Indian Imported Coal based Power Generation Projects - My views published in the Powerline magazine
1) What according to you should the government do to resolve the issue of hike in Indonesian coal prices for projects which are already tied up in PPAs?
Indonesian coal prices have impacted projects that were bid out on competitive tariff based on imported coal, such as Mundra and Krishnapatnam UMPPs. While these had the inherent risk of tying life-of-project long fuel supplies, pricing of the fuel added yet another dimension to the risk. This in view of the fact that miners are turning out to be price-makers and the demand and supply scenarios in the global market seem to indicate continued dominance of the mining firms in price setting. However, the structure of bidding indeed provided for risk mitigation mechanism through escalable and non-escalable components of the fuel/energy charges. The bidding strategy adopted by several players participating in these bids reflected their expectations of prices as much as their control over those. Essentially a bidder with fully escalable fuel charges component may be considered risk averse and having little control over the prices of imported coal whereas one with fully non-escalable fuel charges component may be considered risk tolerant and with control over prices, these representing the entire spectrum. For the first type of bidder the residual risk remained in the movement of actual prices of landed coal versus the escalation permitted through the computation of movements of underlying indices, but if the fuel charges presented in the bid reflected the cost of coal procurements at the time of bidding, these risks may be considered lower in comparison to the other bidder. Thus, it can be stated that the bidding norms indeed provided for a mechanism for risk mitigation. The bids submitted by the participants, therefore, reflected more their respective expectations of movements of prices of coal in the international markets and degree of control each could have on these, either through owning minority stakes in mines and securing price preferences or outright 100% ownership in the mines and keeping tight control on costs.
The issue of Indonesian coal price hike has become prominent now due to the fact that price preferences or cost plus transactions of coal proposed have been negated by the recent Indonesian legislation that forces all transactions to happen at market prices, which are global index linked and are proposed to be approved by the Government of Indonesia. Many saw it coming since low priced coal from Indonesian mines meant the Indonesian Government losing on income taxes and royalties, both linked to price of coal.
On part of the Government of India, or its coordinating agencies, it may be prudent to revise the guidelines in way that the political and regulatory risks of a nature that's difficult to foresee and manage may be addressed through appropriate modifications in tariffs. However, these must not be left open-ended, in which case the competition may lose its sheen.
2) How can the increase in costs be shared by different stakeholders?
For the already bid out projects, there seems to be little recourse although there have been petitions for suitable amendments to tariff structures to make it more reflective of costs of coal procurements. Recent cases of decisions made on Case 1 bids indicate that regulatory commissions may not have the leeway to allow such changes. In such a scenario, the power project companies may bleed, although not necessarily the group companies that may hold assets in Indonesia. However, there is no denying that tariffs should reflect costs of power generation, and hence, the consumers should bear lion's share of the rise in costs. But that said for the competitively bid our projects, it may be tough to discern whether project risk event may have occurred due to developer's aggression and confidence in control of fuel value chain.
The other options for cost sharing may be less preferred - the government/tax payer or the developer - since propagating subsidies will impact the efforts to reform and adverse impact on investment returns of the developers can squeeze investment in the sector. These in any case may be only short term measure as the future tariff based competitive bids will see bids reflective of the new ground realities.
Indonesian coal prices have impacted projects that were bid out on competitive tariff based on imported coal, such as Mundra and Krishnapatnam UMPPs. While these had the inherent risk of tying life-of-project long fuel supplies, pricing of the fuel added yet another dimension to the risk. This in view of the fact that miners are turning out to be price-makers and the demand and supply scenarios in the global market seem to indicate continued dominance of the mining firms in price setting. However, the structure of bidding indeed provided for risk mitigation mechanism through escalable and non-escalable components of the fuel/energy charges. The bidding strategy adopted by several players participating in these bids reflected their expectations of prices as much as their control over those. Essentially a bidder with fully escalable fuel charges component may be considered risk averse and having little control over the prices of imported coal whereas one with fully non-escalable fuel charges component may be considered risk tolerant and with control over prices, these representing the entire spectrum. For the first type of bidder the residual risk remained in the movement of actual prices of landed coal versus the escalation permitted through the computation of movements of underlying indices, but if the fuel charges presented in the bid reflected the cost of coal procurements at the time of bidding, these risks may be considered lower in comparison to the other bidder. Thus, it can be stated that the bidding norms indeed provided for a mechanism for risk mitigation. The bids submitted by the participants, therefore, reflected more their respective expectations of movements of prices of coal in the international markets and degree of control each could have on these, either through owning minority stakes in mines and securing price preferences or outright 100% ownership in the mines and keeping tight control on costs.
The issue of Indonesian coal price hike has become prominent now due to the fact that price preferences or cost plus transactions of coal proposed have been negated by the recent Indonesian legislation that forces all transactions to happen at market prices, which are global index linked and are proposed to be approved by the Government of Indonesia. Many saw it coming since low priced coal from Indonesian mines meant the Indonesian Government losing on income taxes and royalties, both linked to price of coal.
On part of the Government of India, or its coordinating agencies, it may be prudent to revise the guidelines in way that the political and regulatory risks of a nature that's difficult to foresee and manage may be addressed through appropriate modifications in tariffs. However, these must not be left open-ended, in which case the competition may lose its sheen.
2) How can the increase in costs be shared by different stakeholders?
For the already bid out projects, there seems to be little recourse although there have been petitions for suitable amendments to tariff structures to make it more reflective of costs of coal procurements. Recent cases of decisions made on Case 1 bids indicate that regulatory commissions may not have the leeway to allow such changes. In such a scenario, the power project companies may bleed, although not necessarily the group companies that may hold assets in Indonesia. However, there is no denying that tariffs should reflect costs of power generation, and hence, the consumers should bear lion's share of the rise in costs. But that said for the competitively bid our projects, it may be tough to discern whether project risk event may have occurred due to developer's aggression and confidence in control of fuel value chain.
The other options for cost sharing may be less preferred - the government/tax payer or the developer - since propagating subsidies will impact the efforts to reform and adverse impact on investment returns of the developers can squeeze investment in the sector. These in any case may be only short term measure as the future tariff based competitive bids will see bids reflective of the new ground realities.
posted by Dipesh Dipu @ 12:43 AM
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