Interview with Ravi Uppal: “Underutilised, stranded capacity must be put to use”

“Underutilised, stranded capacity must be put to use”

Positive on government initiatives, Ravi Uppal, outgoing managing director and group chief executive officer, Jindal Steel and Power Limited (JSPL), believes that the reliance on thermal power in India will continue in the years to come. In a recent interview with Power Line, he talked about the key issues impacting the segment, the major focus areas of the company, and his outlook for the sector. Excerpts…

How has the performance of the power sector been over the past one year?

The performance of the power sector in the past one year has been mixed, with significant growth in renewables and relative stagnancy in the thermal segment. The government has taken multiple initiatives to address the basic issues facing the sector by launching schemes like the Ujwal Discom Assurance Yojana (UDAY) and now the Scheme for Harnessing and Allocating Koyla Transparently in India (SHAKTI). It has tried to build up the financial position of the discoms at the state level under UDAY and is encouraging them to cut down their losses. While most of the states have signed up for UDAY, indicating that the scheme has been accepted in principle, we are yet to see how its full impact is realised. SHAKTI is a great attempt by the government to revive stranded capacity by providing coal. So the idea behind these schemes is to enable the stranded assets to become self-sustainable by providing them fuel and to strengthen the financial position of the discoms in order to enable them to buy more power. Although these schemes are not moving at the desired speed, they are, undoubtedly, steps in the right direction.

What are the concerns of private developers? What steps are needed to address them?

The biggest issues facing the sector, especially private players, at present are the lack of power purchase agreements (PPAs) for thermal power generation and low plant load factors (PLFs). Several state discoms are renegotiating the existing PPAs, which has a direct bearing on their sovereign credibility. PPAs form the basis of the decision of setting up a plant and selling the power to the government. If discoms start renegotiating and invite bids again and again, this will adversely affect private investment since the players would lose trust in what is promised by the government at the central or the state level. Further, if we look at the PLFs, the national average PLF stands at 65 per cent. However, there is significant variation across sectors with PSUs such as NTPC Limited operating at more than 75 per cent and private sector plants at a meagre 58 per cent. Private sector players are struggling to recover their costs, considering that pricing is done at a standard utilisation level of 85 per cent.

At the national level, considering that plants are designed for 85 per cent, it means that 20 per cent of capacity, that is 45,000 MW, is unutilised. It costs approximately $1 billion to set up every 1,000 MW of capacity and if 45,000 MW is not being utilised, it means that investment of close to $45 billion is going waste. It does not matter whether the investment is public or private; it is a national investment that is not being utilised. Thus, there is gross underutilisation of assets in the country and, to begin with, the underutilised, stranded capacity must be put to use. This will make them self-sustainable, and not necessitate any subsidy. PSUs such as NTPC and NHPC shall come forward and take over the operations of the struggling private players because a lot of money has already been invested by these players.

There is also a need to be careful while making any future investments. Investments must be made with the objective of utilising the existing capacity first. This could be done by improvements in the means of power evacuation or by making power more affordable through tariff rationalisation. Some industrial and commercial consumers still pay tariffs in the range of Rs 6-Rs 9 per unit, while the realisation for the power producer is only about Rs 3.25 per unit. This is because a whole lot of charges including cross-subsidy charges, wheeling charges and maximum demand charges are added to the power purchase costs. The government should rationalise these elements and make the delivered cost of power affordable. It does not make sense for any customer to pay more than Rs 5.50 per unit. The government is planning to introduce direct subsidy for power in the coming years that will be a good step in this direction. It will reduce the burden on discoms as well as the other cross-subsidising consumer categories.

With the increase in renewable capacity, what impact do you foresee on the thermal power segment?

While renewables have grown in capacity very rapidly and costs have come down, the per unit investment required in renewables is still very high. This is because utilisation levels are 22-24 per cent for solar and 27-28 per cent for wind. Thermal units, on the other hand, can be run at even 100 per cent load. So, for the same amount of energy to be generated, the required investment in solar and wind is four times that in thermal.

Further, the share of renewables in generation still remains low. Newer and advanced solutions with respect to energy storage systems are required to make renewables more reliable. Renewables right now are not a substitute for thermal and other energy sources, but they can only complement them. It is a good beginning, and we should keep working on renewables. In the foreseeable future, India will have to continue its dependence on the thermal segment. However, there is a need to use thermal capacity in an environment-friendly way. One way is to set up power plants at the pithead. This will not only eliminate the need to carry coal over long distances but also reduce the creation of mountains of ash.

How has JSPL’s performance been over the past year? What are its current focus areas with respect to the power business?

We have 3,400 MW of independent power producing capacity and 1,800 MW of captive power capacity. Of the 3,400 MW, we are running close to 1,600-1,700 MW. We have PPAs for 1,000 MW and coal linkages for about 1,200 MW. So, we are running at 45-50 per cent at PLF. We are looking for opportunities to sign more PPAs as well as to get more coal, so that we can produce more. Our intention over the next couple of months is to level up to 2,200 MW, which will be 60-63 per cent PLF. We have operated our Tamnar plant at 100 per cent PLF in the past, but now we need more coal and more PPAs against which we can do this.

With respect to our captive capacity, this has been feeding most of the power into the steel plants and in the neighbouring areas. We can despatch more power if there is a need, but there are open access issues. There are a lot of constraints within the system that limit the optimal utilisation of the capacity. Overall, we have done well in the last two quarters, with earnings before interest, taxes, depreciation and amortisation (EBITDA) of 40-44 per cent, which is probably amongst the highest in the country. But we are still not making profit because more than 50 per cent of the capacity is not utilised.

Right now, we do not want to set up new projects until the full capacity of the existing plants is utilised. This is also the call of the entire nation that the existing capacity should be fully utilised before embarking on new projects. Otherwise we will keep blocking more and more money, which is not good.

What is your outlook for the sector over the next few years?

In the long run, I am extremely positive about the power sector and its role in the economic growth of the country. In the near term, stranded assets must get normalised in order to ensure a positive sentiment in the economy and address banking woes. In India, we need to use all sources of energy – renewable, fossil fuels, water, waste, etc. – because while all these are available, none alone is in plenty. We have some kind of energy available in every part of the country – hydro in the northern and north-eastern regions, coal in the eastern and central states, wind in coastal states like Gujarat and Tamil Nadu, solar in states like Rajasthan, Karnataka and Gujarat, and biomass in the agricultural states of Uttar Pradesh and Haryana. These energy sources should be utilised where they are  with a focus on creation of a strong national grid through which this energy can be transmitted anywhere. This will make electricity a national resource, rather than a local or zonal resource. That is the way forward for the country’s power sector. There is a need to liberalise open access and allow free trading. Trading should be the preferred option, which currently is the last resort. There is need for the government to reduce its role in the management of energy.

Meanwhile, our per capita electricity consumption, which is about 1,100 units against the world average of 3,000 units, must grow. Power consumption should grow at 9-10 per cent, which is currently growing at 4-4.5 per cent. While there are initiatives to conserve energy on the demand side, there will also be a push for demand through electric vehicles. Despite some concerns in the short term, the outlook for a more reliable, healthy and self-sustaining sector is positive.

(Ravi Uppal is stepping down as managing director and group CEO of JSPL on September 30, 2017, after completing his term.)