Recent compensatory packages for Adani Power and Tata Power for their Mundra projects hit by an unforeseen hike in the cost of imported coal could set a precedent.
After its orders last week, the Central Electricity Regulatory Commission (CERC) is likely to take a fresh look at a host of projects that have seen a spike in capital costs due to unhedged foreign exchange risk.
If the regulator takes a favourable view, it may allow the recovery of extra fixed charges for generating stations where project costs have escalated abnormally due to factors beyond the developers’ control, such as foreign exchange variations. Projects totalling 20,000-25,000 MW capacity being developed by private developers including Reliance Power, Lanco Power, GVK and Adani Power, who have taken big loans from foreign banks for project financing, could benefit.
The regulator’s new thinking on this matter is reflected in the favourable view taken by it in a recent case relating to the 14% increase in Reliance Power’s Sasan ultra mega power project’s capital expenditure triggered by the weakening of the rupee. The company has taken loans from Chinese banks to finance the Sasan UMPP.
In an interim order issued on Friday, the CERC said, ?Considering the extremely competitive rate at which the procurers are getting power from the Sasan project, there may be a case for the procurers to share a part of the burden as compensation on account of rupee depreciation in order to make the project viable.?
Reliance Power had estimated implementation cost of the Sasan UMPP at Rs 19,600 crore, which has now gone up to Rs 22,400 crore.
In it submission to the CERC, Reliance Power said: ?Since the debt has been capped by the lenders at Rs 14,550 crore based on the levelised tariff of Rs 1.19 a unit, additional equity of Rs 2,800 crore is required to be infused. And since additional equity amount could not have been factored into the bid submitted by it, return on such additional equity which needs to be infused to tide over the increased project cost needs to be permitted.?
According to the petitioner, the rupee has depreciated against the dollar by 37% from the time when it made offer to develop the project ? from 40.27 in July 2007 to 55 on the day it filed the petition before the regulator. This works out to a 6% per annum depreciation, much higher than the 0.74% yearly loss in the rupee’s value provided by the CERC for project cost escalation during the period. Consequently, its outflow on repayment of foreign loans will increase by Rs 3,821 crore. The private developer has justified its move to import equipment for the project, which in turn forced it to take foreign currency loans, citing domestic non-availability of supercritical technology used in the plant.
Analysts cautiously welcomed the regulator’s move. Sali Garg, an analyst with India Ratings, told FE: ?CERC’s directions in the Sasan case are not final…However, the sense from these orders is that the power regulator is keen to resolve issues in large power projects while keeping the projects viable and avoiding burden on consumers.?
Kameshwara Rao, leader, mining, energy and utilities, PwC, also shared Garg’s assessment: ?The approach taken by the regulator gives confidence to the industry that even extraordinary situations can be managed in a competitive bid process so that private investment created is secured, and public interest is ensured,? Rao said.
?Competitively bid power projects have been facing hardship on account of under-recovery of capacity charges due to rupee depreciation, delay in commissioning, increase in cost of R&R and change in law and taxes. This issue needs to be addressed to restore financial viability of affected projects,? said Ashok Khurana, director general, Association of Power Producers, which represent private energy firms.
Although the CERC has taken a considerate view of the project cost escalation in the Sasan UMPP due to the rupee’s depreciation, it has held back its final order in the matter and asked the developer to submit by February 28 key documents relating to ?bid assumptions (original and revised) for the levelised tariff of Rs 1.19 a unit containing the different elements including the escalations factored for each of the elements?. The matter is listed for hearing on April 17.
Reacting to the regulatory intervention, Reliance Power said on Monday: ?We welcome the CERC’s order recognising that the unprecedented and unforeseen foreign exchange rate variations beyond the control of the company and beyond the normal expectations may need to be considered for quantification and compensation by the procurers appropriately.?
Other developers who have taken unhedged foreign currency loans to finance their power projects are likely to approach the CERC soon for relief.