Mitigating Fuel Risks

To create jobs and reduce poverty, India has to grow faster; which cannot happen without sufficient power being made available to consumers. To achieve this, our successive governments have been grappling with policy guidelines and regulatory frameworks for this sector for the last 20 odd years. As a direct result, this whole sector, including specific sub-sectors like generation, transmission and distribution, are in a perennial state of flux and mired in uncertainties of all kind. True, there has been considerable progress from the olden days of government monopoly in generation as well as distribution, and thence to a ´cost-plus´ situation of 16 per cent guaranteed return on investments, all of which bred inefficiencies; but we are still a long way off from the desired end-state of affairs, what with cross-subsidies still existing, and true open access being still a myth. However, every day, every month and every year, there is slow, but positive progress in the direction of a perfect market, perfect competition.

In this whole context, the recent auction of coal mines for the power generation industry, among others, is a major movement. A power generator´s biggest risks on the revenue side revolve around drawal and pricing, while on the cost side is around fuel, - volatility of prices, uncertainty of supplies and excursions of quality. Ideally investors want businesses to operate in a risk-mitigated environment, and try to excel on business strategies, compete on efficiencies, and overall try to do better than competition on merits, rather than win in speculative risk-taking. These auctions have been game-changers at least in terms of path breaking policy making, although the total generation capacity impacted by this round of auctions is not yet very significant. Insofar as this event can be taken as a pointer to the future, it bodes well for risk managers in the power generation industry. power being a regulated sector, the auctions were conducted in ´reverse´ or negative manner, and at the end of the day, the winning companies can now have much more certainty about their overall cost-structure and cash-flows, although admittedly, their profitability may be somewhat reduced in comparison to the (highly) ´optimistic´ scenario of obtaining linkage coal from Coal India at current or project-assumed prices. But they are no longer vulnerable to the vagaries of fortune. Your editors feel that this is a good beginning towards a transparent and healthy level playing field for the industry in the longer term, wherein quality of management, technology and human resources will determine a company´s results, rather than its ability to second-guess or influence the regulators.

Climate change debate notwithstanding, India´s hunger for power cannot be addressed only by cleaner options like renewable energy or nuclear energy. We have to continuously underscore our dependence on traditional coal-based power plants, even as we must encourage the renewables to play an ever-growing supporting role in the power market. Given India´s abundant sunshine, and availability of arid/semi-arid lands, solar power MUST figure significantly in our energy strategy, more so, when the downward trends in capital costs and upward trends in conversion efficiencies are so promising. But there is another, not so obvious reason why we feel solar power is THE solution for achieving penetration in our rural areas - and that reason is - solar power offers itself so nicely to a distributed, micro, cooperative configuration, which has also the potential to bypass our last-mile challenges in transmission/distribution. In this perspective, therefore, we welcome Reserve Bank of India´s announcement that lending to renewable energy ventures will be considered as priority sector lending. To the industry, it is indeed a progressive move as it will facilitate the growth of India´s renewable energy portfolio.