned IndianOil (IOC), which has booked re-gassification capacity at the five million ton per annum Dhamra terminal, participated in the biding process. Questions galore The Regulatory Board’s decision has raised many questions. First, PNGRB held that H-Energy’s low bid of one paise per mmBtu (million metric British thermal unit) makes the project unviable. Apparently, this is to stop H-Energy from cross-subsidising pipeline operations with revenues from other business verticals. Sources, however, point out that the same Board approved nearly two-dozen city gas distribution (CGD) projects based on identical bids. They also wonder if the transmission rate holds the key for viability of pipeline projects, as most projects approved by the regulator in the last five-six years have remained on paper. Many observers level a charge of conflict of interest against the regulator as many PNGRB executives, including some key personnel evaluating the tender, were on deputation from IndianOil. PNGRB response In a written response, Arvind Kumar, Additional Advisor with PNRGB, denied this charge, saying: “All officers of the Board… are on deputation from different PSUs under the Petroleum Ministry, since its inception.” he said. On city gas projects, he said, the authorisation regulations for CGD and natural gas pipeline are “different”. In CGD, the successful entity gets marketing exclusivity. And, the bid tariff is applicable for the third party only and that too after the marketing exclusivity ends only for 20 per cent of the volume. ‘Unfair treatment’ A H-Energy source, however, alleged unfair treatment. “The bid process was annulled by the PNGRB well after H-Energy was technically qualified, our price bid was opened and our composite score was found to be the highest. Most importantly, the yardstick used for the annulment that is ‘standalone economic viability’ is neither mentioned in the tender document nor in any existing regulation,” a H-Energy source told BusinessLine. Sources in the West Bengal government also expressed concern at the development that would cast a shadow on the timely implementation of the LNG project. “The Rs. 9,000-crore project (including pipelines) is an important investment proposal for the State. Cancellation of the tender is a major setback to the State,” said a senior West Bengal government official. West Bengal doesn’t have access to natural gas. The decade-old proposal by GAIL India to connect Haldia with the HBJ pipeline has not seen any progress. In a recent decision, GAIL decided to connect the pipeline to Adani’s Dhamra terminal and this to be followed by an extension to Haldia in the third phase. The Contai terminal being a crucial plank of the Narendra Modi government’s initiative to enhance energy cooperation with Bangladesh, any delay in project implementation will have international ramifications. Armed with a go-ahead from the Ministry of External Affairs, H-Energy promised supply of one million ton of re-gassified LNG to an upcoming State owned power project in South Bangladesh bordering Bengal. The power project couldn’t be fed gas from Bangladeshi sources in the East due to infrastructure inadequacy. A gas sales agreement in this regard is at an advanced stage of finalisation. Also, authorities in both the countries are working on a tax regime to make the trade a win-win and also exploring means to create an international grid connecting northern part of Bengal through Bangladesh. Jeff Locke Womens Jersey