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'Why keep coal for power plants which will come up in 6-7 years'

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August 07, 2014 | Business World Bookmark and Share  
August 05 , 2014 - Neeraj Thakur

With the change of the government at the center, there is new hope among power plant developers. BW| Businessworld spoke with the CEO of Essar Energy, Sushil Maroo at the 15th Regulators and policymakers Retreat 2014 organised by the Independent Power Producers Association Of India (IPPAI).
Excerpts from the interview.

What is the biggest problem for the power sector today?
Today there are stranded power plants with a generation capacity of 35,000 MW in the power sector. For these plants, fuel availability was the biggest issue. Some could not sign the Fuel Supply Agreement (FSA). Some who signed FSA did not get fuel even after that. Some got stuck because of environmental issues. Companies had made large investments in these plants but because of all these issues they could not pay back the debt to the lenders. This led to stress on banks. The situation for the gas-based power plants is worst. Most of the gas-based power plants were set up keeping in mind gas supply from the government. However, the gas never came and even those plants which were getting gas earlier saw they supply decline after a few years. This has resulted in bad financial conditions for power developers.

Do you think the government will be able to increase the gas production by increasing price of gas?
See, a higher price for gas does not mean higher production as well. The government needs to ensure that companies make investment in the gas fields. The gas business is a high risk business and the companies should get good investing environment to put in money in the sector.

You have gas-based power plants as well. Do you think you would be able to sell power if its fuel costs above $5 per unit?
Gas-based power plants are used for peaking power time. At that time industrial users are ready to pay higher price for power. So even if the cost of power goes up due to expensive gas, the customers will be able to buy it.

Industry has shown apprehension over the new ‘standard bidding document’ for the ultra mega power projects (UMPPs). What are the problems with the new bidding document?
In the old document, developers used to take all the risk and run the plant. The new document has converted developers into small contractors like you have in the infrastructure sector where they have to build the power plant and transfer it to the distribution company. There are many issues with that model. The land belongs to the distribution company for which you set up the power plant. Besides, after a few years, the plant goes back to the buyer of power. This may compromise the well being of the plants as the seller will tend to overlook maintenance after some years, thus shortening the life of the plants.

As a power developer, I feel developers will have a problem raising debt for the project, because the plant would not belong to them. Same problem would be faced in getting equity from the market because after some years when the plant starts making money, it goes back to the buyer. And of course there will be  a lot of interference from the buyer.

Do you think the UMPPS will face problem ?
My point is that there are already so many power plants which need coal. Instead of giving coal to those stranded power plants, why is the government keeping coal for power which will come up in 6-7 years.

Do you think that in the Indian power sector the sanctity of contracts has been lost as you any agreement can be changed later?
In the past, neither the Indian government nor the bidders knew about the impact of long-term power contracts. But over a period of time, everyone has become wiser. It is very difficult to figure out what would be the price of fuel in the next 25 years. If there is uncertainty in the bid, people will either go for higher tariff or will not bid at all. The government had to allow the developers to pass on any increase in the fuel cost to consumers. Because without it, the plant would have become unviable.

There are a lot of companies willing to sell their power plants in distress sale. Are you looking forward to acquire some of them to increase your portfolio?
We suffered in the past due to fuel shortage and environmental issues, so, at the moment, our priorities are to complete under construction power plants and make running plants profitable. Once our existing portfolio gets streamlined, we can think of buying other distressed plants. But at the moment we are thinking of managing the existing portfolio.

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