Power Today |
 
Advertise Here [728 W x 90 H pixels]
Cover Story | August 2017

StUMPPed!!!

Change in coal export regulations by Indonesia and Australia has queered the pitch for Tata Power and Adani Power. But can India afford to forsake such huge assets built assiduously? <p></p> <p> In the second half of June 2017, Tata Power, one of the large power sector players, has surprised the whole country by offering to sell 51 per cent of the equity of its 4,000-MW imported coal-based power plant in Mundra to the power procurer (GUVNL) at a nominal price of `1. The plant was built with an investment of about Rs.25,000 crore a few years' back. Though it looks like a piece from the Ripley's Believe it or Not facts, there are several events over the last 7 years that have led the company to arrive at the decision to rescue the mega project.</p> <p>The ultimate rationale for the Tata Power's offer comes from the April 2017 judgement of the Supreme Court (SC) rejecting the earlier reliefs granted by the Appellate Tribunal for Electricity (APTEL) relating to compensatory tariff. This is expected to throw the finances of Coastal Gujarat Power Ltd (CGPL), or the Mundra UMPP of Tata Power, further deep into losses. Adani Power, which owns and operates a 4,600 MW imported coal-based power plant in Gujarat, was also a party to SC judgement on the issue.</p> <p>Later, Essar group, which owns and operates a 1,200 MW imported coal-based coastal power project in Gujarat called Essar Power Gujarat (EPGL), joined Tata Power in seeking solutions for their loss-making imported coal-based units. </p> <p>In its earlier submissions to the regulatory authorities and tribunals, Tata Power had said that bereft of compensatory tariff, the Mundra UMPP would lose Rs.1,873 crore per annum, adding up to Rs.47,500 crore over the 25years of its lifetime.</p> <p>The Mundra UMPP used to get its coal supplies from the Tata Power-owned coal mines in Indonesia. The whole problem started when the Indonesia Government has brought in new regulations that seek to link their export prices to a basket of global coal prices and imposition of some taxes, leading to viability issues for its users. This has upset the calculations of these mega power projects in India.</p> <p>Any delay in solution could bring these plants adding up to 9,800 MW capacity, to a grinding halt, adding to the already stranded capacity of 46,000 MW. The affected power companies are seeking an increase in the per unit prices paid to them, to enable them to offset the higher coal costs they are incurring. </p> <p> <span style="font-weight: bold;">Imported coal prices</span><br /> Tata Power had earlier entered into long term contracts for coal supplies from Indonesia for its UMPP. However, in 2010, Indonesia Government has changed the rules stating that the exports from that country could be done only at prices linked to a basket of international prices. That has doubled the Indonesian coal prices making the Mundra project unviable under the current terms, according to Tata Power.</p> <p>The increase in commodity prices in 2007-08 and subsequently up to 2010, led many governments to enact new mining and export regulations (including for coal) for boosting government revenues, including through taxation. These regulations, rather than prices itself, are responsible for the Indian power industry's woes. 'Not just Indonesia, many countries, including Australia and South Africa, have imposed regulations and taxes which impacted end-use companies that mined coal and commodities for purchase at cost of production. Higher taxes meant that input costs exceeded that on which the projects were constructed,' says Kameswara Rao, Leader - Energy, Utilities and Mining, PwC India. </p> <p> Indonesia, Australia and South Africa together control 98 per cent of seaborne coal. The move has doubled the Indonesian coal prices, according to analysts. If the new rules were imposed only by one country, the Indian UMPPs could have imported coal from some other country. However, with all the three countries making similar changes to the rules, UMPPs are rendered unviable in the wake of lack of pass-through mechanism in their PPAs. </p> <p>Tata Power is said to have requested the Indian government to impress upon Indonesia to exempt the company's coal contracts from the purview of the changed regulations, but the Indian Government was of the view that the issue was not big enough to be taken up through diplomatic channels. </p> <p>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, according to infomine.com,' says Shailesh Joshi, Executive Director &amp; Head-Energy Consulting Services, Feedback Infra Private Limited - Energy Division. </p> <p>Responding to a query, Rao said, 'Many other countries, which depend on