PATH TO POWER PAVED WITH CHEAP POWER

Monthly Power News Commentary: February – March 2017

India

The BJP was reported to be in a rush to fulfil two of its key election promises (i) to provide cheap power and (ii) free energy efficient pumps to farmers, even before formally forming the government in the state. An agreement for Centre’s ‘Power for All’, envisaging commitment to 24X7 power supply, connecting all households, supplying up to 100 units at Rs 3/unit for each household and giving free energy efficiency pumps to farmers has been signed. Though UP was one of the first states to accept ‘UDAY’, the Centre’s plan to rejuvenate debt-laden distribution companies, the outgoing government refused to finalise the terms for signing the Power for All document, which commits states to improve power management and supply. The election campaign also mixed communism with communalism with the accusation that there was partiality on the ground of religion on the issue of electrification and power supply in the state which powered it to victory.

UP will issue bonds worth Rs 100 billion against the debt of its discoms which it took over. This is the second issuance by the state under the provisions of UDAY agreement, which aims to restructure the financials of beleaguered power distribution companies. UP issued bonds totalling Rs 240 billion in three tranches till FY16.

The Delhi government whose cheap power plan also powered it to ‘power’ (which is being actively replicated by all political parties) is reported to have set aside Rs 16 billion for its flagship subsidy scheme for power consumers. In total the Delhi government has proposed Rs 21.9 billion expenditure in the energy sector. Under the subsidy programme, in the last two years domestic consumers using up to 400 units of electricity per month are charged at half the rate. The scheme will continue to benefit over 3.6 million domestic consumers in the national capital who come under the prescribed limit of electricity use.

Not to be left out Haryana has proposed to lower fuel surcharge allowance on power tariff by Rs 0.50-0.60/unit.  The electricity consumer in Haryana is paying Rs 1.24 to Rs 1.43/unit as surcharge levied by the electricity distribution companies – Uttar Haryana Bijli Vitran Nigam and Dakshin Haryana Bijli Vitram Nigam. The surcharge forms one fourth of the electricity bills of the consumers, hence the announcement may bring relief to all sectors.

The opposition party in Rajasthan termed the rollback of power tariff hike for agriculture connections as a victory of farmers and that it would demand the rollback of the tariff of domestic consumers as well. The state government of Rajastan has apparently taken over the loss of Rs 600 billion under UDAY Bond.

The West Bengal government said that it was committed to provide quality power to all consumers and with that end in view it would install 177 sub-stations across the state in the next two years to overcome voltage problems.

Offer of cheap power during election campaign is a time tested strategy of Indian political parties. Few if any notice that the policy to reform the electricity sector and make it more market oriented and the policy to undermine the market through state intervention are often implemented by the same government.

Odisha is the next state going to the polls and naturally there is plenty of news on how the current government has failed to provide power to households. More than 3.5 million households in the state are yet to have electricity connection. Of the families living without power, 1.5 million belong to the below poverty line category.  Power is yet to reach 984 villages in the state. In this light the government has pre-empted opposition parties stating that it will provide electricity to all homes by 2019. The centre has given more than Rs 12.24 billion to cover the villages without electricity.

Dabhol power project re-christened as Ratnagiri Gas and Power is apparently going to be revived with help from the Prime Minister’s office. The Railways has been forced to enter into a power purchase agreement with the company and demerger of the LNG division has been expedited. The Maharashtra state government may also be forced to waive off state-wise transmission charges and transmission losses, and waive off the tax on gas to the project to make the power more viable. The plan for the demerger of the LNG regasification unit from the power unit has been approved by lenders but certain issues raised by Power Finance Corp and LIC have to be sorted out.

The KERC was reported to be considering imposing cross subsidy surcharge for those opting out of grid power and as demanded by the Escoms. Bulk consumers feel they can get power in open market at rates that are competitive than what their respective Escoms offer, and want to shift to such power and reduce dependency on the grid. At present, Escoms are grappling with morning and evening load peaks. Supply peak will not address either the morning or evening supply peaks usually that Escoms experience from 6am to 8am and 6pm to 8pm. This comes between 8am and 6pm when solar power production is expected to be at its peak. Since it is not possible to store the power generated and used to manage morning and evening peaks, the power generator, Escoms will have to find consumers who can utilize this supply peak in a manner that it brings them revenue.  This is an interesting development to watch as solar supply during off peak hours is not what the market would have desired. Without storage adding to supply during off peak hours does not necessarily reduce conventional power generation capacity.

Delhi’s peak power demand is expected to touch 6,600 MW this summer, surpassing last year’s peak of 6,261 MW which is the highest ever recorded till date. The peak power demand in the city during the summer of 2017 is expected to touch around 6,500-6.600 MW. Last summer, it was 6,261 MW, highest ever-recorded in the national capital. The peak power demand in South and West Delhi that had reached 2,669 MW during summer last year, is expected to touch around 2,800 MW this year. The peak demand in East and Central Delhi is also expected to rise from 1,493 MW last year to around 1,600 MW. In north and northwest Delhi peak electricity demand of about 1,900 MW is expected in summer compared with 1,791 MW last year.

Power demand in Bihar that has more than five times the population of Delhi increased from 1,800 MW in July 2013 to 3,854 MW (or just half the capacity required to serve Delhi’s rich consumers) in November 2016. High AT&C loss blamed on large scale rural electrification in Bihar was estimated to be 59.24 percent in FY13 and 43.54 percent in FY16. As per the generation plan, additional capacity of 5,589 MW will be added by FY19 and Bihar’s total available capacity was expected to be 8,925 MW, making it a power surplus state.

Subdued demand coupled with surplus electricity availability has slowed down the addition of new capacity for generating power from conventional sources of energy such as coal and gas in one of India’s most industrialised States, Gujarat. The installed electricity generation capacity of non-renewable energy sources in Gujarat grew by just 0.7 percent in 2015-16. The growth was 6.2 percent and 5.2 percent in 2013-14 and 2014-15 respectively. Gujarat’s installed power generation capacity from non-renewable energy sources stood at 20,765.82 MW in FY 16 against 20,611.30 MW in FY15, an annual addition of 154.52 MW.

