The Parekh committee was tasked with coming up with a formula for the pass-through of additional costs arising from the sharp rise in the prices of imported Indonesian coal. Should its suggestion be accepted, the effective effective tariff payable by discoms to Coastal Gujarat Power (CGPL) the entity that runs the Mundra UMPP would be around Rs 3.02 per kWh.
The current tariff including capacity charges, fuel energy, ocean freight and inland handling charges is Rs 2.44 per kWh. The plant supplies power to Maharashtra, Gujarat, Rajasthan, Punjab and Haryana.
Analysts estimate that every 10 paise per unit increase in tariff brings down Tata Powers losses by approximately Rs 250 crore. The power producers consolidated profit in the previous fiscal was Rs 990.3 crore, which means a net compensation of 50 paise could mean a substantial increase in profits. The Mundra UMPPs under-recoveries of fuel costs were around R0.50/ kWh on a generation of 6,148 million units in Q1 FY14.
The panel also favours a ceiling on the compensatory tariff of anywhere between R0.61 per kWh and Rs 0.87 per kWh in FY14. The stakeholders, it says, can discuss the third-party sale of power beyond the normative availability of 80% which is prohibited at present under the power purchase agreement(PPA). While bidding for the UMPP,Tata power had quoted a levelised tariff of Rs 2.265/ kWh with a scalable component of 45%; the plant runs entirely on imported fuel.
In July last year, Tata Power had asked the Central Electricity Regulatory Commission (CERC) for a pass-through mechanism to offset the adverse impact of the escalation of imported coal prices and changes in the Indonesian law for pricing of coal. CGPL had projected an annual loss of Rs 1,873 crore on account of these two factors.
Although the CERC didnt permit renegotiation of tariff, the regulator ordered in mid-April this year a compensatory package to balance the interest of the consumers and the suppliers, for a limited period till the hardship persists. Should Tata Power be allowed compensatory tariff, Adani Powers 4,620 MW Mundra UMPP too might be given the same.
Meanwhile, CGPL, which has term loans of about Rs 6,000 crore and foreign currency borrowings of around $1.7 billion, has requested banks to provide some relief in the form of lower interest rates or a longer tenure to ensure the project is viable; the Mundra UMPP is notching up losses of about Rs 400 crore every quarter. Lenders, for their part, are reluctant to lower the interest rate or lengthen the tenure, since both would mean classifying the loan as a restructured asset. However, they believe that once the compensatory tariff is approved, the company would command a better rating, thereby enabling banks to lower the interest rate.
The evaluation of compensatory tariff takes care of coal price escalation and marginal cost benefits of blending with lower grade coal are passed on to the procurers. Most significantly, the benefit of a decline in coal prices below $42.13 per tonne (price at the time of bidding in 2006) is passed on to the procurers. And it does not involve any change in the existing tariff components nor the escalation index.
There was little volatility in prices of coal in the international market till 2006, but due to the huge demand coming from China and India, prices spurted and Indonesian government in 2010 introduced a regulation for benchmarking prices of the coal produced in the country on the basis of international prices. This has heavily impacted power projects operating on Indonesian coal in India. The Parekh committee has based its calculations on a $64.38 per tonne price of Indonesian coal on July 13.
To negate undue profit to the Tata Power on account of its mining operation in Indonesia, the panel has built in in the formula a truing-up of the provisional compensatory tariff at the end of each financial year, adjusting actual normative fuel energy expenses and the companys share of profit from Indonesian mining companies proportionate to the offtake for the Mundra UMPP.