Why imported coal is not an easy solution

Right next to it is the Tata’s Mundra UMPP,where two 800MW units are being installed and another three are to come up,which would take the project size up to 4,000MW.

Though the construction is shaping up well,the economics have gone horribly wrong for the developers of both projects. Both were banking on imported coal,seemingly a sound decision considering that the Mundra port is next door,and both had tied up firm fuel supplies from overseas — mainly Indonesia and Australia — prior to committing a delivered electricity price. Then international coal prices were around $35 a tonne. But a change in coal mining laws by the government of Indonesia,brought in with retrospective effect,has resulted in higher costs due to a change in the way royalty and income-tax would be computed for the coal producing company. Australia too is in the process of imposing a new carbon tax on coal mining,and other countries too are said to be following suit. International coal prices have shot up to over $100,with analysts predicting they could go up further.

These prices and a supply volatility in coal — virtually unheard of till about three years ago — have upset the calculations of the power developers,which promised aggressive low tariffs in power purchase agreements (PPAs) with distribution utilities,based on initial calculations of the cost of imported coal.

The promoters are now lobbying for the PPA to be reopened to revisit the low tariffs they had quoted. Otherwise,with every unit of power they produce,the companies would bleed. In the quarter till December 2011,Adani Power registered a loss of Rs 358 crore,mainly on account of higher prices of imported coal. The Tatas too delayed the commissioning of their first 800MW unit for the same reason.

There are other casualties. Reliance Power shelved work in June last year on its 4,000MW Krishnapatnam project,citing higher coal costs. JSW Energy’s 2,000MW expansion of the Ratanagiri project has been reportedly delayed for the same reason. Others worried include banks such as SBI and ICICI Bank,which have exposures to these projects.

At a conservative estimate of around Rs 5 crore per MW,the cost of the Tata UMPP comes to about Rs 20,000 crore,and that of the Adani’s larger project a bit higher. Calculations show that if there is a 50 paise loss per unit (kWH) in energy charges,the life cycle loss to a generating station of 4000MW would be of the order of Rs 40,000 crore over the PPA of 25 years. The Tatas now expect that tariff would have to be Rs 2.90 per unit compared with the current Rs 2.33 per unit.

“The developers are to share much of the blame as they took a business risk in betting on imported coal prices… To their credit,both have continued with the construction schedule despite the obvious viability issue,” a Power Ministry official said.

Efforts to salvage the viability of such projects face legal hurdles as it involves reopening the PPAs. Actions by foreign governments,such as Indonesia jacking up coal prices,are out of the force majeure provisions in the pact. “For future projects,fuel costs could be made partially pass-through to ensure viability. For the ones already coming up on firm PPAs,it is a more vexed issue as beneficiary states are unlikely to agree to hiking tariffs,” a senior regulatory commission official involved in the deliberations said.

What is clear is that the 25-year,long-term PPAs will not work in the current environment of impending fuel cost risks. So quick-fix solutions might not go too far towards making projects such as the twin Mundra plants viable again.