Turning to cross border developments, Nepal and India have agreed to lay down Butwal (Nepal)-Gorakhpur (India) and Lumki (Nepal)-Bareilly (India) transmission lines and setting up of new 400kV sub-stations at Dhalkebar, Butwal and Hetauda (Nepal). The current import of 380 MW of power from India has been possible on account of the installation of additional transformer at Muzaffarpur by the Indian side, as also by technical improvements at Tanakpur at Nepal’s request. With the commissioning of two new lines — Raxaul-Parwanipur and Kataiya-Kusaha, the installed capacity for export of power to Nepal will increase by another 100 MW to 120 MW by the end of February 2017. Further, with the completion of 220 kV substation at Dhalkebar, the installed capacity will increase to almost 700 MW by the middle of 2017. The Indian side agreed to extend technical assistance for improvement of existing infrastructure, so that the era of load-shedding can end in Nepal for good.

Rating agencies maintained a stable negative outlook on power sector for the next financial year despite an improvement in coal availability, restructuring of distribution companies’ debt and operationalisation of stuck projects. The sector’s return on capital employed remains unattractive and small private companies are the worst hit. It said there is a possibility of sector consolidation, which could be triggered by the new bankruptcy code. India added nearly 115 GW of coal-based capacity since FY11. However, demand growth did not keep pace with capacity addition. This has put pressure on the PLFs of coal-based thermal power plants. In the past, coal and discom financial health were the two key constraints to the overall PLF. However, demand, solar capacity addition and discom financial health will be the major factors putting pressure on PLF in future. Earlier, the private sector kept a part of the capacity untied due to high short-term prices. The PLF of the private sector’s coal-based power plants fell to 56.3 percent in FY17 from 83.9 percent in FY10.

Rest of the World

Nord Pool plans to launch a day-ahead power auction and continuous intraday power trading in Ireland from 2018. Short-term power trading has increased in recent years as coal and gas plant operators can no longer plan their output years ahead as they do not know how many hours they will operate in a market they now have to share with renewables. Experts are concerned that Britain’s vote to leave the EU could jeopardise plans to join the Irish and Northern Irish electricity markets, which is a multi-year project to create a unified Irish electricity market in line with EU legislation.

A one-day strike in the French gas and electricity sector cut power production by 4.2 GW. EDF, the French power generator said that hydropower production was cut by 280 MW, while its 535 MW Porcheville 3 fuel-powered generator and the 580 MW Havre 4 generator, reported unplanned outages after workers downed tools. Unplanned outages caused by the strike had reduced output at seven of France’s 58 nuclear reactors, cutting electricity output from the reactors by nearly 3 GW.

Poland may face electricity shortages after 2020 as some of the country’s outdated coal-fuelled power plants are shut down. Poland generates most of its electricity from coal-fuelled power plants, some of which were built in the 1970s. Poland hopes to introduce a power capacity market to help utilities build new coal-fuelled power plants, despite the European Union’s plan to limit such schemes. Capacity market, in which the state pays producers to keep plants online to generate electricity as and when needed, would help Poland secure power supplies in the long term.

Greece’s power market operator LAGIE and the Athens stock exchange have agreed to jointly set up a power trading exchange, that would start operations as early as mid-2018. The new power trading exchange would replace the existing mandatory pool system, where power producers may enter into bilateral contracts that are constrained within the pool. It is expected to improve power sales transparency, boost competition and lower electricity prices for end users. This new market model is part of plans to reform the Greek electricity market in line with European interconnection plans.

FY: Financial Year, KERC: Karnataka Electricity Regulatory Commission, BJP: Bharatiya Janata Party, UDAY: Ujwal Discom Assurance Yojana, UP: Uttar Pradesh, Escoms: electricity supply companies, kV: kilovolts, discoms: distribution companies, PLF: plant load factor, MW: megawatt, GW: gigawatt, EU: European Union

Courtesy: Energy News Monitor | Volume XIII; Issue 41

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INDIA TAKES OFF ON TWO WHEELS

Monthly Oil News Commentary: September – October 2016

India

This newsletter commented in June 2016 that India was taking off, but only on a motor bike rather than a car as presumed by many in the market (ORF Energy News Monitor Volume XII, Issue 52). At that time, the international press was consumed by the idea that India will take over from China as the main growth market for oil.  The fact that oil demand growth in India was 400,000 bpd higher year on year representing nearly 30 percent of global increase in the first quarter of 2016 along with the fact that it was petrol rather than diesel that was fuelling growth was behind this enthusiasm. Rich consumers were thought to be buying cars to drive into prosperity.

Since then opinion seems to have shifted to the Indian growth story moving on two rather than four wheels.  India’s petrol consumption is reported to have increased by 550,000 bpd between June and August, an increase of nearly 15 percent from 480,000 bpd a year earlier. Petrol consumption reportedly hit a new record of 600,000 bpd in August. The number of registered vehicles hit 182 million in 2013 but the majority of this were motorcycles (133 million) with a much smaller number of cars, jeeps and taxis (25 million) and goods vehicles (9 million).

Motorcycles were reported to have accounted for more than 60 percent of all petrol sales in 2013. Motorcycle sales were reportedly growing at 7 percent per year since FY11 and were reported to have hit a record 16.5 million in FY16.  This is low compared to car sales growth of just over 2 percent per year which reached 2.8 million in FY16. It would be of interest to understand what is driving the demand for two wheelers.  The common view is that it is driven by higher incomes and improved social status that a private vehicle brings. This may have been true two decades ago when few had two wheelers. Now most people even in city slums and villages have one. It is possible that the growth in e-commerce has something to do with it. Growth in e-commerce has propelled demand for delivery services and this is probably behind the spurt in demand for two wheelers and petrol. Speculatively one may even say that two wheelers are the ticket to employment for many of India’s educated youngsters who have no real prospects for regular jobs that pay decent wages.

