Power sector picks up in April as generation and RE show encouraging growth

Order inflows in the power sector were poor in April 2011, but power generation registered an encouraging 7.6% growth year-on-year, andalternate energy sources did much better. Power stocks have by and large underperformed the market over the past three months

Power forms a vital part of infrastructure development. In India, recently, the sector has been riddled with poor order inflows. But the growth in power generation has been encouraging. Renewable forms of power generation also have shown strong growth over the past few months. There have been large orders for wind projects and nuclear power generation and hydro generation have crossed the targets set by the Central Electricity Authority (CEA) for April 2011.

According to a research report by IDFC Securities on the status of infrastructure development, "Order inflows (in infrastructure) in April 2011 fell sharply by 49% year-on-year, due to very few orders in the power generation segment, which has been the mainstay of order inflows."

Power generation has grown by 7.6% over the previous year for April 2011. In 2010-11, the power generation sector contributed 45% to the total order inflows of the infrastructure sector. Power transmission and distribution (T&D) was the second highest contributor with 16.9%.

However, orders for the power generation sector fell in April 2011 to Rs8 billion, which is the lowest in two years. Consequently, the order inflows for infrastructure overall during the month fell by half to Rs76 billion from the corresponding period a year ago.

But, IDFC says, there was some relief for the power sector in May. L&T and BHEL received a few large orders, and Gamesa got a large order from Caparo Energy for wind projects in India. This resulted in a 68% yearly jump in order bookings this month.

The highest growth in power generation was in the nuclear power segment that grew by 40.5% from 18,631 MU (power unit) in FY2009-10 to 26,182 MU in FY2010-11. Nuclear generation achieved a remarkable growth rate of 50.72% over March-April 2011 due to improved availability of nuclear fuel to the nuclear plants.

Nuclear power generated 2,660 MU in April, exceeding the target by 612 MU. Energy generated from hydro-electric stations (excluding import from Bhutan) during the month was 8,875 MU against the target of 7,522 MU. Hydro-based plants and coal-based plants registered a growth of 3.40% and 9.22% respectively in March-April 2011. Thermal power generation grew only by 3.4% due to the negative growth rate of gas-based stations.

Alternate energy generation has immense potential as generation of clean and renewable energy is top priority for the country. The growth in nuclear power generation and hydro power generation has been encouraging.

Unfortunately, the performance of power company stocks has not been great. The BSE Power index was down by 12.11% over FY2010-11, against a 10.96% gain by the Sensex in this period.

According to a chart prepared by IDFC, on the performance of power stocks in relation to the Sensex over the past three month, power equipment manufacturer ABB Ltd outperformed the Sensex by 23.5%, whereas the public sector unit BHEL was lower by 4.4%.

Among power utilities, Jaiprakash Power Ventures was the top performer, beating the Sensex by 26.2%. NTPC and Adani saw lower growth compared to the Sensex-they were 1.3% and 7.5% lower.

Most power transmission companies also displayed poor performance. Kalpataru and Jyoti Structures were 4.5% and 6.2% lower than the Sensex.

Tata Power UMPP on track to get commissioned on time

Tata Power today said that it was right on track to synchronise the first Unit-I of the 4,000 MW Ultra Mega Power Project (UMPP) at Mundra in Kutch district of Gujarat by September 2011.

The company has completed critical steam blowing process at unit-I of the UMPP, bringing it closer towards its synchronisation.

"We have achieved a significant milestone towards commissioning of unit-I. The completion of steam blowing signifies the readiness of unit to start synchronisation process," Coastal Gujarat Power Limited (CGPL) Executive Director, Alok Kanagat said.

CGPL , is a special purpose vehicle ( SPV )), constituted by the company for implementation of UMPP. The project shall have five units of 800 MW each, generating 4,000 MW of power using supercritical technology.

Steam blowing of the boiler is an activity undertaken prior to the commissioning of a new unit or for initiation of turbine powering.

The first unit is slated to be ready for commissioning by September 2011, a company statement said.

The Mundra UMPP is progressing as per schedule with engineering, procurement and construction activities in full swing, it further said.

