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Just 10 days after signing a pact with the Gujarat government for supplying 1,000 Mw of power from its proposed domestic-coal-based plant at Korba in Chhattisgarh, Adani Power Ltd, India's third-largest private thermal power producer, decided to shift the project site for supply to Gujarat 1,300 km away to Mundra, a coastal location.
The power-purchase agreement (PPA) was signed with Gujarat Urja Vikas Nigam Ltd (GUVNL), an umbrella electrical services firm owned and controlled by the Gujarat government, on February 2, 2007, and Adani Power's request for change in the plant's location was made to GUVNL on February 12, 2007.
The shift converted the fuel base of the power source for GUVNL from primarily low-cost domestic coal to costly imported coal. Four years later, the company petitioned the Central Electricity Regulatory Commission (CERC), seeking an increase in tariff, arguing the high cost of imports due to "unforeseen" Indonesian regulation making the project "unviable". This was despite Adani Power's commitment under the 2007 pact that tariff would remain unchanged in the event of a site shift.
Last week, CERC allowed "compensatory tariff" to Adani Power, raising a storm of protests over the increased burden on distribution companies, which had signed the PPA on the basis of a lower tariff, and the prospects of higher power cost for millions of consumers.
The sequence of events seems to have some loose ends, even though Adani Power had indicated in its bid it was evaluating Mundra as an alternative site. An analysis by Business Standard raises a few key questions: What led Adani Power to shift the location so soon after signing the PPA? Did Adani Group really suffer the losses due to costly imports from Indonesia, as it claims?
When contacted for response to these questions, Adani Power declined to comment. A detailed email questionnaire sent to the company on Friday also remained unanswered.
Consider these facts: GUVNL invited competitive bids for supply of power in February 2006. According to the request for proposal (RFP), the seller had to take full responsibility for tying up fuel. Seven bids were received, including one by an Adani Enterprises-led consortium that proposed setting up a 1,200-Mw domestic-coal-based plant in Chhattisgarh, quoting a tariff of Rs 2.34 per unit. This included Rs 1.34 as energy charge and Rs 1.00 as capacity charge - both under the "non-escalable" head. This (allegedly) enabled Adani Power to outbid others, including Reliance Power and Coastal Gujarat Power (CGPL), which quoted energy charge under the escalable head.
Adani Power's aggressive bid was based on a commitment of coal from the Morga-II block of Gujarat Mineral Development Corporation (GMDC) in the mineral-rich Chhattisgarh. The limited requirement of imported coal (for blending) was to be met by supplies from Japan's Kowa Company Ltd and Germany's Coal Orbis Trading GMBH. According to the company, it had to sign an agreement with its parent Adani Enterprises for supply of coal from its Indonesian subsidiary because none of the three coal sources materialised.
The shift from Korba to Mundra, however, exposed the company to the infirmity in global rates, and led to what Adani Power calls a "multifold increase in the price of coal procured... which made supplying power at 2.34 per unit impossible and unviable". The company argues its average procurement price between March 2010 ( when it started importing coal) and September 2011 was around $ 36 a tonne. Since then, it has been procuring coal on the basis of indexed price, fixed according to the new Indonesian regulation, between $ 91 a tonne and $ 102 atonne. The company says it has incurred annual losses of Rs 790 crore in supplying power to Gujarat. But there is no explanation for choosing to shift the plants location, increasing the reliance on imported coal.
According to GUVNL, Adanis didnt really suffer any loss from importing high- cost coal. The argument is simple: The excess revenue that accrues to Adanis Indonesian subsidiary by following the Indonesian regulation offsets the loss suffered by Adani Power, the Indian subsidiary buying coal.
This makes the entire exercise revenueneutral for the parent company. For consumers, however, tariff goes up.
This argument was also corroborated by S Jayaraman, one of the four CERC members who opposed the order passed by the commission.
In his separate order, Jayaraman wrote, " Considering the inter- company transactions or agreements within the group or conglomerate affecting transfer price of coal, it is difficult to calculate loss or gain for a particular company.
The increase in price of coal directly benefits the Indonesian company. The benefits are passed on to Adani Enterprises in the shape of return for the investment. Adani Group as a whole, thus, may be the ultimate beneficiary of the Indonesian regulations." The commissions order, however, rests on the principle that the consumers interest is served not only by fixing competitive tariff but it is equally important to ensure continuous and reliable supply of power. This requires allowing adequate return on investments by investors. The commission has also said it is not in favour of re- negotation of tariff, as the sanctity of bids should be maintained. Though CERC has ordered setting up a committee to work out the exact quantum of the " compensation", it has made it clear the " compensation package could be variable in nature, commensurate with the hardship the petitioner is suffering on account of unforeseen events".
CERCs decision on similar petitions by Tata Power ( for its 4,000-Mw Mundra ultra mega power project) and Reliance Power (for its Sasan and Krishnapatnam UMPPs) is expected soon. Though the regulator clearly said in its Adani order that cases of increased costs due to " unforeseen events" would be decided on a case- tocase basis, it would be keenly watched if the Adani verdict would set a benchmark.
THE SEQUENCE OF EVENTS
2006
- 1 Feb: GUVNL invites bids for power supply on a long-term basis
- 9 Sep: Adani Enterprises signs MoU with Germany's Coal Orbis Trading GMBH
- 14 Nov: GMDC issues letter to Adani Power for supply of coal from its Morga-II block in Chhattisgarh
- 24 Nov: GUVNL issues RFP; states fuel sourcing as the bidder's responsibility
- 21 Dec: Adani Enterprises signs MoU with Japan's Kowa Company
- 4 Jan: Adani Enterprises submits its bid as part of a consortium with Vishal Exports Overseas Ltd
- 11 Jan: Letter of Intent issued to the Adani Enterprises-led consortium
- 2 Feb: Adani Power signs PPA with GUVNL for supply of 1,000 Mw
- 12 Feb: Adani Power proposes to supply power from Mundra project
- 18 Apr: Accordingly, a supplementary PPA is signed between Adani Power and GUVNL
- 5 Feb: MoU with Kowa Company Ltd is terminated
- 18 Mar: MoU with Coal Orbis Trading GMBH is terminated
- 24 Mar: Adani Power executes coal-supply agreement with Adani Enterprises for coal purchase
- 26 Jul: Adani Enterprises enters into a consolidated coal-supply agreement with Adani Power
- 23 Sep: Indonesian regulation promulgated
- 23 Sep: Indonesian regulation comes into effect
- Adani Power petitions CERC, seeking tariff increase
- 3 Apr '13: CERC order recommends "compensatory tariff" for Adani Power
