Project Woes

Escalating costs have adverse effect on RPower’s UMPPs

Reliance Power Limited (RPower) has had a mixed experience on the ultra mega power project (UMPP) front. After winning three out of four UMPPs awarded by the Ministry of Power between 2007 and 2009, the company has only been able to successfully commission one while two have been stuck due to various issues. In 2014-15, RPower commissioned the 3,960 MW Sasan UMPP in Madhya Pradesh, but in April 2015, it initiated the process of terminating the power purchase agreement (PPA) for the proposed 3,960 MW Tilaiya UMPP in Jharkhand. Reportedly, the project’s procurers, led by the Jharkhand government, have accepted the termination of the PPA and have decided to buy the entire stake in its special purpose vehicle. RPower is now apparently considering exiting from the proposed 4,000 MW Krishnapatnam UMPP in Andhra Pradesh as well. It has reportedly written to the Andhra Pradesh government (the lead procurer) seeking a resolution of the Krishnapatnam UMPP’s issue on similar lines. Meanwhile, the Central Electricity Regulatory Commission (CERC) recently passed a favourable judgment for the Sasan UMPP, allowing the recovery of compensation on account of the change in law.

Krishnapatnam UMPP

RPower had secured the imported coal-based UMPP at Krishnapatnam in 2007 after quoting a levellised tariff of Rs 2.33 per kWh for a period of 25 years. However, Coastal Andhra Power Limited (CAPL), RPower’s SPV for executing the UMPP, stalled work on the site in 2011-12 as a result of the increase in the cost of imported Indonesian coal. As per the PPA, the company was to supply 1,600 MW of power to Andhra Pradesh and 800 MW of power each to Karnataka, Maharashtra and Tamil Nadu from the proposed UMPP.

Subsequently, in March 2012, the procurers served a penalty notice for defaulting on the timely completion of the UMPP and power supply commencement. The discoms also warned of bank guarantee forfeiture and PPA annulment. In response, RPower secured a stay order from the Delhi High Court, restraining distribution utilities from taking any coercive steps against the company for stopping work at the UMPP. In July 2012, RPower moved the Indian Council of Arbitration for an amicable resolution of the issue. Thereafter, no significant progress has been reported on the UMPP front but the company is said to be working on a compromise formula with the Andhra Pradesh government. RPower has reportedly written to the state government requesting the procurers to purchase CAPL and return the performance bank guarantees furnished by the company.

Sasan UMPP update

In a key positive for RPower, the CERC passed an order paving the way for the company to avail of compensation for the costs incurred due to change in law events during the operating period. Change in law provisions include events like the introduction of any new tax, levy or cess or variation in the existing rate after the bid deadline. In 2013, Sasan Power Limited (SPL), RPower’s subsidiary executing the project, filed petitions claiming compensation for an increase in electricity duty rate and energy development cess on the sale of power and auxiliary power consumption. The UMPP supplies power to 14 discoms across seven states: Madhya Pradesh, Uttar Pradesh, Rajasthan, Delhi, Punjab, Haryana and Uttarakhand.

As per the CERC’s order dated December 30, 2015, the increase in electricity duty and energy development cess on the sale of power to Madhya Pradesh is payable by the Madhya Pradesh discoms in proportion to the share of the state in the scheduled generation. Meanwhile, the increase in electricity duty and energy development cess on the auxiliary power consumption of the station and coal mine is payable by all beneficiaries. Accordingly, the CERC approved a one-time compensation of Rs 2.71 billion for the period till July 31, 2015.

As per an official press release by RPower, “the CERC’s order clearly establishes the principles of change in law in line with the terms of the PPA between SPL and the procurers, which will also ease the pass-through of future change in law impacts on the Sasan UMPP.”

In order to account for future changes in electricity duty rate and energy development cess, the CERC has approved a mechanism that will result in an effective tariff increase of 7 per cent, or about 9 paise per unit. This will allow the provision of compensation of over Rs 3 billion per annum at the project’s full capacity for a period of 25 years.

In another order, dated February 19, 2016, the CERC approved a compensation amount totalling Rs 3.5 billion for SPL on account of the increase in royalty, clean energy cess and excise duty on coal. This is payable by all beneficiaries in proportion to their share in the scheduled generation. However, the CERC did not approve change in water charges under the change in law provision.

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