Power developers shying away from signing electricity supply contracts spread over 25 years with states owing to fuel quality and price risks

Power developers seem to be shying away from signing electricity supply contract spread over 25 years with  states owing to fuel quality and price risks.

Not even one long-term power purchase agreement (PPA) has been signed by five companies selected by Karnataka government to supply 1,980 mw seven months ago. Monnet, Thermal Powertech, Meenakshi, NCC and East Coast Energy, which teamed up with Power Trading Corporation (PTC), were asked to supply 1,380 mw annually. JSW Energy, headed by Sajjan Jindal, was to sign a PPA to supply 600 mw.

The companies were selected through Case-I bidding where power is procured but suppliers do not identify generation sources, location, technology or fuel. Fuel quality and price variation risk have to be borne by suppliers.While the fate of these contracts hangs in balance, Uttar Pradesh and Andhra Pradesh have invited similar bids to source 2,000 mw and 5,000 mw by 2012 and 2014, respectively.

Response from private companies

to supply power to Uttar Pradesh seems to be tepid as bids for only 1,285 mw were received. Andhra Pradesh was luckier as companies lined up to supply 8,135 mw. A senior Karnataka government official told Financial Chronicle that selected developers had indicated issues pertaining to tariff escalation and fuel availability before signing 25-year power supply contracts with the state.

PTC director (finance) Deepak Amitabh said discussions between the company and state government were on and issues would be sorted out. However, he refused to give details.

A Gurgaon-based private power supplier that bid for both Uttar Pradesh and Andhra Pradesh contracts said uncertainties on the fuel front were too severe and their implications on future competitive power landscape were far-reaching to be ignored. Power developers would require greater comfort in terms of quantity and quality of fuel if the sector has to become attractive to investors.

The new coal distribution policy mandates that power utilities, including independent producers, must be supplied coal to fire 90 per cent of normative requirement of a project through fuel supply agreements with Coal India. Developers are expected to source the remaining 10 per cent on their own.

Private developers have said that during the operational phase there are risks associated with variations in quality of grade and uncertainties in transportation. On condition of anonymity, they pointed out that coal procured through e-auction was two-three times more expensive than that notified by CIL.

Coal prices are highly volatile in the international market as they are linked to crude oil rates. Timely availability of imported coal due to lack of adequate port infrastructure and inland rail transportation has also been an issue faced by power suppliers.