Day2: Fuel supply issues ppt sunil wadhwa

Fuel Supply Issues: Risks & Mitigation Measures

The 14th Regulators & Policymakers Retreat

Goa, IndiaAugust 1-4, 2013

Sunil Wadhwa

CEO, IL&FS Energy Development Company Limited

Contents

Background1

Fuel supply Issues/ Risks2

2

Risk mitigation measures – for discussion3

2

Summary4

Overview of the Indian Economy

• India’s economy grew at an average of 7.4% per year for the 5 years to end 2011– IMF estimates growth rate will remain above 6% per year for the

5 years to end 2016

• India’s fast growing economy driving increasing demand for power– 4th largest energy consumer in the world– To meet this demand, India’s annual electricity generation grew

by over 70% in 2002 -12

• A fragile rupee is likely to contribute to the rising import bill of the country thereby resulting in increase in the Current Account Deficit. India recorded a CAD of 18.10 USD Billion in the first quarter of 2013.

3 3

India Energy Mix

• India’s primary energy consumption increased 2.5 times global average in the last decade [India CAGR: 5.9%, global CAGR: 2.5%]

• During same period, India transitioned from being world’s 7th largest primary energy consumer to 4th largest

• While oil is the world’s largest primary energy source, coal is the dominant source of energy in India.

• The share of natural gas is significantly lower than the global average, primarily due to supply side constraints.

4 4

Coal; 53%

Hydroelectricity; 5%

Natural gas; 10%

Nuclear energy; 1%

Oil; 29%

Renewables; 2%

Coal; 30%

Hydroelectricity; 6%

Natural gas; 24%

Nuclear energy; 5%

Oil; 34%

Renewables; 1%

INDIAWORLD

Rising Primary Energy Consumption (% y-o-y growth)

Primary Energy Mix – World and India, 2010

Source: BP Statistical Review, 2011

Source: BP Statistical Review, 2011

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-4%

-2%

0%

2%

4%

6%

8%

10%

World IndiaLinear (India)

India Energy Scenario – Demand

5 5

Trends in Consumption of Conventional Sources of Energy in India

Source: Ministry of Statistics, GoI, 2013

Year Coal Lignite Crude Oil** Natural Gas*** Electricity*

Million TonnesBillion Cubic

Metres GWh

2005-06 407.04 30.34 130.11 31.03 411,887

2006-07 430.83 30.80 146.55 30.79 455,748

2007-08 457.08 34.66 156.10 31.48 510,889

2008-09 492.76 31.79 160.77 31.75 562,888

2009-10 532.04 34.43 192.77 46.51 620,251

2010-11 532.69 37.69 206.15 51.25 684,324

2011-12 535.88 41.88 211.42 46.48 755,847

CAGR of consumpti

on from 2005-06 to

2011-12

4.10% 4.71% 7.18% 5.94% 9.06%

Source: Ministry of Statistics, GoI, 2013

Note: * Includes thermal, hydro & nuclear electricity from utilities.** Crude oil in terms of refinery crude throughput.*** off take

Use of conventional sources of energy for electricity increasing

compared to other uses

Snapshot of India’s Power Sector

38%

20%

8%

29%

6%

Share of power sector in Total Primary Energy Demand (%), 2011

Power Industry Transport Building Others

India China World OECD0

1000

2000

3000

4000

5000

6000

7000

8000

9000

779

2648 2730

8012

Per capita electricity consumption (kWh/capita), 2011

6

Source: IEA 2011

6

Power sector (38%) highest consumer of primary energy in the country.

India’s per capita electricity consumption one-third of the world average.

Source: IEA 2011

India’s power demand to double in 10 years

Source: CEA

Fuel Related Issues – Coal Domestic Coal

• Stagnating domestic production

• Production from current domestic coal reserves barely sufficient to meet requirement of existing FSAs

• Regulations not conducive for private investment in mining

• Infrastructure adds further stress on development – railroads, washeries, domestic manufacturing capacity of mining equipment & machinery

Imported Coal

• Coal imports grew 5 times from 20MTs to 101MTs in the last decade

• Almost entire 12th Plan thermal capacity will have to depend upon imported coal

• Import dependence [seem imperative] – further surge in fuel imports is likely to strain public and private finances and foreign exchange reserves and widen fiscal and trade deficits

• Capacity of importing ports

53%

5%

10%

1%

29%

2%

COAL

7 7

2000-01 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-120

20

40

60

80

100

120

Trends in Net Coal Imports in India from 2000-01 to 2011-12

Mill

ion

Tonn

es

Source: Ministry of Statistics, GoI, 2013

Fuel Related Issues – Gas

• Declining domestic production. May boost with new pricing formula.

• Infrastructure – lack of integrated national gas grid; southern and eastern parts of the country suffer from lack of connectivity

• Affordability will be an issue – power consumer is highly price-sensitive .

