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Monday, September 12, 2011

Power cos need to be insulated from risks: APP

Private power producers have sought key changes in the bidding guidelines for power projects to insulate developers from unforeseen business risks and cautioned that if action is not taken soon, investors could lose interest in the sector.

In a letter sent recently to the power ministry, Association of Power Producers (APP), a representative body of private power generators such as Reliance Power and Tata Power, has said that developers cannot be expected to bear fuel price risks related to changes in law in coal exporting countries as applicable under the existing bidding guidelines.
Key coal exporting countries like Indonesia and Australia have recently changed their coal pricing policy, making fuel cost calculations for projects like Mundra and Krishnapatnam ultra mega power projects go hay-wire.
About 38,000 mw capacity awarded for development through tariff bidding route is facing the prospect of default on power supply contracts as developers cannot pass on increase in fuel cost to electricity buyers, according to APP.
“The situation as it is unfolding wants immediate action as the consequence of inaction would have serious implications for the power sector, as well as the equipment supply and banking sector that is already facing huge exposure to the power sector,” the letter, which was written by Ashok Khurana, director general, APP, said.
APP has cited key findings of a report prepared by Italian energy consultant Mercados at the association’s behest to support its case.
“India has a unique distinction of having a long term procurement process that allows very little flexibility on sale price, but presents open ended risks on key input costs. This fundamental misalignment has been aggravated by the failure of the supply chain for fuel to keep pace. Thus, the 25-year supply framework sits poorly with the input side dynamics,” the Italian consultant says in the report.
“For imported coal based project, bidding should only be based on heat rate. Any risk linked to the price of imported coal should be a pass through under the PPA clauses. This will hold the developer responsible only for the plant efficiency (heat rate) and fuel availability but will allow the pass through of fuel prices to the power purchasers,” the report recommends.
Power projects with domestic coal linkage are also facing risks of default on power supply contracts due to inadequate coal supply by Coal India.

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