Power play
With coal prices sharply up, it would seem the business models of mega power plants have come unstuck. But changing the bidding norms can pose its own set of problems.

Price and supply volatilities in coal — virtually unheard of till two or three years ago — have upset the calculations of private power developers who were rushing to set up thermal plants. These included the so-called ultra mega power projects (UMPP) in coastal locations to be run entirely on coal imported from Indonesia or Australia. At a landed cost of $35 or so for a tonne of coal, they seemed perfectly viable — so much so that some developers bet on these fuel prices to aggressively quote for projects under the new tariff-based competitive bidding (TBCB) format. These projects, by not incorporating the regulator-determined cost-plus tariff revisions allowed under the earlier power purchase agreement regime, effectively transferred fuel cost escalation risks to the developer. At that point, such risks did not seem to exist, even as the shift to the TBCB system itself was seen as a big leap forward in bringing about transparency in the award of new projects and driving down electricity tariffs for consumers.

All this has come unstuck, the immediate provocation being a new mining law in Indonesia that provides for annual aligning of coal prices with international rates, even with regard to fuel sourced against long-term supply contracts. With similar benchmarking regulations on the anvil in Mozambique and South Africa, and Australia too mooting a carbon tax, imported coal prices have crossed $110 a tonne. The same developers who had won projects under TBCB by quoting tariffs well below Rs 2.50 a unit, are now seeking upward revisions. Here, they appear to be on a weak wicket, given that the standard bidding documents for the UMPPs specifically exclude fuel from the force majeure provisions. Also, the definition of ‘non-natural force majeure events' does not cover actions by any foreign government. While the Power Ministry is said to be considering tweaking the bidding format for future UMPPs to permit limited fuel cost pass-through, the question still remains: What is to be done with already awarded projects, where the developers were chosen based on the tariffs they had themselves quoted and which were lower than what others had offered?

It all comes back to the same story seen earlier in telecom and airport modernisation — where the winners bagged operation/development rights by quoting astronomical licence fees/revenue shares and were, subsequently, allowed to ‘migrate' to better terms, or levy user charges from consumers. These were defended on grounds of deterioration in business climate, apparently unforeseen at the time of bidding. But isn't assumption of risk something that is basic to business? Also, in the present context, it is worth asking how power developers would have reacted had the Indonesian authorities chosen to subsidise coal exporters. Would they have ‘passed-through' the resultant lower fuel costs to consumers? Unlikely, perhaps.