Soaring coal prices across Asia have led India’s richest families to shelve plans for a record $36 billion investment in new power stations needed to fuel growth in the world’s second-fastest-growing major economy.
Billionaire Anil Ambani’s Reliance Power Ltd., Gautam Adani’s Adani Power Ltd. (ADANI) and Sajjan Jindal’s JSW Energy Ltd. (JSW) are among companies that mothballed plans to build 42 gigawatts of capacity, Association of Power Producers’ data show, equal to 68 percent of the government’s target for the five-year period that ends in March. While the government sets retail power prices, coal from Australia and Indonesia jumped 27 percent in the last two years, eroding profit margins at plants burning the fuel.
“Things may get worse from here before they get better,” said Sadanand Shetty, who helps manage $1.3 billion of equities at Taurus Asset Management Co. in Mumbai, including shares in Tata Power (TPWR) Ltd., the biggest non-government electricity producer, and Reliance Power. (RPWR) “Fuel supply is the biggest problem for Indian power generators.”
The billionaires today joined Tata Power Chairman Ratan Tata in meetings with Coal Minister Sriprakash Jaiswal and Prime Minister Manmohan Singh on bottlenecks and price curbs that threaten Singh’s goal to boost growth to rival China. The $1.7 trillion Indian economy grew the least in more than two years in the July-September quarter as power and factory output slowed.
Jaiswal afterward gave them hope that the situation will improve. Coal India Ltd., the world’s biggest producer of the fuel, will consider giving utilities extra supplies, he said.
“It’s not possible to increase coal output overnight, but we are doing our best,” Jaiswal told reporters in New Delhi today. “The power sector’s growth is connected to the nation’s economic growth and we are serious about addressing their genuine problems.”
The prime minister assured the electricity industry he would consider all its issues “in a credible and commercially sustainable way,” Ashok Khurana, director general of the Association of Power Producers, told reporters in New Delhi.
“We discussed with him shortage of domestic fuel, cost increase due to imports, financial health of state utilities and environmental clearances,” Khurana said. “The prime minister has decided to set up a committee of secretaries” to probe the problems.
Daljeet Singh, a spokesman for Anil Ambani and Reliance Power, declined to comment. Debasis Ray, spokesman for Tata Sons Ltd., the parent of Tata Power, declined to comment, while Ratan Tata was unavailable, according to an assistant who received the call at his office in Mumbai.
Gautam Adani wasn’t available to comment, according to an assistant who answered the phone at his Ahmedabad office. Sajjan Jindal didn’t answer two calls to his mobile phone.
Reliance Power and Tata Power are among utilities that won rights to build plants by bidding prices at which they would sell electricity. The government sets limits to how much the price can increase from the levels set for these plants, which means companies struggle to break even when fuel costs rise.
“The unprecedented number of power projects stuck at the construction stage doesn’t augur well for the industry,” said Subhranshu Patnaik, a senior director at Deloitte Touche Tohmatsu India Pvt. “Unless fundamental fuel issues are sorted out, shortfalls in power supply will emerge as the greatest threat to India’s economic growth.”
The utilities that have put 42 gigawatts of capacity on hold had bid to sell electricity at an average of 2.5 rupees (5 cents) a kilowatt-hour, according to Rohit Singh, analyst at IDBI Capital Market Services in Mumbai. He estimates that at current fuel prices the cost of producing power at the proposed stations would be about 3 rupees a kilowatt-hour.
“India must choose between expensive power or no new power,” Singh said by telephone yesterday. “The situation is taking its toll on the country as a whole.”
The government has set a target for power companies to invest $400 billion by 2017 in building power plants and transmission lines in Asia’s third-largest economy. That’s double the goal for the previous five years, IDBI’s Singh said.
Building a new coal-fired power station costs about 45 million rupees a megawatt, Singh said. The 42-gigawatt capacity on hold could cost about 1.8 trillion rupees to build, he said.
India’s economy expanded 6.9 percent in the three months ended Sept. 30, the slowest pace in nine quarters, compared with China’s 9.1 percent rate in the same period. Power generation growth declined for five of the eight months to Nov. 30 as coal supplies dropped. The government wants to accelerate economic growth to an average of 9 percent in the next five years.
Living Without Electricity
“Unless issues plaguing the power sector are urgently addressed, the aspiration for 9 percent growth” may not be met, the Confederation of Indian Industry said in a statement yesterday.
The United Nations estimates that more than 25 percent of India’s 1.2 billion people live without electricity. China, which has the fastest growth rate among major economies, adds more generation capacity in a year than India does in five.
Chinese power producers increased capacity by 90 gigawatts last year and will add another 70 gigawatts this year, according to the National Energy Administration. India slashed its target for the five years ending March 31 by 21 percent to about 62 gigawatts, according to the Central Electricity Authority, because of fuel and equipment shortages.
The government aims to add 100 gigawatts by March 2017, more than half of which will be coal fired, according to India’s power ministry. The country’s Planning Commission forecasts annual coal output will rise 28 percent to 715 million tons in the next five year, lagging behind a 41 percent increase in demand to 981 million tons in the same period.
Of the 89 thermal power stations in India, 43 had a coal stock of less than seven days as of Jan. 16 compared with an average requirement of 22 days, according to data on the Central Electricity Authority website.
Shortages of local coal have prompted power producers to rely on imported fuel for new plants. Since 2007, companies including Tata Power, GVK Group and Reliance Power have announced $4.4 billion of coal-mine acquisitions in Indonesia and Australia, Asia’s largest exporters of the fuel, according to data compiled by Bloomberg.
“Companies that bought coal mines in Indonesia and Australia have had a few nasty surprises,” said Chokkalingam G, chief investment officer at Centrum Broking Pvt. in Mumbai. “There was hope these acquisitions would help solve much of India’s coal supply problems. It hasn’t worked out that way.”
Power-station coal at Australia’s Newcastle port rose 27 percent to $111.35 a metric ton in the two years through Dec. 30, according to data compiled by Bloomberg. Indonesia’s benchmark price for January is $109.29 a ton, up 24 percent from February 2010.
The landed price of Australian coal in India would need to be about $85 a ton for a new power station in India to be viable, said Michael Parker, a Hong Kong-based analyst at Sanford C. Bernstein & Co.
Reliance Power has stopped work at a 4-gigawatt station at Krishnapatnam in the southern state of Andhra Pradesh and is seeking higher tariffs to cover the increase in the cost of Indonesian coal, Chief Executive Office J.P. Chalasani said.
“The tariff challenges are industrywide,” Chalasani said in a Dec. 28 interview. “We’re in dialogue with the government and electricity buyers.”
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