Heading into the new year, India?s power industry faces myriad problems such as shortage of domestic coal, rising fuel cost, lack of clarity in tariff renegotiation and weakness in the rupee. The allocation of domestic coal blocks to private firms has also faced scrutiny. Sajjan Jindal-controlled power firm JSW Energy, which has an operating capacity of 2,600 Mw, plans to expand to 11,770 Mw in total power generating capacity in the future. However, it has been forced to put its pipeline of thermal projects on hold as it waits for more clarity on policy issue. In an interview with Viraj Nair, JSW Energy CEO and Jt managing director Sanjay Sagar speaks on the prospects for the company and the challenges it faces in 2013. Excerpts:
In wake of the challenges you faced in 2012, how would you review the year gone by and what are your expectations for 2013?
Financial numbers have been satisfying in 2012 because of weakness in international coal prices, and operationally too, we have done well. However, we did not firmly embark upon expansions in 2012. As of now, we are not really looking at much expansion going into 2013, because there is a policy void on both the selling and fuel sides. Given these uncertainties in sourcing fuel and selling power, it doesn?t make sense for us. We have kept our thermal projects on hold. In 2013, I certainly expect clarity on the power purchase side, finalisation of standard bidding documents for PPAs, so that Case 1 bids start coming in again. We also expect clarity on the coal policy, such as the government?s plans for existing coal blocks and auctioning of new ones. We would like to see the new Cabinet Committee on Investment (CCI) initiatives implemented as all power projects are more than R1,000 crore. From what little has been said about CCI, it seems it will provide a single window for getting clearances, which will certainly help setting up power plants. We’re planning to commission the last unit of our Barmer, Rajasthan, plant in the final quarter of the current financial year. So in 2013, there will not be any significant capacity addition. Construction on our hydro project in Himachal Pradesh should begin in the next financial year because all clearances have been obtained. Commissioning for that project should take another four to five years. Securitising coal is a very high priority for 2013.
Last year, the government announced a debt restructuring plan for money-losing state electricity boards (SEBs). It has been criticised by some experts as a stopgap measure. What are your views on the plan?
I really don’t agree that SEB restructuring is a short term or stopgap measure. One of the most healthy aspects of this restructuring has been that the politically sensitive decision of revising retail tariffs has been taken. Most states have decided to bite the bullet and in some cases have agreed to revise tariffs annually.
Along with that if SEBs can start curbing T&D losses, they should be able to turn around. In any case, the government can’t allow SEBs to go down, you can’t have a country without a distribution system. It is unthinkable. However, they can’t simply write off all those loans. It is a conditional plan, with a set of requirements for both SEBs and state governments. The restructuring plan was the best the government could do under the circumstances.
As opposed to most other IPPs, a majority of your sales come from merchant power rather than long-term PPAs. You now plan to derive more of your sales from PPAs, how much time will this shift in strategy take?
There is no timeline on our shift from merchant sales to PPAs because it is strictly related to government policy. In the long run, we?d like anything between 75-80% from PPAs. Merchant sales have guarded us against tariff issues. We took a gamble with merchant sales and it paid off, but we don?t want to stretch our luck. The power business should be looked as a steady long-term medium returns, you shouldn’t be looking for high short-term returns. If are in this sector, you should look at returns of 15-20% long term. If we start looking at very high returns by selling expensive power, we’re not being socially responsible.
Rupee weakness weighs on JSW Energy?s profit, considering its exposure to imports. What’s your strategy to hedge against fluctuations in rupee?
We’ve been trying to come to a right balance for our rupee exposure. We got a structure in place that we hedge a part of it. We’ve also reduced our exposure. Hedging is a constant exercise, we take calls on a daily or weekly basis. You will certainly see some reversals in this quarter related to rupee depreciation for us and the rest of the industry. However, we have benefited from the weakness in international coal prices. In 2013, there should not be significant movement in coal prices. It should be in the $85-$95 range.
Coal India?s stagnating production has led to fuel shortage in India. What are the ways in which this problem can be solved?
Blaming Coal India in isolation is not fair. They have been bogged down by clearances. They essentially suffer from what we call public sector constraints. However, there has been a discernible change recently. Over the past month or two, I see some clearances coming forward very quickly for Coal India. Once that happens, CIL should be able to pick up its production. It would also be a good idea to put this so-called coal block scandals behind us and give a push to private sector blocks. Also, the government should ensure fasttrack clearances so the private sector can start contributing as soon as possible.
You have a stake in a coal block in Orissa and South Africa. How much coal do these sources provide?
We have an 11% share in the Utkal coal block at Talcher, Orissa. As per the current mining plan, it should produce 15 million tonne per year (mtpa), so we should get 1.65 mtpa. They are planning to expand it to 30 mtpa, double the capacity, because it is a fairly large coal block. So if that happens, we get about 3.3 mtpa. There is an additional quantum allocated to JSW Steel from the same coal block which will go to its plants. The coal from these blocks will go to Vijayanagar plant initially because we?re not sure when our other expansion projects will begin. From the present estimates, the Orissa mine should start producing in first quarter of 2014-15. Our asset in South Africa is very small. Our first mine in South Africa is already exhausted. The second mine is in the process of getting some clearances, but it’s a small asset and not significant. We are keen on adding more international coal blocks to our portfolio.