The recent CERC ruling on compensatory tariff and the government's decision on allowing new power projects to pass on additional cost on account of costlier imported coal has opened few options for power generators. However, the Commission has also in effect ruled in favour of efficient delivery rather than unreliable but cheap services. There is a political twist to the tale as well, since there is already a hue and cry in some sections about increasing tariffs. Pradeep Pandey digs into the implications of this landmark decision.
A slew of positive developments for the energy sector have thankfully given enough reason to cheer up. The Central Power Sector Regulator (CERC), the country's apex power regulatory body, has granted relief at a level for two major private players Tata Power and Adani Power. In another development, the government has rejected the proposal to pool coal prices and decided to allow power projects to import the fuel and pass on the incremental costs as higher electricity tariffs. However, this would be applicable for the power projects that had been awarded through competitive bidding and assured fuel linkages by state-owned miner Coal India Ltd (CIL).
Moreover, the move has been welcomed by the beneficiary companies and stocks of power companies cheered up at the exchanges. Nevertheless, this could be considered as a breakthrough for the energy sector, which has been struggling with a series of uncertainties, most importantly the fuel supply constraints, looming around for long. Now, the question is whether the state and central governments would bear the burden of further raising electricity tariff at a time when election is ahead? The answer would be it's a difficult task as many states have already increased tariffs form 10 to 30 per cent in the last twelve months. The apex power regulatory body and the central government have done their job and the ball is now in the court of the states, where it has to be dealt with.
Power Today did a round up with industry experts, power players and analyst and concluded that these developments are good for the sector but hard to be implemented soon. Some states like Haryana and Gujarat, who are to be in the ring first as they had agreement with Adani Power and Tata Power for power supply, are planning to challenge the CERC ruling. CERC was directed to form a committee, to find out an acceptable compensatory tariff and submit its report by 15th of May. But so far no committee has been formed. "CERC has directed to form a committee and submit report in a month but so far the committee has not been formed, " said Prabal Banerji , CFO of Adani Power. Similarly, Tata Power would also have to wait longer to get the actual relief. Both the companies have booked loss on account of high coal cost due to high cost incidence of imported coal and due to change of law in coal exporting countries such as Indonesia, Africa and Australia. According to Adani Power, the additional cost for the Haryana and Gujarat tariffs on account of imported coal is about 60 paise to Rs 1.10 per unit.
Many power producers such as Adani Power, Tata Power, Reliance Power, Lanco, among few others had acquired coal mines in Indonesia or other coal rich areas to feed their plants in India. However, coal import became expensive for the firms when the respective governments last year started levying higher royalty and income tax. These factors started affecting the financial viability of the power plants, using imported coal operated by these companies. Following this, three of them filed a petition for compensatory tariff relief. To find a viable solution, the government also experimented with implementation of coal price pooling but recently it shelved the proposal due to objections raised by many companies on various clauses that were not in favour of coal consumers. Meanwhile, the two state run majors NTPC and Coal India also locked horns over the coal supply issue. Now, the industry has mixed sentiments over the future of the sector. "Something has to be done by the government and we presume that the process is on," says Pramod Deo, Chairman of CERC.
However, the industry widely believes things have just changed the form rather than getting in line with expectations. One of the CERC members was not in support of the ruling in favour of power generating companies. "The escalation in price of imported coal on account of Indonesian regulation and non-availability of adequate fuel linkage from Coal India for the project of the petitioner is a temporary phenomenon and is likely to be stabilized after some time," CERC said in its order, for Adani Power, passed by Pramod Deo , Chairman and members M Deena Dayalan and V S Verma.
While, S Jayaraman, member, CERC, disagreed with the order and wrote in a separate order, "The decision in the present case will be the precedent to be followed in future. The exercise of regulatory power in such cases will have a cascading effect. In case there is again some development of similar nature, will the commission interfere again at the instance of the project developer? Will such an exercise of power not jeopardize the consumers' interest?" After this, CERC came with another ruling, providing similar relief to Tata Power. And, finally the government decided to shelve the coal price pooling process and allowing power projects to fire their plants by imported coal. However, the industry insiders believe that it may further create a chaos in the sector that may lead to another action. "How long will the government policy keep on changing?," says Suresh Srivastava, COO, Pragati Electrocom. He has also served as a senior official with Lanco Infratech.
CERC Move on Adani Power
The CERC ruled that the company will be allowed to temporarily increase tariffs to compensate for the additional fuel costs.
"The order, a majority verdict since one of the four members dissented, is significant as it opens the door to compensation for other power projects that have run into similar problems due to a seemingly unexpected turn of circumstances, especially with respect to fuel costs," says Amit Kapur , a Senior Advocate with J Sagar Associates, who represented the case on behalf of Tata Power and Adani Power. Companies such as Adani Power that had acquired coal mines in Indonesia to feed their plants in India find themselves in a situation where coal imports have become expensive for the firms with the Indonesian government last year starting to levy higher royalty and income tax, affecting the financial viability of the power plants operated by these companies.
CERC Move on Tata Power
CERC has directed five state governments to compensate Tata Power for the losses it incurred from importing coal for its 4000 MW Mundra Ultra Mega Power Project (UMPP).
A week after, CERC directed Gujarat and Haryana to compensate Adani Power for its coal imports for 2424 MW of capacity at Mundra, due to unanticipated and un-absorbable spiralling prices of Indonesian coal. "The majority judgement in the Mundra Ultra Mega Power Plant case is a step in the right direction by CERC as the regulator in exercise of its statutory mandate in the peculiar facts of the case and keeping in view the interest of both project developer and consumers," argued Kapur.