The other important news that is likely to make a difference was on LPG. The lack of Aadhar card or the failure to register an Aadhar card with a bank account by the end of September will reportedly delink 25 million domestic LPG consumers from accessing subsidies for LPG. Subsidy payments to some 50 million consumers were put on hold since July but only half have reportedly registered their cards. It is to be noted that the recent news quoted 180 million households (As of March 31, 2015 Domestic LPG connections (of IOC) 88.77 million plus (of BPCL) 45.82 million plus (of HPCL) 47.31 million) have LPG connections out of which over 90 percent receive a subsidy but as per figures quoted by the Census 2011 and 68th round of NSSO number of households using LPG as cooking fuel are close to 70 million and 78 million respectively. 30 million connections were reportedly eliminated as they were found to be non-domestic consumers but an equal number of new consumers were supposedly added keeping the total number intact. The budget for FY16 allocated about Rs 270 billion (or about $ 4 billion) for fuel subsidy out of which roughly 73 percent is for LPG and about 26 percent for kerosene. If the number LPG consumers receiving a subsidy is reduced it could substantially reduce the subsidy burden on the government.

Rest of the World

The biggest news on oil was that its price touched $50 per bbl this month thanks to Russia joining hands with the OPEC to limit production. At the moment, Russia is the largest oil producer in the world with over 11 mbpd of production. Opinion is divided on the sustainability of the efforts by oil producers to limit production and boost prices.  In the recent past the impact of such acts have been short lived. Though oil producers want higher prices, none of them, not even Saudi Arabia or Russia want to reduce production. Lower production levels could potentially have a negative impact on market share as well as revenue.

IEA’s oil market report for October said that demand continues to be subdued as demand growth had fallen in China.  The IEA has lowered oil demand growth for 2016 to 1.2 mbpd from 1.3 mbpd in September and 1.4 mbd in August. According to the IEA oversupply is expected to continue through the first half of 2017. But the IEA also suggested rather optimistically that if OPEC stuck to its new target, the market may rebalance faster. OPEC’s oil output was reported to have risen by 160,000 bpd in September to an all-time high of 33.64 mbd on account of increased production from Iraq, Libya, Iran and the Gulf States.  According to experts, OPEC would have to reduce production by 600,000 bpd to reach the upper end of the range (32.5-33.0 mbpd) that it has supposedly committed to.

Few expect such a large reduction in production to actually materialise. According to one expert, Saudi Arabia’s decision to cut production was driven by the fact that it paid a price for not agreeing to cut production in the last two years. The country’s financial reserves have fallen by 20 percent, and the budget deficit in 2015 was $98 billion, over 15 percent of GDP. The deficit for 2016 is projected to be $87 billion. Meanwhile Saudi Arabia revealed in its bond issue prospectus that it expects its 266.5 billion barrels of oil reserves to last another 70 years.  This is not necessarily new information but it will not make the anti-fossil fuel groups very happy.

FY: Financial Year, LPG: Liquefied Petroleum Gas, OPEC: Organization of the Petroleum Exporting Countries, IEA: International Energy Agency, GDP: gross domestic product, bpd: barrels per day, bbl: barrel, mbpd: million barrels per day, NSSO: National Sample Survey Organisation, IOC: Indian Oil Corp, BPCL: Bharat Petroleum Corp Ltd, HPCL: Hindustan Petroleum Corp Ltd

Courtesy: Energy News Monitor | Volume XIII; Issue 18

COAL TAKES ON OBITUARIES

Monthly Coal News Commentary: February – March 2017

India

Obituaries continued to pour in for coal from the those who have identified coal as the primary enemy of mankind. The latest is the report from TERI that makes the case for India to shift away from coal and into green energy because of the excess capacity in coal based power generation caused some excitement among the green community and some anxiety among the ‘not-so-green’ community. According to the TERI study, if India can halve storage technology prices by 2024 it can do without the need for new coal-based plants. Sections of the business media said that TERI’s report was in line with a recent report by the CEA that said the country did not need new coal based power generation capacity till 2027. This is inaccurate. The CEA report says that as over 50 GW of coal based power projects are under construction that are likely to yield benefits during 2017-27 no additional coal based capacity is required for the period.

Naturally the WCA responded that it is not credible to suggest that the country can achieve universal energy access and develop its economy without coal in the next 10 years, regardless of the country’s investment in renewables. According to WCA coal will remain the driving force behind electrification and industrialisation.  WCA also quoted the IEA report that states that coal will continue to make the largest contribution to electricity generation in India through to 2040. WCA said although the competitiveness of renewables and gas-fired technology in India is likely to improve over time, coal is expected to remain the most affordable option through to 2035.

BMI Research joined in to say that India’s power sector will continue to be dominated by coal over the coming decade despite significant growth in cleaner fuels or renewables. According to the BMI Research, the country’s efforts to bolster domestic supply of coal and the loosening of the global coal market over the coming years will ensure that coal will remain the power feedstock of choice for the Indian market. India’s power sector will remain dominated by coal over our 10-year forecast period, with coal making up a share of just less than 70 percent to the total power generation mix by 2026. This is roughly the same level as it is currently, with growth underpinned by the significant and continually growing project pipeline for coal-fired power facilities in the country, it said.

The coal ministry for its part is identifying alternative uses for coal. It said that domestic coal gas can be used as a feedstock for producing urea and other chemicals that can help reduce the country’s import bill by $10 billion in five years and cut carbon emissions. India’s dependence on petroleum and natural gas can be reduced or done away with if the country is able to get gas from coal.  If the country is able to gasify coal and use that for production of chemicals, including urea and methanol, it would lead to reduction in import bill manifold by 2030. Underground coal gasification is a method of converting coal underground into gaseous mixture of hydrogen, carbon dioxide, carbon monoxide and water that can be used in place of natural gas as fuel or feedstock. The government is planning to come up with a series of pilot projects in areas like coal gasification and coal-to-polychemicals next fiscal.

