OIL PRICE HEADWINDS HIT INDIA

Monthly Oil News Commentary: January – February 2018

India

As the crude oil prices rise, the government may ask upstream firms like ONGC to bear a part of the kerosene and LPG  subsidies, India Ratings and Research said. Producers ONGC and OIL as well as gas utility GAIL (India) Ltd were in past asked to bear between one-third to half of the under-recovery fuel retailers incurred on selling LPG and kerosene below market rate. This subsidy sharing scheme ended last fiscal. India Ratings said given the sharp increase in international crude price, oil marketing companies may be required to bear a part of the under-recoveries. This would be on the lines of past when the government capped the subsidy burden it was willing to share per kilogram and per litre on LPG and kerosene, respectively. Any under-recovery over and above the level up to which the government can bear is to be borne by upstream and oil marketing companies, it said.

The Indian crude oil basket comprises 73 percent sour-grade Dubai and Oman crudes, and the balance in sweet-grade Brent, closed December 2017 at $62.29/bbl according to the oil ministry.  The government remained non-committal on cutting excise duty on petrol and diesel to reduce retail prices. Petrol and diesel prices in India are to a “large extent” aligned to international rates, IOC said in response to the charges of government meddling in fixing of fuel prices. The prices are revised daily based on 15-day rolling average rate of their international benchmark.  The prices at petrol pumps of state-owned fuel retailers like IOC were cut by 1-3 paisa every day in the first fortnight of December. They started moving up immediately after polling for assembly elections in Gujarat concluded, leading to speculation that government may have asked oil companies to hold on to the prices. State-owned oil companies in June last year dumped the 15-year old practice of revising rates on 1st and 16th of every month and instead adopted a dynamic daily price revision to instantly reflect changes in cost. Crude oil, natural gas, diesel, petrol and ATF have not been included in the ambit of GST as of now. The CII said till such time that the five are included in GST, C Form should be continued to avoid high tax incidence on these products. As per the earlier provisions of CST Act, a purchaser can make the interstate purchase of the non-GST goods by availing concessional central sales tax rate of 2 percent against Form-C. Hitherto, fertiliser manufacturers, power producers, automobile manufacturers and other industries were buying natural gas and other petroleum products by paying CST of 2 per cent against Form-C. The central government vide Taxation Laws Amendment Act 2017, amended the definition of ‘Goods’ under the CST Act to include only crude petroleum, diesel, petrol, ATF, natural gas and alcoholic liquor for human consumption. This meant that fertiliser companies are not eligible for C Form as the gas is used to manufacture urea and not for manufacture of natural gas. Likewise, automobile manufacturers are not eligible for C Form for inter-state purchase of diesel, petrol or natural gas, which they have to mandatorily fill in the tanks of new vehicles. The industry association said post GST, since Form-C is not available for inter-state purchase of goods and so the extra tax burden will be shifted to the consumer. It suggested that petroleum products, natural gas, electricity, alcohol and real estate should be covered under GST. Alternatively, since VAT is non-creditable tax, VAT rate should be reduced to 4 percent or lower which was the effective rate when credit on VAT was available before July 1.

The Chief Economic Advisor called for petroleum products to be brought under the ambit of the GST. He also made a case for one rate under the GST for all goods and services down the line. Petrol and diesel prices rose to a three-year high across metro cities. Petrol prices in the national capital were at ₹ 72.49/litre, the highest in over three years. Petrol prices in Kolkata, Mumbai and Chennai were at ₹ 75.19, ₹ 80.39 and ₹ 75.18/litre respectively — all three-year highs. Similarly, diesel prices have also been hitting record levels.

The October 2017 excise duty cut cost the government ₹ 260 billion in annual revenue and about ₹ 130 billion during the remaining part of the current financial year that ends on March 31, 2018. The government had between November 2014 and January 2016 raised excise duty on petrol and diesel on nine occasions to take away gains arising from plummeting global oil prices. Just 4 states and one union territory have cut local sales tax or VAT on petrol and diesel since the October 2017 decision of the Centre to reduce excise duty on the two fuels. As petrol and diesel prices soared to a three-year high, the Centre on October 3, 2017 reduced excise duty on petrol and diesel by  ₹ 2 per litre each and asked states governments to match it with a cut in VAT.  The states which reduced VAT following the October 3, 2017 cut in excise duty were Maharashtra, Gujarat, Madhya Pradesh and Himachal Pradesh. The Centre has cut excise duty only once in October 2017 but raised excise duty on nine occasions to take away benefits of sliding international oil prices between late 2014 and January 2016. Prices of petrol and diesel were ‘freed’ from administrative control from June 26, 2010 and October 10, 2014, respectively.

India has the highest retail prices of petrol and diesel among South Asian nations as taxes account for about 40-50 percent of the pump prices. Petrol and diesel account for about half of India’s refined fuel consumption. A cut in excise duty on petrol and diesel in the budget, due to be unveiled on February 1, would pose challenges as the government is struggling to tackle a widening fiscal gap amid falling tax revenues due to the implementation of a GST regime from July. In 2016/17, the petroleum sector contributed around ₹ 5.2 trillion ($81 billion), about a third of total revenue receipts, for federal and state finances. India raised excise duty nine times between November 2014 and January 2016 to shore up federal finances as global oil prices fell, but then cut the tax last October by ₹ 2/litre. The ministry has also sought inclusion of petrol, diesel, jet fuel and natural gas in the GST to help companies claim tax credits against the tax paid on the purchase of equipment meant to produce refined fuel. The oil ministry said the addition of refined products in GST will help reduce retail prices even if the government levies a charge on top of its highest GST rate of 28 percent. The ministry has also sought federal support for laying fuel and gas pipelines in the northeast of the country to give the region a boost. Economic development in India has largely been concentrated in the western and southern states that have better infrastructure and more accessible energy supplies.

States are not in favour of including petrol and diesel into GST at the moment, ruling out any immediate levy of the new indirect tax on these petroleum products. While GST was rolled out on July 1, real estate as well as crude oil, jet fuel or ATF, natural gas, diesel and petrol were kept out of its purview. This meant that the products continued to attract duties like central excise and VAT. The five petroleum items have been kept out of GST as they are considered cash cows, giving both the Centre and states bulk of their tax revenues. But keeping them out has created compliance issues including taking input tax credit.

ONGC completed the acquisition of government-owned fuel retailer HPCL through an all cash deal worth ₹ 369.15 billion, the company said. The company had tied up ₹ 350 billion with seven banks including three private and four public sector banks to fund the acquisition. While ONGC has secured loans for ₹ 350 billion through banks, the details of funding the rest of the acquisition amount, ₹ 19.15 billion, are not in public domain. The combined market value of ONGC and HPCL is estimated to be around ₹ 3119.25 billion, or $49 billion, comparable with Russian energy giant Rosneft’s $61 billion. The acquisition of HPCL by ONGC has paved the way for the country’s first vertically-integrated oil major. As per the government, the ONGC-HPCL merger is an innovative vertical economic integration of companies being done with a motive that goes beyond mere financial consideration. The aim behind the move was not just financial consideration and that the merger decision was taken considering the price volatility in the oil and gas industry which created the need for a company which could cushion the shocks of oil prices. The government has set a disinvestment target of ₹ 725 billion for the financial year 2017-2018, of which ₹ 543.37 billion has been raised so far. India Ratings said ONGC’s acquisition of HPCL will be credit neutral for ratings of HPCL. ONGC, which is 68.94 percent owned by the government, will acquire the government’s 51.11 percent stake in HPCL for ₹ 369.15 billion. Despite the change in ownership, HPCL will continue to operate as a separate entity with a strong brand. Its strategic importance to the government is likely to remain intact, given the company’s role as the State’s extended arm for fuel policy implementation. It could use one or more of the three sources for funding, fresh debt, cash and cash equivalents, and monetisation of its stake in entities such as GAIL, IOC and Petronet LNG Ltd. The combined value of its stake in the three entities is about ₹ 344 billion. For HPCL, the acquisition may result in some synergies in crude oil procurement with Mangalore Refinery and Petrochemicals Ltd, which is 71.63 percent owned by ONGC. HPCL, along with HPCL-Mittal Energy Ltd and MRPL, represented 15.3 percent of India’s total crude import volume of 249 mt. Also, HPCL may be able to capitalise on ONGC’s petrochemical expertise while expanding its footprint in the segment. The combined entity would be the third-largest refiner in India, with a refining capacity of 43.1 mt behind IOC’s 80.8 mt and RIL’s 62 mt. India Ratings said HPCL may have to resort to additional borrowings in case it was to acquire ONGC’s stake in MRPL for cash. ONGC’s stake in MRPL is worth ₹ 164 billion. ONGC-HPCL deal is unlikely to alter government subsidies for kerosene and LPG.

The government’s plan to farm out a 60 percent stake in about 15 fields of ONGC and OIL to private players might lead to a dual system of contracts. The two state-owned companies may have to continue to pay royalties and cess. This is a major dilemma before the policymakers as to whether two parties can have separate sets of contracts for the same fields. The Directorate General of Hydrocarbons has reportedly zeroed in on 15 fields, 11 of ONGC and four of OIL, including ONGC’s four major oilfields in Gujarat like Kalok, Gandhar, Santhal, and Ankleshwar. These 15 are estimated to have a cumulative reserve of 791.2 mt of crude oil and 333.46 bcm of gas. The plan to rope in private companies is part of the government’s production enhancement policy. However, the government is yet to come up with a Cabinet note in this regard. More than 40 fields of state-run producers have been identified for production enhancement through the technical services model.

The government virtually ruled out giving statutory powers to upstream oil and gas regulator DGH saying the sector has not fully developed and needs government support. There are two regulatory bodies in the oil and gas sector – the Petroleum and Natural Gas Regulatory Board, which is a regulator for the downstream activities like laying of pipelines and fuel marketing but without powers to review pricing. The DGH is a technical arm of the oil ministry which overseas upstream oil and gas exploration and production activities. Various committees have suggested creation of an independent, statutory regulator for the upstream oil sector. He said the sector has not developed fully and still looks at the government for reforms. In 2013, a committee, headed by former finance secretary Vijay Kelkar, had recommended hiving off the DGH’s financial oversight function and vesting it with the income tax authorities. The DGH currently manages petroleum resources besides monitoring PSCs, and assists the government in auctioning oil and gas exploration fields. In 2011, a panel led by former finance secretary Ashok Chawla advised the government to turn the DGH into an ‘independent technical office’ attached to the oil ministry and establish an upstream regulator to focus on regulatory functions. It also said the reconstituted DGH as well as the regulator must not have staff on deputation from regulated firms. A similar panel had in 2001 recommended the setting up of an Upstream Hydrocarbon Regulatory Board, giving DGH a techno-administrative role as a part of the oil ministry.

India was scheduled to lift its biggest volume of Iranian crude in nine months in December, helping to shore up the OPEC producer’s oil exports to Asia last month. Asian buyers were scheduled to lift 1.92 million bpd of Iranian crude in December, down 7 percent from the actual loadings in the previous month. India’s scheduled crude oil loadings from Iran, excluding condensate, an ultra-light oil, were about 550,000 bpd last month, up 78 percent from the previous month and the highest since March.

State oil companies have planned a capital spending of ₹ 890 billion ($14 billion) in 2018-19, half of which will go into E&P. In the current fiscal, these companies had targeted an expenditure of ₹ 874 billion, 70% of which has been spent in the first three quarters. The allocation of ₹ 480 billion towards exploration and production in Budget 2018-19 is lower than ₹ 539.6 billion planned for this year. Spending on refining and marketing would rise to ₹ 358 billion from ₹ 312 billion in 2017-18. Investment in petrochemicals would nearly double to ₹ 39.52 billion next fiscal year from ₹ 21.56 billion in the current year. ONGC has planned the highest investment among all state oil firms, with a capex target of a little over ₹ 320 billion in 2018-19. This would go into developing new oil and gas fields and enhancing production from existing fields. For the current year, its planned capex is about ₹ 372 billion, including a $1.2 billion payment for GSPC’s stake in the KG Basin asset. ONGC’s capex figure will get revised upward sharply after factoring in the ₹ 370 billion purchase of government stake in HPCL.

Saudi Aramco, the state oil company of Saudi Arabia, is considering entering India as part of its Asian expansion. The Saudi government has said it plans to sell about 5 percent of Aramco, hoping to raise some $100 billion or more in what would likely be the world’s biggest initial public offer.

Kochi crude oil refinery in Kerala, operated by fuel retailer BPCL has completed its expansion project to become the largest public sector refinery in the country, surpassing the capacity of Paradip and Panipat refineries operated by the largest retailer IOC. BPCL completed the ₹ 165 billion Integrated Refinery Expansion Project (IREP) at Kochi in October last year, ramping up the capacity of the unit to 15.5 mt from the earlier 12.4 mt. That compares with 15 mt capacity each of IOC’s Paradip refinery in Odisha and Panipat refinery in Haryana. The Kochi oil refinery processed 1.2 mt crude in December 2017 as compared to 1 mt processed in the corresponding month a year ago, data from the PPAC, an arm of the oil ministry, shows. India had a total installed crude oil refining capacity of 247.6 mt at the end of December 2017 including 69.2 mt operated by IOC, 36.5 mt operated by BPCL and 27.1 mt operated by the third state-owned retailer HPCL.

India will showcase its oil sector policy reforms and the investment opportunities at the 16th IEF Ministerial, slated for April in New Delhi, where scores of ministers, top officials and industry executives from across the globe are expected to participate. IEF, comprising 72 member countries, is one of the biggest global forum of oil and gas producers and is currently headed by Saudi Arabia. The Ministerial will be held from April 10 to 12. Ninety percent of the oil and gas producers and consumers would be represented at the event, which would therefore be a good opportunity to present India as an investment destination. The issue of ‘reasonable and responsible pricing’ and the long-standing Indian demand of junking the so-called Asian premium will also be discussed at the Ministerial. Oil consumers have become ‘more assertive’ and they will have a bigger say in the global oil market now, Pradhan said referring to how the global oil industry dynamics has changed over the years. A supply glut resulting in lower prices for the last three years has given heavy consumers like India and China a bigger say in the global markets.

The Jammu and Kashmir government said it has achieved a target of 75 percent in the implementation of Pradhan Mantri Ujjwala Yojana by LPG connections to 370,000 below poverty line households in the state. The females from BPL households were provided with sets of chulha, cylinder, gas pipe, regulator and safety manual.

India needs to increase its refining capacity to 600 million mt by 2040 to meet the rising demand for fuel. About $300 billion would be invested in next 10 years in energy and hydrocarbon sectors. India has decided to meet international best practices by leapfrogging to BS-VI norms by April 2020 in the entire country and by April 2018 in NCT Delhi. The government has planned to set up West Coast Refinery cum Petrochemical Complex of 60 mmtpa with an estimated investment of ₹ 2700 billion. Foundation stone for another grass root Refinery cum Petrochemical Complex in Barmer, Rajasthan with an investment of ₹ 43,000 billion was laid in January 2018.

Indian oil consumption in 2017 grew at its slowest in four years, according to government statistics, hit by the government’s demonetisation move and a tax increase that knocked the gain in fuel use back to a modest 2.3 percent. The low growth also coincided with another year of weak, albeit improving, new vehicle sales. India imports almost all of its oil, shipping in around 4.2 million bpd of crude in 2017, according to trade flow data. India saw some structural demand changes that affected the use of refined oil products. A government push for household to use more LPG has India challenging China as the world’s top LPG importer. For 2018, energy consultancy FGE expects India’s oil demand growth to improve to 4.3 percent. India’s slow oil demand growth has surprised many, given the country has often been touted as the next China in terms of rising oil consumption. If an Indian citizen with an average salary buys 10 gallons of gasoline per month, that would represent nearly 30 percent of the person’s income, while the average Chinese would fork out just 5 percent, data from statistics company Numbeo showed.