Equipment and piping erection is progressing sequentially for the units 2 to 5, the statement said.

Petroleum regulator moots diversion of gas from power plants to city projects - The Economic Times

India's petroleum regulator has found a novel way to supply scarce natural gas to millions of households and automobiles and has proposed that a part of the gas allocated for power plants should be used for city gas distribution (CGD) projects, for which investments of Rs 90,000 crore are in the pipeline.

The government's gas allocation policy accords top priority to power stations and fertiliser units in allocating natural gas, leaving little gas available for other sectors, particularly at a time when output from India's biggest gas field, operated by Reliance in the Krishna-Godavari Basin, has declined unexpectedly.

But L Manshing, chairman of the Petroleum and Natural Gas Regulatory Board (PNGRB), says CGD networks can deliver gas for localised power generation , building a strong case for giving such networks top priority in gas allocation . Power industry officials say the use of localised gas-fired units is an effective way to tackle electricity shortages in peak hours because such units can easily be switched on or stepped up efficiently when demand soars.

"Since it tackles effectively the scarcity of power by generating power in a decentralised manner with limited investments on transmission and distribution , part of this allocation can certainly be counted towards allocation to the power sector.

It is, therefore, possible and desirable that the requirement of gas for CGD entities can be accommodated without any significant dilution of the priorities accorded to fertilizer and power sectors," Mansingh told ET in an emailed reply to questions.

The regulator's proposal would be a setback for the power sector as the government is also planning to cut back coal supply to new power stations which plan to sell electricity in the open market, which is usually much more profitable than sales to the grid under power purchase agreements.

The petroleum ministry is also planning to apply the same principle in gas sales and supply gas at regulated rates only to power stations that do not sell electricity in the lucrative open market. City networks consume less than 10% of natural gas in India, but this will jump to 20% as planned networks roll out in the country in the next two to five years, Mansingh said.

Piped gas supply to kitchens and compressed natural gas (CNG) for automobiles are popular in cities like Delhi and several towns in Gujarat , the state where the regulator earlier served as a member of the Indian Administrative Service. Piped gas for homes is cheaper than LPG despite heavy subsidy on cylinders.

It is also a convenient uninterrupted source of domestic fuel. For automobiles, CNG is the cheapest fuel and is popularly used in taxis, autorickshaws and buses as a lowcost , non-polluting alternative to liquid fuel.

The expansion of such networks is limited by scarcity of gas. "CGD networks should be accorded the highest priority for allotment of gas as it would not only as a catalyst in giving a boost to the development of local areas through improved quality and productivity in the manufacturing and service sectors , apart from tackling the endemic power problem prevailing in most parts of the country with the least time lag, but also improve the quality of life of the common man by containing and reducing atmospheric pollution," Mansingh said.

"PNGRB has therefore been requesting the Government to accord the highest priority to the allotment of gas to authorised CGD entities under its Gas Allocation Policy," he added. Manshingh said gas demand would rise in the country as infrastructure for distribution is built. The regulatory board, which aims to set up CGD network in 300 regions, has been lying dormant since August 2009.

Credit rating system for power sector will benefit existing big players only

The ministry of power has mooted the idea of introducing a credit rating system for power sector to make lending to the sector more organised and safe. However, HD Khunteta, CMD of Rural Electrification Corporation (REC), says the rating system on the lines of European countries will make it difficult for the state sector companies to borrow money because of their bad financial condition. Excerpts from the interview with DF of Rural Electrification Corp. Mr. Khunteta:

The ministry of power has mooted the idea of introducing credit ratings for power projects...Could you please tell how this will work and help a lender like you to improve your loan quality?
The idea is excellent. In fact in the other developed countries, the rating of the borrower is being done but in our country, it is possible only for existing developers like Tata, Adani, Lanco to get good ratings, but for new players who are setting up their first power project it would be difficult due to various reasons like coal supply, signing of power purchase agreement, etc. The coal ministry has allocated a number of mines in the no-go area, so although this idea is very good, there are some practical problems for the new entrants.

