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Captive generation: The cost-effective alternative

Published

5 years ago

January 2, 2020

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The power supply condition in the country has shown significant improvement in the last decade. However, it is still a distant dream of the industries for reliable and cost-effective supply from the grid, to ensure the smooth running of factories, high consumption consumers continue to put up captive power plants.

Captive power generation is the backbone of India’s large industry. By definition, companies/ industries which consume 1 MW or more can setup generation facilities for own consumption. Majority of the large enterprises in the country – steel, chemical, cement, textile, auto, aluminium – have a captive generation to meet their consumption requirements. The key reasons to set up a captive plant are a) the generated power is stable, reliable and continuous b) cheaper in comparison to the grid-supplied power.

Globally, India is the third-largest electricity producer in the world with an installed capacity of 362 GW. Thermal capacity with coal-fired power still continues to be the mainstay. Over 200 GW comes from coal-based power plants.

Power in India is a concurrent subject and any policy level review, amendments and implementations invite resistance in the high order.

At the beginning of the ’90s decade is when the country allowed participation of private entries in power generation to an otherwise government dominant segment. State Electricity boards conventionally took care of generation, transmission and distribution. Following the allowance of the private companies in the generation, the captive power policy also witnessed major Amendments. In 1995, the government allowed the captive power generators to sell the surplus power on to the grid.

The amendment came in as a measure to address an impending crisis. According to a government order issued in this regard states, "At the end of 1996-97, the energy shortage is visualised at 15 per cent and peaking shortage at 30 per cent." To meet this widening demand gap, the quicker solution was to allow private participants to set up captive power plants.

The notification said, "There is a need, therefore, to open an alternative route other than Private Generating Company, where the industries themselves will be interested in meeting their own power demand by pooling resources together. Captive Power Plants offer such an alternative. The captive power plants of industries may be allowed to sell their surplus power, if any, to the Grid, on a remunerative tariff, as per mutually agreed terms. Setting up of captive power plants would quickly add to the generating capacity in the country."

The two and half decade journey of the captive generators has been an incredible one. As on March 31, 2019, total captive generated power accounts for 58,000 MW, which stood at 54,938 MW the same period in 2018.

Majority of the captive power plant while running on coal as a fuel, there are plants which run on natural gas, diesel generators, solar energy hydropower, and wind power.

Captive power generation also has co-generation plants as well. The fuel for this segment is mostly either biomass or heat to energy technology.

So far, the story is perfect with a high growth rate, considering the current capacity of 58000 MW.

Current scenario
Is all well with the sector? An emphatic no is the answer. The sector, like any other business vertical, is struggling to overcome many impediments. But stakeholders believe that there is a silver lining in this segment.

Says MS Unnikrishnan, Managing Director and & CEO, Thermax,"In fact, cement is an industry, despite the economic slowdown, there are companies that are investing in cement plants and captive power plants alike."

But he did agree to the point that there is volatility in captive capacity addition. He added, "In the peak times, there were 2,500 to 3,000 MW ordering out from captive and co-generation put together. Now it must have come down to 700 MW. An indication of the ups and down seen in this segment. So the sector will continue to witness such oscillations depending upon how the capacities are being created, the financial position, banks ability to fund etc. But it is not a story that is getting over."

In an interview with our sister publication Infrastructure Today, Kameswara Rao, Leader, Energy, Utilities & Mining, PwC India, said, " There is undoubtedly a flattening in captive capacity addition. Indeed, the grid supply conditions have generally improved in the last few years. But that is not an indication of captive going off completely. Some small scale industries have reduced their dependency on captive/backup power sources and migrated totally on the grid. But not that significant in size. However, for large scale industry, the grid doesn’t guarantee of supply and still are captive dependent. Though we are in a better of condition, ensuring 24/7 supply, for the industry clusters" like the textile, auto clusters " the supply still not reliable enough. That is why captive still continues to add capacity. "Though the industry pays much more, they don’t get the quality of supply. The grid power cost is on the higher side. So if as an industry person with higher consumption, it is wise to put up a captive power plant as the power generated would be 30-40 per cent cheaper than the grid supply."

Challenges
The economic growth of a country depends on the pace at which its energy segment grows. If an economy registers a growth rate of say 5 per cent, then the energy segment of the country should grow at 10 per cent to match the surge in demand. It also is indicative of the fact that, if there is a slowdown in the economy, power will be one of the first sectors to take the brunt.

The major impediment today is the economic slowdown. But, it is a temporary affair with pressure on investments. It is now expected that it will take another few quarters (two to three quarters), and in some cases as long 6 quarters or 18 months for a rebound.

Secondly, the government announcement of phasing out of thermal capacities. With a country whose dependency is more than 70 per cent on thermal power, for sure to take significant time for phasing out. The infirmity of renewable sources will continue to pose challenges when it comes to industrial supplies.

Thirdly, per capita consumption of India is 1181 kWh which is way lower than the global average. It offers tremendous opportunities for all stakeholders. However, for a country like India, which has a high dependency on imports for its energy needs, hits on many impediments.

