State-owned Coal India Ltd (CIL) on Thursday invited independent power producers or IPPs — entities who have long-term power purchase agreements (PPAs) in place but lack access to assured supply of domestic coal — to take part in auctions for fuel linkages.

India has 8.3 GW (Giga-watt) of such capacities in place and another 2.5 GW under construction.

The notification was issued as per provisions of the New Coal Allocation Policy for Power Sector, 2017 which underlines that the auction will be based on discount to quoted tariff in PPA.

The government thinks the IPPs entered into such PPAs assuming higher a price of fuel — which is available either through CIL’s e-auction or imports — and, thereby demands a commensurate cut on electricity tariff upon availability of CIL supplies.

IPPs consider this monopolistic behaviour on the part of the government, and a perfect recipe to add to the stress of a beleaguered thermal power sector.

“Nearly 80 per cent of the private producers are stressed. And the government is taking the industry towards more,” said a source in an IPP.

The grievance against the proposed linkage auction is genuine. To start with, due to gross over-capacity, the PPA market has been extremely competitive for nearly a decade now. And, most PPAs in question had committed to low and flat tariff on a long-term basis.

The investors banked on government’s promise to offer coal either through long-term linkages from CIL — ignoring repeated protests of the miner — or allotment of captive coal blocks. Both policies failed miserably.

Faced with an acute mismatch between coal supply and demand, the government stopped issuing letters of allocation or LoAs to the power sector abruptly in 2010, when many projects were under implementation. There were over 580 such pending applications for the LoA early this year. Those awarded with coal block suffered more, as the Supreme Court de-allocated the mining assets in 2014. Naturally, the investors had little choice but resorting to open market purchase of fuel to keep the PPAs alive, ignoring a hit in the bottom-line.

“The government told the Supreme Court that they will ensure supply of fuel to the affected producers. Now they are asking a premium (through discounts on tariff) for such supplies,” the source said.

A May 2017, sensitivity analysis by rating agency ICRA, validates that the power producers should bid cautiously to avoid impact as discounts may lead to under-recovery of energy charges (PPA has two parts energy charge and capacity cost).

Kameswara Rao, Leader-Energy, utilities and mining, PwC India confirms the challenge before such IPPs. However, he wants the State governments to take the lead from the Centre and help create more demand for electricity as a solution to end the current crisis.

India increased generation capacity by 2.5 times from 132GW to 326GW over the last decade and the majority of the added capacity came from the private sector. Unfortunately for them a gross over capacity, which is almost double to peak demand, created a supply glut, as is evident in below Rs 3 a unit generation tariff in the open market.

“Most of the IPPs are selling power at a loss and creating future NPAs for banks,” said a power sector source.

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