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Private power costs will rise on falling rupee

S Mallika in Bombay

The recent fall of the rupee will force the private power projects to hike their tariffs, since they are dependent on a large foreign equity component. The burden of the higher import costs will largely be borne by the state electricity boards as the independent power projects (IPP) developers have made sufficient provisions to secure their payments from the state electricity boards (SEB).

"The power industry is among those industrial sectors which will be the worst affected by the rupee's depreciation. The cost of electricity will go up as the rupee goes down," said analysts with various financial institutions.

The power project developer has to deal only with the SEB. Before setting up the plant, the producer signs a power purchase agreement with the electricity board concerned, which takes complete care of payments for the power supply, including safeguards for exchange fluctuations.

The SEBs transmit electricity to a large number of consumers in their respective states. The consumers can be divided into three categories: industry, domestic, and agriculture. Each category is price sensitive and there is little doubt that the SEBs will face major hurdles in increasing its tariff. In fact, at present rates, from certain sectors it will not even earn half its cost on the power purchase.

The domestic and agricultural sectors are politically sensitive, and state governments will be loath to hike their tariffs. And the industrial sector, already the highest paying, will be up in arms at any suggestion of a power hike. "Power tariff for industries is very high due to the cross subsidy provided by the states, and any further increase will be opposed," said V K Mittal, director of the Ispat Group, in Bombay.

Aware of the difficulties faced by the SEBs, the companies carrying out the independent power projects are genuinely worried. "We have legal protection, but who wants to resolve problems through judicial means after having invested so much into the venture. One cannot wind up a business easily unless it is the last resort," said one IPP developer, who is developing a mega project in Maharashtra.

Private companies realise that the tariff will be much higher than what was negotiated earlier while signing the PPA, and in some cases, the SEBs will not be able to pass on the cost escalation to the consumers, said a senior official from the state electricity board.

"Almost all the new projects by IPP have a significant dollar component in the project cost," added the power board official, "and the tariff is calculated on the basis of the rupee-dollar component. More the dollar component, higher the tariff."

The hike will not be uniform. "The effect on the tariff will vary per project," said A M Naik, president (operations) of Larsen & Toubro, "as each project is negotiated independently and contains different clauses regarding the foreign exchange risk exposure."

The power tariff is based on the two components: fixed cost, including project cost; and variable cost, including the cost of fuel. The fixed cost will increase due to fluctuation in the foreign exchange while the variable cost will depend on the prevalent fuel price.

The rupee depreciation will make imports of equipment and services for the projects dearer. "The rupee devaluation will push up the cost of imported equipment for the power plant, which will lead to a proportionate increase in project costs," concurs Larsen & Toubro Managing Director and Chief Executive Officer S D Kulkarni.

The companies are yet to fix their rates. For instance, the Dabhol Power project, promoted by Enron, will decide on its price only at the end of the year. "In Dabhol Power, the exact exchange rate that will be used for calculating tariff will depend on the prevailing rate in December 1998, when the project goes on stream," said Enron India country manager Sanjay Bhatnagar. The dollar may well be worth Rs 42 by then.

The impact on tariff will be greater if the plant is run on imported fuel, which will be the case of most new power plants in the country. Since India has limited liquid fuel resources, the power producers will be forced to import the fuel from overseas, which, in turn, will affect the tariff.

Bombay Suburban Electric Services Chairman and Managing Director R V Shahi, however, points out liquid fuel imports are still far away. "The effect of devaluation will not be immediate as over 70 per cent of electricity generated in the country is through coal, which is sourced locally," he said. "Even if the coal is imported, it remains cost-effective due to its high calorific value."

Apart from tariff problems, the increase in project costs due to the rupee's fall might also delay project clearance as further negotiations are likely between the SEBs and other government agencies, said analysts.