Coal auctions: Power cos stare at 65 paise a unit variable cost deficit

Aggressive bidding could lead to Rs 1,350 crore revenue shortfall in FY16: CRISIL Research

Private power producers with a capacity of 10 gigawatt (Gw), who have bid the highest at the recently concluded coal block auctions, are staring at 65 paise-a-unit underrecovery in variable cost because of aggressive bidding, according to a CRISIL study. Consequently, these companies could clock an underrecovery of Rs 1,350 crore in 2015-16 because variable rates will not cover mining costs and production-linked payments to the government. This is based on the assumption the companies will be able to enter into power purchase agreements (PPAs) for 85 per cent of the capacity.

CRISIL Research estimates the deficit could rise to Rs 4,500 crore once allotted coal blocks reach peak production. Therefore, to safeguard returns, they will have to evaluate increasing fixed rates. However, developers who have already signed PPAs, accounting for a third of the 10 Gw capacity, will not have this option. “Even those that are yet to sign PPAs will find it difficult to quote significantly high fixed tariffs due to intense competition. So, the offset available, at best, will be partial,” says the study released on Thursday.

This will put further pressure on the financial position of private power generators, already stretched with an estimated high gearing of about three times at the end of 2013-14.

Says Prasad Koparkar, senior director at CRISIL Research: “The aggressive bids indicate the big premium on fuel security. Bid winners have agreed to forego, on an average, mining costs of Rs 650 a tonne and pay an additional premium of Rs 400 a tonne to states in 2015-16. To offset the resultant 65 paise a unit underrecovery in the variable rate, recently commissioned or under-construction projects will require an average first-year fixed rate of close to Rs 3.5 a unit. That’s 30 per cent more than average fixed rate quoted in the PPAs signed during the past two years. This will be challenging.”

The ability of developers to quote higher fixed rates might be limited because there is a risk that at some point, regulators will cap the fixed rates since the stated objective of reverse bidding is to ensure lower rates to consumers. What will also curb big increases in fixed rates is the likely intense competition for signing new PPAs. Says Rahul Prithiani, director at CRISIL Research: “According to our estimates, 22-25 Gw of power projects, both operational and expected to be commissioned by 2016-17, are untied and will compete for new PPAs. State discoms, however, have signed only  Rs 8.5 Gw of long-term PPAs in the past three years because of stretched financials, large capacity of existing PPAs and sluggish power demand. This will restrict any sharp increase in fixed rates.”

CRISIL Research pointed that while the auctions have addressed fuel supply concerns, it will be the timing and quantum of fresh PPAs that will determine the financial health of power projects.