Captive power players—companies that set up their own power plants in order to supply energy to their manufacturing operations—have for the last few years hoped to outgrow their boots and become major power brokers on the national stage, supplying power to the grid, amongst others. At the end of 2011, 19,509 Mw of captive power generation capacity was added — around 10 per cent of the country’s total generation capacity of 186,655Mw. Many of them already send more than half of what they generate to the grid while others hope to effect a similar transition.
Yet, those plans and ambitions are beginning to take a back seat because of an acute shortage in fuel supply that till now rocked their larger, primarily grid-focused peers.
Take the case of Jindal Steel & Power Ltd, a company that decided to float a separate company for its power business back in 1995, within four years of its parent being incorporated. Of its 2,164 Mw capacity, 1,164 Mw is generated for the group’s captive requirements while the remaining 1,000 Mw is sold through bilateral agreements with offtakers.
In the past several years, captive power has been a super-profitable business. When its Raigarh plant started, Jindal Power began supplying electricity on a merchant basis which meant selling surplus power in the open market instead of entering into long-term PPAs with state utilities. Due to a significant increase in the power demand, JSPL was able to sell power to Punjab, Haryana, Rajasthan and Maharashtra at about Rs 7 a unit versus the regulated price of about Rs 3. With this, JSPL reported net income of Rs 1,581 crore out of revenues of Rs 3,257 crore in FY09. Share of the power division in sales increased from 11 per cent in FY08 to 35 per cent in FY09 while its profit contribution rose from 19 per cent in FY08 to a whopping 53 per cent. Today, however, those rates have come down to earth at Rs 4 per unit.
A fuel problem
So successful has been their foray in selling power to others, that the Naveen Jindal-promoted group wants to add another 2,400 Mw non-captive capacity by 2015. Yet, it cannot lock-in coal supply for even half of this capacity today.
The Essar Group is another significant player in the captive space who decided to branch out to grid power the same time it entered generation for itself. “Currently about 85 per cent of our capacity is captive but as our new projects come on stream over the next two years, this is expected to fall to 20 per cent,” says a senior Essar executive. Essar started off with a 515 Mw power plant, where part of the capacity was tied up in a long-term power purchase agreement with Gujarat while the balance was captive. Subsequently, it set up Bhander Power (500 Mw) and Vadinar Power (120Mw, Phase-I) as captive units for Essar Steel and Essar Oil.
“It is true that the focus initially was mainly captive power to ensure stable power supply to Essar Steel and Essar Oil. But with the opening up of the power sector in 2003, Essar decided it was an appropriate time to create a large independent power business considering the significant growth potential of the power industry and our strength in implementing large capital intensive projects in the infrastructure space,” says the executive. Now, its 10,000 MW expansion plan that is entirely focussed on non-captive offtake looks doubtful.
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Essar and Jindal are but two amongst a host of companies like Jindal Poly Films (unrelated to Jindal Steel) Balco and Bhushan Steel who were initially focussed on captive generation but started branching out by supplying to distribution utilities as well. Many of these plans were drawn up during the peak of 2008 slowdown when all other sectors barring power seemed risky. In a shortage scenario, power provided an opportunity and became their biggest bet.
Captive power players began to leverage tremendous synergies that many others in the sector didn’t simply have. JSPL’s open cast coalmines, for instance, forms the backbone of its existing business plans. These mines situated at Tamnar, 55 km from the Raigarh plant in Chhattisgarh, started in 1999 and today fully meet the coal requirement of not only the steel plant but also of its power plant there.
The production capacity of the mines is 6 million tonne annually and all of the coal is used for steel making and power generation. A washery there meets the requirements of coal for the sponge iron plant and in addition, produces middling's for generation of captive power of about 300 mw. Yet, those synergies aren’t enough today to preserve ambitious expansion plans from a burgeoning fuel crisis.
Silver lining?
Some industry observers feel that the news isn’t all bad. Ashok Haldia, director, PTC India Financial Services, says that captive generators of power, even when supplying to the grid, are not exposed to fuel concerns as much as pure power generators since they can easily pass on the hike in captive power to the end product being manufactured by the parent plant. “Risks are distributed across the entire value chain,” says Haldia. The company, a subsidiary of Power Trading Corporation, has so far financed four projects of a total of around 600 MW in the captive space which includes group captives.
Others say that another advantage that captive plants have are that they are better placed than private generators who are totally tied in to loss-making power distribution companies, especially in projects where a pass-through in fuel cost increase is not permissible. “The destiny of captive power plants is linked to the captive consumer to the extent power is consumed for captive purpose. It is strength in that it has a dedicated buyer,” says the Essar executive. Yet, the combination of captive and grid power, he says, are not of any help in meeting increased costs. “Impact of increased fuel cost depends on the power purchase agreement that has been signed with the state electricity board or captive consumers and not the mix per se.”
Yet, operating coal based projects with 3,000 MW capacity in the next few months in the current environment is another issue altogether . “We, like the rest of the power industry, are aware of and are taking required steps to mitigate the impact of the policy gridlock on the “go/no go” issue which has affected development of coal blocks in India and market based pricing benchmarks of coal exporting countries,” says the Essar executive. Coal sourcing from the market is certainly more expensive than own mining and will lead to increase in generation costs. In case of imported coal, the change in law in Indonesia will also affect cost of generation.
Low on gas
Coal may be the primary concern for most generators but equally worrying is natural gas production since a number of them depend on it for power generation. With Reliance Industries Ltd producing about 50 per cent of the anticipated gas from its KG-D6 block, the domestic production in December 2011 dropped to 3.92 bcm. Essar executive, for instance, says that gas based generation which has been their mainstay so far is increasingly becoming uneconomical due to challenges both in the availability and the cost of gas. Not surprisingly, most of its expansion capacity is coal based.
Industry players, nonetheless, see gas as well as coal production improving. Coal India and captive mines are likely to come out of the current environmental hurdles and will be forced to react to a renewed push from the government in improving production. As a former NTPC chairman sees it, the power sector will be back in glory with issues of environment, land and fuel becoming passé. For now though, captive power may need to re-think its business model in order to ride out the vagaries of fuel supply.