India’s two largest thermal power projects face the risk of turning unviable as costlier imported coal and inability to hike tariffs have left Adani Power Ltd. and Tata Power Ltd. saddled with losses.
Built at a combined investment of Rs 40,000 crore, the projects in Gujarat’s port town of Mundra have been under financial stress as prices of coal at Indonesian mines have nearly doubled since they were planned. Worse, the Supreme Court rejected the companies’ bid to hike tariffs to compensate for the rise in costs.
The losses at Mundra have eroded Rs 4,000-crore net worth for Tata Power in the last three years, Anil Sardana, managing director and chief executive officer, Tata Power, told BloombergQuint in an emailed reply.
Adani Power had to reverse compensatory tariff worth Rs 4,364 crore it had recorded on its books till December last year, resulting in a significant erosion of its net worth as of March, a CARE Ratings report said. The company reported a loss of Rs 4,690 crore in the last financial year.
The Adani Group agreed to sell Mundra power at Rs 2.94 per unit, according to the Supreme Court order. Tata Power sells at Rs 2.26 a unit, its website said. While tariffs come up for renewal along with power purchase agreements after a stipulated time frame, the ability of companies to negotiate higher rates depends on prevailing conditions. Current trends do not suggest much room as solar power tariffs have fallen to a record low of Rs 2.62 per unit.
Domestic Coal Not A Viable Option
Since Adani Power and Tata Power relied on imported coal, setting up the projects in Mundra was logical. Especially, when the port also had one of the biggest automated coal-handling terminals in the country.
More than a decade later, the very basis of selecting the port has also made the plants unviable for using coal mined within India. While most coal mines are located in central and eastern India, Mundra is along India’s west coast.
“The landed cost of domestic coal is more than the cost of imported coal due to longer transportation route,” according to Sardana. Moreover, the quality of domestic coal is such that not more than 20 percent of it can be used as a blend in imported coal, he said.
Adani’s 4,620 MW Mundra project is the largest coal-fired thermal plant by installed capacity in India, followed by Tata Power’s 4,000 MW Coastal Gujarat Power Ltd., also in Mundra. While NTPC Ltd.’s Vindhyachal project in Madhya Pradesh has an approved capacity of 4,760 MW, only 3,760 MW has been installed so far, according to information on the company’s website.
Adani Power has the highest leverage among India’s power producers with a debt-to-operating income ratio of 8.24. Tata Power follows at 7 compared to a median of 4.99 for the sector, according to Bloomberg data.
Tata Power set up its Coastal Gujarat Power Ltd. ultra-mega power plant at an original cost of Rs 17,000 crore, with three-quarters of it coming from loans. The project’s debt stood at Rs 9,730 crore as of March, rating agency Crisil said in May. The company has infused nearly Rs 6,200 crore in equity, including Rs 1,800 crore in the last three years, to maintain the 75:25 debt-to-equity ratio and compensate for net worth erosion.
Debt taken from banks is the responsibility of Tata Power, Sardana said. “It can't just be taken off the books. Since the plant is generating EBITDA margins, it's being run and the amount generated is used for repaying interest and debt, as due.”
Coal prices have declined in the international market in recent times, but the plant continues to post losses due to under-recoveries as the cost of coal (about $58 free-on-board) is still higher than what ($30) was considered at the time of bidding for the project, said Sardana.
For Adani Power, Mundra contributes half the debt. The company has decided to transfer the project into a step-down subsidiary, helping transfer Rs 25,000-crore debt to the arm and making Adani Power the holding company for the group’s power assets.
The Mundra plant is incurring cash losses due to under-recovery of fuel costs as the tariff does not fully compensate the costs of producing power, an Adani Power spokesperson said in an emailed reply to BloombergQuint.
The plant meets fuel requirement largely through imported coal. Adani Power also has an operational fuel supply agreement with Coal India Ltd.
In Search For Options
Adani Power said Mundra plant’s cost of generation is competitive even at higher fuel costs. Under the terms of various power-purchase agreements, the company can recover full fixed costs at 80-85 percent of plant availability, the Adani spokesperson said.
Tata Power is running its plant at a declared capacity at 80 percent to recover full-fixed tariff. Even at this declared capacity, the plant load factor availed by distribution companies is about 70 percent. The company is in touch with power buyers to increase it by 10 percent.
“If this happens, procurers will get 60 percent of margin which can add up to Rs 450 crore earning for buyers and about Rs 300 crore advantage to CGPL each year. We are pursuing this option and Rajasthan has already expressed interest,” Sardana said.