imported coal, such as China and Japan too faced higher costs. In some cases the power plants would have taken a hit as Indian ones did and in other cases, power markets permitted pass-through of costs. </p>It depends on the jurisdiction and regulations.' <p></p> <p> <span style="font-weight: bold;">Index-based tariff</span><br /> For UMPP projects, as per the provisions of the competitive bidding guidelines, a two stage selection process has been adopted and the successful bidder was identified on the basis of the lowest levelised tariff. According to the final award for four projects, the Tata Power's Mundra Project was awarded at a tariff of `2.264/kWh and for Sasan hinterland-based project it was at Rs1.196/kWh.</p> <p>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,' Joshi said. Therefore it was a case of taking a conscious call on the fuel pricing risk at the time of bidding for the projects/PPAs. </p> <p>However, experts do not find fault with the promoters of these mega power projects as they had owned coal mines in other countries while bidding for the projects and they had a long term supply contract signed at a fixed price. 'The bid conditions did offer commensurate pricing option, but bidders did not exercise it fully as they aimed to use captive coal, which was right in principle,' said Rao. </p> <p>So, change in regulations by Indonesia and Australia have queered the pitch for Tata Power and Adani Power. </p> <p> <span style="font-weight: bold;">Viability pangs</span><br /> 'The two imported coal-based power projects in operation today 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,' says Joshi. </p> <p>As on March 31, 2017, Tata's CGPL had accumulated losses of Rs.6,457 crore against a paid-up equity of `6,083 crore, thus wiping out its capital. Besides it had an outstanding long-term loan of `10,159 crore, while Tata Power itself had lent `4,460 crore for the cash requirements of the project.</p> <p>In a letter to Gujarat Urja Vikas Nigam Ltd (GUVNL) recently, CGPL CEO Krishna Kumar Sharma said that the project lenders had stopped disbursal of loans beyond what is already been disbursed due to non-viability of Mundra UMPP, and that due to cash losses it is incurring, besides CGPL had gone into breach of covenants and after much effort, the project lenders have given extension of time, but now there was no hope to correct the situation.</p> <p> <span style="font-weight: bold;">Domestic alternative</span><br /> Using domestic coal, which is available at half the import price nowadays, is an option available to the imported coal-based UMPPs. However, there are conflicting reports on this from the government. On the one hand, the government wants to curtail imports in order to save on precious foreign exchange and increase demand for domestic coal, which has a surplus capacity now, while on the other, it wants to allow imports from Australia. </p> <p>The experts are saying that for use of low energy domestic coal, these power plants have to be reconfigured. UMPPs are using high quality coal imported from several sources outside the country, as of now. The other option is to blend low energy domestic coal with high energy imported coal, but for that also the plants need to be reconfigured. That means additional capital cost for the project already staring at financial chaos.</p> <p> <span style="font-weight: bold;">Power Sector plea</span><br /> Tata Power and Adani Power have approached the Central Electricity Regulatory Commission (CERC), Appellate Tribunal for Electricity (APTEL) and finally the Supreme Court, which in April, had denied the compensatory tariff sought by the companies, thereby denying earlier reliefs granted by APTEL too.</p> <p>Since then, these private players have been seeking ways to deal with these assets so that they do not turn non-performing. The two obvious remedies available to the mega power plants are: One, to renegotiate the tariff and the terms of the power purchase agreement (PPA). Second, to sell 51 per cent of the paid-up equity shares of CGPL to power procurers for a nominal price of Rs.1, as suggested by Tata Power, giving a competitive advantage to the procurer for the full life of the plant, 40 years.</p> <p>Out of desperation, Tata Power has made several alternative proposals to bring its unit out of the losses, even while agreeing that sanctity of bidding ought to be upheld, and that this was an unusual case. The excerpts of the proposals are as follows: </p> <p>The company is willing to settle for a compensatory tariff that would just let the project break-even, and allow no profits. <br /> Raise tariff by 60-odd paise, taking it to around Rs.2.90/ kWh (still cheaper than other options before the utilities).<br /> Extend PPA term above 25 years.