On the policy front there was a progressive move that will hopefully be the beginning of the end of the coal linkage policy that not only constrained supply but also encouraged corruption.  The government announced that private power plants can now bid for coal allotted to state utilities, a move the government feels will lead to more efficient fuel use, reduce cost of generation by Rs 0.40-0.50/unit and result in savings of $ 3 billion/year in 4-5 years. In other words the landed cost of power from private producers inclusive of the transmission charges and losses should be lower than the variable cost of the state generating station whose power it replaces.  But the rules for swapping coal between state utilities and private power producers, notified by the CEA lays down certain conditions such as availability of transmission lines between the state and the power plant with which the coal is being swapped.

The swap will be subject to ability of the railways to transport coal to the new plant from the mine from which coal is allotted to the state utility. The decision is expected to help states phase out old plants and energise several new power plants languishing due to fuel shortage. The plan allowed all long-term coal linkages – supply quotas from specific mines – of individual power plants in a state to be clubbed together and put under the charge of the state government or its nominated agency. According to the new rules, the energy generated under this arrangement will be treated as transfer of coal.  The rules provide that any restriction imposed by regional/states load dispatch centres on scheduling of power due to breakdown of transmission and grid constraints shall be treated as force majeure without any liability on either side. During the force majeure, no coal transfer shall be made to the seller, the new rules stipulated.

CIL’s average e-auction prices for the solid fuel have risen after about 12 months, reflecting a hardening global trend in the costs of coal. In the December quarter, average realisations from e-auction rose to Rs 1,546/tonne, 17 percent higher than the preceding three months, reversing a series of declines that had begun in April 2015. Analysts expect prices to remain firm and aid CIL improve its financial performance because of output moderation by large regional exporter Indonesia and revival of demand from smokestack industries in China, which had initially triggered global declines by shutting some coal-fired power plants. CIL is one of the world’s few miners of the fossil fuel that returns at a rate higher than its weighted average cost of capital.

Rest of the World

Obituaries to coal continued to pour in from the rest of the world as well.  However China has said that it will not force coal mines to cut output on a large scale if prices remain within a reasonable range. China’s NDRC said provincial governments and relevant agencies will decide whether to implement cutbacks at mines that are not considered “advanced”. It did not say what price range it would consider reasonable.

On the other hand, an Oxford University study warned that China’s utilities could write down between $449 billion and $1.047 trillion in assets over the next 20 years, exposing them to financial risks as the country enacted more intensive pollution controls. China Huaneng Group, China’s largest utility, has more than 22,720 MW of new coal generation capacity under construction. These assets face possible devaluations as a result of China’s tightening pollution controls and intense price competition for surviving and new power plants, the study said. Other companies such as China Datang Corp, China Guodian Corp and China Huadian Group are subject to similar risks as they plan to build more than 45,000 MW of new capacity, the study said. The country’s energy regulator has ordered 11 provinces to halt more than 100 coal-fired power projects some of which are under construction, with a combined installed capacity of more than 100 GW.

Britain’s coal production fell by 51 percent to a record low last year as all large deep mines closed and others neared the end of their operational life, preliminary government statistics showed. Coal output fell to just over 2 million tonnes of oil equivalent in 2016.  Britain’s coal production has fallen by 77 percent in the last five years. Coal accounted for 10.6 percent of electricity supplied in 2016, down from 25.8 percent in 2015, due to coal plant closures and a carbon price floor which has made coal-fired generation more expensive than gas-fired power.

The US coal miner Peabody Energy Corp said it has agreed to set aside collateral to cover future mine clean-up costs as part of its bankruptcy reorganization plan, ending its controversial use of “self-bonds.” For decades the largest US coal companies have used a federal practice known as “self-bonding,” which exempts companies from posting bonds or other securities to cover the cost of returning mined land to its natural state, as required by law. Peabody had warned that the financial strain of having to replace all of its self-bonds would eat into its liquidity.

Finally China’s sanctions against high quality coking coal or Anthracite have sent China’s steel mills and traders scrambling to find alternative supplies. Chinese prices of steel, coking coal and coke all rallied, as traders and analysts said mills will likely be forced to buy more expensive domestic material or seek alternatives further afield from Russia or Australia, driving up costs. While North Korea accounts for only a small portion of China’s total coal imports, it is the main foreign supplier of high-quality coking coal which is used to make coke, a key ingredient in steelmaking. Business with North Korea had become increasingly difficult under years of sanctions and the once-bustling trade handling coal from the north had shrunk to just a few private merchants. China bought 22.48 MT of anthracite from North Korea in 2016, 85 percent of its total imports.

MT: Million Tonnes, MW: Megawatt, GW: Gigawatt, CEA: Central Electricity Authority, WCA: World Coal Association, IEA: International Energy Agency, CIL: Coal India Ltd, US: United States, TERI: The Energy and Resources Institute, NDRC: National Development and Reform Commission

Courtesy: Energy News Monitor | Volume XIII; Issue 40

SHOULD WATER BE MIXED WITH POWER?