Rest of the World

Global oil markets are tightening quickly on falling supply from Venezuela, which posted 2017’s biggest unplanned output fall and could see a further decline in 2018, the IEA said. Debt and infrastructure problems cut Venezuela’s December output to 1.61 million bpd, somewhere near a 30-year low. That helped oil prices top $70 per barrel in early January, their highest level in three years. As a result of lower Venezuelan production, the IEA said OPEC’s crude output in December fell to 32.23 million bpd, boosting the group’s compliance with a deal to curb output to 129 percent. OPEC agreed to lower production in 2017 and has agreed to maintain output cuts for the whole of 2018 to help bring oil stocks in OECD industrialized countries down to their 5-year average. The IEA said that if OPEC and its non-OPEC allies maintained good compliance with the output deal, oil markets would balance in 2018. The recovery in oil prices and a decline in global oil stocks has been helped by robust global demand growth in 2017 but it will slow down in 2018, the IEA said. It kept its oil demand growth estimate for 2018 unchanged at 1.3 million bpd, down from 1.6 million bpd in 2017, mainly due to the impact of higher oil prices and changing patterns of oil use in China.

Goldman Sachs raised its Brent crude price forecasts, saying oil markets have rebalanced six months sooner than expected, citing steady demand growth and continuing compliance with OPEC -led supply cuts. The bank’s three, six and twelve-month Brent oil price forecasts were raised to $75, $82.50 and $75 a barrel respectively, from $62 previously. However, Goldman expects the price to dip again as US shale producers pump more oil to benefit from the price reaction to lower global inventories. Goldman sees a global oil market deficit of 0.2 million bpd in 2018, followed by a global surplus of 0.73 million bpd in 2019. Oil prices pared early gains to stay little changed as OPEC’s strong compliance with a supply reduction pact offset news that US production topped 10 million bpd for the first time in nearly half a century.

OPEC and non-OPEC oil producers have a consensus that they should continue cooperating on production after the end of 2018, when their current agreement on production cuts expires. If oil inventories increase in 2018 as some in the market expect, producers may have to consider rolling the supply cut agreement into 2019, but the exact mechanism for cooperation next year has not yet been decided.

In addition to the OPEC and non-OPEC production cuts of 1.8 million bpd that are due to last until the end of 2018, oil prices have found support from eight consecutive weeks of US crude inventory drops. US commercial crude stocks fell by almost 5 million barrels in the week to January 5, to 419.5 million barrels. That was slightly below the five-year average of just over 420 million barrels, the target for OPEC and others cutting output. But the IEA, warned that while oil prices at $65 to $70 per barrel are good for oil producers now, there IEA also said that there might be a further decline in oil production from OPEC member Venezuela in 2018 as its economic crisis hits output.

Surging shale production is poised to push US oil output to more than 10 million barrels per day – toppling a record set in 1970 and crossing a threshold few could have imagined even a decade ago. And this new record, expected within days, likely won’t last long. The US government forecasts that the nation’s production will climb to 11 million barrels a day by late 2019, a level that would rival Russia, the world’s top producer. US energy exports now compete with Middle East oil for buyers in Asia. Daily trading volumes of US oil futures contracts have more doubled in the past decade, averaging more than 1.2 billion barrels per day in 2017, according to exchange operator CME Group. The US oil price benchmark, West Texas Intermediate crude, is now watched closely worldwide by foreign customers of US gasoline, diesel and crude. Iraqi Oil Minister Jabar al-Luaibi said that the OPEC member’s oil output capacity is nearing 5 million barrels per day, but the country will remain in full compliance with its output target under a global pact to cut supplies. Luaibi said the supply cut agreement between OPEC and non-OPEC producers should continue despite a rise in oil prices. The deal between the OPEC and Russia to cut 1.8 million barrels per day of crude, which started in January 2017, is due to last until the end of 2018. Luaibi said current Iraq’s oil production is about 4.3 million barrels per day. Luaibi also said that his ministry plans to conclude three contracts with international gas companies by mid-2018 to utilize gas from Basra, Maysan and Nassiriyah southern provinces.

Mexico has raised the bar on oil contracts in Latin America after sweetening terms to attract international energy firms, luring $93 billion in future investment in the region’s first big auction this year. Mexico awarded 19 of 29 deepwater blocks onoffer, comfortably more than the seven areas expected to be assigned. Anglo-Dutch oil major Royal Dutch Shell emerged as the biggest winner, with nine blocks. Unique for generous terms such as setting a cap on royalties that oil firms can pledge to the government in bids, Mexico faces off this year with Brazil, Argentina, Ecuador and Uruguay. They will all hold auctions for oil and gas fields in 2018 that require billions of dollars in investment from foreign firms. Mexico is due to hold major auctions in March and July. While Brazil’s prolific deepwater presalt oilfields are expected to attract aggressive bidding from oil majors, other regional rivals could be forced to revise the terms of their auctions if Mexico scores another win in its next auction for shallow water areas in March, analysts said. Oil prices have reached three-year highs near $70 per barrel in 2018, giving the world’s top energy companies a cash boost and improving the chances that they will have the funds needed for big-ticket projects in Latin American. After the government of Mexico started auctioning oilfields in 2015, it tweaked the terms of the bidding process several times, following a historic energy reform that ended state oil firm Pemex’s 75-year monopoly over the sector. The liberalization, the most ambitious plank of President Enrique Pena Nieto’s economic policy, started just as oil prices crashed in 2013-2014.

State oil producer Saudi Aramco is expected to launch a tender in July to build facilities to expand its Marjan oilfield while another tender for the Berri oilfield expansion is expected by the third or fourth quarter of this year. The planned projects are further proof that Saudi Aramco is pushing ahead with oil investments to maintain capacity while also meeting domestic demand for gas to fuel industrial growth. International engineering and construction firms have expressed interest in bidding to build oil and gas facilities at Marjan oilfield whose development is expected to cost more than $10 billion. The expansion will increase the capacity of Marjan, currently at 500,000 bpd, by 300,000 bpd of Arab medium crude. A new gas plant in Tanajib which will handle 2.7 billion standard cubic feet per day is due to be built and the capacity of the NGL fractionation plant at Wasit will expand too. As for Berri, development could cost between $6-8 billion. Aramco plans to raise capacity at the field by 250,000 bpd of Arab light and raise production of associated gas. The construction packages for Marjan and Berri are expected to be awarded next year and both projects are expected to be completed in 2022.

China’s NDRC said it will launch a fresh crackdown on oil refiners that expand capacity without official approval, the latest sweeping move by Beijing to curb unfettered growth in fuel output and illicit oil trade. NDRC said it will close refineries with less than 2 mt per year (40,000 bpd) of capacity if they are found to violate regulations. The penalty for larger refineries will be to curb any expansion projects. Even so, China’s refineries have been churning out and exporting bumper volumes of diesel and gasoline, in a race for profits.

Russia held firm as China’s top crude oil supplier in December for the 10th month and racked up its second year as the No.1 supplier to China in 2017, the data from the General Administration of Customs showed, leaving rival exporter Saudi Arabia in second place once more. Shipments from Russia hit 5.03 million tonnes in December, down 0.2 percent from a year earlier, pushing up its full-year supply by 13.8 percent to 59.7 mt, or 1.194 million bpd. Saudi Arabia’s December shipments were up 31.7 percent from a year ago at 4.71 mt, or about 1.11 million bpd. Whole-year shipments from the Kingdom, OPEC’s top supplier, grew 2.3 percent to 52.18 million tonnes, or 1.044 million bpd, the data showed.

Russia’s Sakhalin-1 oil project, led by ExxonMobil, has ditched plans to raise output by a quarter this year after it was ordered by the authorities to return to previous lower production limits. Sakhalin-1 operates under a Production Sharing Agreement struck in the mid-1990s and all plans must be run by local government. ExxonMobil had received preliminary approval for a new quota in December and set output for January at 250,000 to 260,000 bpd, up from 200,000 bpd last year. But the firm was ordered by the authorities this month to return to the old quota of 200,000 bpd. Sakhalin-1 was now operating under the production quota of 200,000 bpd. Russia’s energy ministry said Sakhalin-1 would continue to operate under previous quotas until the Natural Resources Ministry finished approving a new production scheme. The withdrawal of approval for increased production meant Sakhalin-1 shareholders had to reduce their schedule for Sokol crude loadings for January-March. Under the original schedule based on a production rise, 13 cargoes of 95,000 tonnes each were to be loaded from the De-Kastri terminal on Russia’s Pacific coast in January, compared to nine in December, traders said. In February and March, Sokol crude exports had been set at 11 and 12 cargoes, respectively, traders said. After ExxonMobil was instructed to cut production, loading plans were decreased to 11 cargoes in January, nine cargoes for February and 10 cargoes for March, traders said.

ONGC: Oil and Natural Gas Corp, LPG: liquefied petroleum gas, OIL: Oil India Ltd, bbl: barrel, IOC: Indian Oil Corp, ATF: aviation turbine fuel, GST: Goods and Services Tax,   CST: Central Sales Tax, VAT: Value Added Tax, HPCL: Hindustan Petroleum Corp Ltd, mt: million tonnes, RIL: Reliance Industries Ltd, DGH: Directorate General of Hydrocarbons, PSCs: Production Sharing Contracts, bpd: barrels per day, E&P: Exploration and Production, GSPC: Gujarat State Petroleum Corp, PPAC: Petroleum Planning and Analysis Cell, IEF: International Energy Forum, IEA: International Energy Agency, OPEC: Organization of the Petroleum Exporting Countries, OECD: Organization for Economic Cooperation and Development, BPL: Below Poverty Line, NDRC: National Development & Reform Commission, US: United States

Courtesy: Energy News Monitor | Volume XIV; Issue 36

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Auctioning Coal: Will it Clean the Stable?

Lydia Powell, Observer Research Foundation

In a recent interview on coal block auctions, the Minister of State for Coal has said that he had ‘inherited a mess’ and that his mission was to ‘clean the stable’.[1] In the same interview, the Minister has implied that some parties could be hurt and that justice could also be compromised but that all this would be a price worth paying to ‘clean the stable’. The Minister was probably referring to the ‘mess’ caused by the Supreme Court ruling in August 2014, or more correctly the mess caused by Government policy (not just those of the previous Government) rather than the larger mess that coal sector is seen to be in.

The idea of auctioning coal blocks was introduced through an Amendment to the 1997 Mines and Minerals (Development & Regulation) Act in 2012. As per the said Amendment, ‘the grant of reconnaissance permit or prospecting licence or mining licence in respect of an area containing coal or lignite can be made only through auction by competitive bidding even among the eligible entities’.  The sensational report of the Comptroller and Auditor General of India (CAG) on ‘Allocation of Coal Blocks and Augmentation of Coal Production’ for the year ending March 2012 brought this provision into the limelight.  It argued that the delay in introducing competitive bidding for coal blocks to captive users of coal in the power, cement and steel sectors had ensured continuation of undue benefits to private coal block alottees.  The report estimated that financial gains to the tune of Rs 1.86 trillion or roughly $ 30 billion could have accrued to the national exchequer if the decision taken in 2012 to introduce competitive bidding for allocation of coal blocks had been implemented.  The CAG arrived at a value for the potential monetary loss to the Government on the basis of average cost of production and average sale price of coal from opencast mines of CIL in the year 2010-11.

The methodology used by the CAG has been criticised by many observers.  However, the popular media latched on to the ‘mediagenic’ quality of the allegation that the public exchequer had potentially lost Rs 1 trillion and framed the discourse as one of graft arising from the nexus between politics and business.  In reality, the original sin (allocating coal blocks rather than auctioning them) does not appear to have been the result of pre-meditated graft.

As observed in a 2012 paper by ORF, allocations of coal blocks began in the early 1990s when Coal India Limited (CIL) was asked to prepare a list of coal blocks which CIL was not likely to need in the next 50 years.[2] These blocks were to be allocated to end users of Coal by a Steering Committee set up for allocating coal blocks comprised of State and Central Ministries and CIL.  In the early years about half a dozen blocks were said to be allotted to the applicants who were all associated with well-known independent power projects (IPPs). It was a time when blocks were chasing projects rather than projects chasing blocks as one expert put it.  IPPs preferred coal supplied by CIL rather than having their attention diverted to an extraneous activity like mining. In this period it would have been irrational to auction coal blocks because the demand for mining leases was less than that of supply. This changed as the private sector entered into power generation in a big way following the Electricity Act of 2003. The established method of allocating coal to power generators failed to keep up with the pace with which thermal power plants were being set up.

In 1991-91, installed power generation capacity by the private sector was 2.5 GW or 3 percent of the total.  It has increased to over 78 GW or 33 percent of total installed capacity in 2014, which gives a compounded annual growth rate (CAGR) of about 16 percent.[3]  In the same period CAGR of domestic coal production was about 3.4 percent.[4]  If we are blind enough to look narrowly at these two figures, it would be easy to assign blame on the inefficiency of the coal industry and its monopolistic structure.  However a more rounded and balanced analysis would suggest that the blame could be assigned to policy makers who failed to note that a push to open the flood gates for power generation should be accompanies by a similar policy push for fuels.  After all, power generation and fuel production are just parts of a long continuum.

Returning to statements by the Minister, auctioning of coal is unlikely to clean the stable as the stable in question is only part of this long continuum. It could however introduce an element of competition in the sector; it could also change the dominant rationality in coal production from one of administrative planning to one of commerce. However, auctioning of a set of coal blocks is in no way a match for policy adrenalin that continues to be injected into the power generation side (possibly driven by private sector lobbying).  In fact much of the pressure on coal production is the consequence of the rush of adrenalin in the power generation side.  Private investors rushed to install capacity without conducting even basic analysis on growth of fuel supply and growth in power demand which would have been standard practice for investment in any other industrial sector. These power sector investors are now pressing policy makers to find ways to monetise their so called ‘stranded assets’.  Given that private sector concerns are the only concerns that matter today, the Government is rushing to lend a helping hand.

Cleaning the stable is part of this rush but once again, but the Government seems to be overlooking the fact that power generation is just one part of the continuum that begins at the coal mine and ends in the homes, offices, trains and factories of consumers through transmission and distribution networks. As of today production of fuels (coal) and generation of power are the only parts of the continuum that are profitable.  Transmission and distribution continue to lose money. 90 percent of the accumulated losses in the power sector (which amount to about 1 percent of GDP) are on account of losses at the distribution end.  In fact losses at the distribution end have been growing at a CAGR of 9 percent since 2003, the year in which the Electricity Act was introduced. These losses will continue to exert pressure on other parts of the continuum, including the Coal Minister’s stable.

The idea that there is limitless unmet demand for electricity in India justifies a dramatic increase in coal production is also questionable.  27th of August 2014, which recorded the highest demand for electricity last year required only 122 GW of capacity which was roughly half the installed capacity at that time with 15 GW spare capacity was available on power exchanges.  The fact that there is no market demand for power does not mean that there is no need for power but from an economic perspective any rational investor would think twice before adding capacity in this environment.

Then there is the murky area of how much coal is produced in India, how much is round-tripped as imported coal and how much is sold in grey markets. As noted in IEA’s medium term coal market report 2014, in 2013, demand for thermal coal increased by 2 percent while coal based power generation increased by 8.4 percent.  Both cannot be true unless we take into account significant volumes of coal available in the grey market (the report gives a figure of 60 million tonnes).  Any Government that wants to clean the stable must look at all these issues along the continuum. It must also look beyond the concerns of the capitalist entrepreneur, because unfortunately a democracy also has people who are also rate payers and tax payers. If they don’t pick up the entrepreneur’s bills the continuum will collapse.

