When Bloom Energy first got in touch with Girish Paranjpe with a job offer, he was puzzled. So was everyone else when he accepted. Bloom, founded by India-born K.R. Sridhar, a former NASA researcher, is considered one of Silicon Valley's hottest start-ups. But unlike software firms that make Palo Alto a feted name, Bloom is a company specialising in fuel cells that convert air and natural gas into electricity without combustion. Paranjpe had spent the last 20 years in a different world, dabbling in software at Wipro Technologies, where he was the joint CEO at the time of leaving.
But he found a compelling reason to take the plunge into an industry he had never worked in before. "Every country, whether developing or developed, is uncertain about energy. They are concerned either about cost or security,'' says Paranjpe, who, as Bloom Energy International's Managing Director, will develop markets outside the United States, especially - you guessed it - India, China and Brazil.
The uncertainty that Paranjpe flags is manifested in recent moves across Corporate India. Madras Cements has invested Rs 1,000 crore in power. Wind power. The 185 MW generated by this project will take care of half of the company's needs and protect it from tariff increases. Captive power plants are not new to companies, but a captive wind power project is.
As is solar, which is what Thermax has plumped for. The Pune engineering company has set up a 100 kilowatt, or kW, air conditioning system in Gurgaon which runs on solar power. This installation, based on what is called 'triple-effect absorption' technology, takes 30 per cent less space and delivers one-fifth more cooling efficiency.
These are not stray instances. As the Indian economy hurtles down a path of breathless economic expansion, there is a fundamental shift taking place in the way companies look at energy - both in terms of future availability and strategies to deal with rising prices (driven by soaring input costs).
"India needs to consider all modes of power generation to fuel its economic growth," says Gopichand Katragadda, General Manager with GE's India energy operations. Going by projects on the ground, he says, India will move from the current 170 GW - a GW, short for gigawatt, is equal to 1,000 megawatts, or MW - in installed capacity to about 400 GW by 2025. "But the need is 700 GW even by average consumption calculations."
If ratcheting energy demand in the world's second-fastest growing economy is the cause for immediate pain, the root of India's energy troubles lies in its dependence on coal. In 2010/11, 83 per cent of the 811 billion units of electricity produced came from plants running on coal. This is unsustainable and even the government admits so.
"Coal availability will be a major constraint," the Planning Commission said in April. "On an optimistic assumption about Coal India's production, we will need to import 250 million tonnes in 2017/18." The gap between domestic supply and demand is already at 142 million tonnes, which is met through imports. Investment bank Goldman Sachs reckons 31 per cent of new power capacity coming on stream in the next three years will be "at high risk".READ
: Delays in allotment of coal blocks casts shadow on power situation Hauled over the coals
The output of government-controlled Coal India, which produces four-fifths of the coal consumed in the country, meanwhile, is growing at a slower pace. It is likely to finish the current Five-year Plan, ending March 2012, with a meagre 4.37 per cent increase in output, down from 5.4 per cent in the last Plan. Much of the slowing momentum at Coal India is put to environmental clearances for new mines. Of the 250 billion tonnes of coal reserves in the country - the second-largest in the world - Coal India has captive blocks of 100 billion tonnes. The rest have either not been allocated or given to private miners. Of the 208 captive coal blocks earmarked for private miners, just 26 have started production.
A large dose of private sector investment is needed both in mining and in generation, transmission and distribution of electricity: B. Muthuraman, President
Electricity regulator Central Electricity Authority, or CEA, estimates a third of the shortfall in power generation in India in 2010/11 was caused by coal shortage. That continues into 2011/12. In April, the country's thermal stations got a total of 32 million tonnes of coal - four million less than needed. At the end of the month, 28 power stations had stocks for less than a week and 10 of them for fewer than four days. Anything less than three weeks is considered unsafe. (See Sweat It Out,
BT, June 26, 2011.) Predicting a coal shortage of 54 million tonnes this year, CEA has advised power stations to be ready to import coal.