Monthly Non-Fossil Fuels News Commentary: September 2016

India

The hydro-power sector in India received an unexpected jolt from India’s foreign policy this month. India declared that it will accelerate building of new hydropower plants on the three western tributaries of the Indus River that flow into Pakistan in response to a terrorist attack that killed many of India’s soldiers. Article III of the IWT that governs the distribution of waters of the Indus river between India and Pakistan permits India to use waters of the Indus, Jhelum and Chenab for domestic use, non-consumptive use, agricultural use and generation of hydro-electric power with the caveat that such use will not ‘interfere’ and ‘let flow all the waters of the western rivers’. This means that the hydro-projects have to be the so-called ROR projects. ROR projects have proved to be less attractive economically than they originally thought to be when the sector was opened to private investment in the early 2000s. The more worrying signal is that the supposedly water tight Treaty is now leaking and spilling into the primary domains of conflict between the two countries. The IWT only considered ‘stocks’ of water which could be subjected to sovereign powers of control, autonomy and legitimacy. The challenge today is ‘flows’ of water whose trans-boundary nature does not easily lend itself to sovereign powers of control or autonomy. Flows are threatened not just by manmade obstructions but also by volume of precipitation, snowfall and glacier-melt which are factors over which only nature has control. The ecological consequences of exploiting provisions in the IWT, even if permissible, may be unsustainable especially in the light of variability in water flows (or climate change as some would prefer to call it).

The Government is also reported to be considering reclassifying large hydro power plants as renewable projects as this could help India achieve clean power capacity of 225 GW by 2022. Currently only small projects (up to 25 MW) are classified as renewable projects. Of the 305 GW installed power generation capacity, 43 GW comes from large hydro projects and 44.23 GW from other renewable power generation capacities.

Since Fukushima, Kudankulam has been in the news for the wrong reasons but this month it was in the news for the right reasons. Unit 1 of the Kudankulam Nuclear Power Plant operated continuously for than 200 days for the first time since it was commissioned in 2014, generating about 4,700 MU of electricity. The Russian suppliers can look forward to brighter prospects for unit 2 and also the construction for units 3 & 4. Meanwhile it was also reported that US nuclear suppliers had not given up on India and are doing their best to reduce risk exposure for their potential investment in the sector. Apparently the U.S. Export-Import Bank is negotiating a loan for an $8-9 billion loan to finance six Westinghouse Electric nuclear reactors under the infamous nuclear deal signed between the USA and India in 2008.  India is also reported to be negotiating with South Korean nuclear suppliers. India has set itself a target of 63 GW nuclear capacity by 2032.

Solar manufacturers in India are reportedly not worried by WTO’s upholding of the US complaint against domestic content requirement in India’s solar projects. This is understandable given that the ruling favours import of solar modules and other components into India. This is something that most solar sector players are indulging in anyway. However they may be worried if India was to retaliate and impose anti-dumping duty on foreign modules as this would raise the cost for Indian developers. As India-made modules are unable to compete with foreign ones, both on price and technology agencies like NTPC and Solar Corp of India have been holding separate auctions with a DCR provision, where the subsidy provided by the government as well as winning tariffs are significantly higher than in open auctions.

Rest of the World

More good news for Russian nuclear suppliers as construction of Bushehr-2 in Iran with superior technology was reported to have started. Reduction of the risk of core melt down to 1,000 times, reduction of the risk of radioactive contamination down to 100 times, increasing the plant life from 40 years to 60 years, and increasing efficiency up to over 90 percent, were among the features of the new units at Bushehr.

China, which was known for building one coal power each week in the last decade is now in the news with plans to build roughly one nuclear plant every two months for the next ten years (or 60 nuclear plants in the next 10 years). The 60 new plants would include between six and 10 CAP1000 reactors, which are Chinese versions of the AP1000 made by Toshiba-owned Westinghouse. The Chinese nuclear sector was also in the news on Britain’s decision to go ahead with the Hinkley C nuclear project in which state-owned China General Nuclear Power Corp will have a 33 percent stake.  Many in the UK are uncomfortable with the idea of China’s involvement in the nuclear industry of the UK.

But there was some setback for the nuclear industry.  Japan was reported to be considering closing down its prototype fast-breeder nuclear reactor.  About $10 billion of public money has been injected into the facility, but Japan’s nuclear regulator declared its operator unfit following years of accidents. The 280 MW reactor was designed to burn plutonium refined from spent fuel at conventional reactors to create more fuel than it consumes. Fast breeder reactors are part of India’s three stage programme. India has invested in a prototype fast breeder reactor in Kalpakkam.

A philanthropic group was reported to have launched $80 million fund to expand energy efficiency in developing countries just ahead of Montreal Protocol negotiations.  Increasing energy efficiency, specifically in the cooling sector, is seen to be crucial to development. Cooling (such as in air conditioning and refrigeration), the primary user of HFCs, drives as much as 40 to 60 percent of peak summer energy load and is expected to grow substantially.

Finally Glencore a mining and trading giant declared that renewable energy will not be cost competitive with fossil fuels until 2050.  This must be interesting news for those who have turned tariff quotations by solar power generators into a spectator sport. The contest is presumed to be between the sun and coal.  When the quote of $0.0242/kWh (less than Rs 1.3/kWh) tariff from Jinko Solar of China to Abu Dhabi Water & Electricity Authority was reported this month, the sun was said to have beaten coal. The reality is that tariff is just one part of the high transaction cost of harnessing solar power.  But these are not attractive enough for the headlines.

GW: Gigawatt, kWh: Kilo Watt Hour, million units: MU, ROR: run-of the-river, IWT: Indus Waters Treaty, DCR: domestic content requirement, HFCs: Hydrofluorocarbons, WTO: World Trade Organisation

Courtesy: Energy News Monitor | Volume XIII; Issue 17

NATURAL GAS IN INDIA: CRUISING FOR TAKE OFF?

Monthly Gas News Commentary: February 2017

India

India has the potential to become a much larger producer and consumer of natural gas by 2022 when it is expected to surpass China in terms of population, a US Congressional report on India’s natural gas said. India’s current assessment of total resources that are economically and technically viable under existing market conditions are estimated to represent less than one percent of the global natural gas, the report said. As India attempts to shift away from coal and oil over the coming decades, natural gas production, especially from offshore resources, is seen as a way to increase domestic supply, the report said. Combined with improving infrastructure for imported LNG, India could become a bigger natural gas consumer in the future, the report said. The report said in the past decade, India has incentivised foreign access to its upstream sector as a way to increase domestic production. Some of India’s energy companies are also investing more in US energy projects and have signed contracts to import US LNG, the report said. The question that comes to mind is, are US gas exporters looking for larger markers for their gas?

