CERC directs discoms to compensate Adani Power for costlier coal imports; Reliance Power, Tatas expect similar relief

 NEW DELHI: The central power regulator has upheld Adani Power's plea that it should be compensated for higher prices of Indonesian coal, brightening the prospects of Tata Group and Reliance PowerBSE -0.83 % projects locked in litigation with state utilities after costly coal imports raised electricity costs.

In a landmark ruling, the Central Electricity Regulatory Commission (CERC) has directed state distribution companies in Haryana and Gujarat to compensate
Adani PowerBSE -0.63 % for higher cost of Indonesian coal. The company argued that its 4,620 mw project at Mundra, of which 2,424 mw was contracted with state utilities, was suffering an annual loss of Rs 1,370 crore on account of higher fuel costs.

Power firms say the abrupt change in Indonesian laws that raised coal prices could not have been anticipated at the time of bidding, but state electricity boards had refused to revise contracted tariffs. The regulator said power producers should be allowed a variable "compensatory tariff" to account for unforeseen costs.

"We welcome the
CERC order, which will pave the way forward to bring back investor confidence into the power sector," said Adani Group Chairman Gautam Adani.

The order comes as a shot in the arm for the power sector, where thousands of megawatts of generation capacity is stranded because imported coal prices had jumped but companies were unable to pass on the additional cost to customers. This had strained the banking sector, which has a huge exposure to the sector.

The stock market cheered the development. Shares of Adani Power, which has reported five successive quarterly losses, rose as much as 15% before closing 8.8% up. This boosted the sentiment of other power firms on a day the benchmark Sensex fell 239 points, or 1.3%.
Jaiprakash PowerBSE -1.32 % gained 1.34% and Tata PowerBSE 0.73 % rose 0.7%.

The regulatory order has direct implications for Tata Power's 4,000 mw ultra mega power plant (UMPP) at Mundra, which has started operating but its customers have firmly opposed any renegotiation of tariff on the ground that the power purchase agreement does not have such a provision. Reliance Power's proposed UMPP at Krishnapatnam in Andhra Pradesh is also stranded because of a similar dispute with utilities over tariff.

The regulator has directed Adani Power and state utilities to form a joint committee to assess the impact of the price escalation on the project. The eight-member panel will suggest a compensation package over and above the tariff in the PPA by April 30. It will include representatives of Adani Power, state utilities, state governments besides financial analysts and bankers.

In its order, CERC added, "The net profit less government taxes and cess earned by the petitioner's company from the coal mines in Indonesia on account of the benchmark price due to Indonesian Regulation corresponding to the quantity of the coal being supplied to the Mundra UMPP should be factored to pass on the same in full to the beneficiaries in the compensatory tariff." Reliance Power and Tata Power are expecting similar relief from CERC while other power producers are expected to approach the regulator to seek compensation for losses incurred due to higher fuel prices.