States’ Effort To Renegotiate Power Tariffs Doesn’t Impact Essar, Says Prashant Ruia
Prashant Ruia says power tariff renegotiation doesn’t impact Essar, but “makes it hard”.
Attempts by state governments to scrap long-term power purchase agreements and renegotiate tariffs in line with falling market prices will not have a direct impact on the Essar Group, according to director of Essar Capital Prashant Ruia.
Essar's power agreements are already below Rs 4 per unit which states are currently demanding from power companies, Ruia told BloombergQuint in an interview. “But it makes it very hard”, Ruia said, as an investment is made based on the assumptions about viability of the contract.
“If you turn around and change those assumptions, then it gets very difficult for the banks and for the investors to meet those viability assumptions”, Ruia said. “We have to have a sanctity of contract in the country,” he said.
A steep drop in India's spot power prices has left states feeling that they are paying too much under existing power purchase agreements. Andhra Pradesh and Karnataka are currently trying to cancel agreements with power suppliers or revise rates downward, Bloomberg had reported. In June, Uttar Pradesh cancelled deals with seven power projects with a cumulative capacity of 7,040 megawatts.
Indian power companies are already facing stress due to falling tariffs, and an oversupply situation. At least two private banks have flagged the risks emerging from loans to power companies in their first quarter results.
However, Ruia expects the worries in the power sector to correct "very quickly" as power demand picks up with the government's effort to boost growth in the country.
Here are edited excerpts from the conversation.
Is power a viable business or a non-viable one?
The real issue in power has been that a lot of new capacity got invested in the last five years. That new capacity – whether in gas-based power plants, thermal power plants or renewable plants – was invested keeping a certain demand growth in mind. That capacity has come, a lot of it. But the demand growth which was expected has not come in the same measure. And therefore, you are seeing a huge surplus power situation and that surplus power is driving down the tariffs to unviable levels. Because if the tariff is around Rs 2.5, that’s not the tariff of the public auction tariff price. That’s not a viable tariff for the generators. This used to be Rs 6 only four years ago.
Oversupply has driven these prices down and this will correct very quickly once power demand picks up. With government initiatives and the growth that India is seeing, it’s only a question of time before the power demand picks up. Once that happens, you will see a lot of this correcting. In the meantime, very little capital investment is happening. The capacity which is available has to be absorbed, which can happen once demand picks up.
State governments are asking for already negotiated prices to be brought down to below Rs 4 because that’s what new projects are offering in the auction. Does that impact you?
It doesn’t impact us directly. But it makes it very hard. Once you make an investment based on a signed contract, all the assumptions of viability have been based on that offtake. If you turn around and change those assumptions then it gets very difficult for the banks and for the investors to meet those viability assumptions. I don’t know where this will head. We have to have a sanctity of contract in the country. We suffered from some of it. For example, we had a gas supply contract for a steel plant which was canceleld which created a lot of problems in our steel business. We are seeing this now in the power business. If we want significant future investment then having sanctity of contract is very crucial for the investors and banks.
Why you are not impacted in this?
Because our PPAs are already below Rs 4.
This will potentially lead to projects going unviable in the industry. That’s not good news for the banking sector, is it?
Our power minister has been on record voicing his concern over this and they will come with a solution which is best for the industry.