Keeping up with the spirit of optimism BP Plc said new natural gas production from the flagging eastern offshore KG-D6 block will start after 2020, three years later than previously planned schedule. RIL-BP currently produce gas from Dhirubhai-1 and 3 field and oil and gas from MA field, three of the over one-and-half dozen discoveries made in KG-D6 block. The fields, which began gas production in April 2009, hit a peak output of 69.43 MMSCMD in March 2010 before water and sand ingress shut down well after well. The block currently produces around 8.7 MMSCMD.

However there was some positive news on production growth for natural gas. India was reported to have produced 2,738 MMSCMD of natural gas in January 2017, registering a growth of 12 percent over the same month last fiscal. This was the highest growth recorded in the past 30 months, or two-and-a-half-years. Total monthly output has grown from 2,488 MMSCM in April 2016 to 2,738 MMSCM in January 2017. PPAC attributes the historic growth to low base effect as production from Oil and Natural Gas Corp, the private sector and from the joint ventures had decreased dramatically in January 2016.

Mixed views emerged on taxing natural gas at a recent forum. GAIL (India) Ltd sought waiver off customs duty on LNG and wanted gas to be included in the GST fold.  Consumers of natural gas wanted natural gas to be out of GST. The Finance Minister has already obliged GAIL by halving the import duty on LNG to 2.5 percent, a move that will help cut cost of power and fertiliser production.

Rest of the World

Global demand for LNG which reached 265 MT in 2016, is set to grow to 2030, according to Royal Dutch Shell plc. China and India, which are expected to continue driving a rise in demand, were two of the fastest growing buyers, increasing their imports by a combined 11.9 MT of LNG in 2016, Shell said. This boosted China’s LNG imports in 2016 to 27 MT and India’s to 20 MT. Egypt, Jordan and Pakistan were among the fastest growing LNG importers in the world in 2016. Due to local shortages in gas supplies, they imported 13.9 MT of LNG in total, Shell said.

China’s soaring demand for LNG is sparking industry hopes that a supply overhang causing a slump in prices will end sooner than initially anticipated. China’s imports of LNG in January rose 39.7 percent from a year earlier to 3.44 MT. It was the second-highest monthly import level, behind a record 3.73 MT. The steep growth rate in 2016 imports mean that China is challenging South Korea to become the world’s second-biggest LNG importer, after Japan. The LNG industry is banking on China’s growing demand to end a global supply overhang triggered by a wave of new production especially in Australia and the United States. The glut has driven Asian spot LNG prices down by almost 70 percent since their 2014 peak to $6.40/mmBtu. China’s growing demand, much of it coming from import facilities called floating storage regasification units, means that supply and demand in the LNG market could come into balance by around 2021-2022, about a year earlier than previously expected, the Australian oil and gas major Woodside Petroleum said.

On prices the anticipated discount of US LNG did not materialise. Japan was reported to have paid nearly twice as much for LNG derived from US shale gas as it did for its cheapest imports. Shale gas from the USA had been touted as a panacea to Japan’s energy crisis after the Fukushima nuclear disaster nearly six years ago. Japan, the world’s biggest importer of LNG, received 211,237 T of US LNG at an average cost of $645/T. By contrast, the lowest it paid was $337/T for 64,246 T of LNG from Angola. The country paid an average of $386/T for all 8.3 MT of LNG it imported last month. The 428,626 T of LNG imported from Brunei, at $416/T were the second highest-priced supplies. Australia was Japan’s biggest supplier in January, sending 2.01 MT at a cost of $384/T.

Asian spot prices for LNG delivery in March fell to parity with European gas benchmarks, while importers in India, Thailand and Mexico finalised purchases amid healthy supply. Traders said Asian prices for March delivery fell 25 cents to about $7.50/mmBtu matching the UK’s National Balancing Point trading hub levels. Traders said they had heard GAIL (India) had bought supplies in the low $8/mmBtu range, while Thailand’s PTT bought a cargo in the high $7/mmBtu possibly from Chevron. Mexico purchased two cargoes for February delivery. Steady cargo demand was seen coming from Spain.

There were some activity on the acquisition front.  Total was said to be in talks to buy a multi-billion dollar stake in Iran’s partly built LNG export facility, Iran LNG. The French oil major, the first of its peers to strike deals in Iran after sanctions, seeks entry into Iran LNG at a discount to the pre-sanctions price in exchange for reviving the stalled project. The Iranian part of the field, known as South Pars, contains over 14 TCM of gas.

China’s state-run Zhenhua Oil was also reported to have signed a preliminary deal with Chevron to buy its natural gas fields in Bangladesh that are worth about $2 billion. Bangladesh, though, holds the right of first refusal on the assets and could block the transaction. The country, via its national oil company Petrobangla, is keen to buy the gas fields and is talking to international banks to raise financing.

Qatar Petroleum was reported to have has joined an international consortium of major US, European and Japanese energy companies to develop a LNG import project in Pakistan. The consortium, which includes US ExxonMobil, France’s Total, Japan’s Mitsubishi, and Norway’s Hoegh, will develop a project that includes a floating storage and regasification Unit, a jetty and a pipeline to shore to provide natural gas supply to Pakistan, Qatar Petroleum said.

All this activity makes one wonder how and why Indian companies missed opportunities in the neighbourhood.

Finally, it appears that the Trump effect is likely to touch gas as well. Bank of America Merrill Lynch said the enactment of a prospective US border adjustment tax could lash US natural gas prices if Mexico retaliates. A similar border tax scheme, if implemented by Mexico, could spark a wider trade war the investment bank said. The US currently sends 5 percent of its annual gas production via pipelines to Mexico, and the country is the biggest buyer of US LNG.