India and China are the two economies, according to the world economist, the global growth drivers. Having said that China, with almost equivalent population size is much ahead in electricity generation. China at the current levels produces four times power than India; for India to reach that levels of electricity generation would require higher investments. This, the sector experts view as a key challenge as the county does not have the financial ability to fund such large generation capacities. That also requires having a dynamic and adequate infrastructure to support such big generation capabilities.

So, as a country, India has to look at private participation, beyond the generation segment to add capacity, improve efficiency and for a better quality of power. Now the question is, will India offers a captive market to stakeholders to sustain?. Unnikrishnan said,"I am also selling captive power boilers in South East Asia with development almost similar to India. We are getting orders from Indonesia, Philippines, Thailand. Africa is another market which is catching up in captive power, and even South America is prospective. So it is not only India but expanding geographies offers the right market. Domestic alone may not be sustainable enough, but a combination of domestic and international markets."

Way forward
In lies with the fully developed infrastructure prevailing in the developed world, when India reaches to that level, the captive power segment will go down. The pertaining question one has in mind is that – does India have a fully developed power infrastructure? India has achieved the milestone of one nation, one grid couple of years back. It also has adopted technology that allows multiple source generators to pump in electricity from different points. These improvements, both in transmission and distribution, have helped the country’s electricity segment to be more interactive.

But, India, in comparison to its global peers, is far behind in grid infrastructure. The stakeholders’ opinions that India’s power infrastructure is developed only 15 to 20 per cent. 80 per cent development is remaining, and that would take at least 3 to 4 decades minimum.

As Unnikrishnan signed off, he said, "Captive power industry/co generation industry in India will continue to add capacity. But the relevance may come down 20 years or 25 years down the lines. We are not there yet."

Captive power is a story that is continuing to contribute significantly to the capacity addition of the country.

– LIZA V

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Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings

Published

3 years ago

October 21, 2021

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Region-wise,the southern region comprises 35% of the total cement capacity, followed by thenorthern, eastern, western and central region comprising 20%, 18%, 14% and 13%of the capacity, respectively.

The cement industry is expected to post positive margins on decent price hikes over the months, falling raw material prices and marked drop in overall production costs, said an analysis of Care Ratings.

Wholesale and retail prices of cement have increased 11.9% and 12.4%, respectively, in the current financial year. As whole prices have remained elevated in most of the markets in the months of FY20, against the corresponding period of the previous year.

Similarly, electricity and fuel cost have declined 11.9% during 9M FY20 due to drop in crude oil prices. Logistics costs, the biggest cost for cement industry, has also dropped 7.7% (selling and distribution) as the Railways extended the benefit of exemption from busy season surcharge. Moreover, the cost of raw materials, too, declined 5.1% given the price of limestone had fallen 11.3% in the same aforementioned period, the analysis said.

According to Care Ratings, though the overall sales revenue has increased only 1.3%, against 16% growth in the year-ago period, the overall expenditure has declined 3.2% which has benefited the industry largely given the moderation in sales.

Even though FY20 has been subdued in terms of production and demand, the fall in cost of production has still supported the cement industry by clocking in positive margins, the rating agency said.

Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The cement sector will be seeing a sharp growth in volumes mainly due to increasing demand from affordable housing and other government infrastructure projects like roads, metros, airports, irrigation.

The government’s newly introduced National Infrastructure Pipeline (NIP), with its target of becoming a $5-trillion economy by 2025, is a detailed road map focused on economic revival through infrastructure development.

The NIP covers a gamut of sectors; rural and urban infrastructure and entails investments of Rs.102 lakh crore to be undertaken by the central government, state governments and the private sector. Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified.

The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together account for 79% of the proposed investments in six years to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.

Similarly, the Pradhan Mantri Awaas Yojana, aimed at providing affordable housing, will be a strong driver to lift cement demand. Prices have started correcting Q4 FY20 onwards due to revival in demand of the commodity, the agency said in its analysis.

Industry’s sales revenue has grown at a CAGR of 7.3% during FY15-19 but has grown only 1.3% in the current financial year. Tepid demand throughout the country in the first half of the year has led to the contraction of sales revenue. Fall in the total expenditure of cement firms had aided in improving the operating profit and net profit margins of the industry (OPM was 15.2 during 9M FY19 and NPM was 3.1 during 9M FY19). Interest coverage ratio, too, has improved on an overall basis (ICR was 3.3 during 9M FY19).

According to Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region-wise, the southern region comprises 35% of the total cement capacity, followed by the northern, eastern, western and central region comprising 20%, 18%, 14% and 13% of the capacity, respectively.

Installed capacity of domestic cement makers has increased at a CAGR of 4.9% during FY16-20. Manufacturers have been able to maintain a capacity utilisation rate above 65% in the past quinquennium. In the current financial year due to the prolonged rains in many parts of the country, the capacity utilisation rate has fallen from 70% during FY19 to 66% currently (YTD).

