Costly coal: Adani Power gets relief, is Tata Power next in line?

The April 3 order of the Central Electricity Regulatory Commission's (CERC) granting relief to Adani Power Limited is significant not just because it is unprecedented. It could also be a pointer to the stand the commission might take in a similar case involving the Tata Power Company.

In Adani Power's case , which owns 4620 MW thermal power station at Mundra in coastal Gujarat, the question before the CERC was simple: Can it allow the pass-through of the increase in coal prices onto the distribution companies, in this case those in Gujarat and Haryana?   
The calculations of power generation companies went haywire after Indonesia changed its policies. On September 1, 2011, Indonesia enforced a regulation by which coal producers and exporters in that country are required to sell the fuel only at the prices notified by the government based on international prices of coal of equivalent calorific value. As a result, all the previous price commitments between coal exporters and importers turned void.

The regulation hit three large companies, the Adani Power, the Tata Power, and the Reliance Power. The Tata Power fires its 4000 MW Mundra ultra mega power project (UMPP) in Gujarat using the Indonesian coal. According to its petition currently pending before the CERC, it is losing Rs 67 paise on every unit (kilo-watt hour) of electricity generated, which translates into an annual loss of Rs 1,800 crore. The Reliance Power, controlled by Anil Ambani, is developing a similar UMPP at Krishnapatnam in the coastal Andhra Pradesh, which too will fire on the Indonesian coal. The CERC stand in Adani Power's case has given hopes for both.

Adani Power had two power purchase agreements (PPA ) - 1,000 MW with Gujarat and 1,424 MW with Haryana agreeing to sell power at Rs 2.35 and Rs 2.89 per unit in Gujarat and at Rs 2.94 to Haryana. It is committed to sell power at these prices on the assumption that Coal India Limited (CIL) will honour its supply commitments. But CIL did not supply the commodity, forcing Adani to fire its entire plant on imported coal. This made its electricity generation cost costlier by as much as Rs 1.10 per unit.  

There is, of course, debate over whether what CERC did was right and in the interest of consumers. The distribution utilities in Gujarat, obviously, will complain because they don't want their sound finances to suffer, while Haryana is already bleeding. They are even likely to challenge the order before the appellate authority.

The Adani deserved this relief because it is a straight forward case of Coal India reneging on its commitments, says Delhi-based energy analyst V.Raghuraman. "However, it is premature to predict the CERC will take a similar stand in Tata Power's case because the UMPP is entirely dependent on imported coal."

In Adani Power's case, too, what relief it finally gets depends on a host of factors, and will be decided by a committee with nominees from Adani Power, distribution companies, an independent financial analyst and a banker. "We expect the Adani Power to benefit to the extent of Rs 170 crore with every 10 paise raise per unit of electricity," says K. Shankar, analyst with Edelweiss Securities, Mumbai.

In any case, all those manufacturing companies that produce their own electricity using diesel and spend Rs 15 or upwards for every unit of electricity are unlikely to wail. Grid power is the cheapest any day, and improves their profitability.