Tariff uncertainty continues for Tata Power, Adani Power

The Appellate Tribunal for Electricity order overturning the Central Electricity Regulatory Commission’s (CERC’s) decision allowing compensatory tariff for ultra mega power projects (UMPPs) of Tata Power Co. Ltd and Adani Power Ltd came as a rude shock for investors.

The stocks slumped more than 10% each in intraday trading before closing with a loss of 3-4% on Thursday. The stocks recovered after Anil Sardana, chief executive and managing director of Tata Power, clarified that the tribunal accepted the change in Indonesian law as a force majeure and that companies should be compensated in power purchasing agreements (PPAs), instead of the route CERC adopted earlier.

Changes in Indonesian law had raised fuel costs of Tata Power’s and Adani Power’s UMPP plants. With the projects having fixed tariff agreements, the companies were not allowed to pass on higher costs, resulting in huge losses. The companies then petitioned CERC, which in turn asked the state electricity boards to compensate for fuel cost under-recoveries. This was challenged by the electricity procurers.

Now, the tribunal while terming the change in Indonesian law as force majeure has said CERC can exercise no regulatory power to change the tariff except for what is provided in PPAs. According to Sardana, the tribunal asked CERC to calculate the cost under-recovery under the force majeure clause. Compensation for Tata Power and Adani Power will be based on this.

The order gives a fresh lease of life to Tata Power and Adani Power’s Mundra-based power plants. But as can be seen from the losses in share prices, investors are not enthused.

There are several reasons. The order prolongs the waiting period for the companies, which are already bleeding. Cost under-recovery at Tata Power’s Mundra plant eroded Rs.3,817 crore of the company’s net worth in the last three years, says an ICICI Securities Ltd report. Adani Power is also reeling under losses due to high debt and cost under-recoveries.

Second, it is not yet clear when this issue will be resolved. Though the tribunal set a three-month time frame for CERC to compute compensation, the process can take longer if the regulator decides to make fresh consultations.

Third, and most important, is the quantum of compensation and consent. Fuel cost under-recovery for Tata Power plant right now is estimated at 30 paise per unit. What if CERC calculations deliver a different number? Based on earlier CERC recommendations, Adani Power is already booking compensatory tariffs. If the actual compensation varies, will they write back those revenues?

Also, if the buyers (states) do not agree to the compensation plan they may approach the Supreme Court, delaying the matter further. Overall, the tribunal order provided the much- required clarity on the contract. But it also prolonged near-term uncertainties for Tata Power and Adani Power’s UMPPs.