The compensatory tariff hike of 52 paise per unit granted by Central Electricity Regulatory Commission (CERC) to Tata Power's Mundra Ultra Mega Power Project project would only give partial relief to the company as it is being offset by various other conditions prescribed by the regulator.
The company was hit by losses after the Indonesia, from where it sources bulk of coal, linked mineral exports from the country to international prices.
Factors like sharing profits of Indonesian coal mines with procurers, sacrificing 1% return on equity, lower auxiliary consumption of 4.75% in effect dilute the impact of tariff hike.
According to a report by ICICI Securities, after adjusting for reduction suggested by CERC order on account of share in mine profits and 1% return on equity sacrifice, the net bailout works out to be 42 paise per Kilowatt hour (KwHR).
Arun Kejriwal, founder of Kejriwal Research & Investment Services Pvt Ltd, said while the CERC's order is certainly positive for Tata Power and power generation in general, it has opened a scope for further negotiation. He stressed that an 800 mw size of plant certainly needs more auxiliary power.
While 660 mw power plants in general are allowed 8% auxiliary power, somewhere around 7% would have been fair in this case, he said. Sacrificing RoE based on equity investment of contracted capacity could impact the company's earnings by an estimated Rs 50 crore annually.
Tata Power would accept the order for time being, but may make a representation to the government for reconsidering certain clauses in future, he said.
Most brokerages raised concerns over implementation of these order as state utilities could appeal against the order.
"We believe there will be serious amount of litigation and dispute before any judgement get implemented given quantum of money involved," ICICI Securities said.
The regulator has asked Maharashtra, Rajasthan, Punjab and Haryana to pay Rs 329.45 crore to Tata Power for losses incurred at the Mundra project due to unforeseen hike in coal prices.
For the distribution utilities in these states, compensatory tariff would lead to rise in retail tariffs. As per Icra estimates, average increase in tariff on account of supplies from Coastal Gujarat Power alone to utilities in the five states of Gujarat, Haryana, Maharashtra, Punjab and Rajasthan is estimated in the range of 0.4% to 1.8% (3 to 10 paise/unit) while in the case of supply by Adani Power alone, the average tariff for the utilities is estimated to increase by average 1.7% (7-10 paise/unit) in Gujarat and Haryana.
Nonetheless, following the order, power generators would now be able to claim additional tariff compensation so as to pass on the fuel cost under-recovery to the off-taking utilities and also pass on the variation in exchange rate on imported coal costs. Icra estimates that other imported coal based projects would also be benefited by these order.