MT: Million Tonnes, LNG: Liquefied Natural Gas, US: United States, MMSCMD: Million Metric Standard Cubic Meter per Day, PPAC: Petroleum Planning & Analysis Cell, GST: Goods and Services Tax, mmBtu: million metric British thermal units, TCM: Trillion Cubic Meters, RIL: Reliance Industries Ltd

Courtesy: Energy News Monitor | Volume XIII; Issue 39

WAITING FOR REVIVAL OF DEMAND

Monthly Power News Commentary: August – September 2016

India

Reportedly, the Power Ministry is planning to shut coal-fired power plants with capacity of about 8,000 MW that are more than 25 years old to reduce carbon emissions. It is definitely the right time to close inefficient plants as demand for power is subdued. Closure of old plans may also have the additional benefit of reducing land acquisition problems for new plants. New plants can be constructed at the site of closed plants without going through the complex procedure for acquiring land in new sites.  But closing old plants will not address the problem of inefficiency in the Indian power sector. The share of power capacity slated for closure is less than 4 percent of India’s coal based power generation capacity and 12 percent of state owned power generation capacity which has the oldest fleet. Globally over half of thermal power generation capacity is less than 20 years old but in India the share is two thirds. The relative youth of India’s power generation fleet means that relatively few of these plants will reach the end of their technical life time in the next two decades.

The other news that mattered in the last one month is that claims of rural electrification are at best inaccurate and at worst false. Rural electrification plans, irrespective of whether they are called Deen Dayal Upadhyay Gram Jyoti Yojana or Rajiv Gandhi Grameen Vidyutikaran Yojana are a victim of India’s (a) devolved federalism that distributes responsibility over electricity between the State and the Central governments and (b) the conflict between forces of the market and intentions of the Government. Well intended plans of the Centre to electrify villages or poor households often end with putting up the infrastructure such as poles and wires etc or financing such infrastructure. The ownership of the infrastructure and the responsibility to supply of electricity then moves to the State governments. State governments tend to be reluctant to maintain the infrastructure in rural areas or supply electricity but they cannot be blamed. The right hand of the Central government asks State governments to electrify rural and poor households but the left hand of the same Central government (that is under the influence of the invisible hand of the market) asks State governments to submit to the power of the market. The UDAY scheme of the Centre is a good illustration as it is essentially asking State governments to shy away from subsidies and respond to market forces.

One move that can address this problem was also reported. The REC was reportedly working on a scheme to provide long-term loans to States that agree to offer free new electricity connections. The scheme covers funding of expenses like laying of lines to give access to electricity, installation of meters and other accessories. As per the plan, the distribution companies will have to get new connection plans approved by REC, which will reimburse expenses incurred by power utilities in giving electricity access to households.  This is not a great idea as it will only increase the role of the bureaucracy in providing access to electricity.  The bureaucracy is known for inefficiency and leakages. Instead the Central government should distribute pre-paid smart cards to households with which they can draw say 50-100 units of electricity per month at no cost to the household.  Additional consumption could be charged.  This scheme of pre-paid smart cards for electricity access have been successfully implemented in countries like South Africa.  Not only has this increased access to electricity but also simulated demand for more electricity. Households in South Africa that consumed 50 free units of electricity got used to the comforts it provided and started paying for additional units of electricity.

The procurement price of LED bulbs has reportedly fallen to Rs 38 from Rs 54.90 per unit under the government’s DELP and it is expected to reduce the final retail price by Rs 15. LED bulbs are being distributed at a subsidised price between Rs 75-100 per unit by various power distribution utilities across the country depending on the state levies. So far over 152 million bulbs have been distributed. This is expected to avoid 4,000 MW peak demand of electricity and reduce 43,941 tonnes of carbon dioxide per day. If 770 million LED bulbs are distributed as planned it is expected to result in savings of 20 GW avoid carbon emissions of 80 MT every year. This is probably one of the more viable schemes for reducing carbon emissions.

Rest of the World

According to the report by ‘coalswarm’, an anti-coal group, summarised by Reuters, the amount of coal-fired power generation under development worldwide had shrunk by 14 percent to an estimated 932 GW from 1,090 GW at the start of the year driven down by efforts of China to reduce overcapacity. India’s policies to reduce coal-fired plants, partly due to under-utilization of existing plants are also cited among reasons. Overall, the amount of coal-fired generating capacity in pre-construction planning fell 14 percent. The decline, of 158 GW was almost equal to the coal generating capacity of the EU at 162 GW, it said. China accounted for the largest share with a reduction of 114 GW of coal based power generation capacity, followed by India with a decline of 40 GW. From 2003 to 2015, USA added 23 GW of coal capacity and retired 54 GW.

The news of closure of coal based power plants in China was complemented with the news that China may be investing too much in coal power as reported by Bloomberg quoting the IEA. According to the IEA, China started more than 70 GW of new coal projects last year and had 200 GW under construction at the end of April even though many plants were idle more than half the time. According to Greenpeace China supposedly will ‘waste’ $150 billion on excess power capacity by 2020. It appears that one man’s investment is another man’s waste!

REC: Rural Electrification Corp, LED: Light-Emitting Diode, IEA: International Energy Agency, UDAY: Ujjwal Discom Assurance Yojana, EU: European Union, DELP: Domestic Efficient Lighting Programme, MT: Million Tonnes GW: Gigawatt, MW: Megawatt

Courtesy: Energy News Monitor | Volume XIII; Issue 16

WIND FALL GAIN FROM LOW OIL PRICES

Monthly Oil News Commentary: February 2017

India

Middle class owners of personal vehicles in India, with four or two wheels, have been asking why they are paying roughly the same price for a litre of petrol even though the price of crude oil has fallen by more than half in the last few years. It appears that the question has now reached the level of policy makers. In a response to the question in the Parliament the concerned Minister has stated that the current price of petrol at Rs 73.60/litre (in Delhi) was lower than the price in FY 14 at Rs 71/litre and that the money collected through taxes on petroleum products was being used to develop infrastructure and creating educational facilities. The explanation for the insignificant reduction in retail price was that excise duty had been increased to Rs 12/litre and that the rupee had depreciated against the dollar, the currency in which crude oil is purchased. VAT and other local levies by the state governments were also included among reasons why the price of petrol in India had not fallen to the extent the price of crude oil had fallen.

