Forget gas and buy Indonesian coal instead

Vol 14, PW 9 (21 Oct 10) Midstream & Downstream

Indonesia and Mozambique will soon play a bigger role than expected in the rapid growth of India’s power sector, according to US-based Bernstein Research.

In a report released on September 29, Bernstein says uncertainty over future gas pricing in India coupled with lack of confidence in Coal India’s ability to deliver was forcing established players like Tata Power, Reliance Power and Jindal Power to adopt a ‘core strategy’ of acquiring coal assets abroad. “The uniformly enthusiastic embrace of Indonesia and Mozambique is striking,” says Bernstein.

“Like Reliance Power, Tata appears prepared to accept the risks associated with being a foreign owner of a natural resource in Indonesia rather than risk relying on supply from Coal India.” As for Jindal, says Bernstein, “the willingness to purchase natural resources in any geography – no matter how challenging – so as to control both availability and cost, was the striking aspect of the company's long-term strategy.

” Gas, believes Bernstein, is the biggest loser in this rapidly emerging scenario because power companies can’t lock-in long-term fixed prices for imported spot LNG or domestic gas. “If there were greater certainty about gas prices over the long-term more gas-fired capacity would be getting built,” adds Bernstein.

“The economics of (setting up) a gas-fired power plant look pretty good on paper; the problem is signing up the supply, and uncertainty about what happens beyond year five.” Bernstein said instead of resembling the US or Europe, where between 20% and 40% of power generation is fired by gas, India would resemble China, with the vast bulk of power generation fired by coal.

“As things stand, it seems far more likely that coal will dominate new power generation capacity (in India) with gas relegated long-term to a peak shaving role within the industry.”