I N D I A ’S FIRST POWER MAGAZINE Volume 4 •No.

7 April 2000

PowerLine

2000-04 Coal Versus LNG The Best Bet for India

Mr. Vishvjeet Kanwarpal CEO GIS-ACG Global
InfraSys - Asia Consulting Group
Published: April 2000 by PowerLine

34 IPPs with escrow

39 Coal versus LNG
42 P.R. Kumaramangalam speaks out

Draft
53 Delhi Vidyut B oard’
s Jagdish Sagar
67 InFocus: Transmission and Distribution

Electrcity
Bill 2000
 IN THIS ISSUE

NEWS BRIEFS_ _ _ _ _ _ _ _ _ _ _ _ _ _ S_ Karnataka Power Corporation Limited 28 Recent Financings 51

Looking forward to KEB restructuring In India and Overseas

NERA 31
Lending expertise in reforms PEOPLE
BHEL 31 DVB’
s Jagdish Sagar 53
Focus on R&M CG EUN Power Systems’Karl Scherer 56
KERC’
s Philipose Mathai 56
Mixed performance 32
NCAER’s Rakesh Mohan 57
PSUs announce provisional results
Enron-lndia’
s Wade Cline 57
Havell’
s India 32 Power Grid’
s V.K. Garg 58
Strategy for growth Arthur Andersen’
s James Hogan 58

PROJECT WATCH____________ GREEN POWER_ _ _ _ _ _ _ _ _ _ _ _ _ _ _

IPPs with escrow 34 Solar energy 61
Signed or likely candidates Efforts in India

Cutting costs 64
SPECIAL STORIES _____ SCORE BOARD
Technological developments
SEB sources of power 36
Attempt at real reform 10 Generation and purchase for 1997-98
Draft Electricity Bill sparks
high voltage reactions SEB sources of power 37

Pipavav feels the heat 19

Issues raised with C E R C over
availability-based tariff
MP escrow for four IPPs
ST I Power finds a berth
Generation and purchase for 1998-99 ►lnFOCUS-4
TRANSMISSION & DISTRIBUTION 67
FORUM Privatisation of distribution
20 Coal versus LNG 39 State by state - key developments
The best bet for India Intra-state transmission network

Gujarat 20 Ongoing Power Grid projects

New reform strategy
Gridco
Seeks ABT deferment
P.R. Kumaramangalam speaks out
“It is time regulators started
23 becoming ruthless”
42
New Power Grid projects
A word from our sponsors

PTC 23 DIRECTORY OF PRODUCTS

RBI backs out AND SERVICES . 80
Patalganga 23
Revised PPA signed POWER DATA________________
Petronet LNG 24 Nuclear power status 82
N T P C gets a stake Around the world
New proposals 24 Nuclear electricity 83
PSU restructuring Nuclear energy in the next century 46 Share in total generation
Dividend tax 24 By Bertram Wolfe, ex-president,
Power generation statistics 84
Double burden American Nuclear Society
And latest fuel prices

COMPANIES_____________
FINANCE
Ogden Energy 27
Increasing its stake in India Malana Power 48
Timely financial closure

