Legal, administrative changes key to Mundra stake sale, say experts

Adani Power and Essar Power are contemplating similar moves

Industry experts see administrative as well as legal challenges before a solution is arrived at over Tata Power and other imported coal-based power producers’ offer to sell stakes in their stressed assets. 

Tata Power last week asked Gujarat Urja Vikas Nigam (GUVNL) to buy 51 per cent equity in the 4,000 MW Mundra Ultra Mega Power Project (UMPP) for Re 1. Adani Power and Essar Power, which also have power projects based on imported coal, are contemplating similar moves.

“Case-2 bidding does not allow for change in shareholding. But this may be treated as an extraordinary situation, and one could reopen the contract if all stakeholders agree,” said Pramod Deo, former chairman of the Central Electricity Regulatory Commission (CERC). 

Deo is among those who heard the case on compensatory tariffs to Tata Power’s and Adani Power’s Mundra power plants.

States are unlikely to agree to such an arrangement because the assets will remain financially unviable as imported coal prices stay high, according to an executive with a consultancy firm.

Kameswara Rao, partner with PwC India, said, “It can be an administrative challenge as the capacity is contracted to multiple states and there is little precedence for such buyouts. However, the asset is new, technically sound, and with a modest tariff revision will generate strong profits and command a good valuation. So a mature state utility cannot but give it serious consideration.” 

The Dabhol power plant is one instance where a state utility stepped in to buy a stake in a power plant. The project, however, continues to face financial difficulties.

“Losses of a subsidiary in which the holding company holds a 49 per cent stake do not show up in the latter’s financial performance. Such a move will help ring-fence financial distress among private power producers,” the executive of the consultancy said. 

Tata Power holds the Mundra plant through its subsidiary Coastal Gujarat Power. Adani Power recently carved out the Mundra asset into a separate subsidiary.

Most industry experts said unless tariffs were reworked, any sale would only translate into a transfer of financial stress. “It is challenging to hold on to any project which, at a certain tariff, becomes a continued drain on the balance sheet. Such losses will worsen as global coal prices move higher. For efficient projects that do not deliver a reasonable return even after fully absorbing surpluses from coal mining, a regulatory work-out is needed,” Rao said.

Other experts doubted if states would be willing to take on the additional burden with electricity being a politically sensitive issue.

Tata Power has also offered to continue with the operations and maintenance of the Mundra plant. This may be crucial in the case of Adani Power’s Mundra assets, where the equipment has been sourced from Chinese manufacturers. “Offering to continue with operations will be crucial for Adani Power, as it may not be easy for a new operator to run a plant with Chinese equipment," Deo explained.