Virus Affecting Execution, Not Strategy: Q&A

By Vandana Gombar, BloombergNEF. This article first appeared on the Bloomberg Terminal.

The 21-day lockdown imposed by India to deal with the new coronavirus has hit India’s power demand, and will impact new power projects in the pipeline, according to the $3.9 billion Tata Power Company, one of India’s largest power generators in the private sector with 11 gigawatts of capacity.

“We do expect some impact. However, it is too early to assess,” Praveer Sinha, the managing director and chief executive officer of the company said in an interview to BNEF.

The immediate focus is to keep the power supply on. “All our plants at various locations are operating at full capacity. As a utility and an essential service provider, we have to brave such pandemics.”

Tata power’s capacity mix is dominated by thermal plants. It is currently working through a transition plan that has three pillars:

  • 70% renewables capacity by 2025
  • Expansion in power distribution to 20 million customers, from 5 million currently
  • Larger footprint in services, including electric vehicle charging and home automation

Though the medium- to long-term strategy is not impacted for now, “the toughest challenge about dealing with Covid-19 is the uncertainty of everything,” Sinha said.

The interview was conducted at his office Mumbai, with some queries answered via email.

Q: What has been the impact of the lockdown on the power demand from your coal plants, and renewables plants?

A: As a utility and an essential service provider, we have to brave such pandemics alongside doctors, law enforcement and other essential services. All our plants at various locations are operating at full capacity, including maintenance of the transmission and distribution network. It is huge challenge for all of us to ensure that all our employees including contract workers are properly taken care of in their travel, stay, food and safety aspects so that they can operate the plant and systems seamlessly.

Q: How does the lockdown affect the projects in the pipeline?

A: We do expect some impact. However, it is too early to assess. As of now, we are too busy running our operations to keep the power supply on in various parts of the country.

Q: Tata Power is a company in transition, with many elements to that transition. How will Tata Power of 2025 be different from Tata Power of 2020?

A: Today we are a 11,000 megawatts company, of which about 7,200 megawatts are coal- and gas-based, 2,600 megawatts are wind and solar, 700 megawatts are hydro power and another 700 megawatts solar are under implementation. The thermal generation share is 65%, while the clean power share is 35%. In 2025, I would guess it will turn the other way around: we would be 65-70% of clean power, and maybe 30% of coal. All the new capacity additions will be through renewables, primarily solar, but there would be some wind too and also storage projects.

Renewables would include not just large utility-scale, but solar pumps and rooftop solar, which we are going to offer in 100 cities. We have our ambitious target to set up 10,000 micro grids [in partnership with Rockefeller Foundation]. We will also do hybrid solutions with a mix of solar, wind, storage and demand response. A whole set of renewables solutions will come to the market, and we will be big players in that.

The second area where we will be big is distribution. Right now, we are in the cities of Delhi, Mumbai and Ajmer, with about 2.5 million customers. The Orissa CESU [Central Electric Supply Utility of Orissa] will soon add another 2.5 million consumers, so we will be at 5 million. Our target is to add another 3-4 similar licenses in next 4-5 years, to grow to 20 million customers by 2025.

The third big area is energy services, which includes electric vehicle charging, home automation, energy conservation, smart grid solutions, smart metering and the data analytics of that. We will now be focusing most of our energy on low capex, asset-light projects. There are the three big pillars for Tata Power’s future growth plan.

Q: Do you see Covid-19 impacting the medium-term strategy of the company: to increase the share of clean power, expand the power distribution business and grow the energy services business.

A: Not really. The long-term strategy is not impacted. However, the speed of deployment and execution in all industries and countries has been affected due to this pandemic. The toughest challenge about dealing with Covid-19 is the uncertainty of everything.

Q: The one thing that does not fit in with the transition theme is that you have identified thermal power generation as a “key growth area” and you also have plans to grow your coal-based portfolio through the inorganic route. Would you then be able to meet your 70:30 target of clean power to thermal power?

