Tata Power, which is hoping to commission its 4,000-mw ultra mega power plant (UMPP) in Mundra early next year, has been dealt a blow by the Indonesian government, which has called for a sharp increase in the price of coal exported out of the country. At current prices of $110 per tonne of coal, the increased cost could set the company back by about $100 million when all five units are up and running. Anil Sardana, managing director, Tata Power, tells Shobhana Subramanian the company is exploring the options of running the plant at a lower plant load factor (PLF) and importing lower-grade coal so as to save on costs.

How do you think the issue of the sharp increase in coal prices in Indonesia, which will hit the bottom line of the Mundra plant, can be resolved?

At the time when we bid for the Mundra plant, the formula that was fixed by the Central Electricity Regulatory Commission (CERC) predicted that there would be an escalation in the price of coal by 3.4% annually. In the last four years, since we bid, against a predicted escalation of 17%, the increase has been 130%, so the prediction has gone awry. Today, coal prices are at $110 per tonne, then they were $35 per tonne. We had secured ourselves by tying up coal from Indonesia, mirrored against what we had bid, with a 55% fixed price portion and 45% that could be escalated. We built a jetty there and bought ships, ensuring costs were in line with what we had pencilled in as transportation costs. This one piece, the coal piece, has gone wrong because the Indonesian government wants coal to be sold at a minimum home base price. Of the 10 million tonnes that we needed, we had tied up for 2.5 million tonnes, in line with what we had bid, hoping to take advantage of the discounts for the rest. We could have mirrored the entire contract but we felt we could take advantage of discounts. That has not happened.

So, what will be the impact of the increase in coal prices on Tata Power?

When all five units get commissioned, in about two and half years from now, we could have a problem of about $100 annually, at the current price of coal. We?re scouting for cheaper or lower-calorie coal which is available at a discount because the price of coal internationally is non-linear. But, if we use that, the boiler efficiency reduces and we have to pay more for transportation since we need to bring in more coal. So the question is can we run at lower PLF and availability? We can recover fixed charges at 80% availability, which translates into a 70% PLF, so why should we burn more coal?

Tata Power will benefit from the higher coal prices because of the investments in the mines in Indonesia ?

Yes, it?s true we will see some gains in the coal SPV, which houses the Bumi investments, because of the increases in coal prices. But in the Mundra SPV, which will be commissioned early next year, there will be a hit. We can merge the Mundra SPV with Tata Power but the idea is not to get tax gains; the idea is to run the SPV profitably. For that, the tariff would have to be R2.9 per unit compared with R2.33 per unit currently. As of now, we have written to our beneficiaries and they will take a view after involving the central government, since the UMPPs were awarded by the central government. In the meantime, we have sent a status quo report to the government but we have not asked for a price hike nor have we asked for a change in the bidding norms.

What is the long-term solution?

There are many plants that need to import coal and it will not be possible to work with a formula where the price of imported coal will be fixed for 25 years. That?s also true for gas. Around 40,000 MW of capacity has been planned based on imported coal and suddenly all of these plans are in trouble. This capacity would require approximately 60 million tonnes of coal. We have to evolve a way to pass on the higher price of fuel. It?s not just the Indonesian government that has changed the law. The Indian government too has changed mining laws in that it wants that 26%, of even captive mining profits, should be shared.

Is the bidding process a fair one?

Yes, because there?s a two-part tariff. Right now, there is a fixed cost, which for us is R0.91 per unit relating to the capital cost. And then, there is the variable cost for fuel, which, for us, is R1.29 per unit. Both are arrived at by the bidding route and, when the coal is sourced in the domestic market, both parts are predictable. But when it comes to buying foreign coal, the price was to move in line with an index. It?s because the index is not able to compensate for the price rise that there?s an issue. We need to link the bidding process, first to the capital costs and second to the heat rate, so that you commit efficiency. After that, the fuel prices should be passed on. The heat rate means that for every kilowatt I generate, I use so much kg of fuel, so whatever be the cost of that amount fuel, that becomes pass through.

So the government will need to change the bidding norms?should it go back to the old two-part tariff bidding?

They will have to change the bidding norms; I don?t know about us but there is no way anyone will bid with the existing norms. We are not asking for a change in the bidding for the fixed costs or the heat rate. We?re only saying that if you are not able to compensate us for what we had mirrored, tell us how to operate? We?re still going to produce the cheapest power in Mundra with a 91 paise fixed cost component and a tariff of R2.9 per unit. And tomorrow if coal prices come down, then consumers will benefit. The other companies that had planned capacity are all backing out.

Ultimately, the consumer will have to pay for this ?

Of course, if fuel prices go up, the consumer will have to pay. The biggest flaw in our policy is the issue of energy security. We need to create a basket of options and then ensure that every state is equally secure. Today, there is no concept of how states will be allocated energy and that?s why Mumbai, which depends entirely on imported hydrocarbons, has a tariff that is twice as high as Delhi?s. In 2020, the tariff will be four times as high, because fuel prices would have risen and there could be exchange rate issues too. When solar energy came, CERC said every state will include 0.25% of solar energy in its basket, which will go up to 0.5% in three years. Why should coastal states bear the cost of imported coal?

What has happened to open access?

Consumers using above 1 MW do have a choice but hardly any states have come out with norms, probably because they?re apprehensive that the SEBs, which today are selling to the larger customers, will lose revenue. Already the losses of SEBs are estimated at R77,000 crore, and if these paying customers move away they will be ruined. By now we should have had open access below 1 MW. Delhi is the only state where we have open access for retail customers; in Mumbai, retail users can choose between Tata Power and Reliance Infrastructure.

Will the cross subsidy surcharge levied on customers who migrate from Reliance Infra to Tata Power mean that you lose out?

It doesn?t impact our returns at all.

The gap in tariffs, which was earlier 40% between us and Reliance, will now be somewhat lower at 30%.

What with fuel costs and lack of proper regulation, being in the power business is tricky these days ?

Clearly, the sector has to get a move on. We need to look at energy security and reforms in distribution at the state level. All the private sector companies, whether CESC or Torrent Power, are doing well, but the state governments, on the other hand, are promoting losses. The answer lies in handing it over to the private sector, do PPPs. There should be no cherry picking; offer towns or concentric circles of 50 km; take bank guarantees and ask them to commit, otherwise confiscate the guarantees.

You want the government to make changes in your UMPP but you?re in court against the government on the post-bid changes in the Reliance Group?s UMPP. You objected to Reliance using coal meant for the Sasan plant for its Chitrangi plant ?

Yes, we did. The Supreme Court has admitted the petition and has promised a fast-track hearing so the case should come up in February.

By any chance are you planning to set up a gas-based plant? And what is your take on the Saumitra Chaudhuri committee suggesting a hike in gas prices with a link to Henry Hub prices …

Where is the gas? And moreover, the Henry Hub formula is not the right way to go about pricing gas. Our energy resources are priced-based on formulas devised by the Directorate General of Hydrocarbons; earlier the Bureau of Industrial Costs and Prices used to do the costing and then determine the tariff. Today, again, the gas is based on costs, why should the prices be linked to Henry Hub?