Why Adani's compensation package is a boost for power sector

In a landmark ruling, the country’s national electricity regulator has permitted Adani Power to charge a compensatory tariff to offset rising costs of coal imports for its Mundra power plant whose operations were imperilled by erratic domestic fuel supplies.

While the move will allow utilities to pass on costs through higher tariffs it could trigger a backlash too.

The Central Electricity Regulatory Commission (CERC) has allowed Adani Power to charge “compensatory” tariffs for electricity from its Mundra plant in Gujarat, until supply conditions improve. In other words, it has upheld Adani Power’s right to recover additional fuel costs arising from the recent hike in Indonesian coal price from those who buy electricity from its Mundra project. However, the authority has stayed away from recommending what the exact hike should be.

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The regulator said Adani should be allowed such a tariff, citing the “unforeseen” events of the rising cost of imported coal from Indonesia, coupled with the shortages of domestic supplies from the state-run Coal India Ltd.

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“As and when the hardship is removed or lessened, the compensatory tariff should be revised or withdrawn,” the regulator said in an order, adding that a committee should be set up to establish the amount of the tariff.

It did not say how long the provision for higher tariffs would run, but added that the supply problem was a “temporary phenomenon and is likely to be stabilized after some time”.

According to a CLSA sales note, the “compensatory tariff” is positive for Adani Power and Tata Power. The latter offers decent trading upside from current levels, it said.

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The order would set a legal precedent for other companies facing issues of fuel shortage and increased costs. Companies such as Adani Power, Tata Power and Reliance Power bought coal mines in Indonesia to feed their plants. But coal imports became expensive for the firms when the Indonesian government last year started levying higher royalty and income tax.

India’s power sector has struggled with domestic coal shortages and has become increasingly reliant on costlier imports to meet the country’s rapidly growing energy needs. The order opens the door to compensation for other power projects that have run into similar problems due to a seemingly unexpected turn of circumstances, especially with respect to fuel costs. It is also a a boost for investor confidence, as it sets at rest the industry’s apprehension the government might not allow post-bid changes in contract conditions.

Adani Power shares ended up 9 percent.

A decision on similar cases filed by Tata and Reliance Power could be taken within 10 days or so, S. Jayaraman, a CERC official, told CNBC-TV 18.

However, the court ruling implies power costs will rise as discoms in Haryana and Gujarat will have to shell out an additional R1,200 crore per annum if the CERC order is implemented and the tariffs so revised. This extra cost will ultimately be passed on to the retail consumers in these states. Haryana’s state power regulator has already allowed up to 15 per cent increase in power tariff for the current financial year.

According to a report in Mint, the additional cost for the Haryana and Gujarat tariffs on account of imported coal is 64 paise and Rs.1.11 per unit, respectively, in the first year of supply. Quoting a Gujarat Electricity Regulatory Commission official, who requested anonymity, Mint said that for the hike of about Rs.1.11 per unit sought by Adani Power in Gujarat, consumers in the state will have to shell out around 20 paise more per unit.

But with consumers refusing to pay bills in several parts of the country, the scope of litigation is high.

With inputs from Reuters