Light at end of tunnel for Gujarat power companies

New Delhi: The end appears to be in sight for the problems plaguing imported coal-based projects of Tatas, Adanis and the Essar Group in Gujarat as the state cabinet is all set to approve a rescue plan for their stressed power projects that would allow higher fuel charge, extended power purchase agreement (PPA) and a haircut from lenders.

The Mundra projects of Adani Power and Tata Power and the Salaya coal-based plant of Essar Power (already classified NPA) have become stressed following controversial 2010 changes in Indonesian coal export norms that have substantially increased the cost for these plants without any provision for a fuel cost pass-through in existing power purchase agreements.

These issues have already resulted in losses to the tune of Rs 24,000 crore for these companies, which are even now incurring losses to the tune of Rs 5,000 crore annually. The total exposure of lenders to these projects is close Rs 30,000 crore.

“The high-powered committee (HPC) set up by Gujarat government under former Supreme Court Justice RK Agrawal has submitted its report to GUVNL (Gujarat Urja Vikas Nigam) and SBI Capital. The state government has in-principle approved the recommendations and it would be taken up by the Cabinet for final approval soon. The issue to remove stress from these mega power projects is of paramount importance for Gujarat and five other beneficiary states,” said a source in Gujarat government privy to the development.

If the state approves revision of tariff for projects by allowing amendments to PPAs as suggested by the HPC, it would be in fact in conflict with the Supreme Court order that last year rejected the same proposal of revising tariffs as impermissible under the current contracts.

This also flies in the face of a crucial aspect of the apex court’s reasoning, which is that it was the low tariffs quoted by the power generators in the first place that enabled them to win the contracts from the discoms.

In its report, the HPC has suggested a fuel pass-through in the electricity tariff for these projects but with a cap which will disallow any cost recovery for generators beyond imported coal price of $120 a tonne.

However, tariff for generators could be revised after five years based on coal price movement and fuel price rise would have to be borne by the [procuring states and consumers.

As part of the bailout package for the stressed projects, the committee has also suggested about Rs 9,000 crore of haircut for the lenders that will come in the form of reduction in capacity charge (fixed or capital cost component in tariff) by 20 paisa per unit. This will also help mitigate tariff hike for consumers marginally.

But the haircut will add further pressure on the banking sector that is already pursuing resolution of debt worth Rs 1.70 lakh crore for 34 stressed power projects worth 40,000 mw.

Also, the power projects would be allowed an extension of their 25-year PPAs with states by another 10 years that could help them increasing their returns.

But companies like Adani and Tata Power, which have stakes in Indonesian coal mines, would also have to share any profit arising from there with the procuring discoms so that electricity tariff hike could be moderated to less than Rs 1 a unit.

It may be recalled that HPC option was considered in July after the Supreme Court in April 2017 ruled out a tariff hike for the three projects.  Earlier a working group was also set up whose report has also been analysed by HPC.

The situation had turned so grim that last year the three power developers separately approached the Gujarat government and the discoms, offering to sell a 51 per cent stake in the stressed projects for a nominal sum of Re 1. With lenders panicking, state-owned NTPC conducted a due diligence of the projects, assessing the possibility of feeding them with domestic

coal. But this would have required a large amount of fresh capital since the plants are not designed to run on domestic coal. So that stake sale plan and NTPC suggestions were junked.

Industry experts note that while the networth of the three power projects — Tata Power’s 4,000 MW, Adani’s 4,620 MW plants in Mundra and Essar Power’s 1,200 MW plant at Salaya — has been wiped off as a result of continuous losses, only Essar’s plant has become an NPA so far. Lenders also fear that in the absence of a concrete resolution plan, even Adani and Tata projects would turn into non-performing assets.