Column: Tatas power problem

Written by Shobhana Subramanian | Updated: Oct 5 2012, 03:55am hrs
Indias largest private sector power producer is in more than a spot. A sharp jump in the price of coal overseas has thrown the economics of Tata Powers 4,000 MW ultra-mega power plant (UMPP) in Mundra, Gujarat, out of gear. It turns out that fuel needed to generate the power is costlier by about $30-35 a tonne and that could crimp the bottom line; a back-of-the-envelope calculation shows that if the plant is run at a load factor of 80%, losses could come in at an estimated R2,200 a year, if, as the Tatas claim, tariffs need to be upped by 80 paise per kwh. Analysts, however, estimate the break-even tariff at half that levelabout 40-50 paise per kwhmore than the R2.26 per unit thats been fixed, which means losses could come in somewhere between R1,100-1,200 crore a year.

But Tata Power cant afford that and has been working overtime to re-negotiate the tariff with buyersdiscoms of the State Electricity Boards (SEBs). Obviously, the state-owned discoms see no reason why they should pay moreand even if they were convinced they should, they wouldnt say so for fear of the CAG coming down on them. And so the matter has landed up with the Central Electricity Regulatory Commission (CERC); it will be a long-drawn-out affair, given the large sums of money involved, protests by consumers and possible protests from losing bidders. Its not just Tata Power that wants tariff hikesa couple of other UMPPs are hanging fire because the price of imported coal has shot up and the verdict, whether from the CERC or finally the courts, will set a precedent.

Tata Power, for its part, believes there is a case for invoking the force majeure clause in the PPA (power purchase agreement). Lawyers representing the firm are understood to have argued that the PPA can be amended if laws are changed and, in this instance, its the changes in Indonesian law that caused the price of coal to become dearer. Whether or not Tata Power gets to increase the tariff, and if so by how much, will depend on how the law is interpreted. CERC, for instance, may allow Tata Power to charge more for the power but it would also want to make sure consumers dont end up paying too much. The commission would, therefore, take into account the fact that Tata Power gains from higher coal prices because it also owns coal mines.

To be sure, Tata Power should have been far more careful while bidding for the project. After all, participants were free to decide on the proportion of fixed and variable components of the cost of coal. So, its quite possible some of the losing biddersa Sterlite or a Larsen & Toubroassumed a higher proportion of the coal cost to be variable, as a result of which the cost of power quoted by them was higher. Analysts point out that Tata Power had assumed 45% of the cost of the coal as variablein other words, more than half the cost was non-escalable. Reliance Power had quoted a marginally higher tariff of R2.66 per unit while Essar Power had bid R2.80 and Sterlite as much as R3.75. Of the six bidders, only L&T and Sterlite had quoted a tariff of more than R3 per unit.

The question is whether Tata Power should be allowed to charge buyers a higher tariff or whether the sanctity of the PPA should be upheld. After all, the company is currently arguing in court that it might have bid a higher tariff for the Sasan power plantwon by the ADAG Grouphad it known the government would allow a change in the rules relating to coal. So, players who lost out in Mundra may well argue that Tata Power either needs to make good the losses or else give someone else a chance. Given that the UMPP was built at a cost of roughly R4.5 crore per MWlower than the current costs of R5.5 crore per MWthe plant may well find some takers.

Theres no doubt that the Mundra plant will bleed if Tata Power is not able to negotiate a higher tariff; losses in the three months to June 2012 were R165 crore and the estimated losses for 2012-13 are R430 crore. In July this year, Standard & Poors revised its outlook on the company to negative from stable although it affirmed the BB long-term corporate credit rating. The cause for the changed outlook was that the company had breached a debt-equity ratio covenant of loans to the Mundra projecthoused in a 100% subsidiary, Coastal Gujarat Private Limited.

Clearly, Tata Power needs to solve the problem quickly and will be hoping the CERC comes up with a solution; the SEBs, for their part, might be willing to concede some ground because even if they buy power from another source, its unlikely to come any cheaper. Allowing the case to head to the courts will be a disastrous outcome, given how many years, even decades, this can take.