Editorial April 2017

The past month was marked by several key developments in the coal-based power generation segment.

The most significant development pertained to the country’s two major power producers, Tata Power Company Limited and Adani Power, which received a major setback when the Supreme Court set aside an earlier tribunal ruling that allowed the power producers to charge compensatory tariffs from consumers. The ruling, analysts say, will likely weaken the finances of both firms, particularly Adani Power, which may have to write off some of the additional revenues it had booked in anticipation of a favourable verdict.

Meanwhile, a positive development for power producers was the government reassessing the grades of nearly 50 per cent of CIL’s mines, which means that grade slippages are now expected to be lower.

In another positive move providing relief to nearly 21 GW of under-construction power projects, the government has extended the time period for thermal power producers to receive a mega power certificate. The Mega Power Policy had identified 25 power plants (each of over 1,000 MW) totalling 32,300 MW for earning additional benefits under the policy. The policy, which was to end on March 31, 2017, has been extended by five years.

On the whole, these developments have important long-term implications for the coal-based power generation industry. The Supreme Court judgment brings clarity in the scope for regulatory intervention pursuant to the bidding process.  As per the ruling, such intervention is not available to the appropriate commission upon the execution of a PPA (including the adoption of tariffs). This is expected to make bidders exercise caution prior to submitting their bids in the future. Further, the judgment has stated that a change in regulations under Indian law can be considered for compensation. Adani Power has thus been given a small relief as it can now seek compensation on the grounds of change in domestic coal tariffs and the coal allocation policy in 2013, which reduced the share of fuel available for power generators. Also, industry analysts note that all cases pertaining to the shortage of domestic coal will now be eligible for compensation.

The resetting of coal grades is expected to ensure that there are now fewer stand-offs between power producers and CIL, and also lower prices of coal. According to market analysts, the downgrade could result in a 10-12 per cent drop in the average prices of coal. In the longer term, improvements in coal quality and efficiency in the supply chain (through rationalising linkages, swapping, etc.) are expected to lower the cost of generation. According to power ministry estimates, power stations are now burning 8 per cent less coal than they used to three years ago for each unit of electricity. NTPC Limited’s coal costs have come down from Rs 2 per unit in 2014-15 to Rs 1.94 per unit in 2016-17, despite revisions in coal prices, cess and railway freight.

Lastly, changes to the Mega Power Policy are expected to provide relief as only 11 GW of these projects have been commissioned so far.  The changes will give developers more time to sign power purchase agreements and ease terms related to the release of their bank guarantee. Also, banks will now have more headroom to lend to the power sector, say analysts.

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