governance, political economy, institutional development and economic regulation

Posts tagged ‘coal’

Grandfather stranded power assets equitably

Coal

Economic reform has few friends. This truism is visible today as the 2003 de-licensing of power generation capacity is being unfairly fingered as the culprit for the Rs 1 trillion bank debt turning delinquent due to pending or actual bankruptcy of the power projects.

De-licensing of power generation delivered what it was supposed to – capacity addition in thermal generation exceeding the planned capacity addition over the period 2012 to 2017 by 30%. Fingers are also being pointed to low coal production or the prohibitive price of imported gas as additional culprits. This is disingenuous.

Drivers of stranded power assets

The primary reason why installed generation capacity remains underutilised is that distribution utilities have failed to develop new markets for electricity and are stuck at unreasonably high levels of operational inefficiency. The CRE/ICRA 6th Annual Rating for Distribution Utilities July 2018, rates just 7 out of 41 distribution utilities with a satisfyingly high performance. But remember that rating standards in India are contextually determined to offer an incentive for improvement. Lowering transmission and commercial loss below 25% accrues incentive points. International standards would be way better.

The average loss in distribution utilities, during FY 2016, after accounting for subsidy received from government, was Rs 0.65 per unit (kWh) sold. Is it any wonder then that distribution utilities have failed to absorb the available supply of electricity. Actual users have to undergo forced power outages till the utilities can generate cash to pay for purchasing electricity from the grid. Constraints on the supply side have been unplugged by reform. The problem lies in stodgy utilities failing to aggregate potential demand.

India night lights

SHAKTI a transparent, effective resource allocation mechanism

Union government steps for reducing financial stress in the power sector date back to 2017. SHAKTI (Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India) skillfully used the auction methodology to allocate up to 80% of the assessed need for coal supply to 11 generators (31 entities applied but only 14 were found to be at a reasonable stage of project completion) . Generators without any coal linkage, bid for coal supply from Coal India Ltd. by agreeing to reduce their approved levelized tariff , thereby sharing the gain with their customers. Bids for reducing tariff by 4 to 1 paise per unit (kWh) were received. This was commercially smart rationing of coal supply to favour the most efficient generators.

RBI shakes complacent defaulting promoters awake with looming insolvency

Debt Recovery

Why has the debate around stressed power assets gained currency today? Election time, which we are clearly into, is a good time to press for benefits. This applies to requests for extending the time period beyond the 180 days allowed to promoters to rectify a loan default. Under the Insolvency and Bankruptcy Code 2016, promoters or their associates, become ineligible to bid for the assets during resolution proceedings. This severe penalty is meant to spur promoters to fulfil their loan repayment obligations and pay banks back on time.

Timely negotiated settlements better than the judicial option 

Draconian penalties are of little use when the default is due to a systemic shock. The Enron private power fiasco 1992-1999 was sparked by spiralling of imported gas price. Negotiations, rather than judicial options, finally resolved matters. In 2005, NTPC, GAIL and MSEB acquired the assets in Dahbol, Maharashtra abandoned by the bankrupt US company.

Enron solution redux- neither desirable nor feasible

Dahbol involved only 2GW of abandoned assets. Today, 10 GW of gas generators are stressed, like Enron. In addition around 12GW of coal fired generators are also stressed after excluding those which have benefited from the SHAKTI initiative. The stranded asset problem is more than 10X of the Enron problem. The bank loans – mostly of Indian banks – at stake are around Rs 1 trillion. Is there a way out causing the least disruption to embedded economic incentives?

Reduce the cost of coal based generation by lowering the implicit and explicit “tax” imposed on it.  

The most direct route would be to end the extortive levies on coal production and transportation by rail. Rahul Tongia and Puneet Kamboj of Brookings India recommend making the railway freight charges cost reflective. This would also make Indian Railways competitive with road transport, to which it has been losing market share.

Currently, coal transport by rail is charged more than the cost of service. This is an implict tax on freight which subsidises passenger traffic. The resultant excess freight cost feeds into the cost of electricity generated. This increases the cost of electricity by Rs 0.21 per unit (kWh) amounting to Rs 108 billion per year.

In addition, there is an explicit tax on coal via royalties, levies and coal cess. These increased from Rs 200 per tonne in 2011 to Rs 800 per tonne in 2017 pushing up further the cost of coal based power.

Why should electricity consumers pay to subsidise rail passengers?

Quite unfairly, it is the honest electricity user who is indirectly subsidising rail passenger traffic – that too in a poorly targeted non-merit way. Freight charges should become cost reflective and the levies on coal production reduced to Rs 400 per tonne. IR should generate the additional revenue required for keeping passenger fares reasonable, from commercial development of their physical assets.

Subsidise rail passengers explicitly via the budget

There is also a good case to use the revenues from coal cess and other levies for this purpose. Rail transport is more efficient and environmentally less toxic than road transport. Switching to electric rail from road, reduces the import burden imposed by using petro products. A direct subsidy of Rs 150 billion should be allocated to IR specifically for adopting cost based freight charges in the 2019 budget. Lowering the cost of coal based power will improve the finances of distribution utilities and enable them to buy more power, which would feed into the financials of coal based generators.