Views are those of the author                    

Author can be contacted at lydia@orfonline.org

[1] https://in.finance.yahoo.com/news/coal-auctions-will-clean-the-stables-once-and-for-all-063521600.html

[2]http://orfonline.org/cms/export/orfonline/modules/orfpapers/attachments/ORF_Discourse_V_18_1349254256409.pdf

[3] http://www.cea.nic.in/reports/monthly/executive_rep/feb14.pdf

[4] https://www.coalindia.in/en-us/performance/physical.aspx

Courtesy: Energy News Monitor | Volume XI; Issue 32

TRADE WAR BREAKS OUT ON SOLAR PANELS

Monthly Non-Fossil Fuels News Commentary: January 2018

India

As India faces heat at the WTO for giving preference to domestic solar manufacturers in its renewable energy programme, the MNRE has made changes to the content sourcing policy. This comes at a time when the domestic solar manufacturing industry has sought safeguards and anti-dumping duty on import of solar panels from China and Malaysia. CPSUs and states are open to call tender with DCR under the EPC or contractor mode. CPSUs such as NTPC Ltd would be allowed to issue tender for solar project construction with the caveat that the private domestic developer should only be an EPC contractor and not power seller. Also, the new rooftop solar projects policy promotes use of domestic content with central financial assistance and subsidy. MNRE has floated the proposal to increase the amount of CPSUs projects to 13,000 MW from current 1,000 MW. Till last year, 10 percent capacity in each of the tender issued by the central government for solar power project was kept for domestic content sourcing. Earlier it was 50 percent and was brought down after the first appeal made by the US in the WTO in 2014. Apart from this, major PSUs such as NTPC and CIL have committed to build solar power generation capacity from domestic content. The WTO ruling in September 2016 stated that solar projects which are to be taken up by the government, for the government, there should not be any commercial sale. India asked for a year’s time to close all the projects floated on DCR. The deadline expired in December 2017. As the current status of the case stands, India has sent clarification that the Solar Mission is WTO complaint and none of the solar policies flout any trade regulations.

India has proposed to levy a 70 percent safeguard duty on import of solar power equipment from countries like China for 200 days to protect domestic industry from “serious injury”. The safeguard duty would be levied if the finance ministry accepts the recommendations of the DGS. Before final duties or import taxes are levied, DGS will hold further investigation into the injury caused by cheap imports. It would also hold a public hearing on the issue. India has annual manufacturing capacity for solar cells of around 3 GW as against requirement of 20 GW. DGS said import of solar equipment jumped from 1,271 MW in 2014-15 to 4,186 MW in the next year and to 6,375 MW in 2016-17. Current fiscal imports are pegged at 9,474 MW as compared to domestic production of 1,164 MW. Reasoning its decision, it said while China’s exports to India constituted a paltry 1.52 percent of its total global exports during 2012, this increased to 21.58 percent during 2016.

The finance ministry is considering the renewable-energy ministry’s request to tax panels imported for projects won under future solar auctions while exempting those already awarded. The proposed change could imperil the goal of installing 100 gigawatts of solar energy by 2022, especially as developers have relied on low-cost equipment from China to push tariffs to among the lowest in the world. India is planning to offer financial incentives to boost domestic manufacturing and energy security, while probing if Chinese solar-equipment makers are hurting the domestic industry by dumping inventories and driving down prices to unfair levels. Higher global module costs have already pushed up bid rates from record lows in auctions conducted by Solar Energy Corp of India late last year and the import tax could increase prices further.

India hit back at Washington’s latest legal assault on its solar power policies at the WTO, rejecting a US legal claim and exploring possible new protection of India’s own solar industry. The US triggered a new round of litigation at the WTO, arguing that India had failed to abide by a ruling that it had illegally discriminated against foreign suppliers of solar cells and modules. India said it had changed its rules to conform with the ruling and that a US claim for punitive trade sanctions was groundless. It said Washington had skipped legal steps, failed to follow the correct WTO procedure, and omitted to mention any specific level of trade sanctions that it proposed to level on India, leaving India “severely prejudiced”. India would be vindicated if the proper process was followed, it said. Renewable energy has become an area of severe trade friction as major economies compete to dominate a sector that is expected to thrive as reliance on coal and oil dwindles. India unveiled its national solar programme in 2011, seeking to ease chronic energy shortages in Asia’s third-largest economy without creating pollution. But the US complained to the WTO in 2013, saying US solar exports to India had fallen by 90 percent. The WTO judges agreed that India had broken the trade rules by requiring solar power developers to use Indian-made cells and modules. In a separate move that could protect its solar industry from global competitors, not only US rivals, India told the WTO that it was considering the case for imposing temporary emergency tariffs on solar cells, modules and panels, after a petition from the domestic industry.

Solar modules worth more than $150 million are stuck at various Indian ports due to a dispute over their classification and the import tax applicable to them. Indian Solar Association said that up to 2,000 solar module containers are now stranded at four major ports.  Most of the solar modules come from China, but several consignments are now held up because customs officials have demanded that some of them be classified as “electric motors and generators”, attracting a 7.5 percent duty, not as “diodes, transistors and similar semi-conductor devices” with no duty. The Indian unit of Germany’s Enerparc had 30 of its containers stuck at Chennai for three weeks as it finished some “paperwork” and paid a demurrage – a charge for failing to discharge the ship on time – of about ₹ 7 million ($110,471).  The renewable energy ministry has already asked the finance ministry to resolve the matter without disrupting business. Any duty is bad news for project developers such as SoftBank-backed SB Energy but good for local solar component makers such as Indosolar and Moser Baer. Indian manufacturers have struggled to compete with Chinese companies such as Trina Solar and Yingli and have sought anti-dumping duties as well as long-term safeguards. The finance ministry is examining a proposal from the renewable ministry to exempt projects bid earlier from paying the duty.

The Madras High Court has issued a temporary stay on a preliminary report of the DGS recommending imposition of 70% safeguard duty on imported solar equipment. Shapoorji Pallonji Infrastructure, a contractor-cum-developer of solar projects and part of the Shapoorji Pallonji Group, had petitioned the court against the recommendation, maintaining the company was never given a chance to respond to the original petition on the basis of which DGS suggested imposing 70% duty. The DGS had on December 19 last year sent a notice to all stakeholders saying it had initiated an enquiry into the matter on the basis of a petition filed by Indian Solar Manufacturers Association claiming that large scale imports of solar panels and modules from China, Malaysia, Taiwan and Singapore were causing “serious injury” to domestic manufacturers of similar equipment. The notice gave stakeholders 30 days to reply. However, the DGS announced preliminary findings on January 5. Solar developers prefer imported equipment because they are 25-30% cheaper than domestic ones, thanks to economies of scale and government subsidies in the exporting countries. Independent Solar Power Producers Alliance, an association of solar developers, too, has filed a petition in Delhi High Court seeking a stay on the recommendation.

Uttar Pradesh Electricity Regulatory Commission rapped the six solar power companies that had proposed to set up power plants in the state, saying it could not allow them to sell solar power at a rate much higher than prevailing market prices. The companies, including Adani Green Energy, had approached the commission nearly six months after UPPCL issued them a notice seeking cancellation of their agreement with New Energy Development Authority over high cost of power and delay in setting up projects despite an agreement in 2015. The Commission noted that the cost of power proposed to be supplied by the companies ₹ 7.02/kWh was much higher than the prevailing market prices of ₹ 2.44 to ₹ 4/kWh. The six plants, with a combined capacity of 80 MW, belong to Adani Green Energy, Sahastradhara Energy, Pinnacle Air, Awadh Rubber Prop Madras Elastomers, Technical Associates and Sudhakara Infratech. According to the agreements signed in 2015, the developers had to complete the projects by January 2017. That did not happen, forcing the state government to extend the deadline till March 2017.

Private sector lender Yes Bank said it will mobilise $1 billion by 2023 for financing solar energy projects in India. Yes Bank signed five solar energy co-financing Letters of Intent with Tata Power Delhi Distribution, Hero Future Energy, Greenko Group, Amplus Solar and Jakson Group for their solar projects in India to be completed by 2023. ISA is a treaty-based alliance of 121 prospective solar rich member nations and aims at accelerating development and deployment of solar energy globally.

Husk Power Systems said that it has raised $20 million to scale its renewable mini-grid business both in Asia and Africa. Husk Power designs, builds, owns and operates one of the world’s lowest-cost hybrid power plants and distribution network in India and Tanzania. It provides power to rural communities and businesses, entirely from renewable energy sources.

The IFC, the World Bank’s private investment arm, is set to invest $440 million (₹ 28 billion) in the 750 MW Rewa Ultra Mega Solar Park in Madhya Pradesh, paving the way for the financial closure of this project that has for the first time brought solar tariff in India on a par with thermal power. The investment by IFC will be in the form of debt to three companies that are setting up the units, each of 250 MW, Mahindra Renewables, Acme, and Actis. The deal for a $140 million (₹ 9 billion) funding with Actis has been signed, while the one with Acme for $150 million is due to be signed soon. The third one, with Mahindra, for the remaining $150 million is awaiting final approval. The solar park is being developed by Rewa Ultra Mega Solar, a joint venture between Madhya Pradesh Urja Vikas Nigam, a state government agency, and the Solar Energy Corp of India. It is scheduled to be commissioned in December 2018 and is part of meeting India’s renewable energy target of 175 GW by 2022.

In order to kick-start fund mobilisation under the ISA, the central government will set up a $350 million solar development fund. Nine companies and banks have agreed to develop and finance various solar projects, which include a $1-billion partnership corpus of NTPC Ltd and CLP India to the ISA. The firms are: Vyonarc Development, Greenko Solar, Gensol Group and SOLARIG from Spain, Shakti Pump, Refex Energy, Amplus Solar, TATA Power, Jackson Solar, and Zodiac Energy. CLP India and NTPC announced forging a partnership deal with the ISA and committed to making a voluntary contribution of $1 million each to the ISA fund corpus.

ONGC has embarked on an ambitious project on innovation towards making an “Efficient Electric Chulha (Stove)”. ONGC launched a nationwide campaign to seek innovative solutions for the development of Solar Chulha. An overwhelming response with more than 1500 entries was received by ONGC in the duration of the campaign. The top three entries will receive awards of ₹ 1,000,000 ₹ 500,000 and ₹ 300,000 respectively. On successful demonstration and testing performance of the units, about 1000 units may be initially procured by ONGC for demonstration in different regions. ONGC may also provide financial support for fabrication of 1000 units, from the start up fund set up by ONGC to popularize the product amongst the masses. ONGC is working towards finding an efficient household cooking solution to ensure last-mile delivery of clean energy.

In an initiative to promote clean energy, BSES, one of Delhi’s two electricity discoms, launched the country’s first solar rooftop consumer aggregation programme for residential buildings to provide the installations at a single point for the entire apartment complex. The sister discom BRPL’s “Solar City Initiative”, designed to maximise rooftop solar power use in south and west Delhi, was launched at an event. In the first phase of the programme, around 150 residential societies will be targeted in the Dwarka area. Listing the benefits for consumers, the discom said a 1 kW solar PV rooftop system is expected to generate 4-5 kWh of electricity per day, which corresponds to an average monthly saving on bills of about ₹ 750 for a period of 25 years for single-point delivery consumers. Besides, the scheme would help BRPL in meeting its renewable purchase obligation, as well as minimise overloading issues in congested areas during the peak summer months. BSES also announced that a portal has been launched as part of the initiative for online processing of rooftop solar applications, as well as a dedicated solar helpline for faster resolution of customer queries.

GAIL (India) Ltd said it has commissioned the country’s second largest rooftop solar power plant. The firm has installed a 5.76 MWp solar plant at its petrochemical complex at Pata in Uttar Pradesh, the company said. The plant over the roofs of warehouses covers a total area of 65,000 square meters. Tata Power Solar had in December 2015 commissioned a 12 MW solar rooftop project in Amritsar, which produces more than 150 lakh units of power annually and offset over 19,000 tonne of carbon emissions every year. India is plans to have 40 GW of rooftop PV by 2022. This is part of its target of have 175 GW of non-hydro renewables capacity by 2022 (made up of 60 GW onshore wind, 60 GW utility-scale solar, 10 GW bio-energy, 5 GW small hydro and 40 GW rooftop solar). It currently has 60 GW of renewable energy capacity. Captive solar power initiative of GAIL will reduce carbon emissions by 6,300 tonnes per annum and help India achieve climate goals.   With most of the fossil fuel companies either producing or consuming solar power it is not clear if fossil fuels are underwriting renewable energy costs.

Adani Group has been named in the top 15 global utility solar power developers that includes likes of First Solar, Total, SunEdison and Engie. Adani, ranked 12th, is the only Indian company on the list put out by Greentech Media, a Wood Mackenzie business. Top of the list is First Solar with an operational capacity of 4,619 MW and in-development capacity of 4,802 MW. Adani has 788 MW of operational capacity and another 1,270 MW under development. Adani Renewables is targeting 10 GW of installed renewable power by 2022. The company currently has 12 MW of operational wind assets, as well as 788 MW of solar PV.

Solar power tariff fall seems to have bottomed out and may not drop beyond an all-time low of ₹ 2.44/kWh in absence of well-structured bids and rising solar panel prices on demand pressure. The solar power tariff fell to an all-time low of ₹ 2.44/kWh in May 2017 during an auction for 500 MW capacities at Bhadla (IV) in Rajasthan. It had the viability gap funding component, as per the Ministry of New and Renewable Energy data. According to data, the solar tariff rose to ₹ 3.47/kWh for 1,500 MW capacities in Tamil Nadu under a state scheme in July and then dropped again to ₹ 2.66 /kWh in an auction for 500 MW capacities in Gujarat. In an auction of state-run power giant NTPC for 250 MW capacity, the tariff was ₹ 3.14/kWh. But it dropped again with viability gap funding to ₹ 2.47/kWh and ₹ 2.48 /kWh for 500 MW Bhadla-III and 250 MW Bhadla-IV auctions in December 2017. Many experts are also of the view that solar tariff has bottomed out and may not fall further. During 2017, solar power tariff hovered around ₹ 2.4/kWh level only in auctions for capacities, where viability gap funding component was there.

Solar developers have moved the power regulators of Haryana and Uttarakhand to smoothen out anomalies which are impeding the growth of solar capacity in these two states. In one petition, the DISPA has noted that the regulator, the HERC has yet to implement a key recommendation of the Haryana Solar Policy announced in March 2016. In another, it has appealed to the UERC to remove the limit of 500 kW it has imposed on the size of rooftop solar plants. Haryana’s solar policy clearly states that both ground-mounted and rooftop solar projects should be exempted from “all electricity taxes and cess, electricity duty, wheeling charges, cross subsidy charges, transmission and distribution charges and surcharges”. However, HERC has not yet passed any order making these concessions effective. The petition before the UERC argues that the 500 kW limit for rooftop solar plants is entirely arbitrary. Its origins lie in the guidelines issued by the MNRE in June 2014, which imposed “a limit of 500 kW in respect of installed solar capacity for projects under net metering arrangement”. DISPA had also moved the Gujarat Electricity Regulatory Commission to provide net metering and other incentives for putting up solar rooftop plants not only to house owners, but also to solar developers so that they can lease roofs from house owners. House owners were often reluctant to set up solar rooftop projects as they were unaware of the technicalities or could not afford the initial upfront costs. That petition is still pending.

