9th ASSOCHAM Energy Summit on Energy Sector Challenges Ahead Coal Sector Ultra Mega Power Projects

1. 9th ASSOCHAM Energy Summit onEnergy Sector � Challenges AheadCoal Sector & Ultra Mega Power Projects

2. 2 Successful implementation of the Ultra Mega Power Projects (�UMPP�) will lead to significant resolution of issues relating to peak deficit and energy shortage� Rajasthan : Suratgarh, 1250 MW MP : STPS, 1142 MW Gujarat : Wankbori Unit 1 to 6, 1260 Haryana : Tau Devi Lal TPS Unit 1 to 4, 440 MW Punjab : GNDTP, Delhi : Badarpur TPS, Maharashtra : NTPC KAWAS, 656 MW (228 MW Share): State : Nasik TPS, 910 MW, 1.14 Rs/UnitRajasthan : Suratgarh, 1250 MW MP : STPS, 1142 MW Gujarat : Wankbori Unit 1 to 6, 1260 Haryana : Tau Devi Lal TPS Unit 1 to 4, 440 MW Punjab : GNDTP, Delhi : Badarpur TPS, Maharashtra : NTPC KAWAS, 656 MW (228 MW Share): State : Nasik TPS, 910 MW, 1.14 Rs/Unit

3. 3 However, the operation of the Projects will face challenges on account of the difference in the format of regulation across the value chain�

4. 4 Before this is analysed further, it is important to understand the sources of economic value that accrue to a developer from the operation of the Plant�

5. 5 In one of drafts of PPA (for Mundra UMPP), the $ price of coal was proposed to be indexed to multiple international �Coal Price Indices�� 1: Barlow Jonker Coal Index: is an indicator of the spot price of thermal coal in the Asian market. It reflects the price at which a willing seller and a willing buyer are prepared to do business in the spot market for a prompt cargo of thermal coal loaded FOB vessel Port of Newcastle, N.S.W., Australia. Newcastle is the world's largest export coal loading facility and Newcastle coal is the reference coal in the Asian thermal coal market. The prices used historically, and those used each week in determining the BJI, are based on actual shipments of thermal coal. When actual fixtures are not available, a panel of traders and shippers are consulted and an average market price is determined. GCV - 6700 KCAL/ KG 2: South African Coal Index: is an index launched on 1 April 1986 as an index of the price of spot thermal coal exported from Richards Bay Coal Terminal for customers in the European market. The index is related to a base 100.00 at January 1986 when the price was US$30 per tonne FOB. The coal quality which relates to this index is for coal of CV 6000kcal/kg NAR, ash 15% maximum and Sulphur 0.8% maximum 3: Japanese Power Utility Index: is an index based on the �reference� price (previously �benchmark� price) of New South Wales thermal coal sold under long term contracts to Japanese power utilities (JPU). Base 100 for the index was 1 April 1995. The FOB price is for coal of energy content 6,700 kcal/kg (GAD) and applies for shipments over twelve months commencing 1 April each year. As from April 2002 the "reference" price is no longer valid as both shippers and JPUs negotiate individually a price applicable to each contract. What is recorded for JFY 2002 is the "headline maximum" price for coal in this JPU Reference category. As from April 2003 onwards, prices shown are the average contract prices settled with JPUs, as estimated by Barlow Jonker as at 1 April. If settlement has not occurred by this time, the JPU price will be backdated to 1 April following the conclusion of price agreements. 4: Argus/McCloskey Coal Index 5: TFS AP 4 Coal Index 6: China Steam Coal Index: is an index expressed in US Dollars per tonne FOB and as an index, is determined in arrears as the weighted average monthly export price for steam coal exported from China. The base 100 for the index is January 2000 when the price was US$24.28 per t FOB. On an annual basis the index currently covers over 64Mt of export coal. GCV � 6300 Kcal/ Kg1: Barlow Jonker Coal Index: is an indicator of the spot price of thermal coal in the Asian market. It reflects the price at which a willing seller and a willing buyer are prepared to do business in the spot market for a prompt cargo of thermal coal loaded FOB vessel Port of Newcastle, N.S.W., Australia. Newcastle is the world's largest export coal loading facility and Newcastle coal is the reference coal in the Asian thermal coal market. The prices used historically, and those used each week in determining the BJI, are based on actual shipments of thermal coal. When actual fixtures are not available, a panel of traders and shippers are consulted and an average market price is determined. GCV - 6700 KCAL/ KG 2: South African Coal Index: is an index launched on 1 April 1986 as an index of the price of spot thermal coal exported from Richards Bay Coal Terminal for customers in the European market. The index is related to a base 100.00 at January 1986 when the price was US$30 per tonne FOB. The coal quality which relates to this index is for coal of CV 6000kcal/kg NAR, ash 15% maximum and Sulphur 0.8% maximum 3: Japanese Power Utility Index: is an index based on the �reference� price (previously �benchmark� price) of New South Wales thermal coal sold under long term contracts to Japanese power utilities (JPU). Base 100 for the index was 1 April 1995. The FOB price is for coal of energy content 6,700 kcal/kg (GAD) and applies for shipments over twelve months commencing 1 April each year. As from April 2002 the "reference" price is no longer valid as both shippers and JPUs negotiate individually a price applicable to each contract. What is recorded for JFY 2002 is the "headline maximum" price for coal in this JPU Reference category. As from April 2003 onwards, prices shown are the average contract prices settled with JPUs, as estimated by Barlow Jonker as at 1 April. If settlement has not occurred by this time, the JPU price will be backdated to 1 April following the conclusion of price agreements. 4: Argus/McCloskey Coal Index 5: TFS AP 4 Coal Index 6: China Steam Coal Index: is an index expressed in US Dollars per tonne FOB and as an index, is determined in arrears as the weighted average monthly export price for steam coal exported from China. The base 100 for the index is January 2000 when the price was US$24.28 per t FOB. On an annual basis the index currently covers over 64Mt of export coal. GCV � 6300 Kcal/ Kg