Domestic coal prices, which had remained flat for six years, rose a sharp 30 per cent in February this year, which surprised industry experts, given that Indian coal, with as much as 40 per cent ash content, is considered inferior in quality. Depending on the quality of domestic coal, buyers pay anything between Rs 500 and Rs 4,000 a tonne today. And, as global manufacturing returns to healthy levels and China shows no signs of slowing down, international prices, too, have been on the upswing - they have already risen almost 40 per cent in the past 12 months.
At energy research and consulting firm Wood Mackenzie, Prakash Sharma, a coal analyst, is predicting demand for thermal coal, the kind used to fire power plants, "will more than triple in volume by 2030, mainly fuelled by the insatiable demand of China and India". In the immediate term, Sharma foresees pain at the buy side in India. "By 2012 and 2013, we see a return to more robust demand growth, mostly from India, but also from China and Japan... Supply and port capacity will remain relatively tight supporting higher prices in 2012 and 2013," he says.
Rays of hope
Magarpatta City near Pune
Innovative efforts to improve energy efficiency
Magarpatta City, an integrated township near Pune, has a biogas plant. It also has one of India's largest residential water-heating systems, powered by solar panels.
The Saibaba Sansthan, Shirdi, has the world's largest solar steam system. It generates about 3,500 kg of steam to cook food for 20,000 people daily, saving 100,000 kg of LPG a year. There are similar systems at Mount Abu, Tirupati and Sathyabama University, Chennai.
The Energy and Resources Institute has a smart mini-grid at its training facility near Gurgaon, which can generate 117 kW of energy from sources such as wind, sunlight, biomass and diesel.
Thermax has installed a 100 kW solar air conditioning system at the Solar Energy Centre, Gurgaon, which needs 30 per cent less space and has 20 per cent greater cooling efficiency
Outside coal, the picture is not much brighter. Take oil and gas. India imports 84 per cent of its oil needs. Crude prices have been on the boil due to the tensions in West Asia and North Africa. The prices have risen from $80 a barrel last October to $112. Goldman Sachs expects Brent crude to touch $120 per barrel this year and $140 next.
To be sure, doomsday predictions of surging oil prices have not played out to script many times. Gas output in the country has failed to keep up with estimat e s . Reliance Industries's famed D6 in the Krishna-Godavari Basin contributes 32 per cent of the total gas produced in the country, but it pumps out daily just 50 MMSCMD, short for million metric standard cubic metres per day, down from 60 MMSCMD, because of reduced pressure and expects to reach peak production of 80 MMSCMD only after a year.
The gas is now being supplied on priority to the fertiliser industry and the power sector, leaving steel, sponge iron and other sectors starved. "We are in the grip of a serious energy crisis," concludes Kameswara Rao, Leader, Energy, Utilities and Mining, PricewaterhouseCoopers India. Global resource chase
Gautam S. Adani, Chairman of the Rs 28,000-crore Adani Group, is a celebrity in Australia. Queensland Premier Anna Bligh was at hand when Adani opened his offices there last year. Adani's tryst with Australia began last August when he acquired Queensland's Galilee Coal Tenement for Rs 12,600 crore. In May this year, Mundra Port, another Adani company, said it was acquiring Queensland's Abbot Point Coal Terminal for Rs 9,000 crore. The group is contemplating a railway line from the mine to the port.
Adani's love for Australia is rooted in Adani Power's ambition back home. It wants to increase its capacity to 20,000 MW in nine years from 4,620 MW now. Demand is not an issue in a country where 15-hour power cuts are not unheard of even in some well-known urban pockets. The deal-breaker is coal, about 100 million tonnes of which Adani Power will need every year - and, that at a reasonable cost. Likewise with Lanco, India's biggest private power producer, which too has gone to Australia.
While Adani and Lanco have gone Down Under, Tata Power has acquired a 30 per cent stake, worth $1.1 billion, in two subsidiaries of Indonesia-based Bumi Resources, the world's second-largest coal company. The Tata Group company needs to import 21 million tonnes of coal every year to fuel its projects on India's west coast which would produce 7,000 MW. It hopes to get about half of that from Bumi.
