Exclusive: Gujarat Govt’s ‘High-powered’ Plan to Bail out Adani, Tata, Essar’s Stranded Power Projects

A draft report prepared by a high-powered committee appointed by the government of Gujarat has come up with a plan to rescue stranded power projects in the state run by the Adani, Essar and Tata groups. While there have been news reports indicating what the report may recommend, Newsclick has obtained a draft copy of the entire report, which we are placing in the public domain. The three-member committee comprising former Supreme Court judge Justice R K Agrawal, former Deputy Governor of the Reserve Bank of India S S Mundra and former Chairperson of the Central Electricity Regulatory Commission (CERC), Pramod Deo, was set up by the Gujarat government on July 3, 2018 to find solutions for the three thermal power plants located in the state that were in financial dire straits.

The three power plants, all of which use coal imported from Indonesia as fuel, have been floundering due to a rise in the prices of Indonesian coal. Having sought and failed to obtain a tariff revision to cover the cost – which the Supreme Court ruled out in a judgment in April 2017 – the power plants had reduced electricity generation significantly, causing a power crisis in the state of Gujarat and elsewhere.

According to a version of the high-powered committee’s report running into 110 pages, marked “privileged & confidential” and as a “work in progress draft,” a package of measures has been proposed wherein “the burden of hardships will have to be borne by all the stakeholders” – that is,  the developers, the lending banks, and consumers. The burden borne by the developers will include all losses incurred by them so far, which will not be compensated to them.

Significantly, earlier offers by Adani and Tata to sell the power plants to the Gujarat government will no longer be relevant – the companies will continue to hold the assets. The lending banks will be expected to reduce their debt burden on the projects to the tune of more than ₹9,000 crore. This would be despite the fact that one of the three projects (set up by the Essar group) is already considered a non-performing asset (NPA), while the two others are considered “stressed” assets by the banks due to their inability to service their debts. Meanwhile, going forward, the consumers of power are expected to bear the increased cost of Indonesian coal with the costs on fuel incurred by the developers being “passed through” to them up in the form of higher tariffs, upto a stipulated limit.

The committee expects that this will be possible after appropriately amending the power purchase agreements (PPAs) governing the sale of electricity from these power plants to state government companies that distribute electricity (discoms) in five states to permit changes in tariffs, despite the Supreme Court having earlier rejected the same proposal of revising tariffs as impermissible under the current contracts. The committee holds (correctly, it seems) that the Supreme Court was merely interpreting the terms of the existing PPAs and that its judgement doesn’t prevent the parties to the contracts – the discoms and the power generators – from mutually amending the PPAs. However, this flies in the face of a crucial aspect of the apex court’s reasoning, which is that it was the low tariffs quoted by the power generators in the first place that enabled them to win the contracts from the discoms. Instead, the committee in effect holds the view that these power plants are “too big to fail” and thus deserve to be “salvaged.”

The Background

The three power plants put together supply roughly 45% of Gujarat’s total electricity demand and also supply power to four other states – Haryana, Maharashtra, Rajasthan and Punjab.

Tata Power, through its subsidiary Coastal Gujarat Power Limited (CGPL), runs a 4,150 megawatt (MW) capacity Ultra Mega Power Project (UMPP) located in Mundra on the coast of Gujarat. The plant supplies power to Gujarat (1,805 MW), Maharashtra (760 MW), Haryana (380 MW), Punjab (475 MW) and Rajasthan (380 MW). Adani Power, runs a similar plant of 4,620 MW generating capacity inside the special economic zone that the group owns in Mundra. This plant supplies 2,000 MW to Gujarat and 1,424 MW to Haryana. The Essar group controlled by Ruia family, through Essar Power Gujarat Limited (EPGL) runs a 1,200 MW capacity power plant in Salaya in Gujarat, and supplies 1,000 MW to the state. Electricity supplied by CGPL and Adani Power collectively account for 22% of Haryana’s total power demand.

