Day2: Fuel Supply Issues PPT - Sunil Wadhwa

1. Fuel Supply Issues: Risks &
Mitigation Measures
The 14th Regulators & Policymakers Retreat
Goa, India
August 1-4, 2013
Sunil Wadhwa
CEO, IL&FS Energy Development Company Limited

2. Contents
Background1
Fuel supply Issues/ Risks2
2
Risk mitigation measures – for discussion3
2
Summary4

3. 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.
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4. 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.
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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
-4%
-2%
0%
2%
4%
6%
8%
10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
World India Linear (India)

5. India Energy Scenario – Demand
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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 Tonnes
Billion 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

6. 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
779
2648 2730
8012
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
India China World OECD
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

7. 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
0
20
40
60
80
100
120
2000-01 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
MillionTonnes
Trends in Net Coal Imports in India from 2000-01 to 2011-12
Source: Ministry of Statistics, GoI, 2013

8. 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
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9. 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
0
20
40
60
80
100
120
140
160
180
200
2000-01 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
MillionTonnes
Trends in Net Crude Oil Imports in India from 2000-01 to
2011-12
Source: Ministry of Statistics, GoI, 2013
53%
5%
10%
1%
29%
2%
OIL

10. 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

11. 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% RENEWABLE
ENERGY
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12. 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
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13. 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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14. 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
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15. 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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16. 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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17. 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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18. 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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19. 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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20. 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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21. Thank You
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