With accumulated losses of Rs6,457 crore, as compared to the paid-up equity of Rs6,083 crore, if Tata Power’s Mundra power project’s last-ditch effort doesn’t pan out, the company may have no option but to shut it down. Running the plant at a 40 paise per unit loss, after all, means an annual loss of Rs1,000 crore and, even if the promoters are willing to take a hit on their equity returns, the rest needs to be funded by banks. While shutting the plant would endanger nearly Rs14,500 crore of debt – of this, Rs 4,500 crore was taken to meet the daily cash-burn – what is worrying is the cavalier attitude of the state electricity boards (SEBs) that buy power from the company, as well as the Supreme Court that has in a sense ratified this irresponsible behaviour.
At Rs2.4 per unit, Mundra’s tariffs were amongst the lowest in the country, and way lower than many of the new plants set up including those of the public sector NTPC. This remained true even after the Indonesian government, from where coal was to be sourced for the plant, raised the minimum export price. Yet, when Tata asked for a tariff hike, the five SEBs—Gujarat, Rajasthan, Maharashtra, Punjab and Haryana—that bought power from Mundra refused to raise prices, citing their power purchase agreements (PPAs). When Tatas approached the Central Electricity Regulatory Commission (CERC), it ruled out declaring the Indonesian action as a force majeure event—this would have allowed Tata to walk out of the PPA—but used it powers under the law to rule that the company needed a ‘compensatory tariff’; a committee was set up, under Deepak Parekh, to examine how much this should be, and that recommended 40 paise per unit.
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The states appealed to Aptel which struck down compensatory tariff but said it was a force majeure event, and CERC then calculated the compensation under force majeure—the SC then struck down force majeure! The states, needless to say, are within their rights to want the PPA enforced. But when a project runs into an unforeseen problem, sensible people sit down to look for a solution – if the contract was the only thing that mattered, you wouldn’t need a regulator. In this case, CERC had taken the decision and a committee under a chairman of repute had studied the matter before coming up with a recommendation. With SC effectively rejecting the compensatory tariff, Tatas have now proposed the SEBs take over 51% of the equity for one rupee but, since they will now own the plant, they pay Mundra the 40 paise compensatory tariff.
The SEBs will get a plant for 40 years while the 40 paise has to be paid only till the cost of coal falls or for the 15 years left of the PPA, the Tatas argue, and the 90 paise capacity charge will take care of the debt servicing. Whether or not the SEBs agree remains to be seen since they will effectively be taking on the plant’s debt even if it is serviceable. Also, with power rates falling, they may not want to take on a long-term obligation—after signing wind-power PPAs in 2015, as FE reported, the Andhra SEB now wants to rework them in keeping with the lower bids in 2017! If things don’t work out, though, it will be a shame given how low-cost the project still is and the impeccable reputation of the project promoters.