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Cover Story | August 2017

Bidders had choice to bid for 'indexe' fuel cost

<span style="font-weight: bold;">Shailesh Joshi, Executive Director &amp; Head-Energy Consulting Services, Feedback Infra Private Limited - Energy Division</span><br /> <br /> <span style="font-weight: bold;">Only UMPPs in operation in Gujarat are in the limelight recently, citing imported woes. Is it a problem of not having a clause on 'commensurate pricing' of power sold by them from time to time in PPAs, instead?</span><br /> At the time of bidding for the Gujarat UMPP and also in the Case-2 Bidding based on imported coal, the bidders had a choice to bid for an (indexed÷ fuel cost, which meant that any variations in fuel cost could be passed through to the procurers based on an indexation formula defined in the PPA. Unfortunately, the bidders chose to quote a fixed fuel price, fully for Adani project and partially (55% indexed) for the Tata project. Therefore it was a case of taking a conscious call on the fuel pricing risk at the time of bidding for the projects/PPAs. Therefore, the bid documents/ PPAs drafted then, were capable of managing the fuel price risk, but for the choice made by the developers. <p></p> <p> <span style="font-weight: bold;">Are there any UMPPs in operation outside Gujarat, which rely on imported coal?</span><br /> No such UMPP is in operation outside Gujarat. The one that was supposed to have come up at Krishnapatnam is languishing and facing termination of the contract. </p> <p> <span style="font-weight: bold;">Is this a peculiar problem faced only in India? Explain.</span><br /> We believe the issue has nothing to do India or any specific policies as such. As mentioned earlier this problem has arisen due to the way PPAs have been drafted consequent to the tariff bids submitted by the developers for the projects. The regulatory framework as it exists in the country permits pass through of all the PPA- based power tariff to the consumers. Strictly speaking, the additional compensation sought by the developers is outside the purview of the existing PPAs, therefore a special dispensation was necessary for settling the contractual dispute.</p> <p> <span style="font-weight: bold;">What are the available remedies for the imported coal-based power plants in India now and utilisation of these assets in a best possible way?</span><br /> By definitian, any contract is a (Negotiable Instrument. Therefore for the stranded assets like the Gujarat-based UMPPs, scrapping the existing PPAs and redrafting the contracts based on the commercial reality seems to be the only option. However, that would need a consensus to be built among the stakeholders like the developers, procurers, lenders and the regulators. Given the current power market scenario viz. low demand pick up, low PLFs for existing capacities, domestic coal surplus, significant number of stranded assets (~25000 MW) and strong push for renewable energy (RE) capacity addition we don't really envisage any more imported coal-based UMPPs to come up in the near future. However, in case they do, then the Bid Documents and PPA: </p> <p> (i)may encourage blending of Indian and imported coal; <br /> (ii)should provide for a definitive indexation formula for fuel price; and <br /> (iii)should have a reset clause every 5 years wherein the PPA can be reviewed in its entirety and can be tweaked as necessary.</p> <p> <span style="font-weight: bold;">UMPPs were planned with an avowed aim of bridging the gap between demand and supply of electricity? How many projects have been bid for and what is the status of such projects now?</span><br /> Out of around 14 UMPPs planned, four have been awarded (Sasan, Mumdhra, Krishnapatanam and Tilaiya) and of which 2 are operational (Sasan &amp; Mundhra) for the remaining two have made little progress. For the remaining the bidding process has slowed down/ put on hold owing to the current power sector scenario in the country. The Mundhra UMPP by Adani is not Bid out by the government under the UMPP programme, but developed by Adani on its own and the Power Purchase Agreements (PPAs) have been tied up under the Case 1/Case-2 bidding process.</p> <p> <span style="font-weight: bold;">Imported coal-based power projects were doing well till a year ago. What were the advantages they had provided? What went wrong with their operations, of late?</span><br /> The two imported coal-based power projects have been commercially hurt by the inability of the developers to pass on the increased coal prices of the imported coal to its power procurers. Given the vast coastline of India, imported coal based power plants at coastal locations were conceived to provide cost-effective solution for bridging the demand-supply gap. Until the coal prices were within the permissible range (as per PPA) the plants succeeded in meeting this objective.</p> <p> <span style="font-weight: bold;">How the coal price movement in global markets have changed over the last 10 years/a few years?</span><br /> Coal, being a commodity in the energy market, typically follows the oil price movement closely. However, major developed economies like Germany, Japan etc. have committed to enhanced generation from renewable sources and have reduced their coal consumption (and imports) significantly. Similarly China has banned import of low quality coal. Therefore, in the recent past coal prices have shown a declining trend. Over the last 5 years Thermal Coal CAPP price has declined from ~ USD 75/T to ~ USD 45/T. (Source: infomine.com)</p> <p> <span style="font-weight: bold;">Indian industry has entered coal mining in a big way about 10 years¦ back to support their UMPP project plans. How Indonesian experiment has turned sour for mining operators/ importers?</span><br /> On the contrary the mining experience (on (stand alone basis÷) of Indian industry in Indonesia has largely been successful. The Indonesian Government, earlier, were permitting free pricing of coal being exported from the country. In 2011, that government issued a regulation to link the export pricing for coal to a basket of international coal pricing indices. Therefore, the price at which Indian power plants were able to buy coal from their Indonesian counterparts soared significantly compared to the (free pricing regime. Therefore the sour point with respect to the Indonesian coal is (Commercial i.e. inability of the power generating companies to pass on the increased cost to its procurers.</p>
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