Resolving imported coal crisis: Clear national policy needed for competitive bidding
The Economic Times
Ernst & Young
Recently, there has been an intense debate on the fate of imported coal-based power projects (ICPP) with long-term power purchase agreements (PPA) with state power distribution companies (discoms) after changes in the mining laws by coal-exporting countries such as Australia and Indonesia.
For instance, Indonesia now requires that coal should not be exported at less than the market price. Since some of the ICPPs assumed coal supply at less than market prices, an increase in coal price is being projected to make such ICPPs unviable.
To make these projects viable, a tariff increase of around Rs 5,000-8,000 crore per annum is being debated for around 12,000-15,000 mw capacity. The tariff hike can be assessed from two perspectives - contractual and the perspective of equity.
From a contractual perspective, it appears that the PPA signed by ICPPs may not explicitly provide for tariff increases due to changes in foreign law. Further, since bid documents were finalised post discussions with bidders, it is unclear how this aspect got overlooked by bidders.
Although PPA provided flexibility to quote any proportion of their fuel charges as being eligible for annual escalation, some bidders still assumed less than 100% escalable component.
From the perspective of equity between the discoms and the power generators, they would first need to work out the exact financial implications of the change in law by inter-alia considering the following issues: There are two types of ICPPs - one with fuel supply agreements (FSA) with coal mines owned by related parties and other in which FSA is with non-related coal mines.
For ICPPs with related mines, it needs to be considered that when the ICPP pays higher than original price, then the coal mine may also earn higher than original revenues. Hence, it needs to be assessed whether the change in law issue can be addressed by merging ICPPs and coal mines.
Further, for estimating the financial impact of the change in law, it needs to be considered whether the profits from excess capacity, if any, of the ICPP and coal mine need to be considered.
For ICPPs with only FSA with non-related mines, if the PPA has fuel escalation different from the FSA, then it needs to be considered whether such ICPPs are inherently more high risk and hence eligible for a different (lower) treatment than other ICPPs.
From the perspective of equity for the entire power sector, a tariff increase, post bidding, may send a signal that regardless of signed contracts, it may be possible for developers to get changes in competitively determined prices. This may even lead to situations where the selected bidder, post such increases, no longer remains the lowest bidder.
But the above does not mean that changes to signed contracts should not be undertaken at all as in a country which is facing chronic capacity shortfalls, no power may be a worst option than costlier power.
However, what is needed is a clear national policy that may be applied in the rarest situations as it does vitiate the basic framework of competitive bidding.