Tough to breakeven at 30% load factor for 2 revived plants: GVK

GVK Power and Infrastructure, which won 0.67 mmscmd for 220 megawatt (MW) Jegurupaddu II plant and 0.32 mmscmd for 464 MW Gautami CCPP plant in the government third gas pooling auction says, the plants will operate only at 30 percent plant load factor (PLF). The government on Tuesday saw lukewarm response to auctioning under the gas pooling scheme for stranded power plants, receiving bids for 7.2 mmscmd.In an interview to CNBC-TV18, Issac George, Director & CFO of GVK Power says, the two plants were sitting idle for the last two years, as due to lack of gas terminal on East coast, the company could not buy gas from spot market despite cheap prices. Even with two new plants, George says it will be difficult to breakeven, as PLF of at atleast 60-70 percent is required for that. The company will only be able to service interest partly, he says. Below is the transcript of Issac George’s interview with Latha Venkatesh, Reema Tendulkar and SP Tulsian on CNBC-TV18.Latha: Can you give us the details of the win? What is the extent to which you will be able to operate your plant with this gas? How much of gas have you bid for and won?A: We will be in a position to operate like all others who have won at 30 percent plant load factor (PLF). It is not that we are going to operate at 100 percent. It is only 30 percent that we will operate two of our plants which has been idle for quite some time, and this is Jegrupadu-I with a 220 megawatts capacity and Jegrupadu-II with a 220 megawatts capacity and Gautami with a 464 megawatt cacapity, we will be operating at 30 percent PLF.Latha: So, they were entirely idle, 100 percent?A: Yes, in fact, this has been idle for the last two years unfortunately.Reema: Could you tell us what would have been the cost had you bought it in the spot market, because there are a few players who have abstained from participating in this round of auctions, saying that the spot prices perhaps, are more competitive? So, could you walk us through what the difference in the gas price is in the auctions and if you had bought it in the spot market?A: Spot market, today it happens to be cheaper because there are margins that are added to this when the government gives a price. Unfortunately, let us understand that on the east coast of India, you do not have an LNG terminal. So, importing it to the east coast of India – our plants are situated on the east coast of India – importing LNG to the east coast of India is going to be very difficult because we do not have terminals. What is going to happen is that the imports are happening on the west coast of India, because they have terminals and then, what is going to happen, the gas which is going from east to west will be diverted to us. And in view of that, the imported Regasified Liquefied Natural Gas (RLNG) will be given to those who are situated on the west coast of India. Latha: There were already auctions done. You did not participate in the previous ones. Did you not get gas in previous rounds?A: Let me explain. As far as Jegrupadu-II is concerned, the smaller plant with a capacity of 220 megawatts, we were successful bidders last time around. But, as promised, the quantum of gas that was given to us was not as promised by the government of India. So, we hardly operated for about one month at 100 percent capacity. Normally, what happens is that though the government of India allows you to operate at 30 percent PLF, it is uneconomical for plants to operate at such low levels of PLF, because you lose on the heat rate. So, what you do is that you do some sort of a row string mechanism where people will pool together and allow one of the successful bidders to operate at 100 percent for a shorter period of time. That is how it works. Latha: So, you would do much the same now?A: Much the same now, because if you want to operate the plant at an efficient level, then you will virtually have to operate at near 100 percent capacity. Reema: Could you tell us what the cost of generation is and if you have signed power purchase agreements (PPA) for the power that you will be generating now and what price?A: Let us understand, our cost of generation has no consequence on this. What the government of India has said is that there is an element where the state government meets up the cost, which is about Rs 4.70 and there is a Power System Development Fund (PSDF) which the central government meets which is a subsidy which is about Rs 0.41. So, you are supposed to quote PSDF that you will require. The subsidy that you require. So, you can virtually play around with that Rs 0.41. The Rs 4.70 will remain constant.Latha: Now, do you break even is the question actually.A: No, not at all. There are two factors.Latha: The indicative price in the third round was USD 7.2-7.5. at that price, does your PPA work for you?A: Basically, let us understand how people would have bid for this. If Rs 4.70 is constant, you play around with Rs 0.41 which is the subsidy. So, virtually what happens is that one looks at contribution to these projects. Like for example, is there a contribution which will cover the part of fixed charges? You go on the construct of marginal costing where your total revenue minus your fuel charges is the contribution that you are going to get and whether that contribution is good enough to meet a part of your fixed charges. That is how you work on such bids. So, basically, one plays around with Rs 0.41. people had come down to as low as zero. So, virtually, you will have to supply gas at Rs 4.70 to the state government.Latha: At that rate, will you be able to pay off your interest to the banks at least?A: We will be in a position to manage a portion of the interest. That is all.Reema: So, at Rs 4.70, what would be the extent of shortfall?A: That would be substantial. For a gas based power project like ours, if we have got to breakeven, I will have to operate at a minimum of 60-70 percent PLF otherwise I will not be in a position to breakeven. When I talk about breakeven, I am talking about meeting all the fixed charges including the interest, debt payments, etc.Latha: What is the cost of gas at which you will breakeven?A: For me, the gas cost is a pass through.Latha: But your PPA is fixed at Rs 4.70. you cannot pass through beyond that.A: As far as this Rs 4.70 is concerned, I will be in a position to recovery my fixed cost and I will get a contribution which will cover a part of my fixed charges. That is how the entire thing works.Tulsian: I have heard you saying that all the gas based power project producers are operating on a marginal costing principle and I understood your point. And, now you have given a rate realisation of Rs 4.70 per unit. I am not factoring in the Rs 0.41 which they all will be getting, because you have said that some of them have gone with a zero also.A: Most of them would have bid at zero for the PSDF because that is the only change that we are supposed to make. That is a variable.Tulsian: That is right and that is where I am coming to. Your realisation is at Rs 4.70 and what is your direct cost of gas, because the marginal costing principle, I understood that the difference between your direct cost of gas per unit will be meeting your capital cost or maybe your fixed cost requirement. So, what will be the direct cost of gas only for producing one unit of power?A: I do not have the exact numbers, but I am just giving you a ballpark number. Possibly, it will be about Rs 4.20 or something like that. That is a variable cost.Tulsian: Because the industry experts, when we talk to the people, when USD 12 was the price of the gas, they factoring in the direct cost of gas at or around Rs three per unit. So now, prices having fallen to USD 7 per million British Thermal Units (MMBtu), I do not think that it should really exceed beyond Rs 2.20 or Rs 2.30. And gas based power projects always have a lower capital cost of about Rs 3.5 crore per megawatt, so that was giving them comfort to meet major fixed cost portion as well. So, that premise or that calculation is wrong as per your?A: Let me explain. It is not only gas cost that one has got to consider. There is an element of taxes, there is transportation cost also, bringing it to my plant. So, that is what Gas Authority of India is charging me extra over and above the price of gas. So, one should not only look at gas price in isolation, one has got to look at other indirect costs also, like transportation, taxes, etc. Value added tax (VAT) is a major component. Of course, your Finance Budget considers the fact that VAT will not eventually happen, but then the Finance Budget has got to be passed. It will take about two months time.Latha: It is expected that LNG will fall to about USD five given the amount of gas that will come from Australia by 2017. At that point market price of gas will be viable for you?A: For me, viability is not the issue because basically, for me, as per my PPA, gas price is a pass through. My only concern is that when I operate at lower PLFs, there is a heat rate loss and I will not be in a position to sustain that.