Power Cos Agreed to Forgo Mining Cost

Lenders want clarity on how much cost cos can pass on to consumers
Power companies that have won coal blocks in the recent auctions are finding it tough to raise funds -not just to operate or develop the mines that they just got, but to run daily operations as well -as banks have become wary of the gov wary of the gov ernment’s move to limit the cost that electricity producers can pass on to con sumers.Banks have put applications of companies that have sought funds on hold, said a senior ex ecutive at one of ecutive at one of the private power producers.Some lenders have asked the companies to first get clarification from the government on the matter as they fear such a cap would hurt power producers’ ability to pay back loans, this executive said. “The proposed plan will affect lenders’ ability to lend,“ said an official at a state-run bank. “Banks are careful as the power sector is very capital-intensive.“

The development could cripple an industry already hit by an acute shortage of fuel. Companies had bid aggressively to get coal blocks after a Supreme Court order last year revoking licences on 200-odd captive mines made their projects with capacity to produce thousands of megawatts vulnerable. Reluctance on part of banks, which are extra cautious on the power and other infrastructure industries that account for most of their bad loans, could further delay the efforts of power producers to revive projects on hold and expand production.

The companies had agreed to forgo the mining cost they were allowed to pass on and instead pay the government, in what is called negative bidding. The government is worried that they may now use some other cost heads to pass on the expenses to consumers and the proposed cap is to prevent any rise in tariffs because of such moves.

Last week, Mandakini Exploration and Mining, a joint venture of Jindal India Thermal Power and Monnet Power Co, moved the Delhi High Court, alleging that capping the fixed cost after the auction was completed “amounts to ex post facto“, or retroactive, change in bid ding conditions. Because of this, it said, its project won’t be able to service debt.

The company sought to surrender the Mandakini coal block in Odisha that it won if the government decides to cap costs.

The court has asked the government to consider the petition and make a final decision by April 15.

A top government official said the power ministry will make a careful move and might soften its stand on capping by letting state power distribution companies make the final decision.Most of the companies that have won coal blocks don’t have power-purchase agreements with distributors.

Before the auction, the government had said it would revise existing power contracts between generating and distribution companies to lower electricity tariffs from plants that would run on coal from captive blocks. It, however, did not mention future power contracts.

Besides agreeing to forgo the mining cost and paying a fixed price of `. 100 per tonne for the dry fuel mined, power companies that have won coal blocks have offered ` . 370-1,010 per tonne for mines that are already producing coal and ` . 302670 per tonne for those that will soon start production. Industry experts say the aggressive bidding by power companies was due to desperation for the fuel after the Supreme Court order and that the prices they quoted were not sustainable in the long run.

Source: Economic Times; 13 April  2015
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