In an attempt to provide electricity to houses in remote and inaccessible areas of the state where electrification is not possible due to difficult geographical terrain, the UPPCL will soon be providing off-grid electricity by setting up solar power plants. According to the UPPCL, the task to identify the areas that are inaccessible and have not yet been brought under the corporation’s power grid has been handed over to Non-conventional Energy Development Agency. Small solar grids will be set up in the identified remote areas, which will cover one or more villages as per the requirement of load. Every house will be connected with it.

Encouraged by the successful implementation of solar projects in states like Karnataka and Gujarat, the UP is planning to invite bids for 100 MW of solar power projects by March. The bids are for projects on open access basis to be set up in the Bundelkhand region. Leading players like Adani Group, Tata Power Solar, ReNew Power and Hero Future Energies are likely to be interested in the projects to be offered in UP, suggested an industry player. The state government has separately invited tenders for the selection of consultancy firms for establishment of a project management unit to assist UP New and Renewable Energy Development Agency in implementation of the state’s Solar Power Policy 2017. The last date for submission of e-tenders is January 14 and the online technical e-tender opening date is January 15. The financial tender opening date for qualified bidders is January 30. The UP Solar Power Policy 2017 targets implementation of 10,700 MW of grid-connected solar power projects by the end of 2022. Of the total capacity, 4,300 MW is targeted to be achieved through deployment of grid connected rooftop projects, and 6,400 MW through ground mounted utility scale power projects.

India said it can reach a capacity of 17,000 MW in renewable energy by the year 2022. As per the share of renewable energy in the total electric power generation capacity, the addition was 52.2 percent.  This is an order of magnitude smaller than the target announced when the current government came to power.

Haryana wants solar-based micro irrigation schemes be implemented in all districts. At present, the scheme is being implemented on a pilot basis in 14 canal outlets in 13 districts with an outlay of ₹ 246.5 million.

The New Year has brought a fresh ray of hope in India’s nuclear energy sector, with Westinghouse, the bankrupt energy company being sold to a Canadian investment major, Brookfield Business Partners. Westinghouse is supposed to build six of its AP-1000 nuclear reactors in India, a project that had been delayed after the company filed for bankruptcy earlier in 2017. The $4.6 billion acquisition is expected to get the beleaguered US-Japanese company out of hot water. Toshiba, the owner of Westinghouse had been looking to sell the nuclear business after it filed for bankruptcy. Westinghouse had, in its discussions with the Indian government, assured that it would continue to work on the six reactors which are expected to come up in Kovvada, Andhra Pradesh. The company is expected to build six reactors in India — private sector and government entities are currently exploring whether a greater amount of indigenous components can be used to build these reactors, bringing down their costs as well as giving a fillip to Indian nuclear industry. This might even help Westinghouse avert the potential liabilities of the Indian nuclear liability law, which has been singularly responsible for being a drag on the Indian nuclear industry. The government devised an insurance pool and new rules which make it easier for domestic players, but an air of uncertainty continues to hang over foreign players.

Rest of the World

Taiwan has joined South Korea in demanding compensation for steep US tariffs on solar panels, opening a 30-day window for negotiations, a World Trade Organization filing showed. US President Donald Trump signed into law a 30 percent tariff on imported solar panels, billed as a way to protect American jobs but which the solar industry said would lead to layoffs and raise consumer prices. It was among the first unilateral trade restrictions imposed by the administration as part of a broader protectionist agenda that has alarmed Asian trading partners producing cheaper goods. Taiwan, with no fossil fuel resources but a booming tech sector, says it ranks as the world’s second largest solar cell manufacturing base after China, putting it at the heart of an industry caught up in a global trade battle. The US, India and China are all racing to develop their solar industry, a huge growth area as the world moves toward environmentally friendly sources of energy, and are engaged in legal fights to keep their firms in pole position. The US has alleged that China and India are giving their solar sectors an illicit leg-up, and last week Trump resorted to “safeguard” tariffs, effectively shielding US solar manufacturers from foreign competition.

US President Donald Trump’s decision to slap tariffs on solar panel imports is a blow to a booming global industry, and hit stocks in European and Asian solar groups on fears their business might suffer. Although the move was intended to help American manufacturers, some in the sector said it would slow US investment in solar power and cost thousands of US jobs. Trump approved a 30 percent tariff on solar cell and module imports, dropping to 15 percent within four years. Up to 2.5 GW of unassembled solar cells can be imported tariff-free in each year. The US has the world’s fourth-largest solar capacity after China, Japan and Germany. Globally, solar capacity soared to almost 400 GW last year from under 10 GW in 2007, according to the International Renewable Energy Administration. The US-based Solar Energy Industries Association said the decision could cause the loss of around 23,000 US jobs this year, and result in the delay or cancellation of billions of dollars in solar investments. The US government argued that its domestic manufacturers could not compete with what it said were artificially lower-priced Asian panels. The Chinese firms that are the world’s biggest makers of solar photovoltaic cells will be hit by the tariffs at their production sites across Asia.

SMA Solar, Germany’s largest solar group, expects the industry to take a just a small hit from import tariffs imposed by US President Donald Trump, sending its shares to an 11-week high. Trump approved a 30 percent tariff on solar cell and module imports, dropping to 15 percent within four years. Up to 2.5 GW of unassembled solar cells can be imported tariff-free in each year. Although the move was intended to help American manufacturers, some in the sector said it could slow US investment in solar power and cost thousands of US jobs. However, SMA Solar, the world’s largest maker of solar inverters, said it expected the impact to be small, forecasting industry growth in the Americas region would average about 18 percent per year until 2020, more than the 10 percent expected globally. The US government argued that its domestic manufacturers could not compete with what it said were artificially lower-priced Asian solar panels.

SunPower Corp said it was putting a $20 million US factory expansion and hundreds of new jobs on hold until and unless its solar panels receive an exclusion from federal tariffs. The decision to impose tariffs on cheap imported panels was intended to protect American manufacturing jobs, but many in the solar industry have argued that tariffs will raise costs and trigger thousands of layoffs in the installation end of the industry. SunPower’s project development arm has already lost business to rival First Solar Inc, which makes panels that are exempt from tariffs.

The world’s largest solar-thermal power plant has been given development approval by the South Australian government. Construction on the 150 MW Aurora plant, to be built by utility-scale solar power company SolarReserve, will begin in 2018 at an estimated cost of $509 million. The plant would create 650 construction jobs and 50 ongoing positions when completed. The plant will work by using a series of mirrors to concentrate sunlight on a receiver at the top of a 220-meter tower. The sunlight will then heat molten salt to 565 degrees centigrade, generating steam to drive a turbine that will produce 150 MW of electricity making it the largest single-tower solar thermal plant in the world. It will have the capacity to power 90,000 homes with eight hours of full load storage. It will join the largest lithium-ion battery, built by Tesla to complement the state’s power grid during the high-demand summer, as another major renewable energy project in South Australia.

For new projects commissioned in 2017, electricity costs from renewable power generation have continued to fall significantly compared to the fossil fuels, according to a new report from the IRENA. It estimates onshore wind is now routinely commissioned for $4 cents per kWh. The current cost spectrum for fossil fuel power generation ranges from $5-17 cents per kWh. The IRENA with more than 150 member countries says the cost of generating power from onshore wind has fallen by around a quarter since 2010, with solar photovoltaic electricity costs falling by 73 percent in that time. It also highlights that solar costs are set to fall further with another halving expected by 2020. The best onshore wind and solar photovoltaic projects could be delivering electricity for an equivalent of $3 cents per kWh, or less within the next two years. Global weighted average costs over the last 12 months for onshore wind and solar PV now stand at $6 cents and $10 cents per kWh respectively, with recent auction results suggesting future projects will significantly undercut these averages. The IRENA report also highlights that auction results are signalling that offshore wind and concentrating solar power projects commissioned between 2020-22 will cost in the range of $6-10 cents per kWh, supporting accelerated deployment globally. IRENA projects that all renewable energy technologies will compete with fossils on price by 2020.

Westinghouse Electric Co signed an agreement to deliver nuclear fuel to seven of Ukraine’s fifteen nuclear power reactors between 2021-2025, and will source some fuel components locally, Westinghouse said. Owned by Toshiba Corp, Westinghouse said the deal would help Ukraine diversify its energy supplies. The deal builds on an existing agreement to supply six reactors, which was set to expire in 2020. Kiev’s pro-Western government wants to wean Ukraine off a traditional dependence on Russia for energy supplies, including gas imports and nuclear fuel.

French nuclear and renewable energy group New Areva has signed a memorandum of commercial agreement with Chinese partner CNNC for the construction of €10 bn ($12 bn) nuclear fuel reprocessing facility in China. In 2013, Areva and CNNC had signed a letter of intent to build a used fuel treatment and recycling facility in the Asian country. Areva said that the latest agreement reaffirms its commitment with the Chinese partner to complete the contract negotiations for the Chinese commercial used fuel treatment-recycling plant project. The Chinese treatment-recycling plant, which will have a reprocessing capacity of 800 ton of spent nuclear fuel from Chinese power plants annually, is planned to be built on the model of New Areva’s two existing plants, La Hague and Melox, both located in France. A final deal on the facility is expected to provide much needed boost to the French nuclear industry, which has been struggling to gain new contracts since the Fukushima nuclear disaster in 2011.

Russian state nuclear agency Rosatom has proposed building a nuclear power station in Argentina, President Vladimir Putin said. Putin was speaking after talks with his Argentine counterpart, Mauricio Macri, in Moscow.

EDF Energy said its Hinkley C nuclear power station in Somerset, southwest England, will come online by the end of 2025 and give the developer the experience to lower the costs of subsequent nuclear plants planned in the country. Hinkley Point C will be the first nuclear plant built in Britain in decades. It is expected to provide 7 percent of Britain’s power needs while helping to replace the country’s ageing nuclear fleet and closing coal plants. The plant, being built by the British arm of France’s EDF with China General Nuclear Power Corp, has been beset by delays and higher cost estimates. It was initially expected to start producing electricity in 2017. The project has also been criticized over its guaranteed price for electricity, which is higher than market rates. EDF also plans to build two more nuclear reactors at Sizewell in eastern England.

Saudi Arabia plans to prequalify for bidding firms from two or three countries by April or May for the first nuclear reactors it wants to build. Saudi Arabia, the world’s top oil exporter, wants nuclear power to diversify its energy supply mix, enabling it to export more crude rather than burning it to generate electricity. It plans to build 17.6 GW of nuclear capacity by 2032, the equivalent of around 16 reactors, making it one of the biggest prospects for an industry struggling after the 2011 nuclear disaster in Japan. A joint venture between the Saudi government and the winning developers would be signed in 2019 after the shortlisting by end of 2018. Commissioning of the first plant, which will have two reactors with a total a capacity between 2 and 3.2 GW, is expected in 2027. Saudi Arabia has sent a request for information to international suppliers to build two reactors, the first step towards a formal tendering competition. Riyadh was currently evaluating requirements from five countries; China, Russia, South Korea, France and the US. Saudi Arabia is interested in reaching a civilian nuclear cooperation agreement with Washington, and Riyadh has invited US firms to take part in developing the kingdom’s first atomic energy program.

At ground zero of Ukraine’s Chernobyl tragedy, workers in orange vests are busy erecting hundreds of dark-coloured panels as the country gets ready to launch its first solar plant to revive the abandoned territory. The new one-megawatt power plant is located just a hundred metres from the new “sarcophagus”, a giant metal dome sealing the remains of the 1986 Chernobyl accident, the worst nuclear disaster in the world. Ukraine, which has stopped buying natural gas from Russia in the last two years, is seeking to exploit the potential of the Chernobyl uninhabited exclusion zone that surrounds the damaged nuclear power plant and cannot be farmed. The installation of a huge dome above the ruins of the damaged reactor just over a year ago made the realisation of the solar project possible. Ukrainian authorities offered investors nearly 2,500 hectares (25 square kilometres) for potential construction of solar power plants in Chernobyl.

France will not increase carbon emissions as it reduces its reliance on nuclear energy in coming years. The centrist government has launched a year-long debate about energy policy before deciding in early 2019 on the future share of nuclear energy in France’s power production. It now stands at 75 percent. To assist discussions, grid operator RTE has prepared scenarios for cutting nuclear energy’s share from 56 percent to 11 percent by 2035, and an additional scenario on reducing nuclear reliance to 50 percent by 2025. Environment activists complain that the government has withheld scenarios cutting back nuclear capacity the most, when it held workshops this month to prepare for the public debate. France would not build more plants powered by coal or fuel oil, he said, but said the government would consider whether there was a role for gas, which has lower emissions than coal or other fossil fuels. Sustainable energy advocacy group NegaWatt said the most ambitious scenarios for reducing nuclear reliance could be achieved without boosting CO2 emissions provided there was a stronger focus on energy efficiency and if the nuclear reactors had their lifespans’ extended a little beyond 40 years. The majority of EDF’s nuclear reactors were connected to the grid between 1980 and 1990. Closing them all promptly after 40 years, their scheduled lifespan, would cut so much capacity that France would have to build new gas plants to fill the gap. EDF wants to extend the lifespan of its reactors to 50 years, but will need approval of nuclear regulator ASN for each reactor. The ASN has said it will rule on the principle of lifespan extensions in 2021.

The Trump administration announced it is doing away with a decades-old air emissions policy opposed by fossil fuel companies, a move that environmental groups say will result in more pollution. The US EPA said it was withdrawing the “once-in always-in” policy under the Clean Air Act, which dictated how major sources of hazardous air pollutants are regulated. Under the EPA’s new interpretation, such “major sources” can be reclassified as “area sources” when their emissions fall below mandated limits, subjecting them to differing standards. The EPA said the policy it has followed since 1995 relied on an incorrect interpretation of the landmark anti-pollution law.

A team of scientists at Stanford University, including a researcher of Indian origin, has shown how nanotechnology can be used to create crystalline silicon (c-Si) thin-film solar cells that are more efficient at capturing solar energy. The discovery can reduce the cost of solar energy production globally, they noted. The team used optical modelling and electrical simulations to show that a thin-film crystalline silicon solar cell with a 2D nanostructure generated three times as much photo current as an unstructured cell of the same thickness. The longer the light spends inside the solar cell – the greater its chance of getting absorbed. The discovery reveals a simple method to improve the efficiency of all silicon solar cells.

The California regulators have approved PG&E’s request to decommission the 2,256 MW Diablo Canyon nuclear power plant by 2025. With the approval from the California Public Utilities Commission, PG&E will retire the power plant, which features two nuclear reactors, upon completion of its operating licenses. The regulator has also authorized the firm to recover $241.2 mn in costs associated with retiring the plant; $211.3 mn to retain PG&E employees until the facility is retired; $11.3 mn for retraining of workers; and $18.6 mn for Diablo Canyon license renewal expenses incurred by PG&E. However, the regulator has rejected PG&E’s request for $85 mn for a Community Impact Mitigation Program in the absence of express legislative authorization.

New York City announced that it filed a multibillion dollar lawsuit against five top oil companies, citing their “contributions to global warming,” as it said it would divest fossil fuel investments from its $189 billion public pension funds over the next five years. The lawsuit, against BP Plc, Chevron Corp, ConocoPhillips, Exxon Mobil Corp and Royal Dutch Shell Plc, follows similar lawsuits filed last year by San Francisco and other California cities seeking billions of dollars in damages from rising sea levels due to climate impacts. The lawsuits are the latest legal challenges against oil companies over climate change and come as the firms are searching for new business models amid pressure by governments and consumers for cleaner energy.

