Divestments likely in 12-24 months, in talks with govt for extension of imported coal price pass-through: Tata Power CEO

Tata Power has been working on debt reduction for a while now. The company was looking at unlocking value in renewable assets to raise funds to pare debt but now that investors have pumped in equity, how has the debt reduction plan changed?

We are definitely divesting. Some of our divestment plans got delayed as we were not getting the right valuation. Possibly in the next 12 to 24 months, these divestments may happen and we will get good value for our shareholders.

The businesses which have grown—including our Orissa discom and the capacity additions in the renewable business—will also help us get more cash for the growth. On an overall basis, the debt number may look good, but our whole asset base will go up many more times. And that means that my financial indices—whether it is debt-to-equity or debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation)—they will be very healthy. Mind you, we are an infrastructure company and we do not invest if we will not get return on the business. So for us investment is a necessity. But if I have a good cash flow, good returns, I will be able to meet the debt obligations that I have. We’ll have very good EBITDA and good PAT (profit after tax), which will take care of the repayment of the debt and our ability to cater to our requirements.

Tata Power, as part of its strategy, has been importing coal for its plants. For your Coastal Gujarat Power Ltd, you have an interim arrangement which allows compensation for imported coal but this is only till December. You have an older issue of recovering the higher cost on account of imported coal for which you have been talking to state discoms. What happens after December and how are those conversations going with the state utilities?

The interim arrangement which is under Section 11 (of the Electricity Act, 2003) is up to December 31 and we are trying to figure out if it can be extended it further. Section 11 orders may not be there or it may be extended with some modifications to the existing arrangement. We are discussing all these issues with the government, especially the Gujarat government, and hopefully, we’ll come to some amicable settlement on this issue.

This year, when large parts of India faced heatwaves in March-April-May, coupled with soaring demand, the power sector faced a coal supply crisis, exposing the vulnerability of the sector. The government stepped in and made some policy announcements. With these steps, how confident are you that we will be able to avoid another such crisis?

In April, because of the heatwave, especially in the northern and central part of India, consumption of electricity went up; it crossed more than 200 gigawatts (GW). The supply of coal to many power plants got impacted because all of a sudden they had to generate much more, which they had not anticipated, and stocks got reduced drastically. The government, including the ministries of coal and railways, and the power companies got into action. I think that there was no great load-shedding or any power cuts that we saw during the summer months, and thereafter, it has been normal. Again, in October, we typically see huge demand but this time the demand was not to the extent that we saw in April.

What we see is that there has been a huge demand for electricity in the country in the last one year as industries have reopened, commercial activities have restarted and consumption has increased. Because of all these reasons, there is a huge increase in demand. Demand growth that typically would be about 3-4 percent went up 14-15 percent in those months (March-April), and is now at about 7 percent. It’s a good sign that the consumption of electricity is increasing; that means that economic activity and growth is happening in the country.

India’s power sector is very resilient. Notwithstanding the challenges, we have generating companies with 410 GW of established capacity and we have a good mix of conventional generation of coal and gas, hydro and renewable. The way new capacity additions will happen, we should be in a position to be self-sufficient. There will be challenges as we have seen like when international coal prices went up because of the conflict between Russia and Ukraine. But notwithstanding that, India has been very largely insulated.

The Indian power sector is in a much better situation, but it can always improve, especially on the distribution side where we still have challenges relating to efficiency—electricity theft continues to be rampant in many parts of the country and the financial viability of discoms continues to be very vulnerable. That’s an area where a lot of work needs to be done. I hope that the changes in the Electricity Act and some of the other notifications and rules which have been issued by the ministry of power will help us to overcome these challenges.

The Electricity (Amendment) Bill, 2022, is pending and the Revamped Distribution Sector Scheme (RDSS) is still in the works. Will these two policy actions help the financial viability of discoms?

There are huge gaps in discom operations; unless they make operations best-in-class, it will be very difficult to bring in financial viability in the sector. It needs a lot of support in terms of financing for new equipment and technology, which is being supported by the government. The third aspect is that the tariff revision has to be cost-reflective; many times we find that the tariffs are not cost-effective.

We also find that every year, there’s a certain amount of subsidy which the government is supposed to give to support a certain class of consumers. That subsidy has to be paid in advance to the discoms so that it takes care of the cash flow. The financial and commercial discipline that is required in the distribution companies is very important for making them financially viable; there cannot be any free lunches! If there is a cost of power which has been determined by the regulator as a prudent cost, then that money has to be paid.

India took a stand last year at COP26 that it will phase down and not phase out coal. Now, given the global energy crisis, countries across the world are looking at coal with renewed interest. Are we regressing from the global ambitions of turning more towards clean energy?

It’s not that there are a large number of coal plants that are being started, only some existing ones which were not being utilised fully are being utilised. This is a very temporary phenomenon until such time that they find other ways for meeting demand requirements, whether it is in terms of reduction of demand, energy conservation measures, or in terms of getting more LNG supply from other parts of the world.

The agenda for a phase-down cannot be diluted as we have already seen the impact of climate change globally. I think it will be a very retrograde step if anyone today talks of diluting the steps that have been taken. In fact, it has to be accelerated if we really want to stay within 1.5 degrees. (The Paris Agreement seeks to limit the rise in average global temperature to 1.5°C above the level during the Industrial Age.)

What’s your outlook on coal prices?

Coal prices have gone up because of the supply that got restricted from Russia to various parts of Europe and that gap has been now made good from other countries where they have ramped up their production. In the last one month, we see that the coal prices have stabilised or have reduced on a week-to-week basis. We definitely expect coal prices will stabilise going forward, unless something new happens in any other part of the world. But if it is business as usual, it will get reduced and we will have other options for meeting energy requirements, especially in Europe.

Prices in the short-term or merchant power market have been softening. How do you read this? What is your outlook on demand and prices for electricity?

The demand is very seasonal. Typically, there is less demand in the winter months. The demand also changes during different times of the day. If you are looking at demand in the evening at the peak time, the short-term market price in the exchange continues to be very high. It goes up to Rs 10 to Rs 12 a unit. But during certain hours it is much lower, depending upon the requirement of power.

There will not be too much of a yo-yo, it will stabilise. You can’t have a long-term scenario where you have a very high cost of power, because power is the basic raw material for everyday activity, whether commercial or residential. It could never be a very high price, it will stabilise over a period of time as more generation capacity and renewable capacity comes up and the average cost of power will come down.

The renewable power obligation (RPO) numbers are not very promising. Do you expect demand for it to pick up?

We need to look at it from a little wider perspective. In the last one year, the prices of modules from China increased tremendously due to two reasons—one was because many of the factories were closed during COVID period over there, and the second was that the basic raw materials prices had gone up. Because of those reasons, many of the projects that were supposed to come at a much lower price in the country got impacted and they have been delayed. We also saw that the domestic production plan got a little delayed because the second lot of PLI (production-linked incentives) that was supposed to come for Rs 19,500 crore got delayed. The huge capacity addition which we are trying to set up in the country to insulate ourselves from input prices will get implemented in the next one to two years; then things will improve drastically.

With these delays in PLI or in the supply chain, will India’s overall goals be affected?

It has had an impact; we need to enhance the pace of implementation. India may slip a little in the actual number of renewable energy targets. But directionally, we will move ahead even if there is a clear delay in meeting the number indicated for 2030. We are geared up and ready for a marathon, we have been doing everything right and at the end of the day, we will reach the finish line.