A: On coal-based, we have taken a stand that we will not build any new greenfield plant or do a brownfield expansion of our existing plants. On the Resurgent platform, where we are a 26% shareholder [Resurgent Power Ventures has ICICI Bank, Kuwait Investment Authority and State General Reserve Fund of Oman as partners], we bring our expertise in running these plants. These are plants that are established, and floundering for whatever financial and technical reasons. We are taking it up and making it more efficient. We took over Prayagraj Power plant [which owns and operates a 1,980 megawatts supercritical power plant in the state of Uttar Pradesh], on December 11, and in February the availability of the plant went up to 100% from 50%. That is the difference we are going to bring.

We are not adding extra carbon to the portfolio, but trying to optimize an existing asset. We set up this platform four years back, and we have just done one transaction. We may end up doing one more maybe. Not many plants meet our criteria in terms of size and efficiencies. We look at 600 megawatts or 660 megawatts supercritical units already having power purchase agreements. We make a coal plant a bit cleaner by generating more power per unit of coal used.

Q: On distribution, what attracts Tata Power to this opportunity?

A: Unfortunately, distribution has been a monopolistic business mainly run by government-owned ‘discoms’. Most of the discoms are incurring huge financial losses and are highly inefficient, with little or no automation and technology intervention. Tata Power, with its domain knowledge and experience, is best placed to provide reliable and affordable power, and also an enhanced service experience to the consumers. That is our core competence, and this is what we will do in Orissa. In terms of technology absorption, and in terms of technology use, we are maybe two to three years ahead of other private sector competitors, and maybe 5-6 years ahead of government-run distribution companies.

Q: Power Minister Raj Kumar Singh, in a recent interview with BloombergNEF, said that his first priority is viability of the system. He is proposing prepaid smart meters for every user in the country. Do you think that is a move to be recommended?

A: We are talking about 250-260 million smart meters to be replaced. It is a humungous task to get these manufactured and installed. You also need to create a strong and robust communication system, collect data, analyze it and use it intelligently. It is in the right direction, but you need to do many more things along with the smart metering agenda: distribution automation, Scada system, outage management system, GIS [Geographic Information System] – you need to have a whole chain of foundational technologies over which the smart meter sits and provides intelligent solutions. We are also moving to smart meters for our customers in Delhi and Mumbai.

Q: The minister also spoke about limiting cross-subsidization to ensure competitive tariffs for commercial and industrial customers. What is the experience in your distribution zones?

A: The regulator decides the tariff. It is the obligation of the regulator to see that cross-subsidy is limited. If Indian industry has to compete globally, it needs to be done. Our cost of power has to reduce. Globally, the industrial and commercial tariff is lower than the domestic tariff, but because of the populist nature of the governments in the country, they give subsidies to residential domestic consumers. If the government desires, they should be giving subsidies directly – through a direct benefit transfer, or DBT – rather than putting this burden on other consumers, especially industrial and commercial consumers.

Q: What would be a competitive tariff for industry or commercial users in India, on average?

A: I think 6 rupees [$0.08] per unit would be a very good tariff. If the minister can limit cross-subsidy, and bring power tariffs down, I think this will be the biggest service he will be doing to make Indian industry and businesses competitive globally.

Q: You are building 10,000 microgrids, when the grid has reached over 99% of households. What is the business case there?

A: You said households. What happens to the commercial users, shops there? The atta chakki (flour mill)? They still use a diesel generator set.

India’s per-capita consumption is 1,100 units. In villages, it is not even 100 units. The microgrids are small – 30-kilowatt units – aimed at not only supplying electricity to households but also supplying micro-enterprises. This encourages consumption of electricity, thereby creating an ecosystem for development.

It has been our endeavor to make the microgrids commercially viable so that it can be scaled up to reach a large number of villages. We may look at scaling this up to 50,000 once we complete the 10,000.

Q: Is power demand a concern?

A: In the long run, unless distribution reform takes place, and the financial conditions of discoms improves, supply and consumption will be a constraint. There is a lot of pent-up demand or suppressed demand in semi-urban and rural areas. Once the reform takes place, the demand can go up by 30-40% over a period of two-three years.

Q: If each retail consumer in India was given an option to consume 100% clean power, how many do you think would switch?

A: I have not done any survey. My guess would be about 50% would shift. There are many youngsters (Millennials, Generation Z) who would believe in doing it, aspirationally.

 

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