Denmark just set a world record for using wind power to drive its economy. Its government now predicts that anyone betting against the technology is on the wrong side of history. Denmark is positioning itself as the flag bearer for wind power. Denmark obtained 43.4 percent of its electricity from wind last year, beating its own record. The government’s goal is to derive 50 percent of the country’s entire energy consumption from renewables by 2030. Denmark is home to the world’s biggest turbine maker, Vestas Wind Systems A/S, which just raised its outlook after getting more orders than it expected in 2017. The state also holds a controlling stake in Orsted A/S, the world’s biggest operator of offshore wind parks, which this week raised its 2017 profit forecast thanks to strong winds in northern Europe.

The US power grid regulator rejected a directive to prop up aging coal and nuclear power plants, in a setback for the Trump administration that disappointed coal miners but pleased drillers, environmentalists and renewable energy advocates. FERC said it had embarked on a new process to determine whether the grid can be strengthened. The move was a blow to the plan to reward certain nuclear and coal-fired power plants that store 90 days of fuel on site by paying for their operating costs through power price adjustments. President Donald Trump promised to aid the coal and nuclear industries, which have suffered shutdowns resulting from a glut of cheap natural gas. FERC’s new plan involves asking grid operators to submit within 60 days their concerns about the resiliency of the power system. The commission will then decide whether additional action is warranted, FERC said.

Over 30 energy sector players from around the world including India converged in Nepal to explore the country’s hydropower potentials. The aim of the expo was to assist the Nepal government in achieving its objective of generating 17,000 MW of hydroelectricity in the next seven years. Over 30 hydropower generators, producers of electrical equipments, investors, consultants and designers from Nepal, India, China, South Korea, Norway, Germany, Brazil, Italy, Sweden and Austria showcased their products and services at the three-day expo Himalayan Hydro Expo 2018. Italys CMC, Germanys VOITH; BFL, CRYSTAL, FLOVEL from India, VAPTECH – Bulgaria, MAVEL – Czech Republic, Powerchina, CSEC from China among others participated. President Bidya Devi Bhandari inaugurated the exhibition and said Nepal could not utilise its huge hydropower potential due to various reasons and that, it produced only 700 MW of hydro-electricity in the last one hundred years. The president urged private players to join hand with the government in harnessing Nepal’s immense hydro potentials.

Scientists are developing a novel technology that may economically convert fossil fuels and biomass into useful products, including electricity, without emitting carbon dioxide into the atmosphere. Engineers at The Ohio State University in the US devised a process that transforms shale gas into products such as methanol and gasoline – all while consuming carbon dioxide. The process can also be applied to coal and biomass to produce useful products, researchers wrote in the journal Energy & Environmental Science. Under certain conditions, the technology consumes all the carbon dioxide it produces plus additional carbon dioxide from an outside source, they said. The researchers have also found a way to greatly extend the lifetime of the particles that enable the chemical reaction to transform coal or other fuels to electricity and useful products over a length of time that is useful for commercial operation. The same team has discovered and patented a way with the potential to lower the capital costs in producing a fuel gas called synthesis gas, or “syngas,” by about 50 percent over the traditional technology. The technology, known as chemical looping, uses metal oxide particles in high-pressure reactors to “burn” fossil fuels and biomass without the presence of oxygen in the air. The metal oxide provides the oxygen for the reaction. Chemical looping is capable of acting as a stopgap technology that can provide clean electricity until renewable energies such as solar and wind become both widely available and affordable, the researchers said. The engineers also developed chemical looping for production of syngas, which in turn provides the building blocks for a host of other useful products including ammonia, plastics or even carbon fibres. The technology provides a potential industrial use for carbon dioxide as a raw material for producing useful, everyday products, researchers said.

WTO: World Trade Organisation, MNRE: Ministry of New and Renewable Energy, CPSUs: Central Public Sector Undertakings, EPC: Engineering, Procurement & Construction, MW: megawatt, GW: gigawatt, US: United States, DCR: Domestic Content Requirement, CIL: Coal India Ltd, DGS: Directorate General of Safeguards, UPPCL: Uttar Pradesh Power Corp Ltd, kWh: kilowatt hour, ISA: International Solar Alliance, IFC: International Finance Corp, ONGC: Oil and Natural Gas Corp, discoms: distribution companies, PV: photovoltaic, BRPL: BSES Rajdhani Power Ltd, MWp: megawatt peak, DISPA: Distributed Solar Power Association, HERC: Haryana Electricity Regulatory Commission, UERC: Uttarakhand Electricity Regulatory Commission, UP: Uttar Pradesh, CO2: carbon dioxide, IRENA: International Renewable Energy Agency, CNNC: China National Nuclear Corp, EPA: Environmental Protection Agency, PG&E: Pacific Gas and Electric Company, FERC: Federal Energy Regulatory Commission

Courtesy: Energy News Monitor | Volume XIV; Issue 35

SWOT Analysis of Overseas Coal Opportunities[1]

Ashish Gupta, Observer Research Foundation

Countries Australia Indonesia South Africa Mozambique Colombia
Reserves in Billion Tonnes (BT) 76.4 28 30 16 (extensive study required) 6.7

 

R/ P Ratio (years) 160 67 117 Not known 79
Coal Regions Queensland & New South

Wales (exploited).

Surat Basin & Galilee Basin

(partly exploited)

Sumatra & Kalimantan

(exploited).

Papua, Java, Maluku

& Sulawesi (partly

exploited).

Highveld (exploited),

Witbank, Ermelo,

Waterberg, Vereeniging

South Rand, Utrechet and

Klip River are open for exploration.

Tete and Niassa are open for exploration

 

Cesar, Guagira,

Boyaca and

Cundinamarca are open for exploration

 

Coal Quality High Medium & low Medium & low Good High
Mining Status Highly mechanised Labour intensive Labour intensive Labour intensive Not known
Cost of Mining Very costly Labour is cheap Labour prices increased dramatically  by 9.6% in 2013 Labour is cheap Labour is cheap
Policy Framework Conducive Skewed towards indigenous players Conducive. Does not have any concrete energy policy in place Conducive. No local equity/ ownership required Conducive
Rail Infrastructure Heavy investment required Heavy investment required Not very good Not very good Not very good
Port Infrastructure Expanding Not a problem Expanding but heavy investment required Expanding but heavy investment required Expanding but heavy investment required
Cumulative Additions to coal terminal capacity 2015 -19 (MT[2]) 40 55 27 10 43
Planned Investment in Port  Infrastructure $ 10 billion Dudgeon Point

Coal Terminal

$ 5 million PT Bara Ria Sukses’s Jambi

Coal Terminal

$ 1.5 billion terminal at Richards

Bay by Transnet

Expansion of port of Macuse Cerrejon $ 1.3 billion infrastructure

expansion programme

 

Planned Investment in Rail Infrastructure $ 700 million rail track at the Port of Newcastle $ 2.4 billion for b 191 km rail line from Kutai Barat to Balikpapan in East Kalimantan $ 1 billion railway coal link project from Mpumalanga region to

Richards Bay

$ 4 billion rail link under study for

530 km from Moatize to the port of Macuse

 

$ 700 million railway line project from

Colombia’s new port of Puerto Brisa with Central Railway and $ 1.3 billion  infrastructure project at Rio Magdalena

Proximity to Indian Ports 18 days to-Indian west coast and 14 days to Indian east coast 12 days to-Indian west coast and 9 days to Indian east coast 12 days to-Indian west coast and 14 days to Indian east coast 10 days to-Indian west coast and 12 +1/2 days to Indian east coast Voyage distance will be long and will further increase the cost
Shipping Cost $/Tonne[3] 79 50 50 48 55
Attractiveness Import only coking coal Good Better Best Moderate

Views are those of the author                    

Author can be contacted at ashishgupta@orfonline.org

[1] Also Refer, ORF, “Dynamics of Importing Coal: Lessons for India, India, October, 2012

[2] Probable figure from IEA, “Medium term Coal Market Report”, 2014

[3]  supply cost to North West Europe

Courtesy: Energy News Monitor | Volume XI; Issue 33

POWER FOR ALL TO GET VOTES FROM ALL

Monthly Power News Commentary: December 2017 – January 2018

India

By March 2019, all homes in the country will be provided uninterrupted 24-hour power supply throughout the year. By December 2018, 1,694 villages, which are yet to be electrified, will have electricity connection and works in this regard has been going on. It is likely that the date set for declaring full electrification coincides with the date set for elections. A new law will be enacted to impose penalties on power distribution companies in case of failure to provide uninterrupted power after March 2019, except due to technical reasons. The government has set a target of reducing the T&D losses of power from the current 21 percent to 15 percent by January 2019. ₹ 1.75 trillion is being spent to improve the power infrastructure across the country.

All 39,073 villages of Bihar were said to be electrified. Every household in the state would have a free power connection by the end of the next calendar year. The efforts in this regard were a part of the seven resolves (“saat nischay”) of good governance. The turnaround in the power situation was achieved through a number of reforms, as a part of which “the state electricity board underwent a major revamp and a number of government-run power companies were set up”. Bihar will pitch for increase in budget allocation of centrally-sponsored schemes, uniform power purchase tariff for all states and commencement of financial year from January 1 among several other provisions for being included in the upcoming Union budget for the fiscal 2018-19.  Bihar had also pitched for uniform tariff rates across the country on the lines of railway fares.

The government is working on amendments to the Electricity Act to levy hefty penalties on power distribution companies for load shedding and make provisions for direct subsidy transfers by states to power consumers. The Union power ministry is aiming to introduce the Electricity Act amendment bill in the budget session of parliament. At present, the Act fixes universal service obligation on distribution licensees to provide electricity to all applicants and the penalty for non-compliance can extend to up to ` 1,000 per day of default. The amendments are proposed in the Act to explicitly fix 24×7 power supply obligation on electricity distribution licensees. The bill will also provide for subsidy transfers from state governments for power consumption directly to the consumers, on the lines of cooking gas cylinders. Industry experts said a DBT (Direct Benefit Transfer) like structure in power distribution sector would help revive the discoms. But the scheme may face challenges in implementation as net electricity metering is not prevalent in rural areas. The roadmap for one of the most awaited reforms in the power sector by enabling electricity consumers to choose their supplier is also likely to be provided in the bill. However, the bill may not impose timelines for implementation of the proposal as that has been opposed by states. The states may, however, be asked to notify their plans for implementation of the reform for electricity connection portability in the next 3-5 years. The proposal, to separate electricity supply and network maintenance services and introduce multiple licensees for a single area by amending the Electricity Act 2003, has been in works for last many years. The UPA government had in 2014 introduced a bill to this effect in the Lok Sabha. The proposal is similar to mobile number portability where consumers can switch to a telecom operator of their choice. Currently, power distribution utilities are responsible for operating and maintaining distribution system in their licensed areas.

The ₹ 6,000 billion, 24×7 power supply promised to the agriculture sector from January 1 in Telangana is a pioneering move with far-reaching consequences politically and financially, with potential to rejuvenate the rural economy. From a deficit of about 2,000 MW when the State was formed in June 2014, to be in a position to supply 24×7 power to all industries, and now round-the-clock free power to farmers from the Rabi season, is a creditable achievement. However, the impact of free power on the State’s finances, and the health of the discoms, needs to be closely watched. The State utilities have invested ₹ 12,316 billion to strengthen the transmission and distribution system for 24×7 power supply. The discoms will have to contend with additional agricultural demand of 9,765 million units in FY18. Two discoms have made projections that in FY19, the revenue demand will be ₹ 35,774 billion, against a revenue generation of ₹ 26,003 billion, leaving a gap of ₹ 9,771 billion. To bridge the revenue gap, the government will have to significantly increase the budgetary support to keep the discoms financially healthy.

As many as 13,254 houses were given electricity connections in Western UP in a single day under ‘Saubhagya’ scheme. The districts where the connections were given include Meerut, Baghpat, Ghaziabad, Bulandshahr, Hapur, Gautam Budh Nagar, Saharanpur, Muzaffarnagar, Shamli, Moradabad, Sambhal, Amroha, Rampur and Bijnor. Out of the total houses, 2,372 belonged to BPL families. The connections were given for free during 464 mega camps set up across West UP. Pradhan Mantri Sahaj Bijli Har Ghar Yojana ‘Saubhagya’– an ₹ 163 billion scheme of the central government– aims to provide power connections to over 40 million families in rural and urban areas by December 2018. As many as 464 mega camps were set up in 14 districts of West UP, and a report of the number of electricity connections was made public. Paschimanchal Vidyut Vitaran Nigam Ltd (PVVNL) managing director Ashutosh Niranjan had conducted inspection of the mega camps. While the BPL customers will not have to pay for the electricity connections, ₹ 50 per month will be taken from APL customers in 10 easy instalments.

Asserting that the flagship schemes have been launched to achieve round-the-clock power supply for all by 2019, the Jammu and Kashmir (J&K) government said it was actively pursuing with the Centre the transfer of power projects to the state. Among the reasons forcing power cuts in peak winters and summer seasons in Kashmir and Jammu, respectively, against registered 3,101 MW load, the demand should not exceed 1,551 MW, but it is around 2,950 MW (un-restricted) that reflecting that there exists huge unregistered load. Use of unauthorised load creates system constraints by way of overloading the system at transmission, sub-transmission and at distribution levels, thereby causing further distress cuts in addition to the scheduled cuts. Schemes launched to overcome chronic problems at various levels, are Re-structured Accelerated Developmental Programme sanctioned at a cost of ₹ 1.51 billion under part-A and ₹ 16.65 billion under part-B. It is aimed at strengthening, upgrading and renovating sub-transmission and distribution network, adoption of IT application for meter reader, billing and energy accounting, in 30 identified towns of the state, including 17 of Kashmir division, 11 of Jammu division and 2 of Ladakh region. Energy mapping and energy auditing is subservient to 100 percent metering at all voltage levels. With meagre resources, Jammu and Kashmir Power Development Department has been able to bring down the T&D losses from 61.58 percent in 2011-12 to 52.87 percent in 2016-17. The launch of various centrally sponsored flagship schemes which are primarily reform centric, it is projected that the present high T&D losses shall be appreciably reduced post execution of these schemes.

Government’s UDAY scheme has helped debt laden discoms of 24 states to reduce losses to ₹ 369 billion in 2016-17 from ₹515.9 billion in the previous fiscal. The UDAY was launched for the operational and financial turnaround of state-owned power discoms. The scheme aims to reduce interest burden, cost of power and power losses in distribution sector, besides improving operational efficiency of discoms. The participating states have achieved an improvement of one percent in Aggregate Technical & Commercial (AT&C or distribution) losses and ₹ 0.17/kWh Unit in the gap between Average Cost of Supply and Average Revenue Realised in 2016- 17.

Electricity tariffs across India are expected to rise by 62 to 93 paise ($0.0098-$0.0146) per kWh during the first year of upgrades to coal-fired power plants. The estimate of tariff increases of up to nearly 20 percent on average power fees comes amid rising levels of smog in the capital and other major cities, which has put pressure on the government and generators to tackle a growing public health crisis. Power tariffs are a politically sensitive issue in India, where more than three quarters of the electricity is generated by coal-fired power plants. The average power tariff in India is around ₹ 5/kWh. India, which is looking to facilitate loans to power producers through state-run financial institutions to fund one-time costs, aims to make all coal-fired power plants comply with emission-cutting norms by 2022. CEA (Central Electrical Authority) has prepared a phase-in plan for implementing new environmental norms to ensure minimum disruption while plants are shut down for retrofitting. Thermal power companies account for 80 percent of all industrial emissions of lung-damaging particulate matter, sulphur and nitrous oxides in India.

The government may consider increasing import duty on certain items related to power, capital goods and chemicals sectors in the forthcoming Budget with an aim to boost domestic manufacturing. The move would also help promote the government’s ambitious ‘Make in India’ initiative. Imports of cheap power equipment have been affecting domestic manufacturers as well as created issues for independent power producers in view of poor quality and after sales service. The Indian Electrical and Electronics Manufacturers’ Association in its pre-Budget recommendations have asked the government to remove concessional basic customs duty on imports of certain items in the power sector. It has also said that various finished products of electrical industry attracts a basic customs duty, ranging from 7.5 percent to 10 percent. However, the same finished products are imported at a concessional basic customs duty of 5 percent.

