Feb 20, 2013 05:32 PM IST | Source: CNBC-TV18

What is way forward for power discoms? Experts discuss

NK Jain, Vice Chairman of JSW Energy told CNBC-TV18, the poor financial health of state electricity boards (SEB) is the most critical issue facing the power sector. According to him, tariff hikes are imperative for improving the condition of distribution companies or discoms.

Heavyweights from the power sector along with top bankers met Power Minister Jyotiraditya Scindiya on Tuesday to discuss issues hurting fresh investment in the sector. A host of issues including finalising standard bidding documents for coal blocks to price pooling and empowerment of grid regulators were on the agenda.

NK Jain, Vice Chairman of JSW Energy told CNBC-TV18, the poor financial health of state electricity boards (SEB) is the most critical issue facing the power sector. According to him, tariff hikes are imperative for improving the condition of distribution companies or discoms. He also added that domestic coal supply is inadequate for meeting the growing demand for power. Besides, there is also the need to look at cutting down transmission and distribution losses, he opined.

"The distribution companies cannot continuously go on making losses. In that case, they have no choice but to increase the tariff. But more than the tariff increase, they must also work for the losses, reduction in transmission and also in the distribution which is very important and critical," he explained.

Former power secretary, Anil Razdan on the other hand said coal price pooling is expected to come through in the next six months. He is also hopeful of seeing the power sector enjoy the benefits of section 80 IA even after the Budget.

Here is the edited transcript of the interview on CNBC-TV18.

Q: If you have been able to speak with people who attended the minister’s conference yesterday, what was the sense you got from the update? Has progress been made in some quarters and where are you hoping for more progress with respect to the various issues, fuel supply, health of the discoms, the grid improvement, in all those areas where do you see maximum improvement?

Jain: Basically, as you are also saying, this sector is facing the biggest challenge of distribution company’s health because it is very interesting that on one side, the power generating companies are getting whacked down and on the other side there is a shortage of power where load shedding is taking place. It is primarily because of the bad health of the distribution companies.

This is the first meeting of the new power minister and it is too early to say what would be the impact. But, I am sure his language was very positive. Therefore, we expect lot many things to come from him in the next two or three meetings.

Q: We have seen a couple of tariff hikes from almost all the power discom companies. I guess barring West Bengal, almost all of them has raised power tariffs. Are you noticing any improvement at all in their ability to purchase power? Or is it still a long way off?

Jain: I would say it has definitely improved a little bit. Basically, if they are recovering the cost at which they are buying power and matching it with the cost it is sold in the market, they have a reasonable margin. I think the whole process will then change completely. Basically, the distribution companies cannot continuously go on making losses.

In that case, they have no choice but to increase the tariff. But more than the tariff increase, they must also work for the losses, reduction in transmission and also in the distribution which is very important and critical.

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Q: After the SEB restructuring reforms, the next big trigger for the power sector is said to be coal price pooling. What are your thoughts on the direction as well as the modalities which have so far been discussed on coal price pooling and the way forward? How soon could we finalise it and what kind of a seminal impact will it have on the sector?

Razdan: Coal price pooling is a direct result of our inability to provide domestic coal to those plants which have been commissioned after 2009, going up to 2015 and the problem thereafter also. There is a spurt in international prices. So those who had thought they will be importing coal to make up for the shortfall in domestic coal supplies is also complicating the problem.

However, a little silver lining is that the international prices have dipped slightly. I think the problem has begun basically in a little loosening of the fuel supply agreements as they were finalised in the year 2008 with the trigger of 90 percent. At that time that is what we thought would be the ideal fuel supply availability which should get the best efficiency out of the new plants that are coming up, which would not hope to operate at lower plant load factors (PLF).
 
Above 90 percent, Coal India was to get a greater incentive for supply because the producers would also get greater incentives for supply. The whole effort was maximising production. I think somewhere down the line, by allowing Coal India to come down to about 50 percent of the supply envisaged in the Fuel Supply Agreement (FSA), I think that was a gross abuse of the monopoly position which needed to be set right immediately.

There has been an improvement recently and I think Coal India has come up to a level of about 65 percent satisfaction, going up to about 80-85 percent in the years to come. But, there will be a shortfall and I think I am one of those who believe that we must continue to import some quantity of coal and not go the whole hog into the import, but gradually keep increasing so that the shocks in the international markets are not too heavy.

However, there are going to be resistances, particularly from the coal bearing states like West Bengal, Orissa, Jharkhand, etc who say that coal in any case is their own resource. If they are to pay more for those stations, then they have strong objections to it.

Q: This kind of litigation would obviously arise. The question we have is, when do you think the first pooled price will come through? Recognising that these issues will crop up, are you expecting that we should be able to get the pool priced coal in six months, in three months or even within the calendar year?

Razdan: I think our efforts should certainly be within about six months. But, earlier than that, I certainly do not expect it to happen. Before we can put this process through, I think there has to be very intensive consultation with the states also including the coal bearing states. We have to understand their mode of agitation and probably find a way out by which they can probably subsidise some of their consumers by some additional royalties which they maybe receiving on the coal that is being extracted.

There is bound to be dissatisfaction at some levels but, we must realise that Coal India is now a nationalised entity. It has the marketing freedom to go and sell coal in the market. So they have a national obligation also. I think we have got to satisfy demands from the coal producing states as well as the non coal producing states.

We will have to create some mechanism to compensate the coal producing states. But, where I see a problem coming up is that those coal mines which have been allotted for captive use to private producers, their cost of production is going to be much lower than what Coal India’s costs are. Unless Coal India intensifies its efforts to improve productivity on a very high level through mechanisation and other means, there is going to be a disparity between the cost of coal to the private producers and cost of coal coming from the nationalised producer.
 
We will have to work very hard on increasing productivity there. At the same time, we will have to tie up for these imports at the ports, railway movements, etc. It is not an easy exercise and I think the power minister has done well in intensifying his efforts and concentrating at solving these problems. But, non involvement of Coal India and some other key players like the railways, ports in this issue would really be a gap in the whole process.

Till all these agencies are involved, I do not think we are going to come to a very quick and easy solution at the earliest.

Q: What's your sense from what you have seen and heard from Coal India and from the government? Are you expecting pooled price to happen in this calendar year? It is certainly looking like a long political process.

Jain: It should come in this calendar year, we feel so. However, another important point as far as we are concerned is that it is not affecting us much because at Balmer we have our own captive blocks where there is no impact of this. At Ratnagiri and Karnataka, our units are fully based on imported coal.
 
We are importing coal for our generation and we do not have any linkage coal with us. We have not signed any power purchase agreement (PPA) also with FSA. So I would say that we will not be affected much but, I feel this calendar year I will fear to presume that it should happen. There is no reason that it will go beyond calendar year 2013.

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