Coal sector needs rapid capacity addition

In 2010, the top priorities for the coal sector should be energy security, conservation, and environmental issues, says Arun Srivastava, Executive Director, IRG (Infrastructure, Real Estate & Government) practice, Ernst & Young. “At the grass root, we must ensure rapid capacity addition to achieve service standards and affordability,” he adds, during a recent email interaction with Business Line.

Excerpts from the interview.

At the start of the century, or even mid-decade, what were the policy expectations to be fulfilled by the end of the first decade?

Of the many expectations on the policy front at the beginning of the millennium, the most important one was of a new Act providing the much-needed direction and impetus to the sector.

Expectations were also on enhanced private participation through the mega power projects – calling for a changed policy in this regard. Reformed sector (SEBs) and a more competitive market were again very much expected.

Introduction of Standard Bidding processes and documents were expected to further streamline project development process and support increased private participation. There was also an unexpressed expectation of seeing some tangible reforms in the coal industry.

At the close of 2009, where are we?

While the expectations on the policy front were met, the country is still unable to enthuse the private sector adequately. The pace of development shows that we not only need to work further on the foreign investments, but the needs of the domestic investor merits attention too.

While the Government policies and the requirements of the processes, especially under Case-I, need better alignment; those with regard to private sector participation need a paradigm shift.

To encourage private investment all that we seem to have done is to permit the private sector to participate in an environment essentially created for the public sector. We must realise that there are fundamental differences in the way the two operate, perceive and mitigate risks and evaluate an investment opportunity.

The private investor manages risks through alternative arrangements, which don’t exist in the power sector. We must also be mindful of the fact that while the public sector is sector-bound, the private investor is not. The subdued private participation is reflection of this reality.

The sectoral reforms were reluctantly carried out in most States – perhaps due to the humungous burden of commitments required for any meaningful reforms. Real competition is still some distance away in the sector. The competition that the sector has witnessed so far is generally in the area of power supply where the market conditions only push up the offer price.

For 2010, what should be the agenda?

The year 2010 and beyond must focus at a higher level, on energy security, conservation and environmental issues. At the grass root, we must ensure rapid capacity addition to achieve service standards and affordability. Private sector is the most dependable bet for this to happen.

Private participation must not be just allowed but ensured by providing alternatives to hedge project risks and this is most urgently needed in the coal sector – the mainstay of Indian power sector. While imports could be an option for coastal regions indigenous coal remains the best bet for the rest of the country and alternatives must be created to ensure its availability.

The focus must also shift on adequate development and offering mature projects to the market. There can be no better manifestation of the effect of project development on the risk perceptions and the resultant tariffs than the comparison of tariffs in case of UMPPs with those under Case-I. The differentiator is management of project risks through project development.