• City Gas Distribution – lack of adequate gas pipeline infrastructure for bringing gas to city households

53%

5%

10%

1%

29%

2%

GAS

8 8

Fuel Related Issues – Oil

• Import dependence – crude oil imports account for 73% of our total oil consumption in 2011-12

• Net imports of crude oil more than doubled from 74MTs to 172MTs in the last decade

• Pricing – current subsidized pricing structure does not incentivize consumers for prudent use of fuels, nor does it incentivize the producer

9 9

2000-01 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-120

20

40

60

80

100

120

140

160

180

200

Trends in Net Crude Oil Imports in India from 2000-01 to 2011-12

Mill

ion

Tonn

es

Source: Ministry of Statistics, GoI, 2013

53%

5%10%

1%

29%

2%

OIL

Fuel Related Issues – Hydro

• Long processing time for obtaining statutory environment and forest clearances

• Civil society and stakeholder concerns and grievances

• Geological surprises

• Lack of access infrastructure

10 10

53%

5%

10%1%

29%

2% HYDRO

Fuel Related Issues – Renewable Energy

• Transmission & evacuation infrastructure – both expansion and integration issues

• Variable and infirm nature of power – requirement of ancillary services like spinning reserves, storage solutions, etc

• Inadequate legal backing for RPO/REC mechanisms

• Issues with regard to physical fuel in case of biomass and waste

53%

5%

10%1%

29%

2% RENEW-ABLE EN-ERGY

11 11

Fuel Related Issues - Nuclear

• Technological challenges

• Anti-nuclear public sentiment

• Long processing time for obtaining clearances

• Safety & security – disaster management readiness

• Disposal of toxic waste

53%

5%

10%

1%

29%2%

NUCLEAR

12 12

Suggested Supply Side Risk Mitigation Measures –Thermal

I. Incentivize higher fuel efficiency/PLFs

• Current PPAs do not sufficiently incentivize:

– Investments in bringing higher fuel efficiencies

– Improved PLFs

• Need to incentivize more fuel efficient plants and higher PLFs:

– Grants from NCEF/VGF mechanism for enabling investments or through market based mechanisms like PAT or White Certificates.

– Incentives to generators through better PPA terms

– Passing incentive to CIL for exceeding FSA supply obligation

– Role of CERC/ SERCs is key here

• Penalize low fuel efficiency

– Obligate purchase of energy certificates

– Cancel fuel linkage below certain SHR, decommission such plants

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Suggested Supply Side Risk Mitigation Measures –Thermal

II. Encourage acquisition of captive coal mines abroad

• Production from current domestic coal reserves barely sufficient to meet requirement of existing FSAs

• Almost entire 12th Plan thermal capacity will have to depend upon imported coal. In the coming years, fuel imports are bound to go up

• Coal price volatility a big risk

14 14

Suggested Supply Side Risk Mitigation Measures –Thermal

III. Discoms to take over fuel procurement

• Consider domestic coal linkage/ allocations directly to Discom as end retail prices fully regulated

• Will also avoid allegations of misuse of mines by private allotees

• This would create steady market for large MDOs

• Price advantage in collective bargaining by Discoms through an aggregator for coal imports

• This will completely resolve the issue of risk allocation of fuel between Generators, Procurers/ Discoms

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Suggested Supply Side Risk Mitigation Measures – Renewable Energy

I. Make RE projects bankable to help solve thermal fuel supply issues

• Enforce RPOs

• Use NCE funds to support REC market by purchasing unsold RECs/ trade in RECs support

• Increase coal cess if required

II. Storage batteries [to convert RE to base-load/peak power] vs. green corridor investments [only solving evacuation problem]

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Suggested Supply Side Risk Mitigation Measures – Renewable Energy

III. AD to be converted to generation based tax breaks (upfront, but reversible if generation lower than GBI norm – level play with IPP)

IV. Hybrid electric vehicles

• To absorb infirm RE power during off peak periods

• In a way, a substitute for storage systems

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Suggested Supply Side Risk Mitigation Measures – Renewable Energy

V. Faster implementation of enabling Open Access Regulations – mitigate counterparty risk for new capacities (given the credit rating of Discoms)

VI. Off grid generation Cum Distribution Franchisee framework• Currently off-grid generation sold to consumers at the renewable energy

power cost• Subsequent entry of Discoms in such areas will make renewable energy

assets stranded• Remote area consumers paying capacity low• Solution lies in treating off-grid generation as Discoms purchase and off-

grid distribution as Discom distribution• Consumers to pay state regulated tariff• Difference to be settled between Discom and Distribution Franchisee

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Suggested Demand Side Risk Mitigation Measures

I. Energy efficiency and demand side management• Super Energy Efficient Program• Smart Grid• PAT• Standards & labels• Energy conservation building codes

II. Tariff Rationalization• Tariffs, not cost reflective• Electricity perceived as a social commodity• Majority of electricity demand is price elastic• Cost reflective tariffs will reduce irrational consumption, so will AT&C loss reduction

do

III. Reduction in AT&C losses will lead to prudence in consumption.• 15% reduction in AT&C losses can wipe out all the deficits

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In Summary…I. Supply Side Risk Mitigation Measures• Incentivize higher fuel efficiencies and improvement in PLFs• Producers to share PLF incentives with CIL• Discoms to take responsibility of fuel procurement• Use NCEF to support REC market • Evaluate storage independently & vis-à-vis green corridor investment• Upfront AD benefit to be made subject to generation on prorate basis, reversible if

generation lower than GBI norm of 13 Mn. Units• Hybrid electric vehicles• Accelerate Open Access/ Create financially healthy demand for future capacities• Offgrid generation and Distribution Franchisee framework

II. Demand Side Risk Mitigation Measures• Energy Efficiency• Demand Side Management• Tariff Rationalization• Effective enforcement against theft leading to prudence in consumption

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Thank You

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