Tata Power Says Gujarat, Maharashtra, Punjab Have Agreed To Higher Tariff
Tata Power’s Mundra plant had threatened to shut operations if states buying power from it didn’t increase tariffs.
Days after Tata Power Company Ltd.’s Mundra unit threatened to shut operations as states buying power from it didn’t increase tariffs to compensate for costlier imported coal, the company said three have agreed to sign amended agreements and other two would follow suit.
Based on the inputs of Solicitor General of India, Gujarat, Maharashtra and Punjab—that account for 3.2 gigawatt of the 4GW capacity—are in favour of signing an amended power purchase agreement, Tata Power’s management said in a conference call. Rajasthan and Haryana will come back in due course, it said.
The Mundra project is fired by imported coal and agreed to supply power at Rs 2.26 a unit. But a change in regulations in Indonesia in 2010 increased prices, making the project unviable. The Supreme Court asked the Central Electricity Regulatory Commission to decide on the issue after a panel set up by Gujarat suggested an increase in tariff. But the states have yet to sign fresh power purchase agreements.
Tata Power said it will approach the CERC for mediation and for triggering the penalty clause if Haryana and Rajasthan stay opposed and the favourable CERC outcome will allow the company to structure the sale of 20 percent capacity. The management said the company will not sell power to states that don’t agree to compensatory tariff and the new agreements should fall into place within two months.
Lower fuel cost makes the current timing most suited to sign amended power purchase agreements, a process that will likely have to wait because of the current lockdown due to Covid-19, Murtuza Arsiwalla, research analyst at Kotak Institutional Equities, said in a note. Mundra has average fuel cost underrecovery of Rs 0.5 for every kilowatt-hour in the nine months ended December, according to the brokerage. A compensation of Rs 0.15 per unit will help reduce losses by Rs 370 crore for the full fiscal ending March.
Harshvardhan Dole, research analyst at IIFL Securities, said in a report that the brokerage expects the management to steer the complex situation through policy advocacy as any litigation by state electricity boards will have an adverse effect. While the stock is cheap at 0.6 times the book value for FY21, the revenue model is susceptible to coal prices and asset-heavy renewable energy projects, it said.
Other Concall Takeaways
- Monetization of Tata Power assets is taking more time and will likely be pushed back to FY2022. It planned to sell assets worth Rs 5,000 crore in FY21 including the sale of stake in Indonesian coal miner PT Arutmin, other smaller mines in Indonesia, shipping business, wind assets in South Africa and hydro plants in Zambia.
- The company has reduced manpower at its power plants amid the Covid-19 lockdown but generation and fuel supply hasn’t been disrupted.
- Disruption of fuel supplied has been notified as a force majeure event, and accordingly reimbursement of capacity charges will likely continue.
- Only disruption so far has been a mandated 14-day journey from the port of departure for coal supplies.
- Not experienced delays in implementation of renewable projects, don’t foresee delays beyond a few months if the current lockdown persists.
- Application for renewal of the coal licence in Indonesia will be made, and an approval should likely be available in six months.
- Earnings from coal business could benefit from lower cost of production, if the current prices sustain for a few more months.
On Wednesday, Tata Power shares rose 1.89 percent to Rs 35.05 apiece on the NSE while the benchmark Nifty 50 gained 6.62 percent to end the day at 8,317.85 points.