Power discoms in state have approached GERC seeking a hike in FPPPA base price or fuel surcharge. However, none have sought any increase in basic electricity tariffs for fiscal 2018-19. A power company is allowed to offset increase or decrease in fuel cost by way of FPPPA, also known as fuel surcharge. The four distribution companies — UGVCL, MGVCL, DGVCL and PGVCL — have proposed raising basic FPPPA by 6 paise per unit from ₹ 1.43/kWh to ₹ 1.49/kWh for the fiscal 2018-19. Gujarat Urja Vikas Nigam Ltd (GUVNL) affiliated discoms have filed petitions with the GERC for determination of power tariff for the next fiscal. The final quantum of FPPPA increase, however, will be fixed by GERC after hearing all the stakeholders. While private sector company Torrent Power Ltd supplies electricity to Ahmedabad, Gandhinagar and Surat, the state discoms cater to the rest of Gujarat.

Even as it gears up to woo investors in the state, mounting dues towards thermal power plants, including private ones, have come to stare in the face of UP government. UPPCL owes around ₹ 35 billion to some of the major power plants such as NTPC Ltd, NHPC, Lalitpur power plant and Rosa power plant. The situation could turn serious as Lalitpur Power Generation Company has issued a letter to UPPCL saying it does not have enough funds to buy coal and keep its units functioning. The company said that outstanding dues by December-end had crossed ₹12 billion. The company said the situation was “worsening” day by day. According to UP State Load Dispatch Centre, the 1,980 MW Lalitpur power plant has already shut one of its super-critical units of 660 MW citing “shortage of coal”. The situation is equally bad for NTPC. Records show that UPPCL is yet to pay over ₹ 14 billion to the company which supplies 3,182 MW of power per day to the state.

A month ahead of the investors meet in UP, the state government offered yet another sop to industries by giving them the option to take power from the power discom of their choice. The power will be wheeled to the industrial units under the ‘open access system’ for which the state government will set up a help desk at the UP State Load Dispatch Centre (UPSLDC). The permission to take power from a source other than the existing distribution company will be granted by the UP power transmission corporation limited and the respective discom. Industries have been seeking power under the open access system but could not do so since the process for getting clearances was tedious. The open access policy, experts said, could prove to be a boon to the industries in UP which has a power crunch.

City residents should brace for higher tariff with electricity department submitting a proposal for enhancement in the existing rates. The department has submitted a tariff petition to JERC for enhancement in the tariff up to 20% for the next financial year in different slabs. In the domestic category, the electricity department has proposed a hike from ₹ 2.55 to ₹ 2.75 in the slab of 0-150 units. It has proposed increase from ₹ 4.80 to ₹ 5.80 in the slab of 151-400 units and ₹ 5 to ₹ 6 in slab above 400 units. In the commercial category, increase from ₹ 5 to ₹ 6.20 in the slab from 0-150, ₹ 5.25 to ₹ 6.45 in the slab of 151-400 and ₹ 5.45 to ₹ 6.75 in slab above 400 units has been proposed. The commission will take a decision on considering the proposed hike after interacting with the residents of the city. In the past five years, the commission has revised power tariff only twice – 2012-13 and 2015-16— and turned down the petition on three occasions on the ground that the department had failed to submit certain audited accounts. The electricity department caters to 2.15 lakh consumers of nine categories. The majority of power is consumed by domestic consumers followed by commercial category. Despite being repeatedly pulled by the JERC, the department has again failed to file the petition within stipulated time period. For the ongoing financial year, the department had filed tariff petition on January 19, while in 2016 the petition was filed on February 29.

Electricity consumers in Ahmedabad, Gandhinagar and Surat may have to cough up more as TPL has sought permission to increase power rates. The company claims that it needs higher rates to recover its past under-recoveries. The company has not actually demanded a hike in base tariffs — these are revised annually to cover future costs — it has instead proposed a rise in the form of regulatory charge from April 1, 2018. TPL has sought an increase of 25 paise per unit for Ahmedabad area which includes Gandhinagar. For Surat, the regulatory charge proposed to be levied is 20 paise. The private sector company has filed its petitions with GERC for determination of tariff for 2018-19. However, the final quantum of the hike to be passed on to the consumers will be decided by the state power regulatory body, which has sought suggestions and objections from all stakeholders by February 9. In its tariff petitions, Torren Power has stated that its past under recoveries, including carrying cost, works out to be ₹ 39 billion for Ahmedabad, and ₹ 67.79 billion for Surat supply area. The proposed increase, if approved, will translate into an estimated burden of ₹ 4.8 billion on the consumers. Torrent Power has stated in its petitions that it had last increased tariffs in the year 2015-16.

The power ministry is mulling using supercritical power plants to meet new emission norms instead of retrofitting the old polluting units, which could increase their tariff by up to 93 paise per unit. The government has estimated a capital expenditure of ₹ 8.8 million to ₹ 12.8 million/MW for retrofitting the old plant to meet new emission norms. The capital expenditure on retrofitting old plants to comply with new norms will be up to ₹ 12.8 million/MW.

Finally taking cognisance of large number of complaints of inflated power bills issued to farmers, MSEDCL has decided to hold bill correction camps at 11 kilovolt feeder level. MSEDCL said that farmers who have problems with their bills should go to MSEDCL offices with the last bill and receipt. MSEDCL circular issued in this regard states that if a farmer has participated in Mukhya Mantri Krishi Sanjivani Yojana by paying ₹ 3,000 or ₹ 5,000 and has applied for bill correction then his supply should not be disconnected till the deadline for paying the first instalment. However, if any farmer has not participated in the amnesty scheme then connection of such farmer should disconnected as per rules. The circular also states that if a farmer has paid the first instalment under the amnesty scheme then he would get an extension of three months for paying the remaining instalments.

Canadian asset manager Brookfield and the Kotak Mahindra group have jointly bid for 2,200 MW of power assets belonging to Jaypee Power Ventures, a unit of Jaiprakash Associates. The consortium submitted its bid to the committee of creditors and top executives gave a detailed presentation on operational and financial details for the mix of both thermal and hydel assets in north and east India, they said. A deal, if concluded, will close at an equity value of ₹ 35-40 billion, they said. The power assets are currently part of the SDR process intended to salvage the debt-laden company. Brookfield will own 90% of the assets, according to the proposal. Brookfield’s local partner Kotak will hold the remaining 10%. Lenders to Jaiprakash Power Ventures have been looking to sell assets under the SDR scheme since March. Brookfield had held independent talks to purchase the 4,000 MW of assets. Lenders subsequently split these into two — 2,200 MW and 1,800 MW of assets — and sought bids separately for them.

The year 2017 draws to a close with improved performance of the power sector in November on key growth indicators including generation, electricity supply, coal availability and short-term prices even as capacity addition remained low. Power generation, excluding that from the renewable resources, increased 1.7 percent year-on-year to 95 billion units in November. The increase was driven by higher generation across all the sectors including thermal, hydro and nuclear. During the month, all India energy requirement rose 5.4 percent to 93 billion units as compared to the same month last year. India’s power generation from the renewable sources improved by 4.4 percent year-on-year to 6.6 billion units in October 2017 on account of improved generation from the solar sector due to its higher installed capacity and marginal improvement in PLF. Wind power generation, however, continued to decline in October 2017 due to lower PLFs. The share of renewables in the total energy generation improved marginally to 6 percent in October 2017 from 5.9 percent in the same month last year.

Rest of the World

China’s power consumption rose 6.6 percent in 2017 from the year before to 6.31 trillion kWh, according to the NEA data. The nation’s industrial power consumption climbed 5.5 percent to 4.36 trillion kWh in 2017, the NEA said. China’s total installed generation capacity reached 1,777.03 GW by the end of 2017. The world’s No.2 economy consumed a total of 574.6 billion kWh of electricity in December, up 7.4 percent from the year before, according to the NEA data.

Norwegian utility company Statkraft said it has reduced its power trading operations in Turkey due to declining market liquidity and an unpredictable outlook. Statkraft now trades only electricity it generates itself at its two hydropower plants in Turkey. Statkraft sold an unfinished hydropower plant in Turkey last year to local group Limak, after fighting between Turkish security forces and Kurdish PKK militants in 2016 forced it to stop the plant’s construction. The Cakıt and Kargi hydropower plants have a combined capacity of 122 MW and are part of the feed-in regime in Turkey, not exposed to the Turkish forward market.

Nigeria’s electricity grid has been shut down by a fire on a gas pipeline, the power ministry said, as the country’s power infrastructure continues to struggle. Gas supply to several power stations was cut off because of the fire on the Escravos Lagos Pipeline System near Okada in the southern state of Edo, the ministry said. The outage went unnoticed in parts of Nigeria, where blackouts are common and many businesses and households are forced to rely on their own power generators or, for the less wealthy, not have any electricity. The country’s dilapidated power grid is often blamed for hobbling growth in Africa’s largest economy. Most of Nigeria’s power generation is from thermal power stations that use gas, according to the power ministry. In the city of Bauchi in northeast Nigeria, the grid outage went unnoticed because people have already had weeks of power cuts.

Morupule B Power Station, a coal-fired power station built by the China National Electric Engineering Corp, has been credited to spurring electricity production in Botswana, Statistics Botswana said. Statistics Botswana said the volume of electricity generated in the third quarter of 2017 stood at 893,831 MWh, an increase of 32.4 percent from 675,047 MWh in the second quarter. Morupule B Power Station, located some 270 km north of the capital Gaborone, accounts for 90 percent of the country’s domestic power generation. The generation of electricity in Botswana started in 1985 with a coal-fired thermal power station at Morupule operating at a capacity of 132 MWh. Prior to that, most of Botswana’s electricity was imported from South Africa’s power utility, Eskom. In 2008, South Africa’s electricity demand started to exceed its supply, resulting in the South African government restricting power exports. The volume of imported electricity decreased by 62.6 percent from 333,355 MWh during the third quarter of 2016 to 124,612 MWh during 2017 third quarter.

Israel is set to open its power generation sector to more competition after workers at IEC agreed a preliminary deal that also aims to help the state-owned utility cut its huge debts. A stand-off between the government, IEC and its workers has long been viewed as a constraint on Israel’s economy. The utility has said it never received enough money, with prices capped by the government, while IEC’s powerful workers’ union has blocked previous attempts to introduce competition. That stands to change, with the union giving its preliminary consent to a reform. A final agreement will be negotiated over the next 45 days. Under the outline agreement, IEC will remain a monopoly in distribution, but supply will be gradually opened up to competition. Areas such as system management and planning will be taken away and sold to a different government-owned company. The government had managed to open the power production market on a small scale in recent years and about a quarter already comes from private operators.

T&D: transmission and distribution, discoms: distribution companies, FY: Financial Year, UP: Uttar Pradesh, BPL: Below Poverty Line, APL: Above Poverty Line, MW: megawatt, GW: gigawatt, UDAY: Ujwal Discom Assurance Yojana, kWh: kilowatt hour, MWh: megawatt hour, GERC: Gujarat Electricity Regulatory Commission, FPPPA: fuel price and power purchase adjustment, UPPCL: UP Power Corp Ltd, JERC: Joint Electricity Regulatory Commission, TPL: Torrent Power Ltd, MSEDCL: Maharashtra State Electricity Distribution Company Ltd, SDR: strategic debt restructuring, km: kilometre, PLF: plant load factor, NEA: National Energy Administration, IEC: Israel Electric Corp

Courtesy: Energy News Monitor | Volume XIV; Issue 34

COAL PRICING POLICY REVISION: WILL IT IMPROVE QUALITY OF COAL USE?

Monthly Coal News Commentary: December 2017 – January 2018

India

Coal India’s new pricing policy, which involves selling coal on the basis of total energy content in each consignment, is expected to bring down cost of power generation that would be passed on to consumers. In its new coal pricing policy, which will come into effect from April 2018, the monopoly has graded coal on the basis of total energy content. Each of these grades will have a different rate for one unit of energy within these slabs with higher prices for higher calorific value. For every 100 unit reduction in energy content measured in kilo calorie, prices would reduce by a minimum of ₹ 19/tonne for the lowest grade and a maximum of ₹ 48/tonne for the highest grade. According to a CIL there are nine slabs in the new system. For example, coal with total energy content varying between 3,101 kcal/kg and 4,600 kcal/kg will be billed at 23 paise per unit of energy. This means that the price of coal per tonne for this grade will vary between ₹ 713/tonne on the lowest side for the grade and ₹ 1,058/tonne on the highest side of the grade. The current price for this grade is fixed at ₹ 886/tonne as long as energy content per kg lies within the grade.

What is interesting is that in 1954 when the concept of UHV was proposed by the Coal Washeries Committee as basis for pricing, power generators were using better grades of coal, the reserves of which were depleting fast.  The objective of adoption of UHV concept was therefore to encourage and popularize the use of poor grades of non-coking coal by the power utilities.  This was a built- in incentive for a general shift towards usage of E, F and G grades of coal with calorific value of about 4000 kcal/kg. The price of these coal grades for ‘million calories’ was significantly lower compared to the superior coal grades A & B with calorific value of about 5800 kcal/kg. The Tariff Commission recommended UHV basis of pricing in 1966 and it was adopted in 1979.  Under the UHV system of pricing, the coal producer had an incentive to produce coal at the highest ash level of a particular grade.  It also allowed significant slippage of grade in delivered coal.

When the UHV concept was adopted, more than 95 percent of the coal was burnt on either fixed or moving grates where the thermal efficiency dropped steeply with increasing ash content.  Following adoption of UHV, the consumption of inferior grade coals increased and it stood at about 119 mt in 1990-91.  Power plants, whether located near the pithead of away from the coalfields used ROM coal with ash content up to 47 percent.  The shift in pricing policy may incentivise the use of higher quality of coal.

CIL has also raised prices of the fuel used to fire power plants for the first time in about a year-and-a-half, as the world’s biggest coal producer shores up efforts to pay for higher salaries. Higher prices will boost the company’s revenue by about ₹ 19.56 billion ($308 million) in the financial year ending March 31, it said. The price increase will add ₹ 64.21 billion to its annual revenue. This is the first increase in thermal coal prices by the company since May 2016. Thermal coal accounts for about 90 percent of CIL’s revenue. CIL’s shipments in December rose to the highest for the month in data going back to 2013, as power plants, its biggest customers, bought more to replenish their depleted inventories.

CIL introduced evacuation facility charges of ₹ 50/tonne on all coal despatches (except despatches through rapid-loading arrangement) with immediate effect. This is expected to generate incremental annual revenue of ₹25 billion, adding ₹8 billion to revenue in the current fiscal alone. Analysts believe volume growth outlook will start looking better in the coming days. During April-November 2017, CIL’s production increased 1.8% year-on-year, whereas offtake (despatches/sales volume) improved at a faster pace of 8.1%. However, offtake in November alone was relatively slower at 5.2%. So far, CIL has achieved 95% of its production target and 97% of its offtake target. Analysts expect the company to miss its full-year targets this year. CIL’s FSA (fuel supply agreement) volumes realizations had improved quarter-on-quarter in the September quarter and it will be worth watching whether the trend continues.

