Opinion

Why bail out private power producers?

Uttam Gupta | Updated on March 12, 2018 Published on April 09, 2013

‘Empowered’ by the regulator…Adani’s coal-based power plant at Mundra.

By allowing Adani’s coal-based power plant a higher tariff, the power regulator has set a bad precedent.



In his address at the CII AGM, Rahul Gandhi exhorted the powers-that-be to listen to the voice of a billion people. Clearly, he meant that that the ruling dispensation had thus far not listened seriously enough.

Even before his exhortation could die down, the establishment has come out with a decision that ignores people’s concerns and can have the effect of further impoverishing them.

FLOODGATES OPENED

The Central Electricity Regulatory Commission (CERC) has allowed a ‘compensatory tariff’ for Adani Power Ltd’s (APL) imported-coal-based power project in Mundra, Gujarat.

This has been done to neutralise the increase in price of imported coal following the decision of the Indonesian Government in September 2010 to impose a minimum ‘benchmark’ price below which coal cannot be exported.

Armed with the CERC order, APL will charge Re 1 per unit more from discoms in Haryana and Gujarat. Together, they will have to shell out an additional Rs 1,200 crore per annum.

A host of other UMPPs (ultra mega power projects) are placed in a similar situation. These include Reliance Power, Krishnapatnam (AP) and Sasan (MP); and Tata Power, Mundra (Gujarat).

While, RPL’s Krishnapatnam and TPL’s Mundra are affected by the Indonesian regulation, for Sasan too, RPL has petitioned CERC for revising tariff to ‘offset’ high input cost!

There are a number of others, such as JSW Energy and Essar Power, waiting in the wings. Once action starts happening on ground, they too will approach the regulator.

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

Now, if the Regulator permits ‘compensatory tariff’ to all of them (having allowed in one or two cases, it will have no basis to discriminate), the implications for SEBs/discoms will be horrendous.

IMPACT ON SEBs

Already, SEBs are saddled with monumental losses of close to Rs 200,000 crore. The Central government has come out with a ‘restructuring package’. ‘Eight’ States have already given their consent.

State governments will have to take over 50 per cent of the liabilities on their books. Banks too have to take a ‘hair-cut’ by accepting an interest rate of less than 9 per cent on bonds that SEBs/discoms will issue.

SEBs/discoms will have to raise tariffs so that the ‘shortfall’ in revenue as against proceeds from sale is fully eliminated. Any entity not complying with this condition will not be entitled to relief under the package.

Allowing power producers a tariff higher than what was offered by them under ‘Competitive Bidding’ (CB) will thus have the inevitable effect of a steep increase in burden on consumers.

To help producers using imported coal, Government is pursuing price-pooling of indigenous with imported coal. That will increase cost of generation from existing plants, too (‘robbing Peter to pay Paul’).

The Government is considering recommendation of the Dr C Rangarajan Committee to raise price of domestic gas from $4.2 per mBtu to $8.0 per mBtu. This will double the power cost from gas-based plants to Rs 4 per unit.

Power is an ‘inescapable’ input that every household needs for survival. Faced with a tariff hike — duly authorised by the government — where will these more than a billion go for relief?

BREACH OF CONTRACT

Historically, when power projects were assigned on an MoU basis, power purchase agreements (PPAs) included a clause allowing ‘pass-through’ of increase in fuel cost. This led to an automatic hike in tariff whenever fuel prices increased.

The new concept of assigning projects under ‘CB’ route generated hopes. Under it, a promoter who bids lowest ‘fixed tariff’ for supply over a given time horizon, say, 15 years, gets the project. SEB/discoms and consumers are thus shielded against any increase in fuel price.

The shield was intended to be ‘impregnable’ as commitment to supply at ‘fixed tariff’ during the stipulated period is duly incorporated in the PPA, a legal document binding on the signatories.

If this shield is demolished through a flagrant deviation from very fundamentals of PPA — duly sanctioned by the very authorities who are expected to defend its sanctity — consumers will be left completely high and dry.

The argument that ‘compensatory tariff’ will be adjusted when fuel cost declines does not inspire confidence. Will the Indonesian government undo what it did in 2010? Or will Government of India reduce gas price to bring fuel cost in sync with tariff that promoters bid for!

Even so, there are umpteen instances to demonstrate that when fuel costs increase, the Government loses no time in authorising an increase in the price of the end product. When the former declines, little effort is made to reduce the latter.

The hike is being justified also on ground — ‘or else projects will be rendered un-viable leading to no power’. So, the only option is to allow the required increase to make generation viable! This is tantamount to blackmailing millions of consumers.

If such actions are permitted, it will not only undermine the sanctity of agreements (while making a mockery of ‘CB’ policy) but also impose permanent misery on those for whom it professes to care most.

A key plank of the Centre’s fiscal stabilisation programme is that the supply of key inputs viz., fuel, fertilisers, power must not be subsidised. That indeed is the crux of the 2013-14 Budget.

Does it make any sense to first allow an increase in cost of generation by even violating ‘legally binding’ commitments and then forcing consumers to pay for it in the name of fiscal consolidation?

The ruling dispensation will do well to address the causes of increases in cost of inputs and services and take steps to rein in these costs. The Government will be well within its right — legally and ethically — to disallow the hike in tariff. Promoters had bid and got projects on terms as decided by them. This must be honoured.

In the Budget for 2012-13, when Pranab Mukherjee made retrospective changes in tax laws to the detriment of investors, this was perceived as an attack on the sanctity of contracts.

Even as the Government is trying to undo that damage, it should not give contrary signals by striking at the very root of PPAs — especially when this will hurt consumers most.

(The author is a policy analyst and former Executive Director, CropLife India.)

Published on April 09, 2013
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