In a major step towards reviving the stranded power projects operated by Adani Power Limited (APL), Tata Power and Essar Power in Gujarat, the Supreme Court has asked the Central Electricity Regulatory Commission (CERC) to review their power purchase agreements (PPAs). The move comes after the high-powered committee (HPC) appointed by the state government suggested amendments to the PPAs to allow the increase in fuel cost to be a pass-through in the tariff.
The HPC was set up in July 2018 to resolve the issues ailing these power plants and review their financial viability. Based on the order, the CERC has eight weeks to come up with revised PPAs. While a final decision is still awaited (expected in a month’s time), the move is being seen as a huge positive for the power sector, especially the three Gujarat plants.
A look at the key HPC recommendations and their implications for the power plants…
The three power projects – the 4,620 MW Mundra thermal power plant (TPP) of APL, the 4,150 MW Mundra ultra mega power project of Coastal Gujarat Power Limited (CGPL), an arm of Tata Power, and the 1,200 MW Salaya TPP of Essar Power Gujarat Limited (EPGL), a subsidiary of Essar Power – were set up based primarily on imported coal from Indonesia. The projects became economically unviable after a change in Indonesia’s coal pricing mechanism, notified in September 2011, which resulted in an increase in Indonesian coal prices. This increase could not be passed through in the tariff due to the provisions of the PPAs. Hence, the plants continued to supply power at the specified tariff of Rs 1.30-Rs 2 per unit, while the fuel alone costs over Rs 2 per unit. As a result, the plants have been suffering from major underrecovery since 2011. Till March 2018, APL, CGPL and EPGL had incurred a cumulative loss of Rs 97.48 billion, Rs 81.76 billion and Rs 36 billion respectively.
While the CERC and the Appellate Tribunal for Electricity (APTEL) granted compensatory tariff for under-recovery due to a higher fuel cost under the force majeure condition of the PPAs, the Supreme Court overruled their decision through an order issued in April 2017 and stated that the change in Indonesian regulations could not be interpreted as “change in law” or “force majeure” as per the existing PPAs. The Supreme Court asked the CERC to find a fresh approach to resolve the matter. Meanwhile, continued unviable operations intensified the stress, leading to a decline in the creditworthiness of the generators and projects. Seeking to reduce the stress on their balance sheets, the companies even planned to sell a majority stake to the state government for a negligible consideration. EPGL has already been classified as a non-performing asset (NPA). For discoms, power supply has been inconsistent and power procurement costs have increased due to their having to switch to alternative, more expensive energy sources. For lenders, the net worth of the projects had already become zero.
In an attempt to find a solution to the problem, the Gujarat government, in July this year, constituted an HPC, which submitted a resolution plan for the three TPPs. The committee comprised Justice R.K. Agrawal, former justice of the Supreme Court; S.S. Mundra, former deputy governor of the Reserve Bank of India; and Dr Pramod Deo, former chairperson of the CERC. As per the HPC, the only way to resolve the problem was to address the issue of fuel cost.
The three power plants supply power to five states – Gujarat, Maharashtra, Rajasthan, Haryana and Punjab, all of which are high power-consuming states. Any reduction in power supply from these plants affects the demand-supply position of these states and has ramifications for the overall situation. The three projects fulfil about 45 per cent of Gujarat’s power requirement and APL and CGPL fulfil 22 per cent of the power requirement of Haryana’s state utilities. The average variable charge of these plants is Rs 1.74 per kWh against the overall average variable charge of about Rs 2.59 per kWh. Further, the capital cost of these projects (Rs 40 million-Rs 50 million per MW) is significantly lower than that of other recently commissioned projects (Rs 60 million-Rs 80 million per MW). Hence, the replacement cost of these projects would be much higher. Also, any new project would have a gestation period of four to five years.
Another alternative would be procuring power from the exchanges. While the power plants are capable of generating around 62 BUs, the volume supplied by the exchanges is around 45 BUs. This would not only be insufficient but would also increase costs.
Further, as per the technical due diligence carried out by NTPC Limited, the plants are technically healthy and their operations comply with technical standards. This, however, is true only if the plants run on imported coal. If they were to use domestic coal, they would require rigorous analysis and significant modifications involving additional capex.
From a legal perspective too, it has been thought best not to approach the National Company Law Tribunal (NCLT) to initiate insolvency proceedings. Rather, the majority stakes in the projects should be acquired by the state governments or the PPAs amended for a revision in tariffs. Either way, the contractual provisions of the PPAs would need to be amended.
On these grounds, the HPC has recommended allowing a full pass-through of fuel costs in the tariff, while keeping the capacity charge as per the quoted tariff. It has ruled out the option of shutting down the plants, which would not only cause financial losses to the plant owners, but also lead to higher power procurement costs, increase the number of NPAs for lenders, affect power supply to various states and put additional burden on transmission charges. Further, as per the Ministry of Power’s revised guidelines and the standard bidding documents for the procurement of long-term power through bidding, fuel cost is a pass-through.
Implications of the recommendations
The HPC recommendations would have a bearing on all the stakeholders involved. The generators will not be compensated for the losses already incurred. They would have to take up this issue in a different petition. Going forward, fuel costs will be made fully pass-through on the landed cost. However, it will be subject to a ceiling of $120 per metric tonne. Beyond this, the fuel risk will have to be borne by the generator. This ceiling price is also proposed to be reviewed every five years. At the same time, the profits accrued by the companies from their mining business in Indonesia attributable to the Indian power plants will be passed on to the consumers.
For lenders, they will be required to reduce the debt of the companies by about Rs 92 billion (Rs 42.4 billion for CGPL, Rs 38.21 billion for APL and Rs 11.54 billion for EPGL). This will result in a decline of Re 0.20 per kWh, which will be passed on as a reduction in the energy charge for the purpose of merit order and billing. In addition, the lenders will reduce the interest rate for the three power plants.
The amendments to the PPAs will also give procurers the option to extend these for a period of 10 years beyond the expiry date, as per the revised provisions. This will be beneficial for both the generators as well as the discoms. Additional capacity that is not allocated as per the existing PPAs can also be included. APL and EPGL have expressed their willingness to do so. This will help operate the power plants at a higher availability level.
The way forward
The HPC recommendations, if implemented, will not only provide relief to the stressed power projects and developers, but also ensure reasonable and reliable power supply to the five states involved. The amendments to the PPAs will be a landmark move, which reiterates the government’s commitment to revive the stressed power assets. The HPC had recommended implementing the rehabilitation package, including the amendments to the PPAs through an appropriate policy decision. However, the Supreme Court has directed the CERC to come up with appropriate amendments to the PPAs. While the final order by the CERC is awaited (expected in December 2018), there is concern that the decision may be appealed in the court by some stakeholders.