More than a year after Prime Minister Manmohan Singh stepped in to resolve the policy logjam and fuel shortages impacting power and coal sectors' performance, the two key infrastructure sectors seem to be headed for legal tangles. Uncertainty over coal supplies for projects, method and pricing of costly imports, scope of regulatory intervention and multiplicity of policy amendments required to enable bridging the fuel gap are set to emerge as major challenges for the sectors.
Thanks to the proposals currently being discussed to solve the coal-supply logjam, the cases of regulatory nod for compensatory tariff to companies based on change-in-law clause of Power Purchase Agreements (PPAs) are set to become an everyday affair. Two similar cases of compensatory relief allowed recently by the regulator to private generators Adani Power and Tata Power have already kicked over controversies.
The government, having shelved the coal price pooling proposal to make costly imports viable, is now working on a model where the entire additional cost of imports would be passed on to the consumers as it is, according to a person close to the development. The plan is to ask Coal India to meet 65 per cent of the contracted coal quantity for plants commissioned between March 2009 and March 2015 domestically. But unlike the pooling proposal — where the higher cost of imports was to be evenly distributed across projects — the new "cost plus" model will give the developers the option to either source imported coal from CIL to meet the balance 15 per cent requirement and passing it on to consumers or import coal themselves.
This pass through of coal prices, if allowed, would mean tariffs for power produced from plants set up through the competitive bidding route go through the roof. Coal India has to sign FSAs to meet coal requirement of over 78,000 Mw of generation capacity commissioned through six years ending March 2015 and a bulk of this capacity has come up through tariff-based bidding.
The concerns over tariff hikes recently led the power ministry to seek the advice of Central Electricity regulatory Commission (CERC). The commission opined that if CIL is to supply imported coal on a cost plus basis, New Coal Distribution Policy (NCDP) must be amended. It also said that, as the issue relates to competitive bidding, the bidding guidelines under section 63 of the Electricity Act 2003 must also be amended to enlarge the scope of regulatory intervention to take care of situation arising from change in law. For claiming benefits under the "change in law" clause of the PPA, the developers would have to move the appropriate commission, it said.
Experts, however, say the idea to create a modified regime that allows competition in capacity charges and permits pass through of fuel charges through a well-established regulatory mechanism is in the right direction, even if it pushed tariffs up. "This step reflects appreciation of ground realities, creates a legal method of cost-reflective tariffs, helps maintain sanctity of bidding documents and contracts and, hence, helps creating a better investment environment in the sector," said Dipesh Dipu, Partner at Jenissi Management Consultants.
He also said the need for cost-reflective tariffs cannot be ignored since the investment in sector will only flow when it earns appropriate returns. He said it makes sense to modify the bidding guidelines and standard bidding documents, certainly more than post-facto allowing compensatory tariffs, because the risk of high volatility in global coal prices are not within reasonable control of project developers.
Source- Business standard