Without higher tariffs, UMPPs cannot survive
It was never going to be easy to convince the discoms that had signed on with Tata Power and Adani Power to fork out a higher tariff for power they were procuring from these UMPPs. In their appeals to the Appellate Tribunal against the CERC order that allowed compensatory tariff to the power producers—for the jump in the price of imported coal from Indonesia following changes to the laws in that country—a couple of the discoms had argued that the CERC couldn’t stray from the terms and conditions of the bidding documents since the project had been won through a competitive bidding process. Now, the Haryana discoms have moved the Supreme Court seeking a stay on the Apellate Tribunal for Electricity (APTEL) order of July which allowed Tata Power and Adani Power to recover a part of the dues from buyers.
It is not surprising the distribution utilities are up in arms against compensation—CERC has awarded a gross compensatory tariff of 52 paise per kwh for Tata Power—because most of them are in very poor shape financially and, at some point, will have to pass on the increased cost to consumers. It might also seem unfair to ask customers to bear the cost for what seems to be someone else’s miscalculation. However, there is little point in quibbling about whose fault it is; the need of the hour is a quick solution to the issue since large production capacities, set up at huge costs, cannot be lying idle. It is true that the Tatas, who bagged the project at the lowest tariff of R2.26 per unit, could have chosen to leave the cost of coal variable, but by restricting the amount that was escalable to just 45%, they managed to win. However, given the severe shortage of power in the country, it would be imprudent not to be running the plant at full capacity; after all, setting up similar capacity would cost far more. Which is why the CERC has done the sensible thing by permitting some compensation. Without that, Tata Power stands to lose somewhere between R1,500-1,800 crore each year.
There are those who will argue that such compensation by the regulator vitiates investment discipline and that such an order sets an unhealthy precedent; other bidders, who lost out, might be encouraged to take the matter to court. Ironically, it was the Tatas who challenged the bid made by Reliance group for Sasan, on the grounds that changes were made post the bidding. However, priority must be given to using assets productively and generating cash flows so that the banks that have funded the ventures can be repaid. As for the future, given the large number of projects in trouble, there should be some scope for renegotiation, perhaps a permanent body that will look into this. Promoters, however, cannot be allowed to get away without taking a significant haircut.