Keeping Tata company in Indonesia is India Cements, the largest cement manufacturer in south India, which has acquired a mine there with proven reserves of 35 million tonnes. Once fully on stream, this mine will meet the company's coal needs for the next three decades. Such moves are fraught with geopolitical risks. There is an increasing feeling in mineral-rich countries that their resources are being exploited by energy-hungry countries.
For instance, Indonesia, which is the biggest source of imported coal for India, recently said that all exports from the country will be priced at par with international coal prices. If that happens, or as A. Subba Rao, Chief Financial Officer, GMR Group, worries, if domestic coal prices are benchmarked with international prices, "fuel costs will go up significantly; gas prices are also going to rise". Even so, those looking overseas are willing to take the risk. It is not just coal mines which are attracting Indian companies overseas.
High energy costs will dent Indias competitiveness as it (energy) is almost like a raw material in any manufacturing process: R. Seshasayee
Chemplast Sanmar, the country's secondlargest producer of polyvinyl chloride, or PVC, a key input in plastics, is investing $1.3 billion in a 200,000-tonne manufacturing facility in Egypt. Why North Africa?
Because it will be able to buy power there at the equivalent of Rs 1.20 a unit, thanks to abundant supply of natural gas. Nearly 85 per cent of the cost of making caustic soda, the starting point of the PVC manufacturing cycle, is electric power. The cost of making it in Egypt is a fourth of what Chemplast spends in India. "Our Egypt operations lend a great strength to the group," beams Chairman P.S. Jayaraman.
Fellow south Indian giant Murugappa Group has gone a step ahead. Group company Carborundum Universal, the world's largest producer of silicon carbide, which is used in automobile clutches and hard ceramics, with operations across seven countries, gets the electro-fusion process - as energy-intensive as they come - done out of its facilities in Russia and South Africa. Power in those countries cost Rs 2.50 to Rs 2.90 per unit, compared to just under Rs 7 in Tamil Nadu.
"The process (electro-fusion) accounts for almost 35 per cent of my manufacturing cost," says MD K. Srinivasan.Small is painful
Not everyone can go abroad, though. For the spinning mills in Tamil Nadu, nearly 45 per cent of the cost of converting cotton into yarn is the electricity bill. The power cuts in the state - six hours a day - are forcing the mills to run diesel generator sets. At Rs 13 a unit, this power is far from cheap.
Little surprise, then, that of the 6,000 MW of wind power capacity - cost: Rs 3.50 a unit - set up in the state, two-thirds is owned by spinning mills. "But for the investment in wind power, the average power cost would have hurt the competitiveness of the mills and priced their products out of the market," says K. Selvaraju, Secretary General, South Indian Spinning Mills Association.
Take a step a rung lower into the world of small and medium enterprises, or SMEs, and the picture gets really grim. Large businesses can acquire assets abroad, recalibrate investments, and so on - all options not available to the average SMEs. Manish Mohan has been making diesel generator sets for 30 years. His company, Elmech Engineers, much like other SMEs, is in a fight for survival. Elmech's plant in Roorkee, Uttarakhand, runs in two shifts. There is power for the general shift - 9 a.m. to 5.30 p.m. - six days a week, with a twist. "We have moved our weekly off from Sunday to Thursday, since we get power on Sunday and not on Thursday," says Mohan. The second shift, from 6 p.m. to 2 a.m., gets no power at all; it runs on generators. "Two years ago I was spending Rs 50,000 on diesel a month; now I spend close to Rs 3 lakh," he says.
Mohan is a member of a local industry association in Roorkee, which has made an offer to the state government to pay Rs 5 a unit, twice the current rate, if the power supply is uninterrupted. It is also looking at options to set up a husk-based power plant and a biogas plant.
The story plays out elsewhere, too. Metal can manufacturer Hindustan Tin Works relies on diesel generators for 80 per cent of the power needed at its Haryana factory. Rising diesel costs and increasing dependence on generators has reduced the company's margins by 1.5 percentage points in the last three years. Meerut sports gear maker Greenland Enterprises, which runs largely on diesel generators, has doubling electricity costs shaving profit margins by four to five percentage points over the last decade. For SMEs already balancing operations at waferthin margins, that's too big a burden.