Spread the pain of low availability of domestic fuel across all thermal power generators

Why not replicate the SHAKTI auction template to allocate a portion – say 50% – of the annual coal demand to all generators (those owned by the Union, state governments or the private sector) whilst retaining the existing allocations for the remaining one half. Electricity prices at the grid would reduce. The principle of price competitiveness (electricity supply) as the door to preferential access to scarce domestic coal will incentivise all generators to become efficient.

competition

Grandfathering existing contracts is the gold standard of contracting norms. But extraordinary circumstances call for innovative options. When the available resources fall short of demand, the principle of efficiency of resource use overrides historical rights in a merit order system. New generators win the efficiency battle, hands down.

Adapted from the authors opinion piece in TOI blogs, August 9, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/equitable-grandfathering-needed-in-thermal-power/

Modi.gov

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The Modi government is being formed on the back of a mandate for honest and effective governance. Fortunately, it inherits a raft of incomplete social and economic equity initiatives from the UPA II. These need to be continued, deepened and tweaked to deliver more bang for the buck.

But every government craves the opportunity to distinguish itself from their predecessors. The Vajpayee government is remembered for the inter-city state highways it built, state enterprise privatization, albeit stymied half way through and the blot of Godhra.

Clearly, everyone wants a full stop to future Godhras. But the mere absence of organized violence is rarely memorable even though it is immensely difficult to achieve in a tinderbox political environment. What then are the “headline” opportunities that Modi.gov could grab?

Infrastructure, coal and defence present themselves instantly. The former two, to build an enabling India. The last, to deter the many “spoilers” of an Indian development story.

Within infrastructure, the real opportunity is in the railways. China now exports railway projects and technology and we are, reportedly, keen to learn from them. But the truth is that we have not served our cause well over the last two decades. The last memorable Railway Minister was Madhavrao Sindhia; not just for his dashing, good looks but for ushering in the era of “fast Shatabdi trains” in 1988.

What has held railways back since then is the “fiefdom” the Ministry became for coalition partners interested only in distributing goodies. Should not the railways them be privatized to nip its politicisation in the bud? Certainly not. Out of all the infrastructure sectors, railway privatization is the trickiest. Secondly, as we have learnt from the power sector, it makes little sense to privatize a sector, in which tariff setting is highly politicized, before it is stabilised.

The Rakesh Mohan committee on railways (2001) laid down a blue print for the sustained financial viability of a railway system performing on par with international standards of efficiency. More than a decade since, the situation has only degraded further: antiquated track and rolling stock; poor customer orientation; declining service and safety standards; distorted tariffs which are either not remunerative or are not competitive with air and road options.  

The target should be to restore, the low proportion of freight and passenger traffic presently carried by railways, to more economically and environmentally efficient levels with a push towards rapid electrification of rail tracks.

Convert the Railway Ministry into a set of publicly owned companies with core expertise in production of rolling stock; freight or passenger traffic with self-owned rolling stock and track and facility maintenance. These companies should be Board managed and have only an arms-length relationship with their administrative Ministry, which should be the Ministry of Transport. Corporatisation will distance railways from being the “freebie-bag” it has become. This has happened, in the case of National Thermal Power Corporation and POWERGRID, both power sector publicly owned companies, where sound technical and financial decisions are taken by professionals.

Coal, whilst actually being one step ahead of railways, since Coal India is already corporatized, seems even more degraded. The next step should be to privatize it and closely review the vast unused or sparsely developed mining areas which have been allotted to these companies. This could be the Maggie Thatcher moment for Modi.

Abolish the largely discredited Ministry of Coal, as an independent entity; merge it along with oil and gas into a Ministry of Extractive Energy Sources. Appoint a savvy, industry friendly, politician; a Sharad Pawar clone, to restore positive energy into the fractured government-energy industry relationship and watch this sector take off.

Defence is the third big area, which India has pussy footed around for too long. Revamping the structure of our defence forces to be lean and mean with less tail and more teeth; modernization of weaponry, aircraft and warships; minimum levels of usable ammunition stocks and efficient procurement processes; integration of operations across the three services and para-military units; compensating defence personnel handsomely, for putting their life on the line, and re-integrating then productively in civilian life, post retirement, should be near term goals. Opening up defence production to the private sector, including foreign investors can kick start a dormant, defence industry led, domestic supply chain, mini, revolution.

The ideal Minister to manage this mini revolution would be the personable and upright, economist, writer and investigative journalist; Arun Shourie, who displayed nerves of steel as Minister Disinvestment in the NDA and navigated both, the political perils of rapid economic decision making and the roving eye of the CAG, with equal dexterity and success.

The Modi.gov reform and restore agenda is likely to be fairly full. The challenge is to isolate the few lead stories which could be the bell weather for its commitment and credibility to work in national interest; its ability to kick start the economy and generate productive jobs for the educated unemployed.  

