The Power Ministry has taken an in-principle decision to allow ‘pass-through' of fuel costs for all projects to be awarded under the tariff-based competitive bidding route during the 12th Plan period. This is a sensible move from the perspective of attracting fresh investments in power generation capacity, which energy-starved India desperately needs. The existing competitive bidding guidelines require developers — those bagging projects by quoting the lowest average (levelised) tariffs — to sign standard Ministry-approved power purchase agreements (PPA) with distribution utilities. These guidelines, however, do not provide for any mechanism to insulate the developers from fuel price vagaries, even when these occur because of factors beyond their control. Excluding fuel from the force majeure provisions of the standard PPAs, in effect, transfers the risks on this count to the developer. This was fine so long as fuel price itself was not a major issue: Until about five years ago, obtaining assured domestic coal linkage was a mere formality, while it was equally viable to set up coast-based power plants running on imported fuel. As a result, many private players bid aggressively at rates anywhere from Rs 1.19 to Rs 2.33 a unit, with bankers, too, lining up to fund these projects.
These bets have since gone horribly wrong. Just as nobody imagined Coal India's production to flounder the way it has in the last 2-3 years, a spurt in imported coal prices from $30-35 to $100-120 a tonne — on the back of changes in mining laws and new tax imposts by Indonesia and Australia — has come like a bolt from the blue. In this scenario, where fuel supply and pricing uncertainties are a reality, there is no option but to incorporate them in the proposed new competitive bidding documents and relevant PPA articles. The Power Ministry should do it quickly. The 11th Five-Year Plan that ended in 2011-12 saw 54,964 mega-watts (MW) of fresh capacity additions, as against 21,180 MW in the preceding Plan period. Much of it was made possible by private investment, which holds the key for meeting the 76,000 MW target for the 12{+t}{+h} Plan as well. And that cannot happen without a competitive bidding regime reflecting the new realities.
But what about those projects based on the existing bidding framework that does not cover fuel risk? Salvaging their viability would mean reopening the PPAs already signed, which poses obvious legal hurdles. However, there is a need to look beyond technicalities. A fine distinction can be made, for instance, between those developers who have gone ahead with commissioning despite their fuel calculations going awry, and the ones that have simply shelved work. There is a case to allow at least a partial fuel pass-through for the former, only to avoid stranded capacities — a luxury the country can ill-afford today. The projects that haven't taken off should be straightaway rebid under the new pass-through dispensation.