Source:moneycontrol.com

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Wonder Cement shows journey of cement with new campaign

Published

3 years ago

October 21, 2021

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The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…

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Cement manufacturing company Wonder Cement, has announced the launch of a digital campaign ‘Har Raah Mein Wonder Hai’. The campaign has been designed specifically to run on platforms such as Instagram, Facebook and YouTube.

#HarRaahMeinWonderHai is a one-minute video, designed and conceptualised by its digital media partner Triature Digital Marketing and Technologies Pvt Ltd. The entire journey of the cement brand from leaving the factory, going through various weather conditions and witnessing the beauty of nature and wonders through the way until it reaches the destination i.e., to the consumer is very intriguing and the brand has tried to showcase the same with the film.

Sanjay Joshi, executive director, Wonder Cement, said, "Cement as a product poses a unique marketing challenge. Most consumers will build their homes once and therefore buy cement once in a lifetime. It is critical for a cement company to connect with their consumers emotionally. As a part of our communication strategy, it is our endeavor to reach out to a large audience of this country through digital. Wonder Cement always a pioneer in digital, with the launch of our IGTV campaign #HarRahMeinWonderHai, is the first brand in the cement category to venture into this space. Through this campaign, we have captured the emotional journey of a cement bag through its own perspective and depicted what it takes to lay the foundation of one’s dreams and turn them into reality."

The story begins with a family performing the bhoomi poojan of their new plot. It is the place where they are investing their life-long earnings; and planning to build a dream house for the family and children. The family believes in the tradition of having a ‘perfect shuruaat’ (perfect beginning) for their future dream house. The video later highlights the process of construction and in sequence it is emphasising the value of ‘Perfect Shuruaat’ through the eyes of a cement bag.

Tarun Singh Chauhan, management advisor and brand consultant, Wonder Cement, said, "Our objective with this campaign was to show that the cement produced at the Wonder Cement plant speaks for itself, its quality, trust and most of all perfection. The only way this was possible was to take the perspective of a cement bag and showing its journey of perfection from beginning till the end."

According to the company, the campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV. No other brand in this category has created content specific to the platform.

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In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)

Published

3 years ago

October 21, 2021

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Cost cuts and better realizations save? the ?day ?for ?UltraTech Cement, Updated: 27 Jan 2020, Vatsala Kamat from Live Mint

Lower cost of energy and logistics helped Ebitda per tonne rise by about 29% in Q3
Premiumization of acquired brands, synergistic?operations hold promise for future profit growth Topics

UltraTech Cement
India’s largest cement producer UltraTech Cement Ltd turned out a bittersweet show in the December quarter. A sharp drop in fuel costs and higher realizations helped drive profit growth. But the inherent demand weakness was evident in the sales volumes drop during the quarter.

Better realizations during the December quarter, in spite of the 4% year-on-year volume decline, minimized the pain. Net stand-alone revenue fell by 2.6% to ?9,981.8 crore.

But as pointed out earlier, lower costs on most fronts helped profitability. The chart alongside shows the sharp drop in energy costs led by lower petcoke prices, lower fuel consumption and higher use of green power. Logistics costs, too, fell due to lower railway freight charges and synergies from the acquired assets. These savings helped offset the increase in raw material costs.

The upshot: Q3 Ebitda (earnings before interest, tax, depreciation and amortization) of about ?990 per tonne was 29% higher from a year ago. The jump in profit on a per tonne basis was more or less along expected lines, given the increase in realizations. "Besides, the reduction in net debt by about ?2,000 crore is a key positive," said Binod Modi, analyst at Reliance Securities Ltd.

Graphic by Santosh Sharma/Mint
What also impressed analysts is the nimble-footed integration of the recently merged cement assets of Nathdwara and Century, which was a concern on the Street.

Kunal Shah, analyst (institutional equities) at Yes Securities (India) Ltd, said: "The company has proved its ability of asset integration. Century’s cement assets were ramped up to 79% capacity utilization in December, even as they operated Nathdwara generating an Ebitda of ?1,500 per tonne."

Looks like the demand weakness mirrored in weak sales during the quarter was masked by the deft integration and synergies derived from these acquired assets. This drove UltraTech’s stock up by 2.6% to ?4,643 after the Q3 results were declared on Friday.

Brand transition from Century to UltraTech, which is 55% complete, is likely to touch 80% by September 2020. A report by Jefferies India Pvt. Ltd highlights that the Ebitda per tonne for premium brands is about ?5-10 higher per bag than the average (A cement bag weighs 50kg). Of course, with competition increasing in the arena, it remains to be seen how brand premiumization in the cement industry will pan out. UltraTech Cement scores well among peers here.

However, there are road bumps ahead for the cement sector and for UltraTech. Falling gross domestic product growth, fiscal slippages and lower budgetary allocation to infrastructure sector are making industry houses jittery on growth. Although UltraTech’s management is confident that cement demand is looking up, sustainability and pricing power remains a worry for the near term.