Jindal Power may be hit hardest by new bid norms

Written by Noor Mohammad | Noor Mohammad | Rishi Raj | New Delhi | Updated: Sep 25 2012, 14:28pm hrs
Jindal Power will be hit hardest by a government plan to insert a new clause in the competitive bidding process for electricity generation companies to clinch power purchase agreements (PPAs) with state electricity boards (SEBs) and bulk consumers.

Sources said that the power ministry is working on amending the standard bidding procedure for PPAs in such a manner that bids would have to be placed on the basis of cost of coal. This would mean that power producers with captive coal like Jindal Power would have to bid for signing PPAs on the basis of its actual cost of coal, as approved by the regulator. The cost of captive coal, needless to say, is considerably lower than fuel sourced from Coal India and through imports.

Once the new bidding norms are in place, the price advantage of companies having captive coal blocks compared with other firms would disappear. They would have to face real competition in PPA bids and their profitability could shrink.

If Jindal Power, which has captive coal blocks, can sign PPAs with SEBs before the new norms come into force, it can still emerge as the lowest bidder on the back of the cheaper coal it has and continue to maintain high profits. However, according to company officials, it has not been able to sign even a single PPA so far because no SEB is signing PPAs at this point of time because of lack of bids.

There are several other power producers that have got captive coal blocks, including Tata Power, Adani and Essar Power, but they sell power through a mix of PPAs and spot market rates, with Jindal Power being the only company that has been selling power at open market rates and raking in higher profits. Therefore, its inability to sign PPAs before the new norms come into force would rob it of the high profit margins it currently enjoys, analysts said.

For instance, Jindal Power, which is running a 1,000 MW power plant in Tamnar, Chhattisgarh, based on captive coal, quoted Rs 5.27 a unit to supply power to APCDPCL, an Andhra Pradesh discom, a couple of months back. This is higher than Rs 4.29 and Rs 4.4 a unit offered by KSK Mahanadi and Corporate Power plants based on coal supplied by CIL under long-term linkage, according to industry sources. The PPA has still not been signed by the discom concerned.

If Jindal was able to sign the PPA before the new norm comes into force, it would be more profitable than KSK Mahanadi and Corporate Power. Even if it quotes a price below that of the other two, its profit margin would still remain higher because its cost of coal would be lower. However, once the new norms come into force the benefits would erode since Jindal Power would be barred from bidding either lower or higher than the CIL linkage prices or the ones approved by the regulator.

Recently, the Tamnar plant was in the limelight over allegations of making windfall gains by selling power produced with cheap coal at higher tariffs in the open market. For example, during the April-June quarter, Jindal Power earned a net profit of Rs 314.39 crore on revenues of Rs 750.45 crore, which translates into a profit margin of 41%. During the same period, NTPC's profit margin stood at 15%, which is close to the industry norm. On its part the company denied that it earned higher profits due to cheap coal. It said that its higher profits were due to its higher efficiency.

To check such windfall gains by power producers having captive coal mines, the power ministry changed the bidding guidelines mandating all categories of power producers to participate in competitive bids to sell power.