CERC has directed the committee to submit its report by 15th May, 2013 for the parties to find o an acceptable compensatory tariff over and above the tariff decided under the PPA to mitigate the hardship arising out of the need to import coal at benchmark price on account of Indonesian Regulations with an independent financial analyst of repute and an eminent banker dealing and conversant with infrastructure sector.
The Committee has been permitted to suggest any further measures which would be practicable and commercially sensible to address the situation. The Committee shall also keep in mind the following considerations:
"The Central Electricity Regulatory Commission (CERC) has notified CGPL of its decision for a compensatory tariff to be paid till the fuel situation stabilises. The details of the proposed compensatory tariff have to be finalized by a Committee to be set up as per CERC's direction," said a Tata Power Spokesperson.
This decision of the CERC is an important step in resolving the major impasse affecting imported coal based power projects in the country due to extraneous factors well beyond the control of Developers. CGPL, has been delivering the full potential of Mundra across the five beneficiary states albeit with tremendous fiscal pain, the company statement added.
According to beneficiary companies, this decision shows the way forward to the big issue of stranded asset in diverse infrastructure sectors in India û with around Rs 750,000 crore of bank financing stuck and Rs.10,50,000 crore of sunk cost. There is around 30,000 MW of power capacity stranded due to coal and gas supply issues costing between Rs 125,000 to Rs 150,000 crore.
As many believe, permitting power companies to raise tariffs may help them to improve their short-term financial situation. Normally, in the case of rising input costs, a private company may seek that the state electricity regulator to pass the additional cost to its consumers.
In cases when private companies pass on the burden of higher fuel costs to consumers, such market pricing of power is often considered undesirable from the point of view of consumers. Since, power tariff hike is a politically sensitive issue, it's also handled carefully by the government. What CERC has done is grant permission to a couple of private companies to temporarily raise prices owing to coal-supply conditions. These companies can now raise prices, albeit within the strict limits set by the CERC.
Views From the Other Side
While one group isin favour of the CERC Order, the other is quite critical.. "Based on the orders providing compensatory tariff to two companies, now any developer can seek revisiting of the power purchase agreement, on the ground of facing stress due to rising fuel cost" said Debasish Mishra, Senior Director at Deloitte Touche Tohmatsu India, a global consultancy firm.
Adani Power had entered into two power purchase agreements, 1,000 MW each, with the Gujarat government at Rs 2.35 per unit, and Rs 2.89 per unit, for its 4,600 MW Mundra. It entered into a similar accord with the Haryana government at Rs 2.94 per unit for 1,424 +MW.
Tata Power's special purpose vehicle, Coastal Gujarat Power Ltd has also signed agreements to sell electricity generated from its Mundra plant to Gujarat, Maharashtra, Haryana, Punjab and Rajasthan at Rs.2.26 per unit. Similarly, Reliance Power has also sought tariff relief from CERC for its Krisnapatanam and Sasan projects. "When a level-playing field having been provided between the project developer and the distribution licensees and opportunity to cover their respective commercial risks, is it not the mandate of the commission to ensure that the project developer earns profit in every situation, irrespective of business risks assumed by the developer?," Jayaraman has stated in his order.
Adding up the case, the government rejected a proposal to pool coal prices and would allow power players, who have ensured coal linkages from CIL, to import the fuel and pass on the additional costs to the consumers. However, this facility will be available only for the projects awarded after 2009. The cabinet committee on economic affairs (CCEA) has asked the ministries of coal and power to draft a proposal that allows for the pass through of the additional fuel costs.
The move, while, paves the way to increase the power tariff for consumers, it may help to improve the investor sentiments in the sector. The financial viability of power plants fuelled by CIL coal has been hit because the miner has been unable to meet the promised demand. The government is hoping the changed terms by the cabinet committee on investment will kick-start investment activity in the energy sector. But, industry analysts believe that it's a temporary phenomenon. "Ideally, the government should have directed CIL to increase the import and distribute. Importing coal for individually by most of the companies would be a difficult task. And, even if they import, who will determine the cost?," said Kuljit Singh Partner, Power & Infrastructure Ernst & Young. India is deficit in coal, particularly from the private sector. Power projects, most of which are fuelled by coal, have been the worst hit by a shortage of the fuel. The power sector is the biggest consumer of coal, absorbing more than 75 per cent of domestic production.
Bids for power procurement are sought in two ways. In case-2 bidding, such as for domestic coal-based UMPPs, or so-called ultra-mega power projects of 4,000MW each, resources such as land, fuel and water linkages are identified and in some cases also provided to the developer quoting the lowest tariff. In case-1 bidding, the quantum and time period of power procurement is identified, but fuel type, sources and the plant location are not specified.
"There are early talks to scrap these PPAs under the case I/II model and convert them to cost-plus assured return on equity model for the initial five years. Thereafter, these projects should enter PPAs under the revised case I or II bidding policy that aims to ensure (a) pass-through of fuel costs and (b) shortening the PPA term to five-seven years versus 25 years currently (for long-term contracts) as it is impossible to take a view over 25 years," Credit Suisse India Research wrote in its latest report.
However, this decision may be difficult to implement. "There could be multiple challenges in transitioning case I/II PPAs to cost-plus model," the Credit Suisse report said. These challenges areùarriving at a consensus for power allocation to each state, likely resistance from resource-rich or power-surplus states as this move would increase their cost of power procurement, and obvious litigations involved in scrapping contracts, the report adds. Another observation is that many state discoms prefer to increase the load shedding duration in their respective areas rather than buying more costly power. Now, one has to wait and watch how the things are taking shape in future.
Some of the key issues related to the judgment are:
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