Yet another gain from the oil sector to the government was the reduction in the subsidy burden. The government reported that with the termination of over 33 million illegal LPG connections, the government had saved Rs 210 billion (or roughly $3 billion) in subsidies. The government also said that the Direct Benefit Transfer scheme for LPG benefitted over 176 million consumers and over Rs 400 billion (or about $ 6 billion) of subsidy was transferred directly to the beneficiaries’ bank accounts in the last two years.

One of the ambitious initiatives announced in the budget was that of the merger of state-run energy companies to create a single company with market value of over $ 400 billion supposedly provide India the muscle to acquire assets abroad and negotiate better. According to the government this would bring the entity on par with BP, which has a market value of $115 billion. This is probably the right step if India wants to project power in the international arena but the wrong step if India wants to unleash the power of the market in the domestic arena. A single company will become monopoly producer and supplier of oil and oil derived products much in the same way Coal India Ltd is the dominant producer of coal in the country. This will distort competition and reduce efficiency as it has in the case of coal. The comparison with BP is inaccurate as BP is not a state owned company nor does it have a monopoly in Britain which is home territory.  There is also the question whether the idea of acquiring oil assets outside the country is strategically that important for India so as to modify the entire structure of the industry to pursue this single goal.

There was more news on government moves in the oil sector in the budget. The government announced that it will build two more underground crude oil storages at Chandikhol in Odisha and Bikaner in Rajasthan in addition to underground storages in rock caverns at Visakhapatnam, Mangalore and Padur. The storage at Chandikhol is expected to be an underground rock cavern while the one at Bikaner is expected to be an underground salt caverns. Phase-II storage will have a total capacity of 10 MT which includes 4.4 MT storage capacity at Chandikhol and 5.6 MT at Bikaner. Abu Dhabi National Oil Company has reportedly signed an agreement to hire half of the capacity of India’s maiden strategic oil storage at Mangalore. India is 81 percent dependent on imports to meet its crude oil needs.

Now that Iran has been freed from sanctions, India’s annual oil imports from Iran have reportedly surged to a record high in 2016. According to Reuters, Iran is now the fourth largest supplier to India. In 2016 India bought about 473,000 bpd of oil from Iran to feed expanding refining capacity, up from 208,300 bpd in 2015. Indian refiners RIL, HPCL, BPCL and HPCL-Mittal Energy Ltd were said to have resumed imports from Tehran, attracted by the discount offered by Iran. Overall, India imported 4.3 million bpd oil in 2016, up 7.4 percent from the previous year. Rising imports from Iran and Iraq lifted the Middle Eastern share in India’s crude diet to 64 percent in 2016, reversing a declines in recent years, partly due to rising prices for Atlantic Basin oil tied to Brent. Saudi Arabia remained the top supplier to India last year followed by Iraq and Venezuela.

Rest of the World

A survey by Reuters reportedly revealed that Saudi Arabia wanted oil prices to rise to $60/bbl this year. As OPEC compliance with supply constraints is reported to have improved with Iraq and UAE pledging more cuts $60/bbl does not appear to be unrealistic. OPEC already achieved close to a 90 percent compliance rate with its oil production cut, and compliance could increase as Iraq and UAE promise to accelerate their reductions. The two OPEC members were the main laggards in what was an otherwise impressive rate of compliance. Supply from the 11 OPEC members with production targets under the deal in had fallen to 29.921 million bpd. This amounts to 92 percent compliance, according to an OPEC calculation. Compliance of 92 percent comfortably exceeds the initial 60 percent achieved when OPEC’s previous deal to cut was implemented in 2009, and the OPEC figures add to indications that adherence so far has been high. The IEA said that oil production fell by around 1.5 bpd including by 1 million bpd for OPEC, leading to record initial compliance by OPEC with a six-month output-cut deal reached in December by big producers to boost prices. The IEA said if the January level of compliance were maintained, the output reductions combined with strong demand growth should help ease the record stocks overhang in the next six months by around 600,000 bpd.

Staying with the oil states of the Persian Gulf, Saudi Arabia’s King Salman and a large entourage were reported to be taking a month-long tour through Asia, hoping to bolster partnerships and increase investments in the region as they do not see USA as a dependable market. One of the first outcomes was the decision by Saudi Arabia to invest $7 billion in a petrochemical complex in Malaysia. New investment flowing into the region is increasing oil reserves at a fast pace.  Iraq’s oil reserves were reportedly increased to 153 billion barrels from 143 billion barrels bringing it closer to reserves of Iran out at 158 billion barrels. Iraq is now OPEC’s second largest producer after Saudi Arabia.

Low oil prices continue to take their toll.  Major oil companies are actively finding ways to deal with the problem of abundance. Shell was reportedly the third oil major to scale back ambitions in Canada’s oil sands. Last week, ExxonMobil and ConocoPhillips de-booked billions of barrels of oil reserves in Canada, admitting that they were not viable in today’s market.  As for Venezuela, the geopolitical deals that it struck with China and Russia with an estimated value of $55 billion were reportedly going bad with the fall in oil prices.

MT: Million Tonnes, FY: Financial Year, LPG: Liquefied Petroleum Gas, VAT: value-added tax, bbl: barrel, OPEC: Organization of the Petroleum Exporting Countries, UAE: United Arab Emirates, bpd: barrels per day, IEA: International Energy Agency, RIL: Reliance Industries Ltd, BPCL: Bharat Petroleum Corp Ltd, HPCL: Hindustan Petroleum Corp Ltd

Courtesy: Energy News Monitor | Volume XIII; Issue 38