managing fuel supply & uncertainty in india
DESCRIPTION
Managing fuel supply & uncertainty in India, power sector specific.TRANSCRIPT
Managing Fuel Supply & Price Uncertainty
Sushil Maroo
August 1, 2014
• Increasing installed capacity and improving utilization factor of power plants is critical for meeting the rising energy needs of a fast growing nation
• Fuel Security is paramount to the stability and growth of the power sector
• Emergence of fuel shortages and escalating fuel costs has posed the most significant challenge to Industry, Regulators, Governments and Banks since the introduction of the Electricity Act in 2003
• Addressing fuel security is the need of the hour for the return of confidence and capital to the Power sector
• This requires a joint effort from all constituents to offer short term, medium term and long term solutions to the power sector fuel crisis
2
Improved fuel availability is paramount for boosting power generation
Affordable power is linked to risk mitigation for stakeholders and increased generation
• Companies, Lenders and other financial investors today look at Power as a sector fraught with risks – Coal “Scam” and potential cancellation of coal blocks – Delays in environmental approvals and land acquisition affecting project implementation, costs and
adherence to PPA ‘s – Poor financial condition of SEB’s and payment issues – Change of goal post after project implementation has commenced based on stated Govt policy – e.g.
. – Sale of Power from plants with captive blocks
• These stakeholders price in this risk affecting consumer end power prices – Lenders charge commercial rates of interest – ranging from 12-14% - across the world infrastructure
financing happens at rates well below normal corporate lending rates
– Equity return expectations of financial investors are comparable to stock market returns – globally , risk averse, yield oriented investors help finance infrastructure assets at significant discounts to equity market returns
– Companies price in risks of project delays, cost overruns and SEB defaults while bidding for PPA’s – Removal of uncertainties will enable bidding at moderate ROE and competitive tariffs
3
Coal Supply
India has the 5th largest coal reserves globally
Source: CMPDI
Power is coal industry’s major customer
India has substantial resources of coal and power sector is the largest consumer
5
1,25,908.94,
42%
1,42,506.29,
47%
33,149.22, 11%
Proved Indicated Inferred
Proved, indicated and inferred Coal Resources in Million Tonnes(as on 1.4.2014)
69%
7%
4%
3%
17%
Power (utility & captive) Steel and Washery Cement Sponge Iron
Others
Sector wise consumption/supply of coal for 2011-12(Total – 680.6 million tonnes)
6
Demand has outstripped pace of coal production
Coal Production vs Consumption (in Mn Tonnes)
Source: Coal Controller
Demand for coal reached 557 MT in 2012 with imports rising to 68.89 MT to meet domestic shortages
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-120
100
200
300
400
500
600
Production Consumption
Net imports
Solution # 1: Boost Coal India output
Source: Annual Report of CIL FY 2012-13
Accounting for 86% of coal production, improving productivity of CIL’s operating mines is the low hanging fruit
FY 07-08 FY 08-09 FY 09-10 FY 10-11 FY 11-12 FY 12-13
86%
88%84%
80%82%
86%
372
400415 423
433
466
Mill
ion
To
nn
es
7
Solution # 2: Boost captive coal production
8
Captive Mines Production
2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e0
20
40
60
80
100
120
37
44
50 50 52 5249
59
78
98
mt
Source: Company Data, Morgan Stanley Research Estimates
Solution # 3 Linkages to Commissioned plants
9
• Fuel starved power projects have large
investments which need to be salvaged
⁻ Create Enabling framework for coal supply under FSA
⁻ Allow PPA under Section 62
⁻ Do away with predetermined project lists
⁻ Rationalization of coal linkages
⁻ Allow Inter Plant transfer of coal among all companies
⁻ Revisit blended coal price pooling
Capacity (MW) Investment (Rs cr)0
20000
40000
60000
80000
100000
120000
140000
160000
180000
39038
157730
25843
105490
10305
29895
Under recovery of fixed/ variable costProjects with coal linkage related issuesProjects with captive coal block related issues
Capacity and Investment Stuck
Solution # 4 - Open up mining
• Auction out mines without end use restrictions
• Allow entry of private sector and international players to create efficiencies, competition and boost supply
• The world’s largest producers of mineral resources have all created efficient world scale mining assets and companies by encouraging competition and commercial mining – USA – Australia – Canada – South Africa – Indonesia
10
Solution # 5 - Logistics Infrastructure
17% of the power demand located near the pit head and the remaining 83% depends on rail transportation. However, current rail network is highly choked.