There is never a good time to have a crisis, but India's growing energy problem could not have come at a worse time. Two decades of rapid GDP growth have catapulted India to a middle-income economy and a young, highspending population has the potential of taking it far. Without energy, the juice that powers any modern economy, that dream could die an early death. The Planning Commission says commercial energy demand grows by seven per cent every time the GDP grows nine per cent. Shocker Ahead
An energy shock in the offing hangs over like a pall of gloom. "Energy is fundamental to growth and India is in serious shortage of it. A large dose of private sector investment is needed both in mining and power sectors," says B. Muthuraman, Vice Chairman, Tata Steel, and President of the Confederation of Indian Industry, or CII.
Runaway coal prices combined with the reluctance with which state governments increase electricity tariffs will hurt the power sector, already grappling with steep demand-supply deficits. Most state electricity boards, or SEBs, are in a financial mess on account of policies that entail free power, poor maintenance of the generating stations and large-scale transmission and distribution losses. If tariffs cannot be raised, most SEBs will hurtle into bankruptcy, if they are not there already, and become more dependent on the government for their survival.
Private power producers will be no better off. "Private independent power producers, which have committed to supply from upcoming capacities, face the most risk of fuel cost escalation. While these projects can import high-cost coal, the impact on their earnings would be significant as higher costs cannot be passed through tariffs," says K. Shankar, an analyst at Edelweiss Securities. He lists Adani Power and JSW Energy among the most affected, as also NTPC which has commitments from Coal India to the extent of only 70 to 80 per cent.
Next up, steel makers will feel the heat. As much as 700 kg of coking coal is required to produce a tonne of steel. "In the last six months the price of coking coal has moved up from Rs 6,000 per tonne to Rs 9,000. It looks poised to move up further. We steel makers are helpless. We have no captive source of coal and steel prices are determined by the market," laments Vinod Nowal, Director and CEO, JSW Steel, the second-largest steel maker in the country with an installed capacity of 10 million tonnes a year.
Squeeze on manufacturing
It irritates Infosys CEO and Managing Director Kris Gopalakrishnan that regulatory gaps are not being plugged. "A proper policy and infrastructure need to be in place for the investment that industry makes to yield results," he says. For instance, Madras Cements' investment in wind power does not yield full benefit because the Tamil Nadu Electricity Board is not evacuating the power produced by the company's wind mills.
The kilns of cement plants typically burn coal - 150 kg of coal is required to produce a tonne of cement. But it is possible to fire them, at least partially, with hazardous waste (say, paint sludge), used tyre chips, agricultural waste or even municipal waste - but the problem is their availability. "We can reduce our dependence on coal by using other fuels but their supply is minuscule.
India generates a huge quantum of municipal waste. What is lacking is a system for processing the waste and making it available to industry in a proper form," says A.V. Dharmakrishnan, Executive Director, Finance, Madras Cements. Further, though India - and the countries to its immediate south east - have rich sources of natural gas, what is missing is an enabling policy. "Think of a football stadium. Both the teams are on the field. Spectators are eagerly waiting for the game to start and the ball is ready for kick-off. But what is holding up the match is non-finalisation of the rules of the game. Our energy policy is similar," says R. Seshasayee, Vice Chairman at bus and truck maker Ashok Leyland. The same rings true for coal.
"What the coal sector needs is more competition with private players in exploration and market-determined prices," says economist Kirit Parikh, who headed a committee on fuel price decontrol. At stake is India's fledgling reputation as a base of low-cost manufacturing. Seshasayee does not mince words: "High energy costs will dent competitiveness as it is almost a raw material."
Industrial output makes up 16 per cent of the GDP and consumes 45 per cent of the commercial energy. If India is to increase the share of factory output in its economic activity, it will need to have a lot more energy on tap.
Still, people like Carborundum's Srinivasan exude optimism. "When push comes to shove our policymakers will act. I am confident that a solution will be found in the long term. A short-term pain, however, looks inevitable." The question is, how short will that be.