The London-listed Essar Energy would be busy for the next six moths as it is in the last leg of commissioning 3,000 megawatts (Mw). Chief operating officer of the group’s power vertical K Vijaya Bhaskar Reddy talked to Katya B Naidu on their capacity addition plans. Edited excerpts:
The company is on a capacity expansion mode. How many units do you plan to add in the next few months?
We expect to commission three power projects before March 2012. In the next couple of weeks, our first unit at Salaya will be synchronised and after that another five, before next March. On commissioning of these units, the operating capacity will go up to 4,510 Mw.
We are currently operating 1,600 Mw and projects of 8,070 Mw capacity is under various stages of construction and commissioning. All the power projects are financially closed. The total investment of Essar in India's power sector would be around $10-11 billion (Rs 48, 000 crore-Rs 50, 000 crore ) on completion of all the ongoing projects.
How many projects will be commissioned by the end of March 2012? Have you tied up fuel for these projects?
Two units of 600 Mw at Salaya, aggregating to 1,200 Mw; two units of 600 Mw, aggregating to 1,200 Mw at Mahan and two units of 255 Mw each aggregating to 510 Mw at Vadinar will be commissioned by the end of the current financial year. We have tied up fuel requirement for the entire portfolio, except for the Salaya II project. We are looking to buy an additional coal block with reserves of 100-150 million tonnes to meet this requirement. This will ensure fuel availability for the entire portfolio of 9670 Mw.
What is the progress on coal blocks that you hold domestically and internationally?
We currently hold coal reserves of 450 million tonne (mt), of which 350 mt is in India and 100 mt overseas. This includes 72 mt in Mahaan, 75 mt of the Chakla coal block, approximately 100 mt of the Ashok Karkatta and approximately 117 mt in Rampia coal block. The remaining 100 mt reserves are in Indonesia and Mozambique. These overseas blocks will supply to the Salyaya and Vadinar projects. Some of them are awaiting approvals.
Some companies have delay their plans to set up gas-based power plants. With the current international gas prices climbing up, how will their viability be affected?
International gas prices have gone up substantially impacting the cost of power generation. The deprecation of rupee is further adding to the woes of power companies. The power generated through gas based units will enjoy least priority in merit order of dispatch. At the current fuel prices, gas-based projects are not attractive investment proposition.
The worsening financial crisis of state electricity boards has become a worry to the sector. How will this affect your company?
Essar has a good mix of power buyers that include captive, long-term PPA and merchant sale. Currently, we supply most of our power to Gujarat, a state which has financially strong electricity board. Most of our long-term power, around 2,200 Mw is tied-up with this the state. We have tied up 820 Mw of power with Bihar and 150 Mw with Madhya Pradesh. Besides, there is escrow mechanism available to ensure payments on a regular basis.
With the government’s emphasis on separating generation, transmission and distribution, the health of many a SEBs are improving.
How much of your power is yet to be tied up?
Currently, we have either signed or tied up long term PPAs around 60 per cent of our total portfolio, which also includes 18- 20 per cent with other Essar group companies. We intend to take it to 80 per cent to 85 per cent through case I bidding. The remaining power of 15-20 per cent will be sold in the spot market.
Earlier, companies would have gone for higher amounts of merchant power. What made you go for lesser capacity on merchant?
Merchant power prices are very volatile. When you make large investments in the sector, sustainable revenue over a long period becomes critical. So, we opted for a model of long term power purchase agreements which are not subject to the cyclical pricing and uncertainty of volume of the merchant power. You may notice, even the long term PPA tariffs have gone up significantly over the period. Recently, we have signed a PPA at as high as Rs 3.28 per unit. Our strategy has been to optimize our exposure to merchant power. We have merchant power portfolio of 15-20 per cent of total generation to enable us to capitalise on market opportunities.
Essar Power has been shortlisted for a major privatisation drive in the power sector of Nigeria. What kind of play do you see in the country?
As a strategy, we keep looking at various opportunities overseas as well. Our group’s presence in Africa is an added advantage. We are one of the shortlisted bidders in the privatisation process in Nigeria. However, currently, we have nothing substantial to highlight.
When do you think the fuel crisis in the sector will end?
Presently we are witnessing a mismatch in demand and supply of coal. We hope this is only a temporary phenomenon. India has vast coal reserves, which need to be tapped. The coal supplies are also effected due to monsoon related issues. We understand there is improvement in temporary coal supplies, but a lot more needs to be done to ensure long-term supplies to the power plants. There is need to augment coal production domestically. The government is ceased of the matter and its implications on the power sector and the GDP (gross domestic product) growth. It is taking steps to resolve this critical issue.
Many power companies have been impacted by the new regulation of Indonesia, which benchmarks exports to international prices, and you would draw coal from the country for Salaya 1. How will the project be impacted?
We won the Salaya I imported coal-based project through case I bidding, wherein we have signed a power purchase agreement (PPA) for 1,000 Mw. There is, however, no provision of passing the fuel cost to the buyer. But, this can be passed on in case of differential in the forex changes. If the dollar to rupee changes from the date of bidding, that can be passed on to the buyer.
We are still evaluating the impact of change in the law in Indonesia as full clarity is not available on the transfer pricing mechanism. There could be a marginal impact on royalty and tax, but we are to yet assess the full impact.
What kind of relief do you expect for projects which have been affected by this law?
There is a provision for passing the fuel cost to the buyer if there is a change of law in India. We expect a similar provision allowing pass through if there is change in law affecting imported coal-based projects. A lot of representation has been made to the power ministry on this issue. Otherwise, viability of imported coal-based projects would be under threat. We are hopeful of a reasonable settlement of the issue as this would affect 40,000 Mw of power projects based on imported coal.
