India Ratings for compensatory tariff for power projects

A timely compensatory tariff is essential for independent power plants (IPPs) which have signed power purchase agreements through competitive bidding, says India Ratings and Research (Ind-Ra).
"IPPs, having signed power purchase agreements (PPAs) at low tariffs under earlier Case 1 bids, are facing stressed cash flows on commencing supply, due to changes in laws, under supply of domestic coal, and unfavourable changes in original cost assumptions including fuel price (imported coal) and transportation costs," Ind-Ra said in a statement.
Ind-Ra's analysis of select projects commissioned over the last few years revealed that the regulated tariff is higher than the cost of power supplied under Case 1 PPAs.

However, long-term PPAs under Case 1 signed from 2013 show significantly higher tariffs. Despite the tariff differentials, given the multitude of factors impacting the projects including capital costs and location, it is difficult to arrive at the exact quantum of variation.
Nevertheless, Ind-Ra's experience in rating these projects suggests there is need to implement a timely compensatory tariff for a viable supply under competitive bidding, it said.
Ind-Ra said that the recent amendment to the tariff policy is the government's timely policy intervention to address the perils encountered by IPPs.

Although fuel cost pass-through is a reaffirmation of the earlier guideline released in March 2013, the clarity on the jurisdiction of electricity regulatory commission is a harbinger of hope for many projects in the sector, it said.

The amendment lucidly places the onus on Central Electricity Regulatory Commission to handle the compensatory tariff issue for any IPPs selling more than 10 per cent of power outside the state, it said.
Ind-Ra expects these changes to positively impact the sector and believes that this will curtail the time taken for approval of compensatory tariff.
Amendments to the tariff policy includes cost pass-through for the cost of imported coal/e-auction coal used due to a shortfall in domestic coal supply and also for a change in laws affecting taxes, duties and cess, impacting the thermal plants after bidding process.
Approval for a compensatory tariff from Electricity Regulatory Commission takes about two to four years including the resolution of any further appeals.

In the intervening period between the commencement of operations and receipt of a compensatory tariff, under-recovery of thermal plants is observed to be 10-15 per cent of the tariff.
The award of an interim tariff in cases where there is reasonable assurance of the award of a compensatory tariff is likely to have a positive impact on IPPs, it added.