</p> <p> <span style="font-weight: bold;">The way forward</span><br /> It is a ticklish issue to jump to a conclusion in a jiffy given that the sanctity of the bids are considered to be sacrosanct on the one hand and on the other if one agrees to the view that the governments have every right to change rules, and that too when a foreign government is involved. If it is a domestic policy one could argue that the new policy should not be made applicable to existing projects. But one thing is clear, national assets that were built assiduously under a domestic policy cannot he squandered, even as the future of UMPPs comes into question after these developments. </p> <p>What Joshi has suggested looks balanced: '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>GUVNL agreeing to sit with Tata Power at the negotiating table is a good sign. The Centre offering to facilitate a deal in this regard is laudable. Tata Power has already kept all its cards on the table as a proactive measure seeking an immediate solution. A negotiated solution within the limitations of rules is a good idea, even if it ends up with accepting 51 per cent stake sale of CGPL to GUVNL at `1.</p> <p>Why not we hike the tariff by 60 paise as Tata Power had suggested, is the question that comes to one's mind. But such a decision could invite a lot of litigation from other greedy power generators.</p> <p> But if one sees the current power sector scenario, where 46,000 MW of capacity is stranded in the country, there is no need for the government or the regulators to go out of the way to help a power project in trouble, whatever big or crucial it is.</p> <p> <span style="font-weight: bold;"><br /> </span></p> <p> <span style="font-weight: bold;">UMPP initiative in retrospect </span><br /> In 2005-06, the government had launched an initiative for the development of 16 coal-based Ultra Mega Power Projects (UMPPs) each with a capacity of 4,000 MW, in order to bridge the huge gap between the demand and supply of power in the country. These projects, using super critical technology structured on Design, Build, Finance, Operate and Transfer (DBFOT) basis, envisaged an investment outlay of `25,000 crore each. Identification of the project developer for these projects was done on the basis of tariff based competitive bidding, for inducing competition among bidders.</p> <p>UMPPs were planned to be set up using supercritical technology, which enables higher level of fuel efficiency and lowering greenhouse gas emissions. They were provided with dedicated coal blocks for pithead projects, while coastal projects were to run on imported coal. </p> <p>'The large scale of UMPPs offered economies of scale in both mining and power generation, which meant that we had large base load capacity at affordable rates,' Kameswara Rao, Leader - Energy, Utilities and Mining, PwC India. </p> <p>Four UMPPs have been awarded to developers selected through international tariff-based competitive bidding process during 2007 to 2009. Mundra and Sasan UMPPs are in operation at present. According to earlier plans, all the units of Krishnapatnam and Tilaiya UMPP were to be commissioned in the 12th Plan, except the last unit of Tilaiya UMPP which is expected in 13th Plan. But the units of these two projects have made little progress since. </p> <p> 'The Mundra 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,' says Shailesh Joshi, Executive Director &amp; Head-Energy Consulting Services, Feedback Infra Private Limited - Energy Division.</p> <p>Based on Pratyush Sinha committee recommendations, the government has proposed various changes, including forming two special purpose vehicles, one each for operations and infrastructure, while setting up UMPPs. </p> <p>Projects under UMPP pipeline include Bedabahal in Odisha; Cheyyur in Tamil Nadu; at Husainabad, Deoghar district in Jharkhand; Bijoypatna in Chandbali Tehsil of Bhadrak district and Narla &amp; Kasinga subdivision of Kalahandi district for setting up of additional UMPPs in Odisha; at Kakwara in Banka district in Bihar; and at Niddodi village in Karnataka. <br /> </p> <p><span style="font-weight: bold;">- BS Srinivasalu Reddy</span></p>
Post your comment
Name:  
Email:    
Comments:  
Verification Code:   Change Image

 

Posted Comment
1 .     Yogesh Says:
17 Oct 2016
I wish to start pvc / pp electric wire unit in Delhi. What kind of information I can get if I subscribe for your magazine

2 .     Sarfaraj Bilakhiya Says:
20 Sep 2016
Pls invite me all auction in gujarat

3 .     k.natarajan Says:
20 Jun 2016
we are doing business developing for solar power ,thermal power , customer supporting and we have 45 mw splar power on hand needs investors..... thanks lot pls call +910842559230 +919842753550


Advertise Here [728 W x 90 H pixels]