The ultra-mega power project (UMPP) producers have managed to convince the government and power regulator that they need an increase in power tariff to offset the hike in price of Indonesian coal. In being allowed to do so, we are effectively back to the times of input prices being passed through to power distribution companies and consumers. The promise of a fixed tariff from UMPPs, contained in their power purchase agreements, has been effectively put aside.

With Discoms unable to recover the higher costs from farmers, industry and business will have to bear the brunt. That apart, the finances of Discoms will sink further into a mess, requiring a further injection of relief from the Centre and states, in turn impacting their fiscal deficit.

The question that arises is – are UMPPs genuinely in no position to take the hit of higher coal prices?

HOW IT UNFOLDED

In April 2013, the Central Electricity Regulatory Commission (CERC) in its interim order, allowed a ‘compensatory tariff’ for Tata Power Ltd’s (TPL) 4000-MW ultra mega power project, based on imported coal.

The compensatory tariff was meant to neutralise the increase in price of imported coal following the Indonesian Government’s decision in September 2010 to impose a minimum ‘benchmark’ price below which coal could not be exported.

A Committee under Deepak Parekh set up to determine the quantum of tariff hike has recommended an increase of 60 paise per unit. However, this has been strongly opposed by states that have signed PPAs (power purchase agreements) with TPL.

While Punjab has categorically rejected this on the ground that this violates the PPA terms, others such as Haryana and Gujarat have questioned the manner of determination and emphasised the need for ‘all’ stakeholders to share the burden of fuel price increase.

At another extreme, TPL has argued that if the recommended hike is not allowed, this would lead to an annual loss of Rs 1,873 crore. That is Rs 45,000 crore over the plant’s operational life of 25 years.

TPL bagged the project under a competitive bidding procedure (CBP) to supply power at fixed tariff of Rs 2.26 per unit — all through the project’s operational life — with escalation in variable cost capped at 45 per cent.

Adani Power Ltd (APL), another ultra mega power project in Mundra, also got it under CBP and is facing a hit of Rs 1,200 crore per annum due to increase in price of imported coal. Through an order in April 2013, CERC allowed a ‘compensatory tariff’ at the rate of Re 1 per unit to APL.

Other ultra mega power projects placed in a similar situation are Reliance Power, Krishnapatnam (AP) & Sasan (MP), Lanco’s Anantpara, etc. While, RPL’s Krishnapatnam is affected by the Indonesian regulation, for Sasan it has petitioned CERC for revising tariff to ‘offset’ high input cost.

A record 38,000 MW of new generation capacity has been added during 2011-12 and 2012-13. Much of this is from ultra mega power projects where promoters are facing escalation in input cost.

SEBs in dire straits

Owners of ultra mega power projects UMPP argue that increase in fuel cost was not anticipated at the time of bidding. It is argued that if tariff is not increased to reflect the rise in fuel cost, plants will be rendered unviable.

Hence, it would be apt for SEBs/power distribution companies (PDCs) to pay a little extra rather than being confronted with a scenario of no power. Can they pay?

The finances of SEBs/PDCs are in dire straits. Earlier this year the Centre approved a Rs 2,00,000-crore ‘restructuring’ package towards their losses.

State governments took over 50 per cent of their liabilities.

For the balance, they guaranteed bonds issued to creditors/banks. Besides, the Government forced banks to accept less than 9 per cent interest on bonds. The package required them to increase tariff to plug the gap between revenue and cost. The objective was to prevent recurrence of yet another bailout in future.

SEBs/PDCs cannot afford to raise tariff on supplies to farmers and poor households which account for 30-40 per cent of total demand. So, the axe has to fall on the balance 60-70 per cent supplied to industries and businesses.

The actual situation

The amended Electricity Act (2003) provides for ‘open access’. Put simply, it means any consumer with a requirement above a certain threshold can ‘switch’ suppliers, much like MNP (mobile number portability) in the telecom sector.

But this has a cost tag. Apart from wheeling charges, the consumer has to pay cross-subsidy surcharges to the original supplier. Due to these in-built deterrents, open access has remained by and large on paper.

Therefore, industries and businesses cannot leave the assigned power distribution companies even if they wish to. Yet, there are limits to how much tariff hike they can absorb!

They pay for cross-subsidy (to make up for subsidised supplies to farmers et al ), transmission and distribution (T&D) losses and even theft.

A fixed tariff over the longterm under a competitive bidding regime was meant to break this vicious cycle. UMPPs were to help in this endeavour by managing fuel and other risks. But they are backtracking now.

Instead of facing a developing situation head-on, they have merely dumped the baby at CERC’s doorsteps. And the Government has merely acquiesced.

It is on course to reverse the competitive bidding policy. For awarding projects henceforth, it intends to invite bids only for the ‘fixed cost’ component. Fuel cost will be pass-through, back to square one!

This will lead to a steep increase in tariff from all UMPPs — in operation and under commissioning.

Thanks to the escape hatch opened by the CERC and the government, ultra mega power projects have neither explored available options to deal with fuel price hike nor put all the facts on the table. To get an idea, consider this.

TPL holds equity 25-30 per cent in three mines in Indonesia. An increase in price of coal while increasing generation cost also adds to its profits as owner of mine. So, loss to TPL would be lower by Rs 550 crore per annum. The projected loss of Rs 45,000 crore is on the basis that ‘higher’ price of coal is a permanent feature. However, Indonesian regulation could well change.

Tap domestic coal

India is sitting on huge reserves of coal to last 100 years, even while meeting our energy needs ‘fully’. Yet, we keep these idle and let imports come in at more than double the price. There are ample opportunities to rein in fuel cost. Ultra mega power projects should muster the will to tap these. The Government should goad them into honouring their commitment under PPAs.

(The author is a policy analyst)

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