Power projects in a price maze

CERC's decisions on Adani, Tata and Reliance's UMPPs suggest that the principles for raising tariff should be linked to an indexed formula

The Central Electricity Regulatory Commission (CERC) has recently been involved in two landmark decisions concerning mega power projects. First, allowing Adani Power to increase the price of power generated from its imported coal-based project at Mundra, Gujarat. Second, allowing a compensatory tariff package for the Tata Power's four-GW Mundra ultra mega power project (UMPP) over and above the tariff agreed in the power purchase agreement (PPA).

These decisions have provided the much-needed temporary relief to the ailing plants, and are perceived as positive for investments in the Indian power sector. But is a revision in the PPA the way forward? This debate is vital given the impact it may have on the status of future PPAs and UMPPs.

These two decisions are likely to put pressure on distribution companies (discoms) in the states concerned and could lead to an increase in power tariff for consumers. According to reports, the Gujarat Electricity Regulatory Commission has increased power tariff for different categories by an average of Rs 0.31 per unit for 2013-14 at the request of discoms and power developers in the state.

Additionally, CERC has recently directed Reliance Power to deliberate with electricity-consuming states the proposal to increase tariff for its Sasan UMPP in Madhya Pradesh. Though the tariff raise in the case of Sasan is owing to the "unprecedented" depreciation of the rupee, the Tata Power and Adani judgments are a direct response to the retrospective increase in imported coal prices from Indonesia.

In Tata Power's Mundra UMPP case, CERC had to examine whether the dispute fell within the scope of "force majeure" or "change in law" clauses, according to Article 12.4 of the current PPA. The purpose was to ensure continuity of operations in circumstances not envisaged and beyond the control of the parties involved.

Discoms in Rajasthan, Punjab, Haryana and Gujarat, however, were not willing to revise the PPA. According to them, the Article clearly mentions that power tariff cannot be revised on the basis of change in "international regulations". They also debated that an increase in coal price by Indonesia is a post-tender development that should not alter the terms and conditions under which the bid was submitted by Tata Power.

Moreover, they argued, if the operator is losing money on a procurement-related loss, it cannot be "force majeure". Also, the terms "law" and "change in law" relate to the Indian law, and not to laws outside the country. On the other hand, Tata Power was claiming that an exclusion of foreign law will affect the continued operation of plants while restricting "force majeure" will be onerous and costly.

Disquietingly, the government has advised Indian power players to decrease their reliance on coal imports, although this is unlikely since Coal India, the monopoly domestic producer, suffers from the chronic problem of not meeting its production targets in every annual cycle.

There is certainly a need for a transparent and objective mechanism so that abnormalities in input prices can be addressed on an ongoing basis. All the same, it is difficult to understand how, in 2006, companies expected the cost of imported coal to remain so low for such a long period when there is plenty of literature available (such as "Published Commodity Prices For International Steam Coal") concerning dramatic price increases that occurred in and around 2005. Even now, as the recent CERC order stated, the escalation in price of imported coal on account of the Indonesian regulator is a "temporary phenomenon" that may not hold true in the long term.

Following the current logjam, CERC decisions may herald the following changes in the terms of future UMPP-related PPAs:

1. A simple tariff calculation mechanism might replace the complex 25-year levellised system that is currently in place. A format under which bidders are examined on the first-year quote could be an alternative. The government is already working on a new norm that would be applicable for three UMPPs planned in Tamil Nadu, Odisha, and Chhattisgarh;

2. The time limit for the revision PPAs could be altered from the current 25 years to five-year reviews, to counter the impact of unforeseen factors;

3. Ficci, in its pre-Budget memorandum, suggested tying up power within three years from the date of issue of the provisional mega certificate (for duty-free import of power equipment).

Importantly, the principles for changing prices should not be perception-based; there has to be some indexed formulas, as is common practice in other areas of the energy sector (such as LNG contracts). Although it is imperative to help the ailing plants, care must be taken to ensure that consumers are not left high and dry.

The writer is an energy expert. These views are personal