The volatility in the global coal market may take toll on the country’s first ultra mega power project (UMPP) being developed by Tata Power. The company has sought an intervention from the Union power ministry to bail out its Mundra UMPP in Gujarat, which has been rendered unviable by the unexpected surge in international coal prices.
Coastal Gujarat Power (CGPL), the special purpose vehicle of Tata Power that has won the bid for Mundra UMPP, has tied up 3.28 million tonne of coal supply from Indonesia at a discount but its calculations on fuel costs have gone haywire because of the recent changes in Indonesian regulations on coal pricing. This has increased coal price by $40 a tonne for the project, upsetting the fuel costs worked out by the company at the time of the bidding.
The private developer won the project through a tariff bidding route in 2006 by quoting 55% of the fuel cost as a non-escalable component and a levellised tariff of R2.26 per unit.
?The recent changes introduced by the Indonesian government in respect of the coal prices are well beyond any developer’s reasonable expectations,? CGPL said in a recent letter to power minister Sushilkumar Shinde, adding that a tariff revision of R1 a unit would be required if the project is to become viable.
The UMPP is being financed by international lenders like International Finance Corporation, Asian Development Bank and South Korea Exim Bank. ?Failure of the project could potentially raise questions on the viability of the Indian power sector and affect much-needed investments in a very critical sector of the economy,? the letter quoted earlier said.
When contacted, Tata Power said, “Mundra is one of the first ultra mega projects of the country that has progressed faster than schedule. Mundra UMPP had made all contractual preparations including linkages through coal mines abroad, linked ports at both ends and shipping for reliability. Recently, Indonesia, like other coal exporting countries, made amendments in conditions related to coal exports from their shores. We look forward to a discussions on how the issue of change in law in Indonesia regarding imported coal would be dealt with.”
The concerns raised by Tata Power have also been supported by several other private power projects that depend heavily on imported coal. In fact, concerned that the issue could adversely impact the country’s capacity addition programme, the power ministry has already begun conducting a review of tariff bidding guidelines. However, it has no plan as yet to amend the guidelines to pave the way for the reopening of existing power supply contracts. ?Contracts which have already been signed should be respected,? a senior power ministry official said.
In tariff-based projects increase in fuel cost is not passed in tariff. This impacts a company adversely whenever there is abrupt price movement in global markets. Companies placing bids for a power projects do make some calculations to keep these risks under checks. But the present situation has gone much beyond their expectations and calculations.
Even the annual escalation of 3.46% prescribed by the CERC for the balance of the fuel requirement for the project is no longer realistic, with international prices rising 150% since 2006.