Can't sink shareholder money into new thermal project: Sanjay Sagar

Interview with CEO & Joint MD, JSW Energy

JSW Energy has posted profits for the quarter, unlike its power sector peers. While the good news for the company came from lower international coal prices and stable merchant power prices, there could be issues ahead for the company. Sanjay Sagar, chief executive officer and joint managing director of the company, tells Katya B Naidu how thecompany is gearing to meet power sector challenges. Edited excerpts:

JSW's performance in the last quarter has been good due to mellowed international coal prices. How long do you think this state of stability will last?
Given the economic conditions in Europe and the increasing dependence of the US on shale gas, I think imported coal prices are going to remain depressed for some time to come. However, there are some problems in Indonesia like government curbs on various activities like transportation, barging. Due to lack of availability of Indonesian coal, the price is showing a slight upturn. These are temporary issues. I expect the international coal prices to remain subdued for at least this financial year or so, not more.

Does that give you enough time to sign power-purchase agreements (PPAs) with a view on coal prices?

We can sign one or one-and-a half-year PPA, yes. But, there are not many takers for PPAs of these durations. Utilities are coming out with two to three month tenders. Maharashtra is repeatedly coming out with one to two month tenders. This is the area where we have a problem. We have been asking the state to come out with longer term tenders but so far they have not taken a decision on that.

What is the maximum term period of PPAs that you are looking to sign?

At the moment, we can't go for PPAs longer than one or two years because six to seven years is too much of a gamble, unless of course, there is a utility which is willing to do a PPA with a coal price fluctuation pass through. In that case, we will be willing to sign even a 25-year PPA. There is a trend where the government started realising the coal variations will have to be absorbed by the consumer ultimately. But, that has still not set in, it's not come down on paper, it's not implemented so to say.

JSW has already frozen a lot of power projects based on domestic coal. When do you see the domestic coal situation improving?

Coal India is still talking about shortages of 20 per cent or more despite their increased production, even with respect to all the fuel supply agreements (FSAs) that they have signed. Getting into a new FSA is going to be very difficult because the government would want a long-term PPA before that, which is not coming. It is a vicious circle. For long-term tenders to come out, the government should work on standard bidding documents, which is still with the government. I cannot go and set up a merchant power plant as Coal India is not going to give me the coal. There is no coal in the private sector. Ideally, I would want to see Coal India being unbundled and this monopoly being broken but this is not going to happen. In these circumstances, it would be very unreasonable for me to go and sink my shareholders' money into a new thermal project.

The demand-supply dynamics of the power sector have also changed as many states are power surplus. That does not seem like good news for merchant power prices, which are not going up as expected.
We all know the country has power deficits. The government keeps throwing numbers like 50,000 Mw, etc, but simultaneously, you have got a state like Maharashtra, which does not want to buy any power. It is the most industrialised state in the country, which is asking us to back down our units at night. I personally feel that it has more to do with the industrial or the economic slowdown. The consumption has gone down.

There is also news of power plants are getting backed down in states like Haryana though Haryana is highly power deficit. Farmers in the state and Gurgaon face six to seven hours of power cuts. Half the buildings in Gurgaon operate on diesel generators. One can call a state power surplus but what we need to check back is if every citizen in that state is getting 24 hours power or not. It is only after that you can call a state power surplus. So, although power surplus states are there, there is no power supply.

This would also mean merchant power prices will remain depressed, which is not good news for companies like yours that sell almost half their generation on a merchant basis. How would you cope with such situations?

At the moment, merchant prices are certainly depressed in the western sector. But, the southern sector is going to more than make up for it. Also, I do not see this depression in demand lasting very long even in the Western sector. So, as the demand picks up, the demand of western utilities will also go up. We are also heading into an election year which has always been good news for power generators.

Elections in some states have not resulted in a good rise in merchant power prices, as happened in the last elections.
I am not expecting merchant power prices to go up to Rs 14 a unit or Rs 17 as they did the last time. We do expect them to rise slightly. I would be satisfied with anything between Rs 4.50-5.

Will the margins in merchant power prices remain muted?
With lower international coal prices, cost of generation is depressed. Depreciation numbers for our power plants are also coming down. We are not really in the business for selling power at 300 per cent or 400 per cent profit. This is an infrastructure industry and I firmly believe that the generator should be willing to run it on sustained basis on reasonable returns. If we look at abnormal returns, it is not going to last very long. It has to be a straight line balance sheet. Anything around 16 per cent is a very reasonable return, and this can absolutely be sustained.

Are all your plants yielding these kind of returns?
At the moment, they are not. Some are lower, some are higher. Ideally, 60-70 per cent of my power should be tied up with long-term PPAs. But, that is just not happening, due to lack of long term tenders.