Tata Power Management’s Views On Power Sector

In order to get a better understanding of the power sector we had sent a questionnaire to Tata Power, India’s leading power utility company. From the view we understand that the issues may get worse in future if the government does not expedite the reforms in the sector. The current issues in the sector are coal availability, pricing, lower tariffs and funding.

According to Tata Power (TPC), the domestic coal demand supply gap has increased significantly. The delays in clearances and tightening of environmental norms for existing projects have added to this problem. Coal production has led to a lag in power sector growth in the last Five Year Plan. The shortage of coal is affecting operational plants and is also raising concerns about the viability of the future power projects. The lack of coal linkages is making it difficult for power generation companies to raise capital. The domestic coal prices continue to be at a huge discount to the international coal prices.

Since coal is an internationally priced commodity, the TPC management believes it would be difficult to continue with this differential pricing mechanism. As coal prices inch higher, power prices will also increase. The DSIJ view on this issue remains the same. The government is however trying to resolve the situation with putting pressure on Coal India. Besides, as per the media reports, the government is of the opinion that an amendment to the Coal Mine Nationalization Act which will help increase the coal supply to the power generating companies.

On the issue of import duty hike by the government on foreign power equipments, the TPC management said that the import duty hike would affect the domestic power companies but only in the long run. The equipments for the next phase of projects have already been contracted to mostly Chinese and Korean manufacturers who will be hurt due to the import duty hike. Also, it is expected that the new duty structures would not affect the sector in the short term as most of the orders for the current plan (2012-2017) have already been placed.

The utility however said that unless the domestic power equipment companies improve technology and become competitive in the international arena, protectionist policies such as these will have a limited impact in the long run.

The company management also believes that the northern grid collapse has shown the vulnerability of the Indian power networks. The company believes that this event should lead to the modernization of the networks possibly through greater participation from private players. The issues behind the widening demand-supply gap for electricity need to be addressed by the government. We believe that there is ample scope for the modernization of the transmission networks in India given the fact that there are high transmission, distribution and commercial losses to the state boards and distribution companies.

Besides, most of the power networks in India are owned either by the PSUs, Powergrid Corporation of India or by the state level grids. In the last few years, power generation has increased due to private participation (though not to the extent it is required), and we believe that the transmission sector would also benefit from private participation in the future.

On the back of limited domestic coal supply, more projects are expected to be based on imported coal. Tata Power believes that in such a situation the government needs to formulate a policy for ensuring that such projects do not suffer due to coal price or exchange rate movements. The question of tariffs has to be revisited if the power sector is to be strengthened where many states have not changed tariffs for 5-6 years now. We believe that the power revisions are currently happening with many states increasing the tariffs. But these revisions are not adequate to contain all the increased costs.

One must look at the factor that the power projects are required to have 25 per cent equity and 75 per cent debt as per the government regulations and hence on the back of the high interest rates, the power companies are also facing interest cost pressure along with fuel cost pressure. The hikes are not sufficient as there is also political pressure.

Tata Power during the first quarter posted strong operational performance but on the financial front it reported 66 per cent decline in its net profit (consolidated) due to the lower tariffs in its newly commissioned Mundra UMPP.