Don't tell me about it: Despite abundant untapped coal reserves, the sector is mired in inefficiency

Close to a year after they parted ways, the only contentious issue that continues to simmer between brothers Mukesh and Anil Ambani is gas supply-from Mukesh' Reliance Industries to Anil's Reliance Energy. Anil is seeking greater safeguards on the supply contract from his elder brother, who holds the key to supply from the d6 Krishna Godavari basin gas block, which has commercial reserves of 7 trillion cubic feet, enough to power any two large industrialised states in the country. For, otherwise, Anil Ambani contends, his 7,500-mw project in Dadri will remain a pipe dream. He isn't exaggerating. When the project hit the lenders' table last year, there remained only one outstanding issue-fuel supply. Issues as vexed as equity contribution were solved amicably, with the institutions agreeing to a lower equity exposure from the sponsors.

Fuel isn't Reliance Energy's problem alone. The struggle to procure fuel for power generation is actually a larger phenomenon gripping the Indian power sector. Thanks to rising global fuel prices, this struggle has been accentuated. Anil Ambani isn't the only one seeking a better deal from his elder brother; so is NTPC. When Mukesh Ambani's Reliance Industries bid for supply of gas to NTPC's proposed stations in Uttar Pradesh and Gujarat two years ago, he perhaps did not realise that the global prices would rise so sharply in such a short while. Bidding a fixed price of around $3 (Rs 135) per million British thermal units (MMBTU) for 15 years was even back then seen as an aggressive move, since the next bid was a distant $4.16 (Rs 187.2) per MMBTU. Today, a long-term deal is difficult to come by, simply because there is little spare capacity in the world. Secondly, prices are well above the $5 (Rs 225) per MMBTU mark, as GAIL (Gas Authority of India) found out to its dismay when it wanted to procure gas for the recently-revived Dabhol power project.

Not surprisingly, Reliance refused to accept a condition where short supply of gas would mean paying the alternate cost of fuel, naphtha, which in today's price would be nothing less than $20 (Rs 900) per MMBTU. So, NTPC has taken legal recourse to enforce its Letter of Intent (LOI) to Reliance for supply of gas for its 2,600 mw of capacity addition.

Hazira LNG terminal project: Based in Gujarat, this is the largest of Shell group ventures in India

Coal Gets Dearer, Too

The contagion has spread to coal markets as well, though, not as severely. Coal prices, which were once used as a benchmark owing to their relative stability, are also on the rise. Says Praveer Sinha, coo, Nagarjuna Power Company, which is developing an imported coal-based project in Mangalore: "When we firmed up a coal supply contract for our plant a year ago, the long-term prices were around $50 (Rs 2,250) per tonne on a CIF (cost, insurance, freight) basis. Today, they are ruling at well over $70 (Rs 3,150) per tonne."

But then, is it turning out to be a case of carrying coals to Newcastle? After all, the country does have abundant untapped reserves. The stumbling block in the progress of domestic coal sector is the stifling regulatory framework. Free sale of power grade coal is not allowed by the private sector and the award of coal blocks for captive purposes continues to be on a nomination basis. Worse, the dominant player in the business, public sector behemoth Coal India Limited (CIL) operates at a sub-optimal efficiency level. CIL is not entirely to blame. The government regulates prices, thus cutting into the coal corporation's investible surpluses. Further, the average time taken to clear a proposal to develop a mine is still a good six to eight months. And, if the coal ministry does manage to do its bit, getting environment clearance continues to be a major stumbling block. The new regime of fast-track clearances has helped. However, private sector companies claim that the public sector generation companies led by NTPC are the favoured lot, as they are not necessarily in queue. Secondly, CIL cherry picks the good mines and jettisons the rest to the auction pool.

THE NUCLEAR POTENTIAL Concerns remain, but private sector interest in nuclear energy could boost generation.

A nuclear power plant abroad: Even in the west, safety is a big issue with nuclear energy Besides hydel generation, where fuel cost is not market driven (water is, after all, free), the next closest 'comforting' fuel in these times of volatile fuel prices is uranium. Till recently, we were merely ringside spectators as the western world began to embrace the 'condemned' fuel to generate power. However, with the United States Senate considering President Bush's recent proposal to supply nuclear fuel to the country, there certainly is reason to cheer. This could provide a passport to the Nuclear Suppliers Group (NSG), a clutch of countries, including France, that supply equipment for nuclear plants. Modern nuclear plants, of the kind recently supplied by the French to the Chinese, are priced a little over what a coal plant would cost. The upside of nuclear plants is that they last longer-over 45 years as against 30 in the case of coal and around 15 in the case of gas turbines. So, clearly, the nectar lies in the tail. Nuclear fuel is greener than coal, but there are risks in terms of fuel supplies and safety. Nevertheless, the private sector-including Reliance Energy and Tata Power-is going ahead with plans to add capacity in the sector. The Indian experience in this area has so far been poor. Plants have taken over five years on an average to build. It is this factor that determines the viability of nuclear plants, which have high capital costs compared to coal and gas-fired units. Hence, timely execution of construction holds the key to competitive tariff. Despite the concerns surrounding nuclear power, one thing is certain. In the years to come, it will contribute more than the minuscule 2 per cent that it currently injects into the National Power Grid.

So, what does it augur at the generation end with domestic coal firing as much as 65 per cent of the power plants in the country? Back-of-the-envelope calculations indicate that CIL's prices are roughly 40 per cent lower than those of imported coal on the eastern coast of the country. This roughly shaves 20 per cent off the power generation cost. In other words, controlled pricing of coal by the central government implicitly subsidises the power purchase costs of the financially fragile power utilities to a significant extent.

The subsidy story is no different in the case of gas-based generation capacities, which account for around 10 per cent of the power generated in the country. The implicit subsidy burden is borne by gas-producer Oil and Natural Gas Corporation (ONGC), since the consumers end up paying under $3 (Rs 135) per MMBTU, while the market price is close to twice this figure. However, new gas finds are being priced at market rates.

If one were to go by sheer economic merit, hydel generation would come a winner. Moreover, since the country is endowed with immense resources, especially the kind that involve minimal rehabilitation issues, hydel generation ought to contribute more than the prevailing 16 per cent of the country's supply. However, this has not happened for a variety of reasons. First, states demand free power from the project to the extent of 12 per cent of the generation capacity. This blunts the competitiveness of the projects. Furthermore, the domestic market, except in pockets, does not put a premium on 'peaking' power-power that is generated at short notice, a salient feature of hydel projects. A serious deterrent to development of hydel projects in the north-eastern states, where considerable capacity lies untapped, is the law and order problems. Besides problems in individual states, there are inter-state issues that have locked up as much as 7,000 mw of capacity. Also, owing to the difficult terrain in these regions, constructing access routes to the plant sites is a challenge. Although central intervention to address some of these issues has been attempted, the results have been less than impressive. Private sector continues to shy away from the large projects.