It’s a power play that has backfired.
Power producers which quoted abysmally low indexation or escalation costs to clinch purchase agreements with state power utilities and bag mega projects in the last five years or so are being forced to delay or abandon their projects altogether.
Most of these companies had assumed that international fuel prices, particularly of coal, won’t increase much from levels prevalent at that time.
Adani Power, for one, had quoted zero-escalation tariff to bag the 4,620 mw Mundra power project, betting on coal from Indonesia, where it had tied up supplies. The company had, in fact, chosen to quote fixed tariff for 25 years despite the fact that the bidding guidelines of the tariff bids floated by Gujarat and Haryana allowed for indexation (linking tariff to change in price) of imported coal.
Well, coal prices didn’t just rise, they rocketed; more so after the Indonesian government linked its coal to international prices.
Going by S Padmanabhan, executive director, Tata Power, coal prices have moved from $20 per tonne to $100 over the last 5-6 years.
The state utilities with which Adani Power had signed power purchase agreements (PPAs), on the other hand, are unwilling to absorb the increase in fuel costs and want it to supply at the tariff agreed upon.
Today, the company is fighting a legal battle in the Supreme Court after appeals to the state regulators and appellate bodies to scrap the PPAs proved to be of no avail.
The story of Reliance Power’s 4,000 mw Krishnapatnam project is no different. It had bagged the project quoting a uniform tariff of Rs2.33 per unit for 25 years.
Today, it has dragged the 11 state utilities in four states with which it had signed supply agreements to the Indian Council of Arbitration, claiming the hike in international coal prices was force majeure — an act of God. The utilities, however, claim Reliance Power is only using the alibi and has, in fact, abandoned the project.
Tata Power, which bagged the Mundra ultra mega power project, or UMPP, quoting an escalation cost of 45%, is slightly better placed. But even with this escalation clause, it is losing over Rs1 on every unit of electricity it sells to the state utilities.
“All the power projects conceptualised on imported coal are facing the same problem,” said Padmanabhan, adding that the steep increase was hard to imagine, leave alone foresee.
According to P Ramesh, head, energy division, FeedBack Ventures, bids for power projects are typically won on two parameters — capital cost and energy cost. “Capital cost (for installing plants and machinery) and finance cost are the same for almost all players. So the only game changer is energy cost. Players that quoted less energy cost by quoting low indexation had emerged winners.”
Companies that had put in quotes with 100% indexation or escalation cost as allowed by the Central Electricity Regulatory Commission and lost out to these players must be smiling. Today, while they are largely unscathed, the winners stand singed.
But the likes of Adani, Tata and Reliance have only themselves to blame, say lenders, credit rating agencies, energy consultants and analysts.
“Fixed tariff can only be quoted if a company assumes that coal prices and forex (valuation of rupee vis-a-vis dollar) will not change much in future. This is simply not possible and hence quoting fixed tariff backfired,” said Ramesh.
“The mistake these companies made was to treat power as a commoditised business. It is actually a regulated business,” said Ramesh.
Rajiv Lall, vice chairman and managing director, IDFC, which had lent money to the Adani Group, couldn’t agree more. “This is the bitter lesson for them,” he said. “What more I can say?”
Asked why IDFC failed to see the risk in quoting a fixed price for 25 years, Lall said the borrowing company had done a lot of research with several international consultants and concluded that it would be safe over the tariff period. “We can’t really question their judgment. As a lender, we can only structure our loan in such a way that we can secure our lending through other kind of collateral and corporate guarantees. That is the basis we have funded this project on,” he added.
Meanwhile, credit rating agencies have started revising the outlook on these companies.
Crisil recently downgraded its rating on the bank facilities of Adani Power to Crisil BBB/Negative from Crisil A-/stable. The downgrade reflects a belief that Adani Power’s financial risk profile will remain under stress over the medium term due to the fixed-tariff structure for 25 years and sharp increase in fuel costs. Crisil also noted that Adani Power will remain vulnerable to depreciation in the value of the rupee because it has a large unhedged foreign currency debt of $2.5 billion.
Similarly, S&P has revised its outlook for stable to negative for Tata Power.
The beleaguered power producers have now turned to the government for support.
“It remains to be seen who foots the bill --- the government or the consumer,” said an energy consultant, who was associated with a few companies that lost bids in four Ultra Mega Power Projects.
