Tata Power’s ultra mega power project (UMPP) at Mundra appears to have run into an iceberg barely months after it commissioned the first unit.
On the one hand, it is unable to secure coal at the prices it had factored at the time of signing power purchase agreements (PPAs) with various state power utilities, and on the other, it is unable to pass on the additional cost of power generated using expensive coal to the buyers.
The project was envisaged based on imported coal, mainly from Indonesia.
In fact, Tata Power had purchased a 30% stake in two thermal coal mines and trading companies of Bumi Resources of Indonesia for $1.1 billion in 2007 and had tied up as much as 58% of the total coal required from mines in Indonesia, at a significant discount.
However, in August last year, the Indonesian government decided to link the price of coal exported from the country with a benchmark based on international prices of coal and asked mining companies to modify all their old contracts by September 23.
Following this, the prices of coal the company could get from Bumi have shot through the roof, putting Tata Power in a piquant situation from where it can neither backtrack nor go forward with production.
The company had brought the issue to the notice of the power ministry even as it went ahead with commissioning of the first unit.
“It may be noted that the basis of quoting non escalable portion of energy charges to the extent of 55% was the circumstances prevailing in the international coal markets during the period 2006-2008, which is entirely different from the prevalent markets today,” it had said in said in its letter.
A reasonable 14% return on equity based on then CERC norms would have been around Rs600 crore per annum, while the impact of price changes in the market could be up to Rs1,800 crore per annum, the company had said, seeking a hike in power tariffs.
But the state utilities which signed PPAs with it are just not willing to take a tariff hike.
Ajit Saran, principal secretary, power, Haryana said Tata Power had signed PPA contracts with five state utilities including Haryana, and as per PPA agreement it was binding on it to supply power at the predetermined contract rate.
S Padmanabhan, executive director, operations, Tata Power, told DNA Money the company is in negotiation with the Central government through the Association of Power Producers (APP). “Sudden spike in imported coal prices due to change in Indonesian legislation has not only impacted Tata Power but many other Indian power companies and we all are negotiating with the government under the banner of APP,” he said.
Ashok Khurana, director-general, APP said the organisation had written to the power ministry for considering a revision in tariff of generators which are dependent on Indonesian coal and have signed long-term PPAs with state utilities.
According to him, around 29,000 mw of power capacity was lying idle because of this issue, putting in jeopardy investment of around 1.5 lakh crore.
“How can a generator run a plant in loss?” Khurana asked, suggesting the government impose force majeure and resolve the issue.
The status of that proposal is not known yet and no easy solution is in sight.
Tata Power sources said the power ministry has sought advice from the Central Electricity Regulatory Commission on the quantum of tariff hike needed to make the project financially viable.
But Union power minister Sushil Kumar Shinde denied knowledge of this. “I have not received any advice note that sought CERC view on the imported coal issue,” he told DNA Money.
Saran was categorical that the case was not in the CERC’s domain. “This is a contract between state utilities and Tata Power, so how does CERC come into the picture?”
Rajiv Bansal, secretary, CERC differed. The central regulator does have a jurisdiction since the Mundra project involves many states, he said, but maintained that CERC could not intervene until the players brought their grievances to it.
“Tata Power has not approached CERC for adjudication. Moreover, it is a contract between state utilities and Tata Power, so primarily we have a limited role to play. Only clause under which CERC can act is when any party files petition in front of it,” said Bansal.
Meanwhile, a highly placed official from a different state utility wondered why the company had not filed a petition in any forum.
Another official asked why Tata Power has not filed a case against supplier (in this case, Bumi) which had signed a contract with it for supplying coal at a cheaper rate for 25 years. “Coal supplier for Mundra UMPP is an Indonesian company and this company will make super profit due to benchmarking of Indonesian coal prices with international prices. So, first, Tata Power should file a case against its supplier in which it has stakes before seeking any revision in tariff,” he said.
But Padmanabhan brushed aside the suggestion. “How can we file a case against our suppliers when we know that they are just following the rules of the land?” he asked, also drawing attention to the fact that Tata Power owns 30% stake in the supplier company.
A detailed questionnaire sent to Tata Power on the status of the project on June 18 remained unanswered at the time of going to press.
Given all this, it is unlikely the UMPP will take off unless there is a sudden correction in international coal prices, and a deep one at that.