All three power plants were built on the expectation that they would use coal imported from Indonesia. At the time, these power plants were being set up in the early- to mid-2000s, this coal was cheaper than domestically-sourced coal. As a result, not only did these companies set up power plants using imported coal in coastal areas, they also entered the coal mining space in Indonesia in order to integrate their supply chain. Tata Power, through its subsidiaries, holds a 30% equity stake in PT Kaltim Prima Coal, an Indonesian coal mining company. Similarly, the Adani group holds an equity stake in the Bunyu mines in Indonesia through its subsidiaries. These mines supply coal to the companies’ respective thermal power plants in India.

These arrangements were all disrupted in September 2010 when the Indonesian government decided to benchmark the price of its coal to international market levels. This resulted in a rise in the cost of coal for these power plants which affected their economic and financial calculations. The companies immediately sought relief from the electricity regulators – Adani Power and the Tata group approached the CERC while Essar approached the Gujarat Electricity Regulatory Commission. They requested that the tariff that they were charging be adjusted to accommodate the increased cost of the Indonesian coal arguing that the “change in law” and the force majeure (act of god) provisions of their PPAs with the discoms should apply.

The CERC in orders dated April 2, 2013 and April 15, 2013 granted the companies relief. While it did not accept that the Indonesian regulations constituted either a “change in law” or force majeure, it nevertheless held that it had the jurisdiction to recommend tariff changes to compensate the companies. The CERC instructed that a committee be set up to calculate how much compensation was due to the concerned companies. Accordingly, the Deepak Parekh committee was set up and its report was submitted in August 2013. The report recommended a package of “compensatory tariff” measures to be awarded to the companies and paid for by the discoms. These recommendations were accepted by the CERC in its order dated February 21, 2014.

The discoms and consumer protection groups (including NGOs such as Energy Watchdog and Prayas [Energy Group]) appealed this CERC order at the Appellate Tribunal for Electricity (APTEL). At the tribunal, the companies won yet again. APTEL decided through an order passed on April 7, 2016 that the force majeure clause did apply and granted the companies relief accordingly. It instructed the CERC to calculate compensation under the terms of its order, and the CERC released its new calculations on December 6, 2016.

All this came to a head at the Supreme Court. The discoms and the consumer watchdogs appealed the APTEL’s order and within a year, on April 11, 2017, the court ruled against the companies, setting aside the APTEL’s judgement and the CERC’s subsequent tariff revisions. A crucial leg of the Supreme Court’s logic was that since the companies’ had knowingly assumed the risk of a change in the cost of coal when bidding to supply power to the discoms, and had won their bids on the basis of low tariff rates that they had quoted, a revision of tariffs after the fact would vitiate the entire process of competitive bidding. At the time, one of these authors of this article had described the judgement as having raised the ‘bar’ for India's power sector.

A Growing Crisis

Soon thereafter, reports started coming out about the great distress that these power plants were facing. According to the Financial Express, Essar stopped supplying power from its plant on December 15, 2017 and Adani Power stopped supplying electricity on January 20, this year. Both did so without notifying the Gujarat discom and the Gujarat electricity regulator against the terms of their PPAs. The Tata group plant kept operating, and ran up a loss of ₹1,700 crore in the past financial year. To cover up the shortfall in supply, the Gujarat discom was forced to buy from electricity exchanges at a much higher rate in order to prevent a power crisis in the state. Reports began to emerge suggesting that the companies were looking at thousands of crores in write-downs. Seeking to reduce the stress that these projects were causing to their balance sheets, the companies even wrote to the Gujarat government offering to sell a majority stake in their power plants to the government for a token amount of ₹1, provided, of course, that they would be freed of their debt burden.

Meanwhile, another hazard appeared on the horizon for the companies. On Feburary 12, this year, the Reserve Bank of India (RBI) issued a circular giving banks a six-month deadline to identify NPAs on their books and initiate resolution proceedings, failing which the banks would be obliged to approach the National Company Law Tribunal (NCLT) and initiate bankruptcy proceedings against the NPA holders. With these power plants having run into such financial trouble, they were at risk of turning into NPAs and facing the NCLT hammer. Indeed, subsequently, the Essar power plant was declared an NPA. Once such proceedings start, the promoter loses control of the assets in question.

Further light was shone on the subject of power sector NPAs and stressed assets by a report prepared by the Parliamentary Standing Committee on Energy in March 2018 which described the issues plaguing 34 stressed power assets worth more than ₹1.74 lakh crore.  

