Adani Mundra tariff order fuels hope for Indonesian coal users

Written by feBureau | New Delhi | Updated: Apr 4 2013, 07:14am hrs
In a regulatory ruling which would remove the uncertainty over a host of mega power plants, the Central Electricity Regulatory Commission (CERC) has upheld Adani Powers right to recover additional fuel costs arising from the recent hike in Indonesian coal price from those who buy electricity from its Mundra project. The ruling would mean that discoms in Haryana and Gujarat that buy power from the plant might have to pay almost R1 more for each unit of power from the plant. Together, these discoms must shell out an additional R1,200 crore per annum if the CERC order is implemented and the tariffs so revised. Of course, the extra cost will ultimately be passed on to the retail consumers in these states, given that the policy of pass-through of cost is being implemented in the sector with renewed vigour.

The CERC did not spell out any formula for tariff revision, saying the quantum of extra fuel cost will be decided by the parties concerned through mutual consent. A panel comprising the company, principal secretaries (power) in the two states and chiefs of discoms concerned will assess the impact of the higher coal price on the viability of the project and decide the quantum of additional tariff.

Tata Powers ultra-mega power plant (UMPP) at Mundra and Reliance Powers Krishnapatnam UMPP are likely to benefit from Tuesdays CERC decision as their pleas for tariff revision on similar grounds are pending with the regulator and the ruling in the Adani Power case could set a precedent. We welcome the CERC order, which will pave the way to enhancing investor confidence in the power sector, said Adani Group chairman Gautam Adani.

All these projects were awarded through the tariff bidding route where companies usually quote fixed fuel costs to win the project. Adani Power, for instance, had quoted a fixed fuel cost for supplying power to the utilities under Case-1 bidding route where the developer and not the power procurer is responsible for arranging fuel for generation.

The price of Indonesian coal rose after the country moved to international index-based pricing for the fuel, effective September 2011.

Under the 25-year power purchase agreement (PPA), Adani agreed to supply 1,000 MW and 1,425 MW of power to Gujarat Urja Vikas Nigam and Haryana utilities Uttar Haryana Bijli Vitran Nigam and Dakshin Haryana Bijli Vitran Nigam respectively, at levelised tariffs of R2.35 and R2.94 a unit. Adanis Mundra plant uses blended coal (a mix of domestic and imported coal) to generate power.

As per the order, a panel of officials and company representatives will be set up in a week to assess the impact of the fuel price rise and suggest a compensatory tariff package over and above the existing tariff to help Adani recover extra fuel costs.

The tariff will be variable and could be withdrawn as and when additional fuel cost burden reduces or is fully recovered. The panel is required to submit its report to the regulator by end of this month.

In September 2011, Indonesia switched to international index for pricing coal, a move that led to a sharp revision in fuel costs for power producers sourcing coal from that country. Indian power generators, which had entered into contracts with Indonesian mining companies for coal supply before the new law came into force, are now required to pay international prices rather than the contracted price.

The CERC ruling could show the way for resolving similar contractual issues threatening 15,000 MW generation capacity which depend on imported coal. The CERC order is a very positive step and is likely to benefit many of the private sector projects finding it difficult to meet their obligations under PPAs due to reasons beyond their control, said Ashok Khurana, director general, association of power producers.

Adani had submitted before the regulator that Indonesian coal price rose from $36/tonne to $92 after the country moved over to index-linked pricing and said it was losing Rs 790 crore and Rs 580 crore respectively every year on power supplies to Gujarat and Haryana.

Significantly, the petitioner had sought relief from the regulator under the Force Majeure and Change in Law clauses as well. However, these pleas were dismissed. The regulator instead invoked its tariff regulation powers under Section 79 of the Electricity Act 2003 to show a way out of the contractual logjam. The CERC has the jurisdiction to adjudicate upon tariff disputes relating to plants supplying electricity to more than one state. For their part, the respondents argued that that Adani was required to manage fuel cost risks as it was supplying electricity to them under Case-I bidding route. While showing the way out of the dispuite, the regulator has maintained the sanctity of the PPA.