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India Equity Research Reports, IPO and Stock News
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Indo coal risk
Indonesian government’s decision to set a benchmark price for every grade of
coal for exports has raised question marks for the financial viability of many
power projects in India. As per most PPAs, change in law in a foreign country
does not qualify as a force majeure and therefore the risk has to be borne by
the project developer. Project developers would try to re-negotiate the tariffs
with the procurers but it would be difficult given that most of the PPAs were
signed post a competitive bidding process. Our preference in the Utility space
remains for low risk business models – Tata Power, NTPC and Powergrid.
High benchmark prices for coal stumps Indian power sector
q Indonesian government has fixed a price for 61 grades of coal for exports to
prevent revenue loss due to cheaper transfer pricing of coal from the country. The
government was loosing out on royalty and income tax due to cheaper exports.
q Many Indian power companies who were banking on imports from Indonesia would
have to shell out more money which will have an impact on the profitability of the
power projects.
q All existing contracts are to be modified by September 2011 and to provide for
price adjustment every 12 months and to comply with the new regulations.
Even companies/groups owning mines will be negatively impacted
q The PPAs signed by most power companies usually don’t have a change in law in
the foreign country as a force majeure event.
q Even for Indian companies/groups that directly own the coal mines in Indonesia
(like Tata Power) or through a group company (like Adani Power and AEL) the net
impact will be negative.
q Power project profitability could come under serious stress and though mining
companies would be making better margins in Indonesia – they will also have to
pay higher royalty and income taxes.
q Power companies have been therefore been caught between the rock and a hard
place as breaking a PPA (penalties are not large but could jeopardize the chances
for getting future projects) at this juncture, when merchant tariffs also have been
spiralling downwards, is also not a lucrative option.
q We expect the lenders to the power companies which have mining operations in
Indonesia would insist to have either access to the cash flows of coal mining or ask
for more equity injection in the power SPV given the higher risk associated with
the power cash flows post the change in Indonesia.
Renegotiation of the PPAs in the future?
q Tata Power and Reliance Power have written to MoP about the impact of the change
in Indonesian policy on the financial viability of the two UMPPs. Reliance Power has
claimed that lenders are not willing to disburse money for the project due to the
change in coal pricing.
q Essar Power and Shapoorji Paloonji Power have recently cancelled their PPAs with
Gujarat from their imported coal based projects (though they haven’t listed out the
reason as the high coal price). Adani Power is already in a dispute with Gujarat to
supply power at Rs2.35/kWh from its Mundra III project.
q Since nearly all these companies have signed their PPAs post a competitively bid
process (which allowed them to build in escalation rates for the fuel costs) and
therefore ideally can’t expect the power procurers to agree for a higher tariff now.
q However, future PPAs for imported coal based projects may include change in law in
foreign country as a force majeure clause.
q Since the problem is so wide spread and the domestic coal production has also
been disappointing, the government /distributors/ regulators might be forced to
allow some kind of relief to the power project developers. However, we remain
sceptical about any near term solutions given the government is already embroiled
with corruption cases and favouring some select private sector groups might create
more problems for them at this juncture.
q Our preference in the Utility space remains for low risk business models – Tata
Power, NTPC and Powergrid.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indo coal risk
Indonesian government’s decision to set a benchmark price for every grade of
coal for exports has raised question marks for the financial viability of many
power projects in India. As per most PPAs, change in law in a foreign country
does not qualify as a force majeure and therefore the risk has to be borne by
the project developer. Project developers would try to re-negotiate the tariffs
with the procurers but it would be difficult given that most of the PPAs were
signed post a competitive bidding process. Our preference in the Utility space
remains for low risk business models – Tata Power, NTPC and Powergrid.
High benchmark prices for coal stumps Indian power sector
q Indonesian government has fixed a price for 61 grades of coal for exports to
prevent revenue loss due to cheaper transfer pricing of coal from the country. The
government was loosing out on royalty and income tax due to cheaper exports.
q Many Indian power companies who were banking on imports from Indonesia would
have to shell out more money which will have an impact on the profitability of the
power projects.
q All existing contracts are to be modified by September 2011 and to provide for
price adjustment every 12 months and to comply with the new regulations.
Even companies/groups owning mines will be negatively impacted
q The PPAs signed by most power companies usually don’t have a change in law in
the foreign country as a force majeure event.
q Even for Indian companies/groups that directly own the coal mines in Indonesia
(like Tata Power) or through a group company (like Adani Power and AEL) the net
impact will be negative.
q Power project profitability could come under serious stress and though mining
companies would be making better margins in Indonesia – they will also have to
pay higher royalty and income taxes.
q Power companies have been therefore been caught between the rock and a hard
place as breaking a PPA (penalties are not large but could jeopardize the chances
for getting future projects) at this juncture, when merchant tariffs also have been
spiralling downwards, is also not a lucrative option.
q We expect the lenders to the power companies which have mining operations in
Indonesia would insist to have either access to the cash flows of coal mining or ask
for more equity injection in the power SPV given the higher risk associated with
the power cash flows post the change in Indonesia.
Renegotiation of the PPAs in the future?
q Tata Power and Reliance Power have written to MoP about the impact of the change
in Indonesian policy on the financial viability of the two UMPPs. Reliance Power has
claimed that lenders are not willing to disburse money for the project due to the
change in coal pricing.
q Essar Power and Shapoorji Paloonji Power have recently cancelled their PPAs with
Gujarat from their imported coal based projects (though they haven’t listed out the
reason as the high coal price). Adani Power is already in a dispute with Gujarat to
supply power at Rs2.35/kWh from its Mundra III project.
q Since nearly all these companies have signed their PPAs post a competitively bid
process (which allowed them to build in escalation rates for the fuel costs) and
therefore ideally can’t expect the power procurers to agree for a higher tariff now.
q However, future PPAs for imported coal based projects may include change in law in
foreign country as a force majeure clause.
q Since the problem is so wide spread and the domestic coal production has also
been disappointing, the government /distributors/ regulators might be forced to
allow some kind of relief to the power project developers. However, we remain
sceptical about any near term solutions given the government is already embroiled
with corruption cases and favouring some select private sector groups might create
more problems for them at this juncture.
q Our preference in the Utility space remains for low risk business models – Tata
Power, NTPC and Powergrid.
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