6. 6 Cyclical nature of international coal prices may pose a challenge to the developers of coastal projects as compared to developers of pit head ones� Lack of high/complete correlation between indices within a year is possible Project may be exposed to intra year fluctuation of price of coal (USD 37 to USD 55) since requirement of coal may not be uniform throughout the year

7. 7 Cyclical nature of international coal prices may pose challenges to the developers of coastal projects as compared to developers of pit head ones� Over a long term, the effective variable cost can fluctuate significantly leading to potential issues with respect to �despatch on a regular basis�

8. 8 Regular despatch, hence Economic Value, may be at risk. Options exist to deal with the situation among various stakeholder in the sector�

9. 9 The information on reserves would need to be combined with the E / P ratio � to provide an indication of the sources that can be considered for sourcing of coalThe information on reserves would need to be combined with the E / P ratio � to provide an indication of the sources that can be considered for sourcing of coal

10. 10 In the medium to long term, India is not expected to play �significant� role - in its ability to influence market price of coal in the international market�

11. 11 As per the current draft of Power Purchase Agreement, the developer may have limited flexibility and scope in offloading �surplus� energy to alternate buyers� Entire Contracted Capacity of the Power Station shall be for the exclusive benefit of Procurers. The Seller shall not grant to any third party or allow any third party to obtain any entitlement to the Available Capacity and/or Scheduled Energy. However, the Seller shall be permitted to sell power to third parties if: there is a part of Available Capacity which is not desptached by the Procurer, ordinarily entitled to receive such part; and there exists prior written consent of the concerned Procurer for such sale; and such part has first been offered, at the same Tariff, to the other Procurers and they have chosen to waive their right within two (2) hours of being so offered the opportunity

12. 12 Recommendations of the T L Sankar Committee provide valuable direction towards introducing reform for the coal sector in India� Different grades of coal preferred by different consumers and variations in the paying capacity of consumers provide an ideal setting for a �market� Further, in keeping with size of deposits and the level of production/consumption, the coal sector should integrate with the world coal market for a competitive coal industry Therefore, there is need to keep import option functioning efficiently as a supply option along with the regulation of price, which will ensure least cost supply of coal for power generation while allowing a competitive and transparent coal market to supply the needs of other consumers

13. 13 Presenter�s contact detailsHiranyava BhadraKPMG Advisory Services Private Ltd.+91-98936 29050hbhadra@kpmg.comwww.in.kpmg.com