Tata Power Co. (TPWR), India’s second- largest generator, is seeking coal assets in the U.S., Canada and Colombia as prices of the fuel drop amid surging shale gas supplies in North America.
Initial purchase talks are on for several mines, Managing Director Anil Sardana said in an interview, declining to identify the assets. Acquisition prospects in South Africa, where Tata Power has scouted for more than a year, have dimmed because of infrastructure concerns, he said.
“We just want cheap coal and there are several assets that are languishing after the shale gas boom in North America,” Sardana said. “A lot of assets got abandoned because of the boom as existing buyers moved on to shale gas.”
Cheap coal may help Tata Power, led by Cyrus Mistry, to turn its biggest power plant profitable after a purchase of mines in Indonesia turned sour as the Southeast Asian nation pegged its coal to global benchmark prices. U.S. power generators have turned to gas extracted from shale rocks as hydraulic fracturing, or fracking, has made the country the world’s biggest producer of the less polluting fuel, while freeing up coal reserves.
Lack of railroad facilities and inadequate port handling capacities that can transport coal from the mines to the nearest shore are veering Tata Power away from assets in South Africa, Sardana said. The acquisition costs for such mines increase because miners have to spend time and money to build the infrastructure, he said.
Tata Power fell 0.6 percent to 94.70 rupees at the close in Mumbai. The shares have dropped 14 percent this year, compared with a 0.4 percent gain in the benchmark S&P BSE Sensex.
A shortage of local coal supplies and Indonesia’s move have driven up costs for Indian utilities including Adani Power Ltd. (ADANI) and Tata Power, which have little choice but to bring in Indonesian supplies because buying coal from other nations would boost shipping charges.
Trouble for Tata Power began when Indonesian prices increased following the change in regulation. Tata Power, which owns stakes in PT Kaltim Prima Coal and PT Arutmin Indonesia, both controlled by PT Bumi Resources, and a 26 percent stake in PT Baramulti Suksessarana, had won the contract to build a 4,000-megawatt plant at Mundra in Gujarat state in December 2006 after bidding the lowest tariff of 2.26367 rupees a kilowatt- hour.
The coal from Indonesia, which was $42.13 a ton at the time, has since jumped 79 percent.
Tata Power needs 0.54 rupees more per kilowatt hour for electricity from Mundra to erase losses, Sardana told Bloomberg TV India in an interview April 15. The company said in an e-mail that it has written off 26.5 billion rupees ($489 million) on its Mundra unit.
The unit may suffer a loss of 475 billion rupees over 25 years, considered the lifetime of a plant, should the current tariff be maintained, Tata has told the industry regulator, which has recommended the producer must be compensated for the increase in coal costs.
Tata Power reported its first annual loss of 10.88 billion rupees for the year ended March 2012, dragged down by Mundra and currency fluctuations.
It’s unlikely the Indian states buying power from Mundra will accept the regulator’s order, said Sachin Mehta, an analyst at Mumbai-based IFCI Financial Services Ltd. who maintains a sell rating on the stock. Five Indian states that have contracted to buy 3,800 megawatts of electricity from the Tata Power plant have resisted tweaking the contract norms.
“Tata Power is not very bullish on India and is seeking to grow through overseas operations,” Mehta said. “Yet, raising funds for an acquisition or a new project will not be easy, considering the losses it is suffering at Mundra.”
The utility is planning to add 1,600 megawatts of capacity to its Mundra plant and has signed a preliminary agreement with the Gujarat government for the $1.25 billion expansion, Sardana said. Tata Power has sought environmental clearance and may take about four years to build the additional capacity, he said.
The company will use borrowings to fund 70 percent of the investment, with equity financing the rest, Sardana said. Electricity from the new capacity will not be bound by regulatory tariff and could be sold in the open market, countering losses arising from fixed tariff contracts signed with state governments, he said.
The boom in fracking, which shatters shale rocks using pressurized water to pump out gas and oil, in the U.S. and Canada has absorbed bulk of the energy demand, freeing up large quantities of coal reserves. The assets can help Tata Power revive the unprofitable Mundra power plant and aid Asia’s third- largest economy prevent outages such as the world’s worst blackout that left 640 million people without electricity last year.
“The current price points of shale gas have fundamentally changed the cost economics in the U.S.,” said Arvind Mahajan, partner and head of energy, infrastructure and government practices at KPMG LLP. “There’s a clear shift in feedstock preference towards gas whose supply has increased in a step function. This is rendering a lot of coal reserves surplus and ready for exports.”
KPMG is working on feasibility studies for several companies on transporting coal cheaply from these countries and exploring options such as swap agreements, Mahajan said, without disclosing if Tata Power is a client.
Global coal demand has grown at a compounded annual rate of 4.8 percent since 2003, seven times the pace between 1990 and 2002, according to data compiled by Bloomberg. Much of the rapid pickup has been driven by emerging market demand, principally China and India, which together have accounted for almost 95 percent of the growth in the past decade.
Growth for Tata Power would depend on how challenges around its Mundra project are overcome, which Chairman Mistry “fully understands,” Sardana said. The Mundra unit “is the albatross around the neck.”