As India battles a power crisis amid rising demand in a scorching summer, the government’s decision to cap the price of power in the short-term market will discourage power producers from generating electricity, warns Prashant Jain, Joint Managing Director and Chief Executive Officer of JSW Energy Ltd.
“The cap on the short-term prices is a bit unfair,” Jain said in an interview to Moneycontrol’s Rachita Prasad.
Based on the current price of coal, the fuel cost is as high as Rs 10 per unit for power generation. The cap on short-term power prices was enforced to restrict profiteering by power producers, but that logic is flawed because they are already reeling under high coal prices, Jain said.
He said JSW Energy’s plan to become a 10-gigawatt company by 2030 is on track and the company will invest Rs 10,000 crore on capex every year for the next 10 years. Edited excerpts:
The short-term power prices were high in the fourth quarter, and it seems to have benefitted your company too. On April 1, the Central Electricity Regulatory Commission (CERC) stepped in and asked electricity exchanges to cap prices at Rs 12 per unit in the day-ahead market. How has the cap affected you?
We did pretty well in the quarter. Our generation was up by 15%, driven by higher long-term sales which went up by 20% in thermal and our total hydro generation was also up by 15%. We didn’t do well in short-term power sales in the last quarter because the merchant prices were not remunerative whereas coal prices had gone up. So our merchant generation was down 34% last quarter, but in the current quarter, we are doing pretty good as we are running at full capacity at plants.
The cap on the short-term prices is a bit unfair. On one side, we say that the market should determine the price in the exchange and on the other side, we cap it. When power prices go as low as Rs 1.10/ unit, there is no floor price. It should be fair on both sides; nevertheless, we understand the constraints under which we are operating at this point of time. But we need to see that if it is not well remunerative for someone to run the plant, then power will not be available. After the cap was introduced at Rs 12 a unit, you see the merchant volume on the daily market, which used to be 225 million units per day being traded on the exchange, has gone down to 40 to 70 million units per day. There is a drop of 60-70% in volume because if we are importing coal, the cost of coal itself is Rs 10 to Rs 11 per unit. Then how can I run the plant? The thermal coal prices are $300 per ton FOB (Free on Board), and then there is also a substantial increase in the sea freight, then there is import duty, GST (Goods and Services Tax), and clean energy cess. And the premium on domestic coal is 400-500% on domestic coal. It is more expensive than imported coal if we buy from e-auction as you can't use the coal available through linkage from Coal India for merchant power. So, is the cap serving the purpose? Optically, you may feel that you want to have a cap on the price, but if the raw material prices are so high, then how can they operate at a loss?. Domestic coal, which is available in e-auction is more expensive than the imported coal and it is not viable to produce power with a Rs 12 cap. And then we have to pay commission or fee to the exchanges too.
How much power are you selling on a merchant basis?
About 13% of our total capacity is open for merchant sales. Approximately 260 megawatts (MW) in Ratnagiri and around 500-600 MW is in Vijayanagar, so altogether, we have some 700-800 MW odd capacity which we are selling in merchant sales.
What proportion of coal do you source from e-auction?
We are not sourcing anything from e-auction, 100% is imported. We are participating in e-auctions, but it is prohibitively expensive.
What has been the change in the average cost of coal in the last one year for you? What’s the outlook on coal prices?
Last year’s average was $165 per ton, and last quarter it went up to $250 FOB. In March, it was more than $300, and it remains so in April and May.
There is a huge supply disruption right now. The last week's auction for WCL (Western Coalfields Limited) coal, which has a calorific value of around 4,000 kcal as against the international coal of 6000 kcal, had an auction price of Rs 14,000 or $190, and then you also have to pay royalty.
Amid the power crisis, the government is trying to get started imported coal-based power units that have been idle. The government has also asked power producers to import more coal to use for up to 10% for blending with domestic coal to increase power generation. Given the coal prices right now, is it viable?
The way to solve this power crisis is to have enough generation. Enough generation will happen if you remove the cap on power sale. Then people will import coal, produce power and supply.
The ability of power generation to pass on cost in tariff has traditionally been challenging. The short-term market was the only segment there where market forces decided the price. With these price caps in the term ahead market, will it impact the sector?
That's right. How do we make investments then? When the prices fall, we don’t have a floor. That's the point...when the prices go to Rs 1, you don't have a floor. Right now, you won’t be able to survive at the current fuel prices. If at Rs 12 it was viable, then why are we not seeing more merchant volume?
If you cannot pass on the fuel cost then you will not generate, you will stop. In our plant, whenever prices are lower than my fuel price, I stop my unit. And that’s why the volume has gone down in the merchant market.
Has the industry raised this issue with the government?
Yes, it has been raised but we understand the construct in which the government operates. If there is profiteering by the power producer, the government should put the cap. But that is not the case right now because the fuel cost is already more than Rs 10 a unit for both domestic and well as imported coal. If the coal prices would have been less than $100, there was a good case to put a cap on the power price.
There should be a free market, which is what the government intends to do and they should look into the public interest. I am sure that they will soon take corrective action on that. If it is not serving the purpose, they will increase the cap.
JSW Energy has a stated strategy of increasing power generation capacity to 10 gigawatts (GW) by FY2025 to 20 GW by FY30. Is it on track? And what kind of investments would that require in this fiscal?
We are doing pretty well. It's all moving ahead of schedule. Last quarter, we have already given guidance that we will be spending close to Rs 10,000 crore capital expenditure every year.
The company has initiated the process of reorganizing business into two parts—conventional and renewable business. You had said that you have sought National Company Law Tribunal’s (NCLT’s) approval for it. What's the update on that?
It should get completed in the current financial year. The application will be listed in NCLT this month. Some steps have already been taken, now only the merger of JSW Future Energy with JSW Neo is pending.
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