• Dedicated Freight Corridors
• Critical rail connectivity links for evacuation from large coal fields/ clusters
• New ports and upgradation of ports including draft increase
• Infrastructure needs to be build to cater to transportation and installation of increased plant unit
11
Solution # 6 - Rational land policy and faster clearances
• Land:– Address major issues such as lack of land records, compensation, R & R process , right of
way
• MOEF Clearance:– Single-window clearance and cluster approval for mines – Standard ToR for OC and UG mines should be circulated by MoEF.– Dispensation of public hearing in case of projects having only forest land.
• Forest Clearance:– Coal Companies insist for NOC from State Forest Authority even when no forest land is
involved for the project.
12
Solution # 7 - Imports to meet the shortfall
• India’s imports of coal have been rising sharply due to failure to boost local production
• Focus on domestic coal for all requirements should be target – India has adequate coal resources– Imported coal is costly – Drain on foreign exchange reserves
• In medium term, fiscal, tariff and other regulatory support important to allow imported coal to meet gap
13
2011-12 2012-13 2013-140
20
40
60
80
100
120
140
160
180
119.834710743802
145
171
Coal Imports(MT)
Imports are rising and will continue to rise as domestic output falters and imported coal becomes cheaper
Coal Cost
Coal price trends are mixed
15
May
201
1
Augus
t 201
1
Novem
ber 2
011
Febru
ary
2012
May
201
2
Augus
t 201
2
Novem
ber 2
012
Febru
ary
2013
May
201
3
Augus
t 201
3
Novem
ber 2
013
Febru
ary
2014
May
201
460.00
80.00
100.00
120.00
Indonesia Coal (US$/MT)
117
73
• Steadily rising linkage prices rising and higher e-auction allocations (c 10-12 %) are increasing effective prices for several consumers
• Imported coal prices softening but rupee depreciation has limited gains
• Rising fuel costs have hurt producers though aggressive PPA bidding has been a key factor contributing to the pain
2007 2009 2011 2012 20140
200
400
600
800
1000
1200
1400
1600
1800
2000CIL Linkage Price (Rs/Tonne)
38%
Fuel costs are getting factored into long term power prices despite some stress on old fixed tariff PPA’s
16
Rs/k
wh
Source: CERC and others
Coal availability and not cost is key risk to industry
Old PPA Terms Recent PPA terms
Tariff • Bidding capacity and variable charge to cover capital costs and fuel costs
• Bidding only on capacity charge with fuel cost a pass through
Fuel • Fuel risk primarily with power company with option available to de-risk partially by quoting escalable tariff
• Fuel risk with the Buyer.
Change in laws • Change in laws in sourcing countries for fuel or equipment not accepted in PPAs
• Impact of change in laws in countries exporting equipment and fuel covered
17
Fuel cost risk will reduce going forward
Fuel cost de-risked under new pass through regime
Gas Supply & Pricing
Gas based power faces an existential crisis
• Gas based power at market price of gas is uncompetitive with coal
• A sharp decline in domestic production and prioritization for fertilizer industry has further aggravated the viability issues
• With a low carbon footprint, limited social issues and coal shortages, gas based power is important to meet energy needs
• Focus on protecting standing gas based capacity critical
19
Gas@ 8.4 USD
Gas@ 14 USD
Captive coal
Linkage Coal
E auction0
1
2
3
4
5
6
7
8
Variable Cost of Power Generation (Rs/ Kwh)
2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
2
4
6
8
10
12
14
16
18Asia LNG Prices (US$ /mmbtu)
24,000 MW gas based capacity is at risk
20
• Gas supply for existing capacity of 16,624 MW is sufficient to operate at only c 20% PLF
• Under commissioning projects of 7,525 MW, completely stranded without any gas allocation/ supply and have no PPA
• Investment of over Rs. 1.2 lakh Crores and debt of Rs. 85k Crore at risk
Grid Non-Grid Upcoming0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
5624
738 0
4,447
1,075976
6551
528
6549
Central State Private
Gas Based Capacity (MW)
Solution # 1 - Improved domestic output and LNG facilities key to supply boost
• Restoration / improvement of KG6 supply
• Increase allocation of gas to power sector. Currently, Fertilizer sector is using approx. 30% gas while power is using 31% gas.
