Issues with Ultra mega power projects

Why in news?

The Gujarat government has recently asked its power distribution companies (discoms) to approach the Central Electricity Regulatory Commission (CERC) to get approval for a tariff hike.

What is the background of the issue?

• The central government framed a mega power policy for developing coal-based power projects, with a capacity of 1000 MW and more, in 1995.
• Under that, it decided to set up ultra mega power projects (UMPPs) and has invited bids for setting up coastal UMPPs.
• The UMPP’s are run by the Tata group, the Adani group and the Essar group in Gujarat.
• However, they can run only on imported coal and have a combined generation capacity of around 10,000 megawatts.
• They sign power purchase agreements with distribution companies of various state governments and their projects run on coal from Indonesia.

Where does the problem arise?

• In 2010, Indonesia issued regulations that changed the coal mining and pricing framework.
• This had severe financial ramifications for Indian power plants that were designed to sustain on affordable Indonesian coal.
• Imported coal-based power plants across India face financial ramifications but cannot raise tariff without approval of CERC.
• Also, the Supreme Court ruled that change in Indonesian pricing regime cannot be construed as a change in law.
• Hence, CERC refuses relief to Adani group and Tata group on basis of “change of law” in Indonesia.
• This has made the three plants unable to pass the uncontrollable increase in the fuel prices on the procurers (discoms) under the Power purchase agreements.
• Lenders of these projects stated that the net worth is already wiped out for these projects, and these projects are surviving on additional fund infusion by promoter groups.
• There is also a likelihood of further erosion in the credit worthiness of the generators resulting in the creation of non-performing assets.
• Also a tariff hike would affect consumers of various states, including Maharashtra, Rajasthan, Punjab, Gujarat and Haryana.
• Each of these states has signed a power purchase agreement (PPA) with the three power plants that run on imported coal.
• Thus, a high-powered committee (HPC) was set up this year by the Gujarat government acknowledging the issue.

What are the recommendations of HPC?

• The three projects should be permitted to pass on the impact of the high fuel costs equitably to consumers, lenders and other stakeholders.
• Banks would have to take a haircut of more than Rs 10,000 crore.
• The lenders could reduce the interest rate also on the debt of these three projects.
• The HPC recommends partial pass-through of high coal prices to consumers, along with a commercial restructuring plan for these plants.

What is the present status?

• Supreme Court says its previous order won’t come in the way of measures suggested by HPC.
• Currently, the state government has focused its attention on pass-through of only the fuel cost.
• Since only the CERC can approve an increase in power tariffs, the government has asked its discoms to get this approval.

Source: The Indian Express