The cost of no power

While staying an order permitting Tata Power and Adani Power to hike the price of electricity from their two imported coal-based plants, the Supreme Court has provided more than an inkling about its views on the question of compensatory tariffs. An interim ruling of the Electricity Appellate Tribunal (APTEL) had, on the basis of an unforeseen escalation in imported fuel costs, upheld a Central Electricity Regulatory Commission (CERC) order asking State distribution companies to bear about an additional 50 paise on every unit purchased. The ruling took into account the severe financial constraints faced by the two plants. Also, the amounts received from the extra levy, sufficient to ensure continued generation at the plants, were to be maintained in a separate account. If the tribunal’s final verdict went against the power producers, they were to refund this amount with interest to the utilities.

The withdrawal of the compensatory tariff — even before the final order of APTEL — is going to further hurt the already strained finances of the two companies while raising questions about the sustainability of their continued operations. For example, Tata Power’s Mundra facility alone made losses of ₹1,492 crore in 2013-14. The company has further written off over ₹2,650 crore in the last two years on expenses incurred in running the plant.

At the heart of the matter is a fundamental question: What is the best approach to deal with such a situation? One tack, and seemingly favoured by the Supreme Court, is to adopt an uncompromising and rigid legalistic view. It is a fact that the power purchase agreements entered into by the producers with State utilities did not provide for pass-through of fuel costs. As the Court pointed out, the companies are liable for the contracts they have entered into. The other, and more pragmatic approach, is to weigh the risks of slightly more expensive power against no power at all. In other words, to provide some measure of financial viability to the companies while keeping in mind the interests of consumers and the overall economic situation. The two mega power projects had originally contracted imported coal at landed costs of $32-36 a tonne. This has more than doubled because of certain regulations promulgated by the Indonesian government in September 2012 that were totally unforeseen at the time of bidding. Yes, the promoters are to blame for bidding so aggressively and not factoring in any fuel price risks over 25 years. But the germane issue is who loses if plants with 8,000 MW of combined capacity are to shut down. Given that tariffs from new power projects are anywhere between ₹4 and ₹7 a unit, wouldn’t the utilities — and eventually consumers — be better off paying an extra 50 paise? One hopes that this question is addressed before there is a final resolution of this issue.

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