Bidding for a new UMPP: Is it a wise bet?

Four UMPP (Ultra Mega Power Projects) that Tata and Reliance Power bid for post 2005 struggled during the implementation stage.  Rising coal prices, the Coalgate scam, a depreciating rupee, an inability to pass on the tariff hike to end consumers, problems in land acquisition and environmental issues have proved as impediments in the path of setting up UMPPs. Overall, these projects were expected to add 16000 MW of electricity generation. 

However, only Mundra Power plant (by Tata Power), a 4,000 MW UMPP was implemented after a lot of struggle. One of the pressing issues that Tata Power or any other power generation company faces is a heavy dependency on imported coal. Fuel forms approximately 70% of the total operational costs; as Indian projects are largely dependent on Indonesian coal imports for its operations. For example, Mundra and Krishnapattam UMPP are largely dependent on imported coal. This imposes further pressure on the operational costs.  With limited production of coal by Coal India and other Indian coal mines, the shortage of Indian coal supply remains a looming bottleneck. Although to ease this situation, the government is looking at 100 million tonnes - 180 million tonnes of coal imports by Indian companies. These imports will help Indian power generating companies sustain electricity generation across India. 

A looming issue that the Mundra power project faces is that unless it is able to pass on the increased costs of fuel to the customer. The project will continue to incur losses.  The original Power purchase agreements with the government had ascertained a constant tariff rate. However, the government had not anticipated events such as the coal gate scam and increased coal imports. In view of the development of these events, unless the government allows a cost pass through structure, power generation will result into heavy loss for a company. A closer look at the operational level of the Mundra power project reveals that an annual loss worth Rs.1,800cr will be incurred on a continuous basis if the original tariff is maintained. Tata Power believes that unless (CERC Central Electricity Regulatory Commission) permits a movement towards a higher tariff rate, it (Tata) will not be able to offset the coal price hike.  Adding to its existing woes is an issue of a depreciating rupee. The depreciating rupee makes the imports more expensive and unfeasible unless the company (Tata) is able to pass on the costs to the end consumer. 

Although the coal prices have dipped to US$100 per tonne, down 16% from the previous rate, a 0.7 paise per unit increase in the tariff rate would reduce the losses faced by Tata power to a certain extent. The one time tariff hike will not be a permanent solution. The tariff should be determined by the market forces. Unless and until the basic problem of a pass through tariff is addressed; power generation companies will continue to incur losses and projects will turn into bad debts. 

Even if the government allows a leeway in the lending norms to the power generation companies or considers converting the debt as secured debt. This will not resolve the fundamental problems that the companies are facing in terms of breaking even and generating profits. This situation will lead banks to refrain from lending to such projects in the long run.

The implementation of the first phase of the UMPPs is a reflection towards the various issues faced by the power generation companies in the present and the future. This has given rise to doubts in the minds of the potential bidders who will be bidding for the next phase of the 12 UMPPs. Marred with a number of issues, power generation companies will think twice before bidding for a UMPP.

“This article is written by Bawa Jaslene Kaur Ranjit Singh, a FPM student of 2013 batch of IIM Raipur. She can be reached at jaslene.fpm2013@iimraipur.ac.in".

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