In a bid to give a boost to power generation in India and make it available at ‘affordable’ and ‘stable’ rate to the consumers, in the first decade of 2000s, the then government had mooted the idea of ultra mega power projects [UMPP].
Two such plants were bagged by Tata Power Ltd [TPL] and Adani Power Ltd [APL] under tariff-based competitive bidding [TBCB] each with installed capacity of 4000 MW and 4620 MW respectively. While, TPL is based entirely on imported coal, APL uses 70% domestic and 30% imported coal.
The projects were committed to supply power to state electricity boards [SEBs]/power distribution companies [PDCs] at fixed tariff all through project’s operational life. The tariff in case of TPL was Rs 2.26 per unit whereas for APL it was Rs 2.35/ Rs 2.94 per unit for supplies to Gujarat/Haryana. Accordingly, the power purchase agreements [PPAs] signed.
The foundation of this new arrangement rested on two pillars. First, the generators armed with committed off-take by PDCs all through project’s lifespan, would optimize the operating parameters so as to generate power at low cost. Second, the consumers would be assured of supply at the fixed/target rate fully shielded against any increase in fuel price [under subsisting PPAs, they are made to pay for it].
These plants have been in operation for about a decade. All this while, even as the consumers have not reneged on their obligation [read: assured off-take], TPL/APL are leaving no stone un-turned in backing out of their commitment.
In 2012, both TPL/APL petitioned the Central Electricity Regulatory Commission [CERC] seeking the so called ‘compensatory tariff’ – a sophisticated nomenclature for hike in tariff. Even worse, the bureaucrats, regulators and judicial authorities whose prime role is to uphold the sanctity of PPAs and protect the interests of consumers are going out of the way to extend them a helping hand.
The argument of generators is that in September 2011, Government of Indonesia imposed a minimum ‘benchmark’ price below which coal from that country could not be exported and since bulk of the import is from that country, this led to increase in the cost of fuel to these projects. This event being beyond the control of these companies, they had no option but to seek hike in tariff.
The CERC was impressed and based on the recommendations of a committee under Deepak Parekh, sanctioned in February 2014, a hike of 52/41 paise per unit for TPL/APL. The Appellate Tribunal for Electricity [APTEL] too vide an interim order [July 2014] allowed the tariff hike prospectively and confirmed the same in December, 2016 under directions from the Supreme Court [SC]. The Tribunal used ‘force majeure’ clause – euphemism for an event beyond control – in support of its order.
In its order [April 2017], SC rejected the claim of Tata/Adani for compensatory tariff under ‘force majeure’ clause to an extent the hike is caused by increase in price of coal imported from Indonesia. In respect of domestic supplies however, it agreed with the interpretation of APTEL resulting in corresponding relief to APL which sources 70% of its requirement locally.
However, in a recent order dated October 29, 2018 the apex court has literally reversed the above decision by directing CERC to amend their PPAs to facilitate pass-through of future fuel price escalation subject to a cap.
This is based on the recommendations of a committee [set up by Gujarat government in July, 2018], which argued that at tariff allowed under extant PPA [Rs 2.26/2.29 per unit], the plants are running at low utilization forcing the state to buy power from other sources at much higher rate to compensate for the shortfall.
In short, even the top most court has acquiesced to the demand of generators based on their main contention viz. ‘force majeure’ besides adding one more reason. Both are untenable.
The fuel [coal in the instant case] is a major component of the cost of generating electricity. Any increase in its price is bound to increase the generation cost. It is also known that the generator does not have a captive source of fuel; that it buys it from external source including import from other countries. Therefore, the price it pays is predicated on the actions of the suppliers.
It is naïve to believe that at the time of bidding, the companies were not aware of these fundamentals including the role of regulatory intervention in influencing the price. Indeed, they were expected to know all the more in view of their commitment to supply power at a fixed price over a long-term [25 years].
Moreover, both TPL and APL had taken steps to guard against a scenario of increase in coal price. For instance, TPL acquired 25-30% equity in 3 Indonesian mines. Likewise, Adani acquired a coal mine in Queensland [Australia] in 2010. The rationale behind setting up such ventures was to ensure an uninterrupted source of coal supply at a price of its choice.
Having taken a conscious and well thought out decision and put in place measures to shield them against possible increase in fuel price, for the generators to now turn the table upside down and expect the consumers to pay for it is an abhorrent idea. The change in Indonesian law cannot be given the benefit of ‘force majeure’. If a miner in exporting country says ‘my excavation cost has increased because the state utility starts charging more for power supply’, will the regulator accept it as ‘force majeure’?
A further argument that SEBs/PDCs will have to pay much more [buying from other sources] if the said projects are unable to supply is also not tenable. The generators must honour the terms of the contract/PPA by supplying power at the agreed price. Alternatively, they should compensate the PDCs for excess price paid by latter for purchasing from the other source.
While, companies will make efforts to protect their business interests, it is the responsibility of regulators/judiciary to preserve the sanctity of contracts/PPAs. Unfortunately, the latter have abdicated their responsibility. Gujarat government is the biggest culprit in this saga as after putting up a brave fight until last year, it has meekly surrendered to the pressure mounted by the generators.
Considering that SC verdict is the last word on any issue/dispute, there is no hope for the hapless consumers who will have to pay more for the electricity they buy. It also forestalls any chance of their having access at fixed tariff in the future.