Expect more S&P action on power if no action taken
Though Standard & Poor’s has contented itself with lowering the outlook on Tata Power to negative—Moody’s had done the same last month—due to the problems with its Mundra ultra-mega power plant (UMPP), the issue goes way beyond just Tata Power. Around 8,000 MW of additional power capacity planned on the basis of imported coal from Indonesia is in the same boat—the increased price of Indonesian coal makes these plants viable only if tariffs are raised by 80 paise to a rupee per unit. If that is not forthcoming, as it is not, it will be cheaper for producers to pay whatever penalties are imposed than it will be to produce the power—in the case of the Tata’s Mundra UMPP, the additional costs are estimated at around R2,000 crore a year at full capacity. While Anil Ambani’s Reliance Power hasn’t started work on its Krishnapatnam UMPP for this reason, the buyers it had contracted to sell this power to have begun to get antsy and want to encash bank guarantees—while 11 of these firms won their case to encash bank guarantees in the Delhi High Court, Reliance Power filed an appeal against the order while filing for arbitration with all its buyers.
If this isn’t bad enough, another 30,000 MW of completed power capacity is held hostage to Coal India (CIL) not being able to meet their coal needs—another 17,500 MW of power plants are stuck in the environment clearance for their captive-coal blocks. These 30,000 MW—plus another 20,000 MW in the construction phase—are the power plants that the PMO had directed CIL to sign fuel supply agreements (FSAs) with. While CIL’s board said it could not sign FSAs with a guaranteed supply of 80% of the plants needs, the PMO is now amenable to a lower 65% commitment—FE’s front-page story today points out that even this cannot be met. A coal ministry assessment says CIL will be able to meet just 54% of the needs in 2013-14 as compared to the PMO’s lowered 65% standard.
On the face of things, the power plants should just import the coal. But with this costing 50-60% more, the question is whether power tariffs will rise as much—power sector losses are already up to R2 lakh crore, and increasingly states are asking power plants to back down their production as they are unable to buy expensive power. This is the problem the PMO was asked to solve, and so far it hasn’t been able to do anything. The proposed power package with banks being forced to take a haircut will provide some breathing room, but there is no solution other than to hike prices if CIL is unable to provide enough coal. The other possibility is to do some sort of pooling of imported and local coal so as to lower the overall impact—the power ministry was to write to the Central Electricity Regulatory Commission to examine this, but even this letter has not been sent.