CLP stuck between a rock and a hard place in India
HK power major has been running at a loss in the country since 2012, but it has yet to pull the plug, given the immense market opportunities
The little mountain of rocks tucked away in a corner of CLP's sprawling Jhajjar plant, 2½ hours from New Delhi, is where the Hong Kong power major's woes have been piling up.
India is the only region where the company is losing money and it started doing so ever since it commissioned this 1,320-megawatt plant.
Only one of the two units here was running in the first half of the year because of poor coal supply from Coal India. And even when it gets any coal from the state monopoly, it is mostly unusable because it is mainly rock that is dumped in this stack.
CLP's Indian operation swung from a HK$154 million net profit in 2011 to HK$497 million in losses last year after the plant was commissioned. In the first half of this year, it lost HK$212 million.
That is not a particularly large amount compared with CLP's overall net profit of HK$3.8 billion in the period, but India continues to be the sole drain on its resources. And as it announces its third-quarter results today, its shareholders would look for signs of hope.
There are plenty, says CLP India's managing director Rajiv Mishra, adding both the supply and quality of coal have improved in the past three months.
"In May, Jhajjar Power obtained formal approval to procure 1.7 million tonnes of imported coal. This has helped raise the average availability of our plant considerably. In fact, availability reached 85.7 per cent in July," Mishra told the South China Morning Post.
But imported coal does not come cheap, especially when the rupee has depreciated about 16 per cent in the past 12 months. And the government may have allowed it to import, but it is difficult to pass all the extra cost on to consumers.
"The incremental cost of the imported coal could be passed through to the provincial grids, according to CLP, although we think the execution remains to be tested," said Pierre Lau, the head of Asian utilities and clean energy research at Citibank.
Jhajjar is not the only plant where CLP is taking a hit. Its 665MW gas-based power plant in Bharuch, Gujarat, has also been running at very low levels.
"The gas fields that were supposed to supply the plant have dried up since March," Mishra said.
Gas imports for the plant is not an option either as they are about three times as expensive.
The company was among the first to rush in when India fully opened up its power sector, and offers a glimpse of the difficult choices all private firms face in the country: a tough operating environment stemming from a slothful bureaucracy on the one hand and immense opportunities on the other.
An estimated 400 million people have no access to electricity and power demand is expected to double by 2035. India plans to add 88,000MW of capacity in the five years to 2017, and a planned outlay of US$400 billion on power in these five years makes it one of the most attractive markets in the world.
Mishra is quick to point out other virtues of India, namely rule of law, a free press, democracy and a level playing field. "India allows 100 per cent foreign ownership in power production, which is surprisingly uncommon in the Asia-Pacific," he said.
But the challenges are equally daunting. Almost 70 per cent of India's hydrocarbon fuel needs are imported and, because of political sensitivities of energy pricing, they are subsidised. That means state utilities that buy power from the likes of CLP are running at huge losses.
Until the end of last year, CLP's bills with state utilities were overdue by more than a year, said Mishra, adding a slow commercial dispute resolution process made matters even worse.
It is not for nothing that AES of the United States, the only other foreign power major that arrived with CLP, decided to wind up most of its operations in India.
CLP appeared to reach the end of its tether in November last year when a frustrated Andrew Brandler, the then chief executive, wrote to Indian Prime Minister Manmohan Singh, saying: "It is becoming increasingly difficult for us to sustain our operations in India as … we bleed financially on a daily basis."
The company appears to have pulled back from the brink since, and it is focusing on a targeted 1,000MW wind energy capacity within 12 to 18 months. This month, it entered into a deal with three banks for 10 projects.
"We are committed to being in India," said Mishra, rock-like. "It's important to take a long-term view in [this] business."