POWER L I N E •April 2000

 P O W E R F O R U M
Coal Versus LNG
The best bet for India
Vishvjeet Kanwarpal
Consultant
Asia Consulting Group
Power consultants discuss the thermal fuel strategy of the future and
which fuel type should dominate in the sector. Coal emerged as the pre­
ferred choice, with a smaller role for LNG...
What should our thermal fuel strategy be for
the future?
Vishvjeet Kanwarpal
India today is faced with an ill-boding ener­
gy situation. The country has no coherent
national energy plan or strategy, it lacks
vision for national energy security, it is
slowly being drawn into the trap o f heavy
reliance on imported fuels for power, and
cannot afford the implied forex exposure of
energy imports. Simultaneously, it posses­
ses vast natural coal and hydro resources
that it does not tap successfully. India must
balance these challenges and develop a
long-term sustainable and cost-effective
energy strategy.
In the light o f IPP development, imported
fuels have been bandied about carelessly,
without any due diligence o f the long­
term impact on the country. Initially, a few
brave companies proposed extremely logi­
cal and cost-effective pipeline projects
from the Middle East and Central Asia.
T he only problem was an unreliable
neighbour that could one fine morning
link continued supply o f gas to the
Kashmir issue!
Representative
MNC Coal Supplier
When liquid fuel projects were encour­
aged, we saw almost 35,000 M W o f
proposed capacity spring up based on
naphtha. Naphtha today lies disgraced.
Then, imported coal became the fuel-of-
the-day and there appear to be definite
merits to this option for projects located
far from Orissa and Bihar. Today we are
in the grip o f L N G fever, with 23 termi­
nals being proposed.
It can be rightly argued that project
finance - the ultimate touchstone - will
automatically weed out these wild plans.
But in the meanwhile, vast amounts o f
India should focus on coal
as the backbone of its
national energy strategy
and on pipeline gas for
eastern and northern
India. Limited LNG
imports are an inevitabil­
ity on the western side.
Vishvjeet Kanwarpal
POWER L I N E •April 2000
R.V. Shahi
CMD
BSES
energy, time and money are lost on unvi-
able schemes. At the end o f the day, India
loses credibility and investors joke about
the vast potential o f the Indian market,
which will always remain a “ potential”.
These developments reflect a few disturb­
ing elements regarding fuel strategy and
policy. First, there is no real focus on
indigenous coal, which fuels over 60 per
cent o f India’s power capacity. While in
theory, India has over 200 years o f coal
reserves, in fact, most o f it lies at depths
that are not readily accessible. Today,
approximately 70 per cent o f our coal
(ash-rock-mud) production comes from
open-cast mines. Open-cast reserves are
inadequate to meet the future require­
ments and are estimated to dwindle rapid­
ly within the decade. This poses an
ominous future situation for India.
Investment in shaft mines (where most of
our coal lies) is pathetic and productivity in
this sector is extremely poor. To offset the
shortage resulting from open-cast mines
requires massive investment and tech­
nology infusions, neither o f which is hap­
pening. Additionally, the gestation period
o f shaft mines is about five years. If nothing
is done soon on a war footing, India may
find itself speaking o f its indigenous coal
potential the same way as it boasts o f its
80,000 M W hydro potential today.
39
POWER FORUM
The panacea is clear. Invite private and
foreign participation aggressively, provide
clear incentives and take steps to rescue
the sector from the formidable “ coal-
mafia”and counterproductive labour laws.
Representative
The focus must be on the most cost-com­
petitive fuel, i.e. the ones that would pro­
vide lower generation costs resulting in
lower tariffs. T he dynamics o f fuel supply
should consider which fuel can produce -
and sustain in the long term - the lowest
final tariff, and can support a decent level
o f growth/availability in the future. But it
is critical that for the above to be effective,
the inefficiencies in the market are cor­
rected, the main one being the need to
have an integrated transmission grid for
the entire country. As the grid is not inte­
grated yet, everything is possible - even
high-cost liquid fuels may play a role.
R.V. Shahi
Before commenting on the thermal power
fuel strategy, it needs to be brought out that
the hydroelectric proportion has declined
considerably. It is necessary to substantially
augment the hydroelectric power capacity
by fully exploiting the potential available
within the country as also through the
hydroelectric programmes in collaboration
with Nepal. In the next 10 to 15 years all
efforts should be made to see that the
hydroelectric capacity is restored to about
40 per cent o f the total capacity. As far as
the strategy for development o f thermal
power plants is concerned, we must encour­
age large coal pithead power stations.
N TPC’ s experience with developing these
power stations in the last 20 years has been
highly rewarding. In fact, it is these power
stations, together with similar power devel­
opment by SEBs, that are providing cost-
effective and economical power to the
system. Nuclear and gas-based power sta­
tions also have a definite role. But keeping
in view the size o f the problem, and there­
fore the need for massive capacity addi­
tions, both the sources would no doubt
contribute in the overall thermal power
development programme. We will have to
continue to depend heavily on coal-based
power stations because this is an indigenous
fuel and is available in abundance.
40
However, environmental considerations
will have to be kept in mind and all possi­
bilities will need to be explored to make this
fuel more environment friendly. Clean coal
technologies aimed at alternative methods
for exploiting this fuel for power generation
need serious efforts. It is in this context that
coal benefaction, IGCC, coalbed methane,
etc. have to be brought out from experi­
mental and prototype stage to commercial
stage and studies need to be made to see
that they are made cost effective.
Simultaneously, the latest environmental
technologies to take care o f emission and
pollution problems and appropriate man­
agement o f ash disposal, including its utili­
sation, have to be given serious attention.
All o f us need to recognise that it is coal that
will support, to the greatest extent, the
Coal definitely has a
leverage compared to
LNG, as power generation
with coal results in lower
costs... LNG could also
play a role but, because
of its higher costs, it
would most likely be a
“nice second player”.
Representative
power development programmes in India
and therefore, we can no longer afford to
not develop new approaches and methods
to use this fuel fully.
Which fuel should play a bigger role in the
future - coal or LNG?
Vishvjeet Kanwarpal
For island nations poor in energy
resources such as Japan, Korea and
Taiwan, L N G is a natural choice. It offers
a long-range lock-in energy security and
meets the relatively high environmental
standards in these countries. The credit
rating o f the offtakers in these countries is
very sound and L N G makes obvious
sense. L N G is a peculiar fuel in that it
requires a very rigid offtake guarantee and
payment security. Fluctuations in offtake
POWER L I N E •April 2000
and payment can seriously jeopardise the
project financials. T he L N G market today
is a buyer’s market and unless the rules set
by the Japanese change, it is an expensive
and unforgiving option.
For countries such as India, L N G is really
necessitated purely by the failure o f the
Gulf, Iran and Central Asia gas pipelines.
Several countries within pipeline reach of
India have large reserves o f gas, no real
markets and can offer an extremely cost-
competitive solution to India’ s energy
needs. India offers an ideal long-term mar­
ket for these countries. However, due to
the relations between India and Pakistan,
none o f these is likely to materialise, forc­
ing India to examine the more expensive
and risky L N G option.
The only real gas options for India at the
moment are L N G from the Gulf and gas
from Bangladesh. Two L N G terminals are
viable and likely to happen in the western
region. From a pipeline infrastructure per­
spective this is a positive development.
M ost o f India’s gas resources are located
off the coast o f Gujarat and Maharashtra.
As gas has been struck off the coast of
Karachi there are likely future reserves in
this area. When and if these materialise
they can be absorbed into the gas grid.
On the eastern front, India should aggres­
sively develop the Bangladesh option.
Here too politics has played an extremely
retarding role. Bangladesh has minimal
use for its gas reserves and is obsessed with
value-added options such as gas-by-wire
and even proposing L N G as an option.
The only real choice before Bangladesh is
to export the gas to India and earn hand­
somely while investing minimally in value-
added options. The first stretch o f the
eastern Bangladesh pipeline should con­
nect eastern India and HBJ at the J-point.
Another line should carry the gas south
from Bangladesh.
In the long run, it is conceivable to create a
third pipeline connecting the two southern
gas grids in the south. This would complete
a diamond-shaped national gas grid and
would provide the ideal mechanism to
absorb future sources o f gas - be they in the