Can we say that for the new entrants the cost of interest would be high?
Your point is right. In the case of companies that have good ratings the interest rate would be lower and for those companies with average or below average ratings, the cost of borrowing would be high. But then, this rating procedure should not be limited to only the non-banking financial institutions and should be followed by banks also so that the competition is balanced between the two types of lenders. But the introduction of ratings will certainly make the cost of setting up power projects costlier because the interest burden accounts for between 8% and 10% of the project cost. So, higher interest cost of the projects will ultimately increase power tariffs in the country.

What would be the interest rate difference for a company with a good rating and the one with a lower rating?
In Europe, even the companies with ratings of AAA have defaulted. The yield on the bond has increased to 10%-12% because of some defaults. But if you take our example, we are rated BBB- at par with the sovereign ratings. We have recently gone to the international market and got funds at 250 basis points over US treasury. This was one of the best also. So, normally the difference between a borrower with an excellent rating and one with a good rating is about 100-150 basis points. But in case of a default the yield on the loan increases in the secondary market.

Do you think that the new rating system will benefit only a particular type of borrowers?
Well, if the ratings system is introduced, let me tell you, it would be very difficult for the state sector projects to get funding. Look at the financial health of the state electricity boards. In the private sector the benefit will go to the Tata Power because they have got better rating, but for Reliance Power the rating has come down. Most of the players will not get excellent ratings despite the fact that they have completed their projects on time.

Coal deficit in the country is hurting the thermal power plants in the country and the ministry of power has warned of some defaults in loan payment by developers. Are you prepared to face such a situation? Have any of your debtors defaulted on loan payment?
So far none of the companies have defaulted, and this issue of coal is being taken up by power and coal ministries. Since the matter is so much highlighted, we hope necessary steps will be taken by the ministry of coal and Coal India to increase the supply of coal so that the projects that are being commissioned could at least operate at a plant load factor of 85%.

Many power developers had placed orders for equipment but they have not been given any coal linkage. How will you manage such a situation where your debtor has taken loan but has not got fuel linkage?
We have not sanctioned any loan where coal linkage has not been given. However, we have sanctioned loan on the basis of the letter of assurance (LoA) by Coal India Ltd with the hope that CIL will honour its commitment. Even CIL has said that they will sign fuel supply agreement (FSA) only after 50% completion of the project.

But are you not taking any precautions in case CIL does not provide coal linkage to these companies?
We have already taken precautions at the time of the sanctioning of the loan and we do not disburse the money unless the coal supply is tied up or at least the LoA has been given to the company by CIL. We also have a condition of having environment clearance for the project before sanctioning the loan. So, I think we have sufficient measures to reduce the risk involved in a project.

So, you do not fear any defaults given the current situation of coal projects in the country?
We have a strong system, in certain projects we even take the state guarantees, where we think it is needed for the mitigation of risk. I do not think that the states can afford to default on loan repayment, because in that case they will not get power from NTPC, and NHPC and banks will not make them the payment. I think it is a vicious circle that the states would not like to enter into.

What is your repayment cycle of loan?
We sanction a loan for a period of 13 years with a moratorium of 3 years for the principal amount. The interest payment is made by the company on a quarterly basis even during the construction period.

What is your gross non-performing assets (NPA)?
Our gross NPA stands at Rs20 crore and net NPA Rs2 crore on a loan book of Rs81,700 crore.

Have any of the states or private sector developers asked for restructuring of loans till now?
In the last four years, only two private sector companies have asked for restructuring of loan. The amount was Rs275 crore andRs72 crore, respectively.

The interest rates in the country are hitting the roof once again.

How will it impact the power sector and your disbursement targets?
The increase in interest cost has affected project cost by only 2%-3%. Higher interest rates persist only for a period of 6-12 months. The same scenario had occurred in 2008-09, when the interest rates had gone up to 14% but later on it came down to 7%-8%. So I don’t think this will continue on a long-term basis, and ultimately the rate of interest has to settle down in the range of 10%-11%, which is good for the REC as well the power developers.

What is your current cost of borrowing and net interest margins?
Currently it is at 7.85% on the total borrowing of Rs70,000 crore. The net interest margins are at 4.40%.