The government said that the annual production target CIL has been kept at 630 mt for the upcoming financial year. Against the target of 408.6 mt, CIL produced 385.6 mt of coal till January 1 in the ongoing financial year. In the Annual Plan of CIL for 2017-18, the production target has been pegged at 600 mt. From the production level of 554 mt in 2016- 17, the PSU has envisaged to enhance its coal output to one billion tonnes by FY’20. CIL has identified mines with a production capacity of 908 mt so far. Considering the demand for coal from various segments, while finalising the Annual Plan of 2017-18, CIL was given the offtake target of 600 mt by the coal ministry. In a bid to achieve the annual target, CIL is required to increase its daily production to more than two mt during the remaining day of the ongoing financial year.

CIL has achieved a 7.6% growth in sales during April-December 2017 against the previous corresponding period when it achieved a 0.6% growth. During this period, CIL sold almost 421 mt of coal reducing pithead inventory by about 37.5 mt. In the previous corresponding period CIL sold almost 392 mt. Western Coalfields achieved the highest sales growth of 30.2% followed by Central Coalfields and Northern Coalfields at 17.1% and 17.7% respectively. South Eastern Coalfields achieved near 12% growth In December last year it sold 53.44 mt against 51.46 mt produced in December 2016 thus achieving a near 4% growth.

SCCL will be investing about ₹ 100 billion during the next five years on expansion programmes with a target to achieve ₹ 340 billion revenues by then. SCCL said the investment involves expansion of new mines, adding 800 MW to the existing 1,200 MW power plant and setting up 500 MW solar power project. The government-owned coal mining company is poised to clock ₹ 240 billion income this year from both selling coal and power and aims to take this figure to ₹ 340 billion in five years. Currently, the miner has 47 coal mines spread across the northern part of Telangana with about 10 billion tonne reserves. Under Sridhar, who took charge three years ago, SCCL has been showing growth in both production and dispatches. The average price of coal the SCCL sells currently is about ₹ 2,500 per tonne with different rate structure for power producers and others.

The government is looking at 2018 with renewed optimism for the coal sector in the wake of demand upturn and expecting 6-7 percent growth in supply of the dry fuel next year. Also, the government is hopeful of a better show by CIL which is expected to achieve an output of 600 mt in 2017-18. In 2017, there has been a resumption in demand for coal and this has been the greatest difference from the last year. Bottlenecks in coal supply to power plants turned out to be a big issue this year. While power producers held the coal ministry responsible for inadequate coal supply, the latter blamed the former for the low stock of fuel at plants. The coal ministry went to the extent of saying that there was no shortage of the dry fuel and power plants should have adhered to the Central Electricity Authority’s guidelines for stocking of coal. Hoping that coal supply will grow at 6-7 percent in 2017-18 compared to 2016-17, he predicted that 2018-19 will see a more improved performance. In October, the Karnataka government had asked the Centre to ensure adequate supply of coal and early allocation of a coal block in Odisha to meet the severe fuel shortage faced by power units.

To bring back lost coal freight revenue, the ministry of railways has prepared a scheme for a bypass rail route near the 35-km line between Chandrapura and Dhanbad that was closed due to underground fire at the Jharia (Jharkhand) coalfields in June. This will be funded by CIL, holding company of Bharat Coking Coal that operates the Jharia mines. Closure of the line meant an annual estimated loss for the railways of at least ₹27.5 billion. RITES, the railways’ engineering arm, was asked to do the detailed project report and the Railway Board is expected to approve the proposal the coming week. The earlier line went through Jharia and was under threat of caving in due to underground fire. On an average, the route used to carry around 25 mt of coal traffic a year, the annual loss of which was ₹ 25 billion. The line also used to carry 12.4 million passengers a year, leading to annual loss of around ₹ 2.5 billion. The railways had to shut the Dhanbad to Jharia route in 2007 for a similar reason. It is likely to be safe for operations from 2022 onwards. Only around 10 underground fires out of 80 have been extinguished since the government take-over of coal mines in 1971.

Polish companies may explore opportunities at commercial coal mining in India if conditions are right. The Indian mining sector has been using Polish technology and machinery extensively and many Polish companies are now looking beyond Europe to find new markets and opportunities. India is currently working on a methodology for offering coal blocks for commercial mining. The European country will showcase Silesia region in the Bengal business gathering as a potential region for economic partnership between Bengal and the province.

The power ministry has asked the coal ministry to issue directions to CIL to start coal supply to the winners of coal contracts auctions without waiting for approval from the power regulator Central Electricity Regulatory Commission (CERC). In a meeting held by the power ministry, representatives from banks expressed concerns about delay in issue of coal allocation letters to auctions conducted by CIL for PPA holders under Shakti, the office memorandum said. Signing of firm coal supply agreements may take 2-3 months after issue of the coal allocation letters as the requirement of PPA and approval of the appropriate commission may take time, it said. CIL’s board had approved the winning bids of a bunch of power producers including Adani Power, GMR Energy and KSK Energy who had quoted the highest discount in electricity tariffs to receive coal from the state-run miner.

The system of coal blocks allocation could undergo an overhaul, with New Delhi leaning towards the oil-and-gas industry model that involves sharing production or revenue instead of the existing practice of auctions. The coal ministry has set up an expert committee to examine challenges facing the current bidding system and to suggest changes to the process for conducting future auctions of coalmines. The formation of the committee follows an advisory by a government department to the coal ministry, pointing out the annulment of the last two tranches of coalmine auctions due to tepid response from the industry. The fourth and fifth rounds of coalmine auctions to non-power firms have been shelved as companies were not too keen. The present coalmine auction mechanism has become provided under the Coal Mines Special Provisions Act and the amended Mines and Minerals Development and Regulation Act.

The coal ministry is devising methods to penalise coal block operators falling behind targeted production and revenue payment to states. According to the coal ministry, of the 34 auctioned or allotted mines, vesting order has been issued for 29. Of these, 15 have started production of close to 15.32 mt. Coal production from the auctioned 29 mines stood at 15.32 mt during 2016-17. This, the government said, was close to the production by these mines in 2014-15 when they were re-allocated. Cumulative production was 15.8 mt then. Of the eight power companies that were allocated coal blocks, five have moved court to challenge the government’s decision to disallow pass-through of quoted discount on coal cost on the final power tariff. The Jharkhand government started marking forest and non-forest land for ease of doing business. But the process is far from over, thereby putting in soup a lot of coal mine owners who received the mine in the 2014-15 auction but haven’t started any work yet. After the Supreme Court cancelled all coal blocks allocation of the past two decades in August 2014, the ministry of coal started re-allocation reserves via transparent e-auctions. It allocated 34 operational coalmines to private companies through auctions and to states through allotment — for power and non-power sectors. The revenue estimated to be collected was ₹28.5 million over 30 years for mine-bearing states. In the first e-auction of coal blocks during 2014, 34 coal blocks went to private companies, including Hindalco, Balco, Jindal, JSW, Adani, GMR and Essar.

Rest of the World

China’s central government-owned enterprises will target coal capacity cuts of 12.65 mt in 2018. It provided a separate 80 mt target for consolidation of coal capacity by central government-owned firms in China, the world’s largest coal producer, this year. The NDRC, China’s state planner, said it planned to create several “super-large” coal mining companies by the end of 2020, each with capacity to produce 100 mt per year of coal by the end of 2020 as the world’s biggest producer of the fuel ramps up years of efforts to streamline the fragmented sector and slash outdated capacity. These super large companies will compete on the global market and help to modernise the sector.

Last year, China had more than 4,000 coal mines with a total capacity of 3.41 bt a year, the NEA said in November. Only six of China’s coal mining companies are currently capable of producing more than 100 mt per year, according to the China National Coal Association. Those include top coal miner Shenhua Group, China Coal Energy Group and Datong Coal Mine Group. The NDRC’s plan follows the acquisition last year of state power company China Guodian Group Corp by Shenhua to create the world’s largest utility. Among the steps proposed, the NDRC said it would encourage the coal industry to undertake more deal making with chemical coal, shipping and iron and steel firms. Under its five-year plan to 2020, China has pledged to eliminate around 800 mt of outdated capacity and add around 500 mt of advanced output. Coal output will be around 3.9 bt a year by 2020.

China’s top state coal miners have cut spot prices for the fuel to dampen a month-long price rally that was triggered after Beijing reversed a ban on using coal in households and some industrial plants amid the nation’s winter heating crisis. Seven firms in China’s top coal mining province of Shanxi, including Shanxi Coking Coal Group, Datong Coal Mine Group and Jinneng Group, have issued statements announcing have lowered their coal prices by 15-20 yuan ($3.10) per tonne, according to the CCTD. Except for Yangquan Coal Industry Group, who did not respond to Reuters, the coal mines confirmed the price adjustments as outlined by CCTD. The move came after coal prices jumped by more than 10 percent since heating season kicked off in mid-November, with demand at coal-fired power plants continuing to surge as freezing weather swept across the country.

China has urged coal miners to increase high-grade coal supplies to ensure heating fuel for winter, the NDRC said. The NDRC asked miners to put more high-grade coal projects into operation “as soon as possible”. Coal-fired power plants are also encouraged to increase their thermal coal stockpiles and upgrade

Chinese imports of coal from key supplier Australia slipped in November from a year ago, China’s General Administration of Customs data showed, hit by heavy traffic congestion in Australian ports. Shipments from Australia fell 0.3 percent in November from the same month a year ago to 5.59 million tonnes, customs data showed. That compared with October’s 5.61 million tonnes. More than 300 large dry cargo ships have been waiting outside Chinese and Australian ports in a maritime traffic jam for over a month, choking supplies to the world’s second largest economy. High-grade coal from Australia, with lower pollutants such as sulphides and higher energy value, has seen increasing demand from utilities and industrial plants in China. As part of battle against air pollution, China aims to reduce consumption of low-grade bulk coal by 200 mt by 2020. China is expected to import around 260 million tonnes of coal in 2017, according to data from China National Coal Association. Arrivals from Russia rose 10.9 percent from a year earlier to 1.92 mt in November, while imports from Mongolia were down 17.8 percent at 2.76 mt customs data showed. Indonesian coal supplies tumbled 33.9 percent from a year ago to 3.41 mt.

China’s industrialized province of Shandong plans to eliminate 10.23 mt of coal capacity, two days after the central government criticized Shandong officials for failing to take action to curb coal capacity. The Ministry of Environmental Protection (MEP) issued a statement accusing Shandong officials of deceiving authorities to evade capacity cuts in the polluting coal, steel, aluminium and chemical sectors. Criticism came after the central government dispatched inspectors to Shandong in August and September to check its environmental situation. Shandong said it has met the 2017 target of eliminating 2.55 mt coal capacity.

China has eased restrictions on coal imports by quickening the customs clearing process, dampening record high prices as cheaper foreign supply lands at ports. The country tightened imports by banning small ports from receiving foreign coal cargoes and delaying the process of issuing quality reports for imports from July 1. Traders said it took as many as 40 days to clear customs compared with one to two weeks previously. Prices of the most-active thermal coal futures have fallen more than 5 percent from a record high of 641 yuan ($98.77) per ton hit on December 18. Authorities at major coal import hubs have shortened the time it has taken to issue a quality inspection report for foreign coal cargoes and have cut random checks since late December. A campaign to switch millions of households from using coal to natural gas has created a shortage of natural gas, forcing factories and many gas power plants to shut. The campaign also unexpectedly boosted demand from coal-fired power plants, which are operating at higher rates to provide electricity for winter heating.

Asian benchmark thermal coal prices have pushed to their highest levels since 2016, fuelled by demand in China and loading delays in Indonesia that have ramped up shipping congestion outside major coal ports. Spot cargo prices for Australian Newcastle coal have risen nearly 15 percent from lows in late November after China loosened import restrictions to help meet a winter fuel shortage. The move by the NEA also followed an ambitious gasification program that moved too many households and factories from coal to gas for its utilities to keep up. Bottlenecks at import terminals across China and delays at loading ports in Indonesia’s Kalimantan island, one of the world’s biggest thermal coal mining regions have added to the tighter market.

Germany imports of hard coal in 2017 fell 10.5 percent to 51.2 mt from 57.2 mt preliminary data from coal importers’ lobby VDKI showed. The figure fell short of a VDKI forecast made last summer and mainly reflected a 16 percent fall to 36 mt in steam coal imports used by power generators Imports of coking coal used in steelmaking rose by 0.6 mt to 12.9 mt and those of coke, a related product, rose by 0.3 mt to 2.3 mt in 2017, VDKI data showed. VDKI said some old coal plants closed and wind power expanded helped by its higher priority on power networks

A company that plans to build a coal export terminal in the Pacific Northwest to ship western US coal to Asian markets sued the state of Washington for blocking construction last year. Lighthouse Resources Inc filed a lawsuit in federal court against Washington Governor Jay Inslee and two state regulators for allegedly violating the US Constitution’s commerce clause by denying permits to allow the company to ship coal mined in Wyoming, Montana and other western states through its proposed Millennium Bulk Terminal to clients in Japan and South Korea. Lighthouse Resources’ complaint, filed in US District Court in Tacoma, claims that state regulators “unreasonably” refused to process permits to develop a site on the Columbia River where an existing Washington state lease allows coal exports. Lighthouse, a privately held company based in Salt Lake City, said that by rejecting necessary permits, regulators imposed an “embargo” on new coal exports and discriminated against Lighthouse’s efforts to transport coal mined in Montana and Wyoming through Washington. The Millennium Coal Terminal is the last of six proposed coal terminals in the Pacific Northwest that was denied approval by state regulators or the US Army Corps of Engineers amid opposition from states and the Lummi Tribe, which argued that coal terminals interfered with their fishing rights.

The Czech Republic can seek hundreds of millions in funds seized by Swiss authorities from bank accounts linked to the disputed privatization of one of the nation’s coal mines two decades ago, Switzerland’s highest court said. The sale of lignite miner MUS became one of the biggest Czech post-communist privatization scandals, among a string of murky disposals of state-owned companies. Swiss authorities seized more than 660 million Swiss francs ($677 million), giving them jurisdiction over the case that delivered its verdicts in 2013. The Czech Republic had originally been excluded by the Swiss Federal Criminal Court from intervening as a private party after missing judicial filing deadlines relating to the case, despite saying it had been damaged by the MUS deal. The Swiss Federal Tribunal directed the Swiss criminal court to now take up the Czech claims. The tribunal, in Lausanne, also said its judges had rejected most of the appeals lodged by the five former MUS managers seeking to challenge their convictions four years ago in which they received prison sentences of 36 months to 52 months and financial penalties. MUS now has different owners, with its name changed to Czech Coal and Severni Energeticka.

CIL: Coal India Ltd, UHV: Useful Heat Value,  kcal: kilo calorie, mt: million tonnes, bt: billion tonnes, kg: kilogram, ROM: run of mine, PSU: Public Sector Undertaking, FY: Financial Year, MW: megawatt,  PPA: power purchase agreement, NDRC: National Development and Reform Commission, CCTD: China Coal Transport and Distribution Association, SCCL: Singareni Collieries Company Ltd, NEA: National Energy Administration, US: United States, MUS: Mostecka Uhelna Spolecnost

Courtesy: Energy News Monitor | Volume XIV; Issue 33

GST FOR NATURAL GAS: WILL IT TRANSFORM THE NATURAL GAS MARKET?