Railways, defence and coal are not low hanging fruit. All three have deeply embedded elite interests; the risk of failure is high and the likely adverse fall-out significant. Reforming them is not for the faint hearted. But that is precisely why they are good choices to announce ones arrival. The one that succeeds at reforming the three would have bent and strung Shiva’s bow.   

Aside

Importing energy insecurity

Shortages make people do crazy things. In the 1970’s a Bajaj scooter was a prized posession because it was most easily available against payment in US$, as were denim jeans, which were smuggled in or sold by the firangi “flower children” flooding India for hash and nirvana. In the 1990’s, the humble Maruti 800 beame a “must have” since the only other options were the gas guzzlers; Ambassador and Premier Padmani. In the 2010s, gold is the the “go to” asset, as the INR crumpled.

Countries are no different. The neglect of long term, efficient, development of India’s domestic energy sources (coal, hydro, solar, wind and biomass) have made economic growth artifically dependent on petro products (gas and oil), as the fast and easy option to add electric power capacity. 30% of petro consumption today is for this purpose. Stagnating coal production, increasing coal imports, further bolster petroleum as the “go to option” for power generation. Highly efficient generation technology (developed for gas surplus countries like UK, US and now Africa) adds to the “green” character of gas based generation versus coal. Constrained by domestic supply side issues and seduced by external incentives (climate change and the engineer’s incentive to use the “best” technology) to switch to petro and gas, India fell headlong into the “shortage syndrome”- best recognised by a panic stocking up of goods….in this case gas based power plants (their installed capacity exploded since 2000), diesel fueled generators, diesel powered trains and diesel powered ground water pumps as short term answers since 2000 to the low availability of electricity.

The Mahatma’s concept of “Self Sufficiency” ceded defeat since the 1980s to the dominant, liberal, concept of an “open” economy via international movements in trade and capital (though not people). However, within this mantra “pricing power” has to be contended with by “small” buyers like India. We should learn from the US ( a big buyer) where the rapid expansion of domestic shale gas production was doggedly pursued and has decreased reliance on gas imports, leading to a reduction in international gas price. Even a “big buyer” like the US does not like being beholden to imported energy.

We are too small to move world petro/gas prices by reducing our energy import demand. However, energy security concerns should induce us to tax petro and gas consumption heavily to limit demand. We don’t do this today. The eternal scare has been the fall out of retail energy price induced inflation, but this is really a timing issue. The time to adjust energy prices upwards is when inflation is low or when energy prices dip. Today baby steps are being taken in this direction. What we need is to stride forward.

Our energy strategy is short sighted. (1) It does not limit the use of gas purely for industrial, road public transport in metros and cooking fuel use, as it should (2) It does not cap the use of petro products for power generation to existing generation capacity (3) It does not aggressively pursue hydro power generation where we have exploited only 40% of our potential. (4) It postpones rapid coal mining reform, principally due to political economy constraints. The only bright spot is the growth in renewable generation and market friendly domestic energy trade practices.

A very high Current Account Deficit (shortage of US$ to pay for imports) re-emerged as a major fiscal destabaliser in 2013, after more than a decade of stability in the external account. This is a sharp reminder, that external account stability (and our energy security) is hostage to energy imports. We import a very high proprtion (75%) of the petro and gas we consume. These constitute 40% of our import bill. India’s export performance (and hence its capacity to pay for imports) has been good. Our share of world merchandise exports increased from 0.4% in 1990 to 1.7% in 2010 (WTO 2013). Export of commercial services did even better with our world share increasing from 0.8% in 1980 to 3.3% in 2011. However, none of these export achievements have been enough to overcome the insecurity of having to import energy security in US$. Annual Petro imports (US$110 billion) are a high 50% of our FEx reserves (US$ 220 billion). China imports only 50% of the petro products it consumes and the prospect of this increasing to 70%  by 2020 (IEA) has them worried. This is despite the fact that their annual energy imports amount to only 20% of their FEx reserves. We cannot continue to be hostage to energy imports.

TERI Energy Map 2030, recommends the following steps to reduce dependence on petroleum imports: (1) Electrify rail and save diesel.   Today less than 30% of the rail track is electrified. (2) Switch passenger and freight transport to rail and save diesel by avoiding dependence on road transport. Today only 30% of the goods traffic uses rail and the share of road transport is expected to grow from 70% today to 85%. This trend needs to be reversed. (3) Increase domestic coal production which is one of the three dominant eneregy sources (hydro and solar being the other two) in India (4) Increase hydro based generation, whose share has reduced from 40% in 1980 to 12% in 2012, due to ineffective planning strategies and a defeatist approach to the genuine concerns of citizens with potential environmental fall outs. (5) Price energy competitivey to remove distortions in consumer demand across products (please we don’t need diesel powered motorcycles) and incentivise energy conservation.

Like our defence policy and our diplomacy, our energy policy is too status quoist and backward looking, to serve us well. We are not planning for a secure energy future.

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