The RBI’s six month deadline expired last month in August 2018. In a rear-guard action, however, power companies managed to earn a reprieve from the bankruptcy process mandated by the RBI’s circular. A group of power generators approached the Allahabad High Court seeking a stay on the RBI circular and when the high court failed to grant them one, they approached the Supreme Court. On September 11, the Supreme Court partially granted their wish, ordering that until it completes its hearings, the status quo be maintained – that is, the banks couldn’t drag the power producers to the NCLT.

The Government’s Rescue Act

It was in these climes of distress that the Union government stepped in to find a way to rescue the power producers. Immediately after the Supreme Court judgement, the companies began knocking on every possible door seeking a solution to their problem. These efforts included the aforementioned offer to sell the power plants to the government. Solutions were sought by the discoms as well, seeing that the power companies were beginning to cut off power supply.

According to the draft report of high-powered committee (HPC), the government of Gujarat referred the matter to the Union government and on June 20, 2017, the Ministry of Power held a meeting of lenders, developers and officials of the five procuring states to discuss options to resolve the issue. At this meeting, a working group comprising members representing the procuring states and the lending banks was set up, with the State Bank of India (SBI) acting as the convenor. This working group prepared a final report which was circulated by the SBI on January 10, 2018.

Additionally, the SBI also requested the formation of a HPC to review the working group’s report and recommend solutions. The Gujarat government approached the centre once again on the basis of this report in February 2018 and in April 2018, received the permission of the central government to take the lead on finding a solution, as it was the biggest procurer of power from the three power plants. Accordingly, the Gujarat government constituted the HPC in June 2018.                                                                                                                                                                                  

The Rescue Package

The HPC met company officials, discom and state government officials, bank representatives and consumer representative groups, and sought their views and suggestions on how to proceed. Additionally, it took into account data analysis that suggested that despite the increase in cost of Indonesian coal, electricity generated at these power plants remained a cheaper option for the procurer states than other alternatives. Having taken all these views into account, the HPC’s draft report has laid out its recommendations.

The recommendations are based on the principle of “balancing of equities,” whereby the “pain” is “shared by all stakeholders.” Thus the “variable” component of the electricity tariff paid by the procurers, and ultimately power consumers, will increase to accommodate the increased cost of coal. The report states directly that “the fuel cost risk will be mostly borne by the procurers and eventually the end consumers.” This increased tariff is not without limit: the HPC has put a cap on  the cost of coal that can be passed on to the customer at $120 per metric tonne of coal – any amount higher than this will be borne by the developer. This increase in tariff will be offset by a “sacrifice by lenders” of a projected amount of ₹9,215 crore, which will be used to discount the “fixed charge” component of the power tariff by 20 paise per unit or kilowatt hour. (Electricity tariffs are composed of two components – “fixed” and “variable” charges – the first based on the costs incurred in setting up the power plant, and the second based on the costs of fuel which fluctuate.)

The developers, according to the HPC draft report, will bear their share of the pain as the losses that they have incurred on these power plants so far will not be compensated. The HPC suggests that its recommendations be implemented from October 1, 2018, and that no retrospective changes to tariff or “compensatory tariff” can be entertained. However, interestingly, the HPC did not even go into the question of take-over of these power plants by the Gujarat government – a solution that the companies themselves had offered the government prior to this rescue act.

The “bonafide on the part of the developers to continue with the projects” were apparently demonstrated to the HPC by the fact that they have already incurred higher losses than the damages that they would have had to pay if they chose to break the contracts. Neither does the HPC go into the fact that two of the three companies had indeed violated the terms of their PPAs by cutting off power supplies. On the possibility of a resolution through the insolvency process at the NCLT, the report throughout appears to consider it a priority to prevent this eventuality – that is, to “save” the companies from being dragged down the NCLT route.

If the high-powered committee’s final recommendations are comparable to this draft, its recommendations are clear – namely that state governments led by the Gujarat government should change their policies to “bail out” three of the biggest power plants in the country set up by the Adani, Essar and Tata groups. When finalised, will the committee’s recommendations be accepted? And if and when this happens, will such moves go unchallenged?  

Time alone can provide answers to these questions.