Project Stakes in Exchange for Fuel Security--an Emerging Trend in the Indian Power Sector

---

Researched by Industrial Info Resources (Sugar Land, Texas)--As demand for coal continues to surge across the globe, fuel suppliers to the coal-hungry Indian power sector are seeking a mutually beneficial business package that includes equity stakes in power ventures in exchange for a steady supply of the fuel at insulated prices.

The emerging trend has been primarily triggered by foreign mineral and fuel suppliers looking for stakes in ventures that they supply, as well as by Indian manufacturing and power companies investing in overseas mining ventures with a view to supporting domestic and regional projects.

This shared ownership model is currently being advocated by several fuel suppliers in Australia, South Africa, Indonesia and the Gulf region, which are home to vast mineral and coal deposits. Representatives from foreign firms, including Middle East Coal (MEC) (Singapore), which owns coal mines in Kalimantan, Indonesia, are in discussions with major Indian firms to push for acquiring stakes in Indian ventures.

The long-term supply model, spanning a time frame of 15 to 20 years, will be priced lower than the governing market rates, but will include a fixed royalty. The model, if accepted, will provide respite from fluctuating fuel supply levels and prices in the long run, with the recipient firms effectively being rid of feedstock woes. However, mineral-rich countries are expected to apply a "floor price" to the export of the valuable fuel resources.

The proposed model is especially significant in the current domestic power sector scenario, with the Indian government planning to revamp fuel linkage schemes for ultra mega power projects (UMPPs). According to the proposed revisions, future UMPP ventures of 4,000 megawatts (MW) in capacity would have to rely on imported fuel supplies for operations. The corresponding policy is also likely to restrict development of UMPPs to coastal regions, where proximity to ports will facilitate fuel imports.

Although India has about 250 billion tons of coal reserves, these are just sufficient to meet the demand of small and medium domestic power plants. Furthermore, the high ash content of the deposits presents an overhead on transportation costs, as recovered ore is not necessarily cost-effective.

Of the nine UMPPs planned during the Eleventh Five-Year Plan (2007-12), four have been awarded to private sector firms, while the remaining projects have yet to start because of issues related to water, land, regional protests, and environmental clearance.

Three UMPPs are being developed by Reliance Power Limited (BSE:532939) (Mumbai)--the Krishnapatnam project in the state of Andhra Pradesh, and the pithead plants in Tilaiya in Jharkhand and Sasan in Madhya Pradesh. The Tilaiya plant will use imported coal, while the others will be fed by domestic linkages. Tata Power Company Limited (BSE:500400) (Mumbai) will also use imported fuel for the company's UMPP in Mundra, Gujarat.

Reportedly, 25% of the power-generation target of 78,577 MW by the year 2012 has taken a hit due to erratic coal supplies, with several projects recording zero progress because of an unavailability of fuel linkages. In this scenario, India's coal imports for the power sector are expected to rise from of 18 million tons during the last fiscal year to about 30 million tons during the current fiscal year. Coupled with the shared ownership model, the imports may well be profitable for a few decades, given the phased implementation schedules of the mega power projects.

Private Indian power firms such as Tata Power, GMR Infrastructure Limited (BSE:532754) (Bangalore, Karnataka), and Reliance Power, among others, are said to be interested in long-term fuel security arrangements. In addition to private firms, India's largest public-sector enterprise, Coal India Limited (CIL) (Kolkata, West Bengal) is also wanting to import thermal coal from Mozambique, Australia and Indonesia in 2016-17 to cover supply shortfalls. Hancock Prospecting Pty Limited (West Perth, Western Australia) and Rio Tinto Limited (NYSE:RTP) (London, England) have offered stakes in their mining ventures to CIL. Both Reliance Power and Tata Power have already invested in a few coalmining ventures in Indonesia.

View Project Report - 089000972 089001118 089001181

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.