Monthly Gas News Commentary: December 2017 – January 2018

India

It literally took the country by storm six months back when dozens of taxes and levies were rolled into one, but as the new GST stabilises, its ambit is now likely to be increased by including natural gas in next couple of months. On July 1, when the new national sales tax was implemented, it was decried as technologically tedious and expensive and had potential to torpedo political prospects of the ruling BJP. While GST transformed India into ‘one nation, one market’ at the “stroke of midnight” on June 30, real estate as well as crude oil, jet fuel or ATF, natural gas, diesel and petrol were kept out of its purview. This meant that the products continued to attract duties like central excise and VAT. That may well change in 2018, at least for natural gas. The revenue department said as the Centre and states are assured of revenue flows, natural gas can be the next big item to be included. A 5 percent GST, equivalent to that being charged on coal, will benefit states in reducing price of CNG as well as cooking gas piped into kitchens. The Centre may try to bring up inclusion of natural gas at the next GST Council meeting in January. But doing so for other petroleum items could be difficult because the states and the Centre both get quite a bit of revenue from those items. The roll out of biggest tax reform since independence on July 1 was without undue disruption. The ‘one nation, one tax’ united at least 17 different central and state indirect taxes under one umbrella to cut tax evasions and reduce corruption.

India is discussing setting up refineries and LNG plants in Indonesia In an attempt to increase its presence in its eastern neighbourhood, India is selling diesel to Bangladesh via rail. India’s presence in the ASEAN region has been historic, one of the country’s oldest overseas oil and gas fields was acquired in 1988 in Vietnam. ASEAN region is also a source of crude oil and LNG to meet India’s hydrocarbon requirement. Last year, India imported 6 mt of crude oil from Malaysia, Brunei and Indonesia, accounting for 2.8 percent of the total crude oil imports, which is an increase of 12 percent from the year before. It also imported 1.45 mt of LNG mainly from Singapore and Malaysia accounting for 7 percent of the total LNG imported. India also imported one mt of petroleum products and some quantities of LPG from the region. There is a healthy collaboration between oil majors Indian Oil Corp (IOC) and Petronas of Malaysia. The two companies are working in India and third country. The Malaysian national oil company is a reliable partner in technology.

GEECL, India’s first producer of natural gas from coal seams, will invest up to ` 25 billion over the next three to four years to raise output. The planned capex of ` 20-25 billion will be for “drilling 144 new wells and laying internal pipelines” in GEECL’s Raniganj block in West Bengal. GEECL, the first to start CBM production in India in 2007, produces 0.57 million standard cubic metres of gas a day at the Raniganj block. The company has so far drilled 156 wells on the block which has gas reserves of 2.6 trillion cubic feet in place. The government has so far awarded 33 blocks for extracting CBM but only three have started production so far. While GEECL has been producing CBM for 10 years now, Essar Oil last year produced about 9,00,000 cubic metres a day from another block in Raniganj, RG(E)-CBM-2001/1. Reliance Industries Ltd (RIL) began gas production from its Sohagpur CBM blocks in Madhya Pradesh after winning extraction rights in 2002. ONGC has entered development phase in its four blocks including Raniganj (North). GEECL produces CBM from Raniganj (South) licence area, which covers 210 square kilometres, with 2.62 trillion cubic feet of gas reserves in place. The government is looking at raising share of natural gas in the energy mix to 15 percent by 2020 from 6.5 percent now, in a bid to cut use of polluting liquid hydrocarbon fuels. CBM production is about 1 percent to the total gas consumption.

GGL has increased the prices of natural gas supplied to its industrial consumers in the state. The public sector company has hiked natural gas prices — from ` 2.50 to ` 2.57 per scm following a steep rise in prices of natural gas in the international market. GGL, which provides PNG to over 3,000 industrial consumers across the state, has increased PNG prices for industrial units in Morbi by ` 2.50 per scm (from ` 24.87/scm to ` 27.37/scm). For industrial consumers other than those in Morbi, the prices have been raised by ` 2.57/scm from ` 26.59 per scm to ` 29.17 per scm. The new rates are effective from December 23 this year. The state-run gas company confirmed the price hike and stated that around 40% increase in LNG prices in the global market necessitated the price rise for end consumers in the state. GGL supplies 4.3 mmscmd to industrial units in Morbi, Vapi, Ankleshwar, Bharuch and Thangadh among others. It may be mentioned here that the company had in October this year increased PNG prices for domestic consumers by ` 0.95 (from ` 19.90 per scm to `  20.85 per scm) while CNG prices were hiked by ` 3.25 per kg (from ` 44.25 to ` 47.50 per kg). The price hike, however, seems not to have gone down well with industry. Ceramics industry is the largest consumer of GGL with gas consumption of 2.5 mmscmd.

AGL also has increased the prices of PNG and CNG for different segments including domestic, commercial and industrial in Ahmedabad and Vadodara. For residential (domestic) consumers, retail PNG price has been hiked by ` 1.20 per standard cubic meter (scm) to ` 21.36 per scm from ` 20.16 per scm (exclusive of all taxes). The company has raised CNG price by ` 1.85/kg to ` 47.80 per kg from ` 45.95 per kg (inclusive of all taxes). These revised prices are effective from January 2, 2018. AGL serves about 240,000 households and approximately 150,000 CNG users in Ahmedabad and Vadodara. As far as commercial and industrial segments are concerned, AGL has increased PNG prices (with minimum guaranteed off-take) for industrial consumers to ` 31.81 per scm, while the rates have been hiked to ` 45.17 per scm for commercial customers. Both these rates are exclusive of all taxes and are effective from January 1, 2018. Last year, ahead of assembly elections AGL had raised the prices of CNG and PNG (domestic) in the month of October but rolled back the hike on its own. Several CGD companies have increased natural gas prices after the central government’s move to raise domestic natural gas prices from October 1, 2017. In December, GGL, another CGD company, increased the prices of natural gas for industrial consumers.

Indian gas firm GAIL (India) Ltd is renegotiating its LNG purchase deals with US-based Cheniere Energy and Dominion Cove Point. GAIL has signed contracts for sourcing up to 5.8 million tonnes of LNG from the US. India wants to raise the share of natural gas in its energy mix to 15 percent in the next few years from about 6.5 percent now. But price-sensitive customers in the South Asian nation forced renegotiation of the price of two long-term LNG deals. Pricing of US LNG is linked to a formula but other charges including freight to India add an extra $2-$3 per million British thermal units, leading to GAIL scouting for destination, time and volume swap deals. India has in the past renegotiated LNG deals with Qatar’s RasGas and Exxon Mobil Corp as spot prices have declined substantially amid a supply glut.

The Union Cabinet has approved the signing of the MoU between India and Israel on cooperation in the Oil and Gas (O&G) Sector. The MoU is expected to provide impetus to India – Israel ties in the energy sector. ONGC has made a significant oil and gas discovery to the west of its prime Mumbai High fields in the Arabian Sea. The discovery has indicated potential in-place reserves of about 29.74 mt of oil and oil equivalent gas. Mumbai High, India’s biggest oil field, currently produces 205,000 barrels of oil per day (just over 10 million tonnes per annum) and the new find would add to that production in less than two years’ time. ONGC is carrying out a further appraisal of the discovery and has intimated upstream regulator the Directorate General of Hydrocarbons (DGH). The new find, which comes almost 50 years after ONGC began production in Mumbai High, will help the company maintain production levels from the basin for a longer time than currently estimated. Mumbai High is ONGC’s flagship oil producing assets.

Rest of the World

US dry natural gas production was forecast to rise to an all-time high of 2266 million cubic meters per day (mcm/d) in 2018 from 2084 mcm/day in 2017, according to the EIA’s Short Term Energy Outlook. The latest January output projection for 2018 was up from the EIA’s 2257 mcm/d forecast in December and would easily top the current annual record high of 2099 mcm/d produced on average in 2015. EIA also projected US gas consumption would rise to an all-time high of 2195 mcm/d in 2018 from 2096 mcm/d in 2017. The EIA projected gas’ share of generation would rise to 33.1 percent in 2018 and 34.3 percent in 2019 from 31.7 percent in 2017.

A Russian pipeline project that would boost Moscow’s ability to manipulate European energy markets can be slowed by Denmark but ultimately Germany would be needed to stop it, US State Department said. Russian natural gas company Gazprom and its European partners are seeking to build Nord Stream 2, a project to move gas to Germany under the Baltic Sea, bypassing existing land routes through Ukraine and Poland. Russia cut gas shipments in winter months in 2006, 2009 and 2014 during pricing disputes with neighbouring countries including Ukraine. Washington hopes to diversify Europe’s gas supply with shipments of US LNG, a business that has emerged recently with advent of the fracking boom. Currently 90 percent of US LNG goes to markets in Asia. But the exports are expected to soar in coming years as US facilities open, which could mean more will be available for Europe. Washington also supports other gas pipeline projects including the Southern Gas Corridor to bring gas to southern and central Europe from Azerbaijan and the Caspian Sea.

Europe will resume its role as a global gas sink from 2018-2020, absorbing surplus volumes of global LNG as supply growth outstrips demand. A recent report said that the region’s ‘large and liquidly traded’ gas hubs, strong pipeline interconnectivity, extensive regasification capacity, substantial volumes of flexible supply and price responsive demand will enable Europe to adopt this position. Europe’s role in rebalancing the LNG market was previously established from 2009-2011, when it absorbed volumes that had been backed out of the US market by the rise in shale and released them out to Asia following the Fukushima nuclear incident.

Norway’s pipeline gas exports to Europe hit a record high in 2017, exceeding the previous year by almost 7 percent. Europe’s second-largest gas supplier after Russia exported 116 bcm of natural gas via pipelines to receiving terminals in Britain, Germany, France and Belgium last year, up from the previous record of 108.6 bcm in 2016. Norway’s pipeline gas exports meet about a quarter of Europe’s demand. Norway’s export levels in 2017 were boosted by low summer maintenance at the country’s offshore gas fields, and higher output from its largest field, Troll. More than 40 percent of all exports went to terminals in Germany, and over 30 percent to Britain, with the rest shared between France and Belgium. The highest daily delivery in 2017 stood at 365.3 million cubic meters, the preliminary data showed. Norway’s annual export of gas to Europe has held at over 100 billion cubic meters each year since 2012.

Russia’s gas exports increased by 8.1 percent to a record high 193.9 bcm in 2017. Gazprom’s gas production, the world’s largest, rose by 12.4 percent to 471 bcm. Russia has dropped the requirement for Serbia to consume its gas only on the domestic market, a Russian government document published showed, allowing the Balkan state to re-export the fuel. The concession was made ahead of a meeting between Russian President Vladimir Putin and his Serbian counterpart Aleksandar Vucic in Moscow. Gazprom has made a number of concessions to consumers, including price reductions, as it faces increasing competition form other energy sources, such as liquefied natural gas, as well as political pressure in Europe, which has tried to cut its reliance on energy supplies from Moscow. The new document amends the 2012 contract for gas supplies until 2021 for the volume of 5 billion cubic meters per year. The government has ordered the Russian energy ministry jointly with the foreign ministry to conclude talks with Serbia and sign the protocol on changes to the 2012 agreement.

Ukraine’s Naftogaz and Russia’s Gazprom both claimed victory in a long-running gas dispute, each saying a Stockholm court had ruled in its favor over a gas contract. Gazprom appealed a May ruling by the court over a ‘take-or-pay’ clause in a 2009-2019 contract between the two countries. Naftogaz said the court had again rejected Gazprom’s $56 billion claim on this issue and other points. With its claim, Naftogaz had sought a lower price for Russian gas and disputed the take-or-pay clause requiring buyers to pay for gas whether they take physical delivery or not. Gazprom, however, said the court had backed most of its claims and ruled that the main terms of the contract between Naftogaz and Gazprom were valid. Gazprom said the Stockholm court had ordered Naftogaz to pay more than $2 billion to Gazprom for gas supply arrears and that it had also ordered Naftogaz to buy 5 bcm of gas from Gazprom annually from 2018. Pricing disputes in the past led to Russian gas supplies disruptions to Europe via Ukraine, including in 2009 and 2006. Since then Russia has been pushing for new pipeline projects via the Baltic and Black seas to bypass Ukraine. In a separate claim still pending before the Stockholm court, Naftogaz is seeking up to $16 billion from Gazprom in relation to a transit contract. A decision is expected in February 2018.

Beijing’s crackdown on pollution has put China on track to overtake Japan this year as the world’s biggest importer of natural gas, used to replace dirtier coal. China – already the biggest importer of oil and coal – is the world’s third biggest user of natural gas behind the United States and Russia, but has to import around 40 percent of its total needs as domestic production can’t keep up with demand. China still lags Japan, with gas annual imports of around 83.5 million tonnes, all as LNG, but its overall gas imports topped Japan’s in September and again in November, government data and shipping flows show. China’s three biggest LNG suppliers are Australia, Qatar and Malaysia, while pipeline imports come from Central Asia and Myanmar. A pipeline connecting China to Russia is under construction. As a result, Asian spot LNG prices LNG-AS have more than doubled since June to $11.20 per million metric British thermal units (mmBtu), their highest since November 2014, making LNG one of 2017’s strongest performing commodities. China’s surging demand already pushed it past South Korea in 2017 as the world’s number 2 LNG importer.

China’s NDRC said it launched an anti-monopoly investigation into 17 natural gas suppliers on December 20. NDRC said it was investigating whether the companies might have broken anti-trust laws amid surging gas prices driven by Beijing’s efforts to switch millions of household from burning coal to using gas for heating this winter in an ambitious drive to cut pollution. NDRC said PetroChina gas sales unit Qaqing was one of the companies under investigation, without identifying the others. NDRC said it had already punished four Chinese utilities for overcharging on heating fees and gas prices. Heilongjiang Zhongxin Power Heating Co, Zhejiang Haiyan Gas Co, Xuanhan Hexin Natural Gas Co and Shangdong Hengyuan Gas Station were fined a total 540,000 yuan ($82,430.16) for lifting gas prices without approval from central government, the NDRC said.

China plans to launch a natural gas exchange in Chongqing in early 2018, aiming to create an Asian price benchmark as the nation’s use of the fuel surges amid its shift away from coal. China is the world’s third-biggest consumer of natural gas behind the United States and Russia. An exchange in its fast-growing market would be a strong contender for an Asian gas marker off which other supplies in the region could be priced. The Chongqing Oil and Gas Exchange – supported by state energy majors, and private and local government-backed gas distributors – would provide a trading platform for domestic output, pipeline imports from Central Asia and Myanmar, and imports of LNG. Chongqing is China’s second attempt to develop a traded gas market, having set up a similar exchange in 2015 in Shanghai. An Asian gas price benchmark to stand next to those of the United States and Europe is seen as a key missing piece in establishing a truly global market for natural gas. China’s NDRC currently sets wholesale or city-gate gas prices by linking them to alternative fuels such as LPG and fuel oil. China is also struggling to build the infrastructure needed to freely distribute gas supplies. An inadequate pipeline grid and insufficient storage helped to trigger a supply crunch this winter after millions of households were switched from using coal to gas for heating. The exchange, though, is confident rising demand and slowly expanding gas infrastructure will help it succeed. Chongqing, with its population of more than 30 million and proximity to Sichuan province’s large gas basin, already has a relatively well-developed gas grid, and distributors there are keen to participate on the exchange.

GST: Goods and Services Tax, BJP: Bharatiya Janata Party, ATF: aviation turbine fuel, VAT: Value Added Tax, CNG: compressed natural gas, LNG: liquefied natural gas, mt: million tonnes, ASEAN: Association of Southeast Asian Nations, GEECL: Great Eastern Energy Corp Ltd, CBM: coal-bed methane, GGL: Gujarat Gas Ltd, scm: standard cubic meter, PNG: piped natural gas, mmscmd: million metric standard cubic meter per day, AGL: Adani Gas Ltd, CGD: city gas distribution, US: United States, MoU: Memorandum of Understanding, ONGC: Oil and Natural Gas Corp, EIA: Energy Information Administration, mcm/d: million cubic meters per day, bcm: billion cubic meters, NDRC: National Development and Reform Commission, LPG: liquefied petroleum gas

Courtesy: Energy News Monitor | Volume XIV; Issue 32