Ind-Ra's analysis of select projects commissioned over the last few years reveals that the regulated tariff is higher than the cost of power supplied under Case 1 PPAs. However, long-term PPAs under Case 1 signed from 2013 show significantly higher tariffs. Despite the tariff differentials, given the multitude of factors impacting the projects including capital costs and location, it is difficult to arrive at the exact quantum of variation. Nevertheless, Ind-Ra's experience in rating these projects suggests there is need to implement a timely compensatory tariff for a viable supply under competitive bidding.
The recent amendment to the tariff policy is the government's timely and welcome policy intervention to address the perils encountered by IPPs. Although fuel cost pass-through is a reaffirmation of the earlier guideline released in March 2013, the clarity on the jurisdiction of electricity regulatory commission is a harbinger of hope for many projects in the sector. The amendment lucidly places the onus on Central Electricity Regulatory Commission to handle the compensatory tariff issue for any IPPs selling more than 10% of power outside the state. Ind-Ra expects these changes to positively impact the sector and believes that this will curtail the time taken for approval of compensatory tariff. Amendments to the tariff policy includes cost pass-through for the cost of imported coal/e-auction coal used due to a shortfall in domestic coal supply and also for a change in laws affecting taxes, duties and cess, impacting the thermal plants after bidding process.
83% of the coal consumption by the power sector is supplied at regulated prices by government-owned entities. Variable charges are quoted in the tariff-based bidding process on the assumption that domestic coal will be supplied to power plants at regulated prices from government-owned entities. However, a change in the coal mix towards more imported coal, precipitated by a shortfall in domestic supply and also by delays in the award of a compensatory tariff to mitigate increases in fuel cost, has mired IPPs. Since major domestic coal producers (Coal India Limited and Singareni Collieries Company Limited) and distribution utilities are both government-owned entities, there could emerge a structure where coal cost can be directly borne by distribution utilities, since coal is sold at regulated prices. However, efficiency-related incentives would be necessary to make IPPs responsible for the quantum of coal consumption.
Approval for a compensatory tariff from Electricity Regulatory Commission takes about two to four years including the resolution of any further appeals. In the intervening period between the commencement of operations and receipt of a compensatory tariff, under-recovery of thermal plants is observed to be 10%-15% of the tariff. The award of an interim tariff in cases where there is reasonable assurance of the award of a compensatory tariff is likely to have a positive impact on IPPs.
Continuing reduction in imported coal prices has provided relief to thermal plants since the gap between the cost of power produced from imported and domestic coal has reduced to 5%-10% in India's coastal regions. However, adverse forex movements may nullify the effect of decreasing imported coal price to an extent. The increase in domestic coal production (1HFY16: 9% yoy up) is also favourable to thermal plants.
Plant load factors are likely to be subdued over the short to medium term, since power consumption will increase gradually in case health of distribution utilities improves and based on the quantum of thermal capacity addition till FY17.
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