Relief for power plants, Supreme Court order safeguards 60,000 MW from cost increases Relief for power plants, Supreme Court order safeguards 60,000 MW from cost increases

Anupam Chatterjee

Tuesday’s Supreme Court order on compensatory tariffs has removed the uncertainty over whether a change in government policy like the New Coal Distribution Policy (NCDP) will constitute a “change in law” (CL) that allows the regulator to fully correct the tariff disadvantage arising from it to power generators. The result: Power capacities to the tune of 60,000 megawatts will be completely safeguarded from the cost increases due to vicissitudes of policy changes over the entire period — usually 25 years — of their supply contracts with discoms. The beneficiaries of the policy clarity include a veritable who’s who of private-sector power firms (see chart).

While several state power regulators invoked the CL clause in power purchase agreements (PPAs) in the past to fully protect power companies from adverse government policies that jacked up their costs, an ambiguity was created by a recent Central Electricity Regulatory Commission (CERC) order. Pronouncing its order on the dispute between Maharashtra’s state power regulator and GMR Warora Energy in early February, the CERC quoted an earlier appellate authority (Aptel) ruling of similar import and said: “There is a clear-cut finding that the increase in price of coal on account of change in NCDP linked to reduced availability of domestic coal does not constitute an event of Change in Law. Therefore, relief on account of higher purchase cost of coal due to reduced availability of domestic coal cannot be granted (under Change in Law).”

The regulator, however, allowed GMR Warora to seek a remedy of force majeure for the extra expenses incurred by it on being forced to buy (more expensive) coal from alternative sources due to the failure of Coal India subsidiary SECL to supply fuel up to the prescribed level of annual contracted quantity (ACQ).

Pertinently, relief emanating from CL amounts to full restoration, via monthly tariff payments, of the affected power companies to the economic position before the CL occurred. Invocation of force majeure, on the other hand, would yield only limited benefit to the firms and involve haircuts as the regulator would in such cases attempt to find a balance, keeping in view the interests of lenders and consumers also.

The latest Supreme Court ruling, which rejected the claims to compensatory tariffs of Adani Power and Tata Power on their Mundra, Gujarat units, was clear that change in foreign law (at this instance, that of Indonesia) doesn’t amount to either CL or necessitate force majeure. However, it averred that a change in domestic policy — in this instance, the 2013 amendment to NCDP that relaxed Coal India’s fuel supply commitments — would qualify as CL. It said Adani Power, which sources 70% of the fuel from domestic sources under the PPA with Haryana discoms, is eligible for CL benefit and asked CERC to “go into the matter afresh and determine the relief”.

“The SC order is a mixed bag. It said no to force majeure and/or change in law in the context of foreign laws. It, however, put at rest the uncertainty over treating domestic policy changes like NCDP as change in law and salvaged investments of over Rs 3.6 lakh crore. The court’s observation that under composite scheme CERC, and not state regulators, will deal with regulatory matters concerning power plants having PPAs with more than one state is also a positive for the industry,” said Ashok Khurana, director-general, Association of Power Producers of India.

In addition, the apex court has also affirmed the CERC’s general regulatory powers under Section 79 of the Electricity Act, 2003, which empowers it to use discretion to deal with claims of relief in situations where prior guidelines don’t exist. The regulator had used this power while unveiling a compensation package for Adani Power and Tata Power in April 2013.

Of course, with power demand growth in recent years being less than projected, private power plants in the country are now running at plant load factor below 60%. Coal supplies have been eased due to stepping up of production by Coal India. So, at the current juncture, not all companies might want to seek relief under CL. But as the economy picks up, instances of fuel supply crunch and power companies seeking to buy more expensive coal might multiply. The SC ruling in such cases would stand the industry in good stead.