• Continued availability of domestic gas at reasonable price – US$5-6/MMBTU
• Improvement from other domestic sources like conventional fields, CBM etc
• World class LNG terminals to boost imported gas facilities …
21
Solution # 2 - Blended costing of fuel
• Pool pricing of power by SEB / utility to provide steady ROE for all
• Blending domestic gas with costly LNG
22
Global Scenario
US Shale production is set to rise exponentially
24
2007 2008 2009 2010 2011 20120
2000
4000
6000
8000
10000
12000
U.S. Shale Production (BCF)
Source : US Energy Information Administration
• Shale gas production to grow by more than 10 Tcf, from 9.7 Tcf in 2012 to 19.8 Tcf in 2040
• US to transition from being a net importer of 1.5 Tcf of natural gas in 2012 to a net exporter of 5.8 Tcf in 2040
25
Shale is chancing US and global energy landscape
Source: BP Statistical Review June 2014
1990 1995 2000 2005 2010 2012 20130
20
40
60
80
100
US Energy Production (%age)
Liquids Natural Gas Coal
Nuclear Energy Hydroelectricity Renewables
• Contribution of Natural Gas has increased drastically from 28% in 1990 to 33% in 2013 while dependency on Coal reduced from 34% to 27%
• US energy production as a share of consumption declined substantially to ~69% in 2005 before rising back to ~83% in 2013.
1990 1995 2000 2005 2010 20130
20
40
60
80
100
US Energy Consumption (%age)
Europe’s and Eurasia thrust on renewables putting pressure on fossil fuels
26
1990 1995 2000 2005 2010 20130.0
20.0
40.0
60.0
80.0
100.0
Consumption Pattern (%age)
Liquids Natural Gas Coal Nuclear Energy Hydroelectricity Renewables
• Demand for fossil fuels decline by 16% with losses in oil (-22%) and coal (-36%) overwhelming gains in natural gas (+9%).
• Fossil fuels now account for 80% of EU energy consumption in 2013, down from 88% in 1990
1990 1995 2000 2005 2010 20130.0
20.0
40.0
60.0
80.0
100.0
Production Pattern (%age)
Liquids Natural Gas Coal
Nuclear Energy Hydroelectricity Renewables
• Production of Energy increased by merely 1% in 2013 over 1990
• Production of coal declined by 37%
China and India will be focal point of Energy
27
1990 2000 2010 2013 2015 2020 2025 2030 20350%
20%
40%
60%
80%
100%
120%
Production as Share of Consumption (%age)
India China
• India’s and China’s dependence on import of Liquid and Natural Gas continues to grow
₋ India’s consumption to touch ~1307 mt by 2035 against ~595 mt in 2013
₋ China’s consumption to touch ~4671 mt by 2035 against ~2880 mt in 2013
• Production not enough to fuel growth₋ India’s Production to increase by
108% over 2013 by 2035 against 120% increase in consumption
₋ China’s Production to increase by 56% over 2013 by 2035 against 62% increase in consumption
In Conclusion
Make Power sector a low risk, moderate returns sector • Risk mitigation to create a truly infrastructure utility model is key to delivering adequate, low
cost power to India
Measures to address short to medium term fuel issues • Stable policy regime • Easing regulatory and other constraints to boost coal and gas output • Prioritizing supplies to power industry and ready projects • Rational pricing policy for ensuring industry viability without subsidizing the inefficient
The answer to LONG TERM fuel security is a Comprehensive Energy Policy which addresses the following • Do we want to make the best use of India’s vast fuel reserves to become self sufficient? • Do we want to provide fuel at lowest possible cost to generate low cost power for the
country ? • Can we balance the interests of fuel producers, power producers and power consumers to
have a fair pricing regime for the electricity chain?
28