Arabian Sea, the Middle East, Bangladesh
or Myanmar. But this is still quite far off.
In summary, India should focus on coal as
the backbone o f its national energy strat­
egy and on pipeline gas for eastern and
northern India. Limited L N G imports are
an inevitability on the western side. The
ideal would, o f course, be pipeline gas
from Iran and the Middle East but that
may well remain a pipe dream.
What is very clear in all three cases - pri­
vate sector coal development, Bangladesh
gas and Middle East pipeline gas - is that
politics rules over project sense. It is imper­
ative that India traverses an energy strategy
course by design and not find itself trapped
in an imported energy bind by default.
Representative
Coal definitely has a leverage compared to
LNG, as power generation with coal
results in lower costs. With current tech­
nology, coal-fired boilers could produce
energy reasonably efficiently and reason­
ably clean compared to gas, except for N ox
and C o 2, which, in principle, should not
,be a problem for India compared to devel­
oped countries with much higher levels o f
industrialisation where C o 2 and global
warming issues are more severe.
Domestic coals could have a reasonable
advantage compared to other fuels if min­
ing is concentrated in the large and shal­
low open-cast operations maximising scale
and therefore reducing unit costs. If such a
scenario is achieved, power could be trans­
mitted, for example, for 1,000 km and still
be competitive at a benchmark level of,
say, Usc5/kWh at delivery point. Imported
coal-fired stations could complement this
where distance from the large and shallow
coalfields exceeds 1,000 km, for example
Gujarat, the Mumbai region and
Rajasthan. Also, it is expected that these
coastal imported coal stations would be
necessary to coexist in order to stabilise
the grid, given the large transmission dis­
tances involved.
L N G could also play a role but because o f
its higher costs, it would most likely be a
“nice second player”.
POWER FORUM
R.V. Shahi
T he Oil and Natural Gas Commission,
the Gas Authority o f India and other
organisations are trying to explore all pos­
sibilities to increase the availability o f gas.
This would definitely lead to capacity
additions. Natural gas available elsewhere
in the world can be liquidified, transport­
ed and regasified for using it in power sta­
tions. However, the economics o f L N G
use have to be carefully considered. There
are two important implications - liquidifi-
cation, transportation and regasification
jack up the price o f L N G significantly as
compared to the original price. Second, a
substantial part o f the cost o f delivered
L N G gets linked to foreign exchange. As
such, both the price as well as foreign
exchange fluctuation are going to substan­
We will have to continue to
depend heavily on coal-
based power stations....
But all possibilities will
need to be explored to
make this fuel m ore envi­
ronment friendly.
R.V. Shahi
tially affect the cost o f generation. With
crude oil at $18 a barrel, a few gas agencies
were indicating that L N G would be avail­
able at the rate o f $4 per month, BTU
exclusive o f customs duty. N ow crude oil is
almost $28 to $30 per barrel, which means
the price o f L N G would accordingly have
increased further. This might mean that
per unit o f electricity, the fuel cost itself
would be more than Rs 2. Security o f sup­
ply on a sustained basis is another aspect
that would have to be kept in mind. In the
light o f the above, L N G will add to the
Indian thermal power capacity addition
programmes, but I do not think it will be
anywhere near the size o f capacity addi­
tions expected from coal-based power sta­
tions. It is economically not feasible and
therefore not desirable. In fact we may
consider, as a substitute to the extent we
can, the gas available in Bangladesh, just
like we have to consider seriously the
hydroelectric potential o f Nepal. ■
P O W E R L I N E •April'2000 41