You are going for overseas borrowing to reduce the cost. How much are you saving on the interest cost in the international market?
Out of $1.2 billion that we borrowed overseas, $500 million has been hedged and there we are saving 300 basis points compared to the domestic market. In case of the $500 million syndicated loan and the $200 million bond issue we have not hedged. So the cost of that money is much lower.

Do you think the cost of hedging may increase the cost of borrowings in future?
Even if we go for 100% hedging, the cost of fund overseas would be 8.5% against the domestic rate of 9.6%. So, overseas borrowing is cheaper in all parameters.

Source : DNA

Limited availability of coal, gas hurts power sector

Limited availability of domestic coal and gas is constraining development of Indian power sector, which is expected to see on average an annual capacity addition of 12,000 MW over next five years, says a report. “Even with easier equipment procurement and increasingly streamlined approvals, Indian [power sector] development is being held back by limited availability of domestically sourced coal and gas,” according to a research report from global banking major UBS.

Shortage of coal is affecting the country’s power sector, whose main source of generation are thermal power plants. The shortage of coal is likely to reach 137 MT this fiscal and 200 MT by FY17. “Growth is constrained by the ability of power purchasers to afford higher power prices that will result from an increasing reliance on imported fuel, which is much more expensive,” the report noted.

Going by UBS estimates, India is expected to add 45,000 MW of coal-fired generation capacity between FY10 and FY15. As per the report, the Indian power generation capacity is expected to see a Compound Annual Growth Rate of 6.5 per cent over the next five years, or an average of 12,000 MW annually.

“Of this, we expect coal-fired capacity to account about 67 per cent of the total, wind 12 per cent and gas 8 per cent,” it added. In the current five-year plan (2007-12), the Power Ministry is expected to see a capacity addition of about 51,000 MW. The capacity addition in the first four years of the 11th Plan ending March 31, 2012, stood at 34,462 MW.

The government is targeting a power capacity addition of 1,00,000 MW in the 12th five-year plan (2012-17). The report pointed out that power plant investment would be constrained “even if bureaucratic impediments to power plant development continue to fall. This is because we think fuel availability, fuel costs and ability for off takers to absorb higher fuel prices will remain as significant challenges,” it noted.

KSK Energy may raise Rs 1,200 crore to fund projects

KSK Energy Ventures may raise up to Rs 1,200 crore debt to fund its wind energy projects across the country, sources close to the development said. The company, which currently has around 71 Mw wind energy projects under operation, is mulling to set up another 250 Mw projects by the next wind season (May). “The company is talking to various suppliers, including Chinese suppliers like Dongfang, Shanghai Electric in China and Suzlon in India, for the wind energy machinery. Each Mw typically cost Rs 5.5 crore to Rs 6.5 crore. Around Rs 1,500 crore is required for the total project on 80 per cent debt and 20 per cent equity basis. The company prefers to raise the debt though Dollar Denominated Debt,” a source said.

The KSK group, which is targeting at around 8,000 Mw power generation by FY13 is aiming to generate 5-6 per cent of that though renewable. The Group has incorporated a subsidiary KSK Green Energy Pte Limited in Singapore to make direct investment in new renewable power generation opportunities. The Group with its implementation of more than 900 Mw by March 2011 would achieve a critical mass of project execution capabilities in India and hope to leverage the same in the execution of the 3.6 Gigawatt power project in Chhattisgarh. The first 600 Mw of the Mahanadi power project is expected to synchronise with the Grid in the first quarter of 2012-13.

KSK Energy has already signed a deal with Dongfang Electric Corporation, chain-based power equipment maker for procuring 250 Mw of wind turbines. The value of the deal could be in the range of US $450 million, according to industry sources. Similarly, the company has also entered in to an agreement recently with Shanghai Electric for supply of 125 units of 2 Mw wind turbines. The company, however, is looking at a single supplier which will be able to supply at least 200 Mw in this fiscal.

“There are some problems with Chinese suppliers. They need to get regulatory approvals from Indian Authorities. Whoever gets the approvals first, the Company may go with them. However it is unlikely that any single supplier would fulfill the requirements. So as an alternative Suzlon is also contacted,” a source explained adding identification of land and agreements are all in advanced stage.

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