India’s Massive Thermal Power Plant policy under Threat as predicted since Tata’s UMPP sees $600 million Loss in First Year

The past 5 years have been a riches to rags story for India’s power generation companies. The utilities which competed with each other for the position of being India’s biggest private power generator are now finding themselves competing to delay their power projects. We had warned earlier about the over reliance in an earlier post.

Earlier Article

Indian Privately Owned Power Utilities are furiously expanding their capacities as India looks to treble its Power Generation Capacity in the next decade. The major power companies like Adani Power and Reliance Power are giving Tata Power a tough fight for the position of the biggest private Indian Utility. While these companies cannot hope to overtake state owned giant NTPC in this decade, they may do so in the next one. Note some of these companies are expected to grow almost 20 times in the next 10 years. Here  are the main contenders:

1. Tata Power is looking to double its capacity to around 6 GW from the 3 GW at present by March 2012
2. Reliance Power is also looking to add around 5 GW from its around 1 GW present. Reliance Power with its 3 UMPP Coal Plants has the biggest expansion planned near term
3. Lanco Power with around 2 GW has around 7 GW under construction
4. Adani Power seems to be executing best with around 6.6 GW to come under steam in the next year with 1 GW under operations. Adani’s Mundra Power Plant seems well ahead in the construction timeline.

Note most of the power plants being built in India are coal ones with the power providers aggressively buying up coal mines in Indonesia, Australia and South Africa to increase fuel security. However in case of any global disruptions, India remains very vulnerable. However India’s policymakers are sleeping on this issue. It makes more sense to concentrate on those sources whose fuel security is high such as solar and wind power. Coal also faces the prospect of high carbon taxation as global warming becomes acute.

Reason for UMPP Losses

The reason is that these companies bid aggressively for India’s ultra mega power projects (UMPP) based on domestic and imported prices of coal to be in a certain low range. However the growth in India’s power sector and poor performance of India’s monopoly coal miner had led to fast increasing prices of coal. The companies which had bought expensive coal mines in Indonesia and Australia were faced with duties and taxes on coal exports by these countries. The result was the prices for electricity that were bid were below the cost of operating these massive 4000 MW thermal power plants. Tata Power which is India’s biggest utility in the private sector has already lost $600 million during the Mundra plant’s first year of operations. The company is losing 1.3c/KwH on the 4c/Kwh revenue that it gets from selling electricity. Reliance Power which bagged 3 UMPP contracts has stopped construction at one of its plant, as it knows that operating that plant based on imported coal price will mean losses.

What Industry and Government are doing now

The utilities are now lobbying the center and CERC to increase the prices of power despite the contract stating fixed price for electricity for 20 years. It was plain bad planning on the part of the power companies and now they want a bailout from the government. With the Indian banks also looking at debt defaults, the government is trying to come up with a new plan.

This new plan has following features:

1) Reduce the Power Purchasing Agreement Tenure to 5 years from 25 years. This would make it easy to change the prices of power purchased to reflect the changed realities.

2) Some sort of fuel cost indexation for electricity tariffs. The reason is that prices of imported coal has risen dramatically which has made the large UMPP get stuck because the revenues do not meet the costs.

However State Government is unwilling to buy Higher Priced Electricity

States buying electricity from Tata Power’s Mundra ultra mega power project (UMPP) in Gujarat have turned down the company’s plea to revise the contracted tariff. Tata Power had asked for a revised tariff to make up for the higher cost of imported coal. Power distribution companies of five states, including Gujarat and Maharashtra, have filed a petition with the power regulator, Central Electricity Regulatory Commission (CERC), saying they are not willing to hold any discussions with Tata Power on tariff escalation, sources said. The matter will be heard by CERC on Thursday.

ET

Tata Power, which is seeking higher tariff for electricity generated from its 4,000 MW Mundra UMPP, has so far seen erosion of more than 60 per cent of the Rs 4,500 crore equity investment in the project, according to sources.

Tata Power, which is seeking higher tariff for electricity generated from its 4,000 MW Mundra UMPP, has so far seen erosion of more than 60 per cent of the Rs 4,500 crore equity investment in the project, according to sources.